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

IN THE SUPREME COURT OF INDIA Reportable

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.6000 OF 2010 (Arising out of SLP (C) No.760 of 2007)

Afcons Infrastructure Ltd. & Anr. ... Appellants Vs.

Cherian Varkey Construction Co. (P) Ltd. & Ors. ... Respondents

JUDGMENT

R.V.RAVEENDRAN, J.

Leave granted. 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.

2. The second respondent (Cochin Port Trust) entrusted the work of

construction of certain bridges and roads to the appellants under an

agreement dated 20.4.2001. The appellants sub-contracted a part of the said

work to the first respondent under an agreement dated 1.8.2001. It is not in

dispute that the agreement between the appellants and the first respondent

did not contain any provision for reference of the disputes to arbitration. 2

3. The first respondent filed a suit against the appellants for recovery of

Rs.210,70,881 from the appellants and their assets and/or the amounts due to

the appellants from the employer, with interest at 18% per annum. In the

said suit an order of attachment was made on 15.9.2004 in regard to a sum of

Rs.2.25 crores. Thereafter in March 2005, the first respondent filed an

application under section 89 of the Code before the trial court praying that

the court may formulate the terms of settlement and refer the matter to

arbitration. The appellants filed a counter dated 24.10.2005 to the

application submitting that they were not agreeable for referring the matter

to arbitration or any of the other ADR processes under section 89 of the

Code. In the meanwhile, the High Court of Kerala by order dated 8.9.2005,

allowed the appeal filed by the appellants against the order of attachment

and raised the attachment granted by the trial court subject to certain

conditions. While doing so, the High Court also directed the trial court to

consider and dispose of the application filed by the first respondent under

section 89 of the Code.

4. The trial court heard the said application under section 89. It recorded

the fact that first respondent (plaintiff) was agreeable for arbitration and

appellants (defendants 1 and 2) were not agreeable for arbitration. The trial

court allowed the said application under section 89 by a reasoned order 3

dated 26.10.2005 and held that as the claim of the plaintiff in the suit related

to a work contract, it was appropriate that the dispute should be settled by

arbitration. It formulated sixteen issues and referred the matter to arbitration.

The appellants filed a revision against the order of the trial court. The High

Court by the impugned order dated 11.10.2006 dismissed the revision

petition holding that the apparent tenor of section 89 of the Code permitted

the court, in appropriate cases, to refer even unwilling parties to arbitration.

The High Court also held that the concept of pre existing arbitration

agreement which was necessary for reference to arbitration under the

provisions of the Arbitration & Conciliation Act, 1996 (`AC Act' for short)

was inapplicable to references under section 89 of the Code, having regard

to the decision in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya & Anr.

[2003 (5) SCC 531]. The said order is challenged in this appeal.

5. On the contentions urged, two questions arise for consideration :

(i) What is the procedure to be followed by a court in implementing section 89 and Order 10 Rule 1A of the Code?

(ii) Whether consent of all parties to the suit is necessary for reference to arbitration under section 89 of the Code?

4 6. To find answers to the said questions, we have to analyse the object,

purpose, scope and tenor of the said provisions. The said provisions are

extracted below :

"89. Settlement of disputes outside the court. - (1) Where it appears to the Court that there exist elements of a settlement which may be acceptable to the parties, the Court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observations of the parties, the Court may reformulate the terms of a possible settlement and refer the same for -

(a) arbitration; (b) conciliation; (c) judicial settlement including settlement through Lok Adalat; or (d) mediation.

(2) where a dispute has been referred -

(a) for arbitration or conciliation, the provisions of the Arbitration

and Conciliation Act, 1996 (26 of 1996) shall apply as if the proceedings for arbitration or conciliation were referred for settlement under the provisions of that Act;

(b) to Lok Adalat, the Court shall refer the same to the Lok Adalat in accordance with the provisions of sub-section (1) of section 20 of the Legal Services Authority Act, 1987 (39 of 1987) and all other provisions of that Act shall apply in respect of the dispute so referred to the Lok Adalat;

(c) for judicial settlement, the Court shall refer the same to a suitable institution or person and such institution or person shall be deemed to be a Lok Adalat and all the provisions of the Legal Services Authority Act, 1987 (39 of 1987) shall apply as if the dispute were referred to a Lok Adalat under the provisions of that Act;

(d) for mediation, the Court shall effect a compromise between the parties and shall follow such procedure as may be prescribed."

