Afcons Infrastructure Ltd v Cherian Varkey Construction Co. (P) Ltd (2010)

This is the leading decision on s. 89. It does three things that no other authority on the section does together: it states plainly what is wrong with the drafting of the section, it rewrites two of its clauses by interpretation until Parliament corrects them, and it sets out, step by step, the procedure a trial court must follow — including a list of the categories of case that should not be sent to an alternative dispute resolution process at all.

It also settles the question the appeal was brought on: whether a court may refer a suit to arbitration under s. 89 without the consent of every party. It may not.

The second respondent, the Cochin Port Trust, entrusted the construction of certain bridges and roads to the appellants under an agreement of 20 April 2001. The appellants sub-contracted part of that work to the first respondent under an agreement of 1 August 2001. That sub-contract contained no arbitration clause; the judgment records that "the agreement between the appellants and the first respondent did not contain any provision for reference of the disputes to arbitration."

The first respondent sued the appellants for recovery of money, and in March 2005 applied under s. 89 asking the court to formulate the terms of settlement and refer the matter to arbitration. The appellants filed a counter saying they were not agreeable to arbitration or to any other mode under s. 89. The trial court nevertheless referred the parties to arbitration, and the High Court of Kerala affirmed that reference.

Two questions, as the Court framed them at the outset: "The general scope of Section 89 of the Code of Civil Procedure (`Code' for short) and the question whether the said section empowers the court to refer the parties to a suit to arbitration without the consent of both parties, arise for consideration in this appeal."

The appeal was allowed. The Court answered the two questions in these words.

On the first: "The trial court did not adopt the proper procedure while enforcing Section 89 of the Code. Failure to invoke Section 89 suo moto after completion of pleadings and considering it only after an application under Section 89 was filed, is erroneous."

On the second: "A civil court exercising power under Section 89 of the Code cannot refer a suit to arbitration unless all the parties to the suit agree for such reference."

The orders of the trial court and of the High Court referring the matter to arbitration were set aside, and the trial court was directed to "consider and decide upon a non-adjudicatory ADR process."

The Court headed a part of the judgment "What is wrong with section 89 of the Code?" and identified two anomalies.

The first anomaly — the definitions are transposed. Clause (c) of sub-s. (2) attaches to judicial settlement a reference to a suitable institution or person deemed to be a Lok Adalat; clause (d) attaches to mediation the court's own effecting of a compromise. The Court said that it "makes no sense to call a compromise effected by a court" mediation, as clause (d) does, and that nor "does it make any sense to describe a reference made by a court to a suitable institution or person for arriving at a settlement" a judicial settlement, as clause (c) does. The cause is not policy but carelessness: "The mix-up of definitions of the terms "judicial settlement" and "mediation" in Section 89 is apparently due to a clerical or typographical error in drafting, resulting in the two words being interchanged in clauses (c) and (d) of Section 89(2). If the word "mediation" in clause (d) and the words "judicial settlement" in clause (c) are interchanged, we find that the said clauses make perfect sense."

The second anomaly — the section imports the last stage of conciliation into the first stage of a reference. Sub-section (1) requires the court to formulate the terms of settlement, give them to the parties, receive their observations and reformulate, all before it refers anything. The Court's objection is practical: "If all these have to be done by the trial court before referring the parties to alternative dispute resolution processes, the court itself may as well proceed to record the settlement as nothing more is required to be done, as a Judge cannot do these unless he acts as a conciliator or mediator and holds detailed discussions and negotiations running into hours." The requirement "that the court should formulate the terms of settlement is therefore a great hindrance to courts in implementing section 89 of the Code."

The two corrections made by interpretation. The Court concluded that "proper interpretation of section 89 of the Code requires two changes from a plain and literal reading of the section. Firstly, it is not necessary for the court, before referring the parties to an ADR process to formulate or re-formulate the terms of a possible settlement. It is sufficient if the court merely describes the nature of dispute (in a sentence or two) and makes the reference. Secondly, the definitions of judicial settlement' and mediation' in clauses (c) and (d) of section 89(2) shall have to be interchanged to correct the draftsman's error." It added the limit on its own exercise: "The above changes made by interpretative process shall remain in force till the legislature corrects the mistakes, so that section 89 is not rendered meaningless and infructuous."

The Court was careful to place this within the ordinary rules of construction. Departure from the literal rule "can however be only in exceptional cases, where the anomalies make the literal compliance of a provision impossible, or absurd or so impractical as to defeat the very object of the provision", and purposive interpretation "is more readily and easily employed in relation to procedural provisions than with reference to substantive provisions."

The distinction the Court drew is the one most often got wrong in an answer. The hearing is mandatory; the reference is not universal.

"Therefore, having a hearing after completion of pleadings, to consider recourse to ADR process under section 89 of the Code, is mandatory. But actual reference to an ADR process in all cases is not mandatory." Where the case falls in an excluded category there need be no reference; "In all other case reference to ADR process is a must."

Where the case is unsuited to any of the modes, "the court will have to briefly record the reasons for not resorting to any of the settlement procedures prescribed under section 89 of the Code."

