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

Supreme Court of India, 26 July 2010, 2 judges

A civil court acting under Section 89 CPC cannot refer a suit to arbitration unless all parties agree; the Court read Section 89 purposively, listed cases unsuitable for ADR, and laid down the procedure for referral.

Facts

Cochin Port Trust awarded construction work to the appellants, who sub-contracted part of it to the first respondent. Their sub-contract had no arbitration clause. The first respondent sued the appellants for about Rs. 2.1 crores and then applied under Section 89 of the Code of Civil Procedure for reference to arbitration. The appellants refused to agree to arbitration or any ADR process. The trial court nevertheless referred the dispute to arbitration, holding that a works contract dispute was suited to it, and the Kerala High Court dismissed the revision, holding that Section 89 permitted reference of unwilling parties to arbitration. The appellants came to the Supreme Court.

Questions before the Court

What procedure must a court follow in implementing Section 89 and Order 10 Rule 1A of the Code of Civil Procedure?
Is the consent of all parties necessary for a reference to arbitration under Section 89?

What the Court held

Section 89 must be read purposively: the court need not formulate or reformulate terms of settlement, and the definitions of 'judicial settlement' and 'mediation' in Section 89(2)(c) and (d) are to be read interchanged to correct a drafting error, until the legislature corrects it.
Holding a hearing after pleadings to consider ADR is mandatory, but actual reference is not mandatory in all cases. Representative suits, disputes about election to public offices, probate matters, serious allegations of fraud or forgery, cases needing the court's protection and criminal prosecutions are normally unsuitable.
Arbitration is adjudicatory and needs an arbitration agreement. A court cannot refer unwilling parties to arbitration under Section 89; the parties may agree in writing before the court. Sukanya Holdings does not hold otherwise.
The Court summarised the procedure: preliminary hearing, exclusion of unsuitable cases, ascertaining consent for arbitration or conciliation, and otherwise referring to Lok Adalat, mediation or judicial settlement. The reference to arbitration was set aside and the trial court directed to choose a non-adjudicatory process.

Why it matters

The judgment sets out how courts must apply Section 89 CPC: a mandatory consideration of ADR after pleadings, illustrative lists of cases suitable and unsuitable for ADR, and a step-by-step procedure for choosing the process. It holds that arbitration under Section 89 requires consent of all parties, and reads the section purposively to correct the interchanged definitions of mediation and judicial settlement.

In the Court's words

Copied from the official judgment; each passage links to its page.

“Having regard to the tenor of the provisions of Rule 1A of Order 10 of the Code, the civil court should invariably refer cases to ADR process. Only in certain recognized excluded categories of cases, it may choose not to refer to an ADR process.”

R.V. Raveendran, J.Page 17 of the judgment

“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 under an excluded category there need not be reference to ADR process. In all other case reference to ADR process is a must.”

R.V. Raveendran, J.Page 18 of the judgment

“If there is no agreement between the parties for reference to arbitration, the court cannot refer the matter to arbitration under section 89 of the Code. This is evident from the provisions of AC Act. A court has no power, authority or jurisdiction to refer unwilling parties to arbitration, if there is no arbitration agreement.”

R.V. Raveendran, J.Page 23 of the judgment

“Though the process under Section 89 appears to be lengthy and complicated, in practice the process is simple: know the dispute; exclude 'unfit' cases; ascertain consent for arbitration or conciliation; if there is no consent, select Lok Adalat for simple cases and mediation for all other cases, reserving reference to a Judge assisted settlement only in exceptional or special cases.”

R.V. Raveendran, J.Page 35 of the judgment

Provisions interpreted

Section 89, Code of Civil Procedure, 1908
Order 10 Rules 1A to 1C, Code of Civil Procedure, 1908
Section 8, Arbitration and Conciliation Act, 1996

Case and bench

Parties: Afcons Infrastructure Ltd. & Anr. v. Cherian Varkey Construction Co. (P) Ltd. & Ors.
Case: Civil Appeal No. 6000 of 2010 (arising out of SLP (C) No. 760 of 2007)
Decided: 26 July 2010
Bench: R.V. Raveendran, J.M. Panchal
Opinions: Unanimous. Judgment delivered by R.V. Raveendran, J.

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