Order 10 Rule 1A. Direction of the Court to opt for any one mode of alternative dispute resolution.--After recording the admissions and denials, the Court shall direct the parties to the suit to opt either mode of the settlement outside the Court as specified in sub-section (1) of section 5

89. On the option of the parties, the Court shall fix the date of appearance before such forum or authority as may be opted by the parties.

Order 10 Rule 1B. Appearance before the conciliatory forum or authority.--Where a suit is referred under rule 1A, the parties shall appear before such forum or authority for conciliation of the suit.

Order 10 Rule 1C. Appearance before the Court consequent to the failure of efforts of conciliation.--Where a suit is referred under rule 1A and the presiding officer of conciliation forum or authority is satisfied that it would not be proper in the interest of justice to proceed with the matter further, then, it shall refer the matter again to the Court and direct the parties to appear before the Court on the date fixed by it."

7. If section 89 is to be read and required to be implemented in its literal

sense, it will be a Trial Judge's nightmare. It puts the cart before the horse

and lays down an impractical, if not impossible, procedure in sub-section

(1). It has mixed up the definitions in sub-section (2). In spite of these

defects, the object behind section 89 is laudable and sound. Resort to

alternative disputes resolution (for short `ADR') processes is necessary to

give speedy and effective relief to the litigants and to reduce the pendency in

and burden upon the courts. As ADR processes were not being resorted to

with the desired frequency, Parliament thought it fit to introduce Section 89

and Rules 1-A to 1-C in Order X in the Code, to ensure that ADR process

was resorted to before the commencement of trial in suits. In view of its

laudable object, the validity of section 89, with all its imperfections, was

upheld in Salem Advocate Bar Association v. Union of India reported in

[2003 (1) SCC 49 - for short, Salem Bar - (I)] but referred to a Committee, 6

as it was hoped that section 89 could be implemented by ironing the creases. In Salem Advocate Bar Association v. Union of India [2005 (6) SCC 344 -

for short, Salem Bar-(II)], this Court applied the principle of purposive

construction in an attempt to make it workable.

What is wrong with section 89 of the Code?

8. The first anomaly is the mixing up of the definitions of `mediation'

and `judicial settlement' under clauses (c) and (d) of sub-section (2) of

section 89 of the Code. Clause (c) says that for "judicial settlement", the

court shall refer the same to a suitable institution or person who shall be

deemed to be a Lok Adalat. Clause (d) provides that where the reference is

to "mediation", the court shall effect a compromise between the parties by

following such procedure as may be prescribed. It makes no sense to call a

compromise effected by a court, as "mediation", as is done in clause (d). 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 as "judicial settlement", as is

done in clause (c). "Judicial settlement" is a term in vogue in USA referring

to a settlement of a civil case with the help of a judge who is not assigned to

adjudicate upon the dispute. "Mediation" is also a well known term and it

refers to a method of non-binding dispute resolution with the assistance of a 7

neutral third party who tries to help the disputing parties to arrive at a

negotiated settlement. It is also synonym of the term `conciliation'. (See :

Black's Law Dictionary, 7th Edition, Pages 1377 and 996). When words are

universally understood in a particular sense, and assigned a particular

meaning in common parlance, the definitions of those words in section 89

with interchanged meanings has led to confusion, complications and

difficulties in implementation. 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.