"The following categories of cases are normally considered to be not suitable for ADR process having regard to their nature":

1. "Representative suits under Order 1 Rule 8 CPC which involve public interest or interest of numerous persons who are not parties before the court." 2. "Disputes relating to election to public offices (as contrasted from disputes between two groups trying to get control over the management of societies, clubs, association etc.)." 3. "Cases involving grant of authority by the court after enquiry, as for example, suits for grant of probate or letters of administration." 4. "Cases involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coercion etc." 5. "Cases requiring protection of courts, as for example, claims against minors, deities and mentally challenged and suits for declaration of title against government." 6. "Cases involving prosecution for criminal offences."

Everything else is presumptively suitable — the Court listed commercial and contractual disputes, disputes from strained relationships such as matrimonial and partition matters, disputes where a continuing relationship must survive, tortious claims including motor accident compensation, and all consumer disputes. The Court added the qualification that must be reproduced with the list: "The above enumeration of suitable' and unsuitable' categorization of cases is not intended to be exhaustive or rigid. They are illustrative, which can be subjected to just exceptions or additions by the court/Tribunal exercising its jurisdiction/discretion in referring a dispute/case to an ADR process."

Of the five processes the section names, arbitration is the only adjudicatory one, and it is governed by the Arbitration and Conciliation Act 1996. "A court has no power, authority or jurisdiction to refer unwilling parties to arbitration, if there is no arbitration agreement." The parties may agree after the suit has begun — "by means of a joint memo or joint application or a joint affidavit before the court, or by record of the agreement by the court in the ordersheet signed by the parties" — but without that agreement the route is closed. A reference to arbitration, once made, takes the case "outside the stream of the court permanently".

Conciliation likewise requires the agreement of all parties. The other three — Lok Adalat, mediation and judicial settlement — do not, and that is why the Court, having set aside the arbitration reference, directed the trial court to "consider and decide upon a non-adjudicatory ADR process."

Afcons does not depart from the two Salem Advocate Bar Association decisions; it completes them.

- Salem Bar (I), reported at 2003 (1) SCC 49, upheld the validity of the section notwithstanding its defects. As the Court put it, the section was upheld "with all its imperfections", and was "referred to a Committee, as it was hoped that section 89 could be implemented by ironing the creases." - Salem Bar (II), reported at 2005 (6) SCC 344, "applied the principle of purposive construction in an attempt to make it workable." It did so in two ways on which Afcons relies. First, it diluted the formulation anomaly, as the Court records: "This Court therefore diluted this anomaly in Salem Bar (II) by equating" the terms of settlement to a summary of disputes, "meaning thereby that the court is only required to formulate a" summary of disputes and not terms of settlement. Secondly, it adopted for mediation the definition in the model mediation rules, a facilitated negotiation before a neutral third party, and did so "in spite of a different definition in section 89(2)(d)", which is the transposition Afcons then corrected openly. - On consent, Afcons treats the point as already settled: "This Court has consistently held that though section 89 of the Code mandates reference to ADR processes, reference to arbitration under section 89 of the Code could only be with the consent of both sides and not otherwise."

The judgment summarises the steps a trial court is to take. In outline: fix a preliminary hearing once pleadings are complete and before issues are framed; consider first whether the case falls in an excluded category and, if it does, record a brief order and proceed to trial; otherwise explain the five options to the parties; ask first about arbitration, telling the parties that it is adjudicatory, that it takes the suit permanently outside the court and that they bear its cost, and refer only if both agree and agree on the arbitrator; failing that ask about conciliation, which also needs the agreement of all; and failing both, refer the matter — "keeping in view the preferences/options of parties" — to a Lok Adalat, to mediation, or to a judicial settlement.

The choice among those three is guided rather than free. A simple case, or one "where the legal principles are clearly settled and there is no personal animosity between the parties (as in the case of motor accident claims)", may go to a Lok Adalat; where "the questions are complicated or cases which may require several rounds of negotiations, the court may refer the matter to mediation"; and where mediation is unavailable, or the parties want a judge's guidance, the court may send the matter to another judge.

On the criticisms of s. 89, this case converts two of the standard complaints from argument into authority. The transposition of clauses (c) and (d) is no longer merely alleged to be a draftsman's error; the Supreme Court has held that it is, and has directed that the clauses be read with the labels interchanged. The duty to formulate terms is no longer merely criticised; it has been read down to a description of the dispute "in a sentence or two". Say so, and say that the corrections hold only until the legislature acts.

On whether s. 89 is mandatory, give the Court's two-part answer verbatim — the hearing is mandatory, the reference is not universal, and a refusal to refer must be briefly reasoned.

On consent, distinguish the adjudicatory mode from the four negotiatory ones. That single distinction decides the case.

The trial court's first error was not the arbitration reference at all. It was that the court waited for an application. The Court held that "Failure to invoke Section 89 suo moto after completion of pleadings and considering it only after an application under Section 89 was filed, is erroneous." Section 89 is a duty the court owes of its own motion at a fixed point in the suit — after the pleadings are complete and before issues are framed — and a party's application is not what sets it in motion.