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

Section 89 CPC lets a court that sees elements of a settlement formulate the terms and refer the dispute to arbitration, conciliation, judicial settlement including settlement through Lok Adalat, or mediation. Read literally, it appears to let a court push unwilling parties into any of the five. Afcons is the decision that sorts the five into two classes and tells you which of them require consent.

It is the single most useful case in this paper, because it sits across all four modules: it fixes when a court may send a case to a Lok Adalat, when it may not send it to arbitration or conciliation, which categories of case are unsuitable for any ADR process, at what stage the reference is to be considered, and what the court does with the settlement when it comes back. It is also one of the decisions the course recommends as a subject for a case comment.

Cochin Port Trust gave construction work to Afcons, which subcontracted part of it to Cherian Varkey. The subcontract contained no arbitration clause. Cherian Varkey sued for about Rs. 2.10 crore and then applied under s. 89 CPC for a reference to arbitration. Afcons refused to consent to arbitration or to any other ADR process. The trial court nonetheless referred the dispute to arbitration, and the High Court upheld that order.

The absence of an arbitration clause and the express refusal of consent are the two facts that drive everything.

A court cannot refer parties to arbitration or conciliation under s. 89 without the consent of all parties. It may refer a case to the other three processes — Lok Adalat, mediation and judicial settlement — without consent.

The Court added four working directions:

• Choosing the forum. Simple cases capable of completion in one sitting, and cases where the legal principles are clearly settled and there is no personal animosity — motor accident claims are the example — may go to a Lok Adalat; complicated cases needing several rounds of negotiation should go to mediation.
• Excluded categories. Normally unsuitable for any ADR process: representative suits under Order 1 Rule 8; disputes about election to public offices; cases requiring the grant of authority by the court after enquiry, such as probate; serious allegations of fraud, forgery, impersonation or coercion; cases needing the court's protection, such as claims against minors, deities and mentally challenged persons, and suits for declaration of title against government; and prosecutions for criminal offences.
• Stage. The court should consider a reference after pleadings are complete and before issues are framed; in family matters, immediately after service on the respondent and before the written statement.
• Effect of a settlement. Because the referring court retains control, a Lok Adalat award in a referred suit is placed before the court, which applies the principles of Order 23 Rule 3 and passes a decree in its terms. Where the settlement covers disputes outside the suit, the court directs that they be governed by s. 21 of the 1987 Act. A settlement reached by mediation on a court reference is deemed to be a Lok Adalat settlement for this purpose.

The division turns on one question: does the process take the case out of the court's stream?

1. Arbitration ends in a binding award that replaces adjudication by the court. It can only rest on an agreement, so a court cannot manufacture one; a reference without consent would deprive a party of the forum the law gives him.
2. Conciliation likewise produces a settlement with the status of an award, and it cannot work at all without willing parties. Consent is therefore both a legal and a practical requirement.
3. Lok Adalat, mediation and judicial settlement are non-adjudicatory. They cannot impose an outcome; if they fail, the case simply returns to the court, which never lost control of it. Nothing is taken away from the unwilling party but time, so consent to the reference is not required.
4. Control also determines what happens on success. Since the suit remained the court's, the settlement is brought back and decreed under Order 23 Rule 3; only the parts of the bargain lying outside the suit need the separate machinery of s. 21 of the 1987 Act.

It opens every s. 89 problem, every question on court reference to Lok Adalat, and the comparison question between the five processes. In a Lok Adalat problem the order of attack is: jurisdiction (is the dispute pending or pre-litigation; is it a non-compoundable offence?), then the route under s. 20, then the consequences of settlement under s. 21 or of failure under s. 20(5) to (7) — with Afcons supplying the consent rule and the excluded categories at the threshold.

It disposes of the argument that a court may compel an unwilling party into arbitration under s. 89, and equally the argument that a party may block a reference to mediation or Lok Adalat by withholding consent.

It does not decide anything about arbitration once an arbitration agreement exists — s. 8 of the Arbitration and Conciliation Act, 1996 and the case law on it govern that — and it does not alter the Lok Adalat's own jurisdiction or composition under the 1987 Act.

The commonest error in the examination is to write that Afcons allows compulsory reference to arbitration. It holds the opposite: compulsory reference is possible only to Lok Adalat, mediation and judicial settlement.