Afcons Infrastructure Ltd. and Ors. V Cherian Varkey Construction Co. (P) Ltd. (2010)

Facts in Brief:

The Cochin Port Trust, one of the defendants, on 20th April 2001 endowed the task of development of some overpasses and roadways to the petitioners, Afcons Infrastructure, and certain others, by way of a contract. On 1st August 2001, The Afcons Infrastructure and Ors. sub-contracted a fraction of the work to Cherian Varkey Construction, the other defendant. That the contract entered into by the petitioners and the principal respondent didn’t bear any arrangement for seeking remedy through arbitration catering for the situation of a dispute, is not for debate.[1]

The first defendant recorded a case against the respondents for the recuperation of a little more than Rs. 2 crores and their properties at the interest rate of eighteen percent per annum. An order of attachment was formulated on 15th September 2004 with respect to the amount of Rs. 2 crores. In March of the resulting year, the first defendant recorded an application citing S.89 of the Civil Procedure Code before the trial court, praying for the planning of the settlement terms and elude the issue at hand to arbitration.

On 24th October 2005, the appellants recorded a counterclaiming that they didn’t agree with subjecting the issue to either arbitration or other forms of ADR under S.89 of the CPC. Subsequently, the Kerala High Court, on 8th September 2005, permitted the appeal recorded by the petitioners and considered the attachment allowed by the lower court. At the same time, it likewise mandated the lower court to discard the application documented by the first defendant under S.89 of the CPC.

The trial court permitted the petition under S.89 by a contemplated mandate dated 26th October 2005 and observed it was suitable that the dispute ought to be resolved through arbitration. The appellants documented a retrial against the mandate of the trial court. The High Court, through a speculated order, dismissed the appeal, stating that the clear tone of S.89 directed that the court subject even non-consenting parties to the process of arbitration. Hence, through appeal, the order was brought forth before the Apex Court.

Issued Raised

Based on the arguments presented by the counsels, two issues were created and deliberated upon by the Supreme Court:

What is the course of action to be heeded by the court in enforcing S.89 and Order 10 Rule 1A of the CPC?

Section 89 ought to be coupled with Rule 1-A under Order 10 which warrants direction by the court towards the parties for choosing their preferred mode of the alternative dispute resolution process and refer the matter accordingly. The aforesaid rule doesn’t make it necessary for the court to establish the terms of settlement or make the same available to the parties to re-establish the conditions of a probable settlement subsequent to procuring the parties’ inferences.

Whether consent of both sides to the suit is mandatory for bringing forth arbitration as a process under S.89 of the CPC?

The fundamental question examined by the Apex Court was whether referral to Alternative Dispute Resolution mode is compulsory, by observing the interpretation done in the Salem Bar Association Case that deemed the element of the struggle between the language of S.89 and Order 10 Rule 1-A of the CPC.

Rule of Law

S.89 of the CPC

S.89 was included through the (Amendment) Act 1999 into the CPC, 1908.[2]

Section 89(a) authorizes the civil courts to subject disputes that arise to methods of ADR, namely, arbitration, conciliation, Lok Adalat, judicial settlement, and mediation before the case is heard.

Section 89(b) also lays down the laws under the scope of which each mode shall be dispensed:

1. Arbitration or conciliation under Arbitration and Conciliation Act, 1996.
2. Lok Adalat through Legal Services Authorities Act of 1987.
3. Judicial settlement under any appropriate institution.
4. Mediation may be monitored through a compromise as the court proposes.

Rule-1 under Order 10 of the CPC

Rule 1-A under Order 10 of the CPC similarly incorporates the bench to pick any one method of ADR and determines that at the discretion of the parties, the court shall fix the date of trial before such platform or entity selected by the parties.

Rule 1-B deliberates upon the presence in front of the conciliatory platform or entity wherein a suit has alluded under Rule 1A.