9. The second anomaly is that sub-section (1) of section 89 imports the

final stage of conciliation referred to in section 73(1) of the AC Act into the

pre-ADR reference stage under section 89 of the Code. Sub-section (1) of

section 89 requires the court to formulate the terms of settlement and give

them to the parties for their observation and then reformulate the terms of a

possible settlement and then refer the same for any one of the ADR

processes. If sub-section (1) of Section 89 is to be literally followed, every

Trial Judge before framing issues, is required to ascertain whether there 8

exists any elements of settlement which may be acceptable to the parties,

formulate the terms of settlement, give them to parties for observations and

then reformulate the terms of a possible settlement before referring it to

arbitration, conciliation, judicial settlement, Lok Adalat or mediation. There

is nothing that is left to be done by the alternative dispute resolution forum.

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.

10. Section 73 of AC Act shows that formulation and reformulation of

terms of settlement is a process carried out at the final stage of a conciliation

process, when the settlement is being arrived at. What is required to be done

at the final stage of conciliation by a conciliator is borrowed lock, stock and

barrel into section 89 and the court is wrongly required to formulate the

terms of settlement and reformulate them at a stage prior to reference to an

ADR process. This becomes evident by a comparison of the wording of the

two provisions.

9

Section 73(1) of Arbitration and Conciliation Section 89(1) of Code of Civil Procedure Act, 1996 relating to the final stage of relating to a stage before reference to an settlement process in conciliation. ADR process.

When it appears to the conciliator that there Where it appears to the Court that there exist elements of a settlement which may exist elements of a settlement which may be acceptable to the parties, he shall be acceptable to the parties, the Court shall formulate the terms of a possible settlement formulate the terms of settlement and give and submit them to the parties for their them to the parties for their observations observations. After receiving the and after receiving the observations of the observations of the parties, the conciliator parties, the Court may reformulate the may reformulate the terms of a possible terms of a possible settlement and refer the settlement in the light of such observations. same for (a) arbitration; (b) conciliation;

(c) judicial settlement including settlement through Lok Adalat; or (d) mediation.

Formulation and re-formulation of terms of settlement by the court is

therefore wholly out of place at the stage of pre ADR reference. It is not

possible for courts to perform these acts at a preliminary hearing to decide

whether a case should be referred to an ADR process and, if so, which ADR

process.

11. If the reference is to be made to arbitration, the terms of settlement

formulated by the court will be of no use, as what is referred to arbitration is

the dispute and not the terms of settlement; and the Arbitrator will adjudicate

upon the dispute and give his decision by way of award. If the reference is to

conciliation/mediation/Lok Adalat, then drawing up the terms of the

settlement or reformulating them is the job of the conciliator or the mediator 10

or the Lok Adalat, after going through the entire process of conciliation/

mediation. Thus, the terms of settlement drawn up by the court will be

totally useless in any subsequent ADR process. Why then the courts should

be burdened with the onerous and virtually impossible, but redundant, task

of formulating terms of settlement at pre-reference stage?

12. It will not be possible for a court to formulate the terms of the

settlement, unless the judge discusses the matter in detail with both parties.

The court formulating the terms of settlement merely on the basis of

pleadings is neither feasible nor possible. 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. This Court therefore diluted

this anomaly in Salem Bar (II) by equating "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'.

How should section 89 be interpreted?

13. The principles of statutory interpretation are well settled. Where the

words of the statute are clear and unambiguous, the provision should be

given its plain and normal meaning, without adding or rejecting any words.

Departure from the literal rule, by making structural changes or substituting 11

words in a clear statutory provision, under the guise of interpretation will

pose a great risk as the changes may not be what the Legislature intended or

desired. Legislative wisdom cannot be replaced by the Judge's views. As

observed by this Court in somewhat different context : "When a procedure is

prescribed by the Legislature, it is not for the court to substitute a different

one according to its notion of justice. When the Legislature has spoken, the

Judges cannot afford to be wiser." (See : Shri Mandir Sita Ramji vs. Lt.

Governor of Delhi - (1975) 4 SCC 298). There is however an exception to

this general rule. Where the words used in the statutory provision are vague

and ambiguous or where the plain and normal meaning of its words or

grammatical construction thereof would lead to confusion, absurdity,

repugnancy with other provisions, the courts may, instead of adopting the

plain and grammatical construction, use the interpretative tools to set right

the situation, by adding or omitting