Rule 1C states that appearing at the Court subsequent to the disappointing endeavors of ADR wouldn’t be appropriate in light of legitimate concern of fairness to continue with the dispute thereon, then it will subject the dispute once more to the court and mandate the parties to be present before the court on the date given.

Judgment Analysis

Fallacies in the Formulation

The Supreme Court drew attention to numerous drafting mistakes in construing S.89 of the Code:

The first fallacy is the jumbled meanings of mediation and judicial settlement under the third and fourth clauses of the second subsection under S.89 of the Code. The third clause states that for judicial settlement, the court shall facilitate the same under an appropriate institution or individual who will be regarded as a Lok Adalat. The fourth clause mandates that if the subjection is to mediation, the court shall execute a compromise amongst the parties by heeding techniques as might be endorsed.

The compromise and depiction of a reference executed by the court to an appropriate institution, under the third and fourth clauses, are unfeasible. At a point when words are comprehended from a specific perspective, the meanings of those terms under S.89 with exchanged definitions have prompted inconvenience in the usage of the same. This misunderstanding is a result of a blunder in drafting. [3]

The second fallacy is that the first subsection under S.89 absorbs the last phase of conciliation mentioned under S.73 of the Arbitration and Conciliation Act [4] into the stage which occurs before referring to ADR as per S.89 of the Code.

The literal pursuance of the first sub-section of S.89 would ensue each Trial Judge having to find out whether there are any aspects of resolution which the parties consider as valuable and create and present the conditions of settlement to parties before subjecting it to any one of the ADR processes. Section 73 under Arbitration and Conciliation Act observes the completion of conceptualizing conditions of settlement at the last phase of conciliation. The court is incorrectly required to detail the conditions of settlement at a phase preceding reference to an Alternative Dispute Resolution session. This becomes apparent by an examination of the wording of the two sections.

It was expressed in Salem Advocate Bar Association v. Union of India [5] that on the off chance that arbitration is resorted to, there will be no purpose attached to the terms of settlement detailed by the court because it’s the conditions of settlement which is resorted to not the dispute; and the Arbitrator will settle upon the same through rendering an award. A court won’t be able to figure the conditions of the settlement, except if the appointed authority examines the issue carefully with the parties. The court conditions the terms of settlement as per simply the oral pleadings is not practical or conceivable. The necessity that the court ought to prepare the terms of the settlement is subsequently a large obstacle in the execution of S.89 of the Code.

Deliberation upon the Issues

After hearing the arguments from both sides, the Apex Court prepared and discussed two issues:

The course of action to be adhered to for enforcing S.89 and Rule 1-A under Order 10 of the Code.

The sole feasible manner of interpreting S.89 and Order 10, Rule 1-A is that after the pleadings and before preparing issues, the court will have a referral to S.89 of the Code. This necessitates the court to deliberate upon the nature of the dispute, notify the parties about the modes of ADR accessible, observe their inclinations and then refer the parties to their choice of session accordingly.

Appropriate translation of S.89 of the Code necessitates that it shouldn’t be mandatory for the court to detail or refine the terms of a potential settlement when it is adequate enough for the type of case to be depicted in not more than a few words. Furthermore, the meanings of the third and fourth clauses of S.89 will have to be exchanged to address the drafting mistake. The Apex Court announced that these changes shall be enforced till the legislature rectifies the errors, to ensure that it is not rendered trivial.

It is compulsory to obtain the consent of the parties for recourse to arbitration under S.89 of the Code.

The Supreme court observed that S.89 commences with words that plainly express that suits that aren’t appropriate for ADR should not be resorted to under S.89 of the Code. On the off chance, the case is not suitable for referral to the same, the court must to crisply record the purposes for not turning to any of the settlement methods as given under S.89. Where the suit comes under a discarded category, there needn’t be a referral to ADR. Otherwise, resorting to ADR is an absolute necessity.

Excluded categories incorporate representative suits which include public interest, disputes regarding election to public offices, awarding of power by the section after investigation, and arraignment for criminal actions. Suits of civil nature that come under the mentioned categories can be subjected to ADR. These involve suits regarding trade, commerce, and agreements, the requirement for the persistence of the previous relationship, tortious obligation, and consumer disputes. By such a demarcation, the Apex Court tried to resolve the conflict under S.89.

Judgment

The Apex court depended upon the ratio of Sukanya Holdings Pvt. Ltd vs Jayesh H. Pandya & Anr [6] wherein it was observed that to argue in favor of conducting an arbitration under S.89 of the Code, the parties’ consent isn’t a prerequisite. The court, in that case, had been debating on whether an inquiry under S.8 of the Arbitration and Conciliation Act could be sustained even where a section of the subject matter of the case wasn’t encompassed under an arbitration under the agreement.

The Bench observed that S.89 of the Code can’t be referred to for deciphering S.8 of the Arbitration and Conciliation Act as it exists on an alternate footing and it can be applied in situations where no arbitration agreement to which the dispute may be referred. It also inferred that absence of an arbitration agreement can’t bar the parties to opt for an ADR session provided they all consent to it.

Consequently, the Supreme court issued a landmark judgment observing the following:

1. The trial court failed to perform the appropriate procedure for executing S.89 of the CPC.
2. A civil court, through S.89 of the Civil Procedure Code, can’t refer a case to arbitration without the mutual consent of all parties involved in the suit.

Conclusions and Observations

Conclusion

That consent is invariably given utmost priority while pursuing remedies is the surmise that is taken away by this judgment.  The Court suitably necessitated the prerequisite of free consent of the two parties only after which modes of ADR under S.89 of the Code may be resorted to.

On the off chance that S.89 is to be perused and required to be executed in its strictest sense, it will amount to ending up being a “Trial Judge’s Nightmare”. It takes a mixed-up approach and establishes an unreasonable and non-feasible methodology in the first clause. Furthermore, it stirs up the definitions laid down in the second clause.

Regardless of these flaws, the aim of S.89 is praiseworthy and logical. Referring to ADR methods is imperative to render the parties with a quick and viable solution and to diminish the truckload of cases heaving on the courts.

Observations

1. Arbitration Agreement is a compulsory pre-requisite to procure before conduction of dispute resolution via arbitration is commenced
2. Parties involved in a suit may consent to an arbitration agreement at any phase of the trial as per the Court’s authorization.
3. Referring to S.89 of the CPC, regardless of whether the civil court presumes that the essence of the matter is such that it could be settled through arbitration, the parties can’t be compelled to be subject to arbitration without their explicit consent. Consent of all parties in a suit is compulsory for subjection to arbitration under S.89 of the CPC.
4. At the end of an arbitration session, the arbitrator renders an award (judgment) that results in an award that is obligatory and binding on the parties just as any other decree or order given by the courts.
5. Arbitration occurs, only after the consent of the parties is obtained, and effectively resolves the issue at hand.
6. However, with regard to rendering an award that binds the parties legally, the Arbitrators needn’t seek the consent of the partiers unlike conciliators engaged in the process of conciliation.

Therefore, in light of the aforementioned observations, the emphasis attached by the Legislature to the requirement of the parties’ consent during the phase of being subjected to arbitration is perspicuous.

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References:

[1] Afcons Infrastructure Ltd. and Anr. v Cherian Varkey Construction Co. (P) Ltd. and Ors (2010) 8 SCC 24.

[2] Code of Civil Procedure, 1908, No. 5, Acts of Parliament, 1908 (India).

[3] Manjeet Kumar Sahu, Afcons Infrastructure Ltd. And Ors. v Cherian Varkey Construction Co. (P) Ltd, LEGAL SERVICE INDIA.http://www.legalservicesindia.com/article/1248/Afcons-infrastructure-and-Ors.-v.–Cherian-Verkay-Construction-and-Ors.html.

[4] Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996 (India).

[5] (2003) 1 SCC 49.

[6] (2003) 5 SCC 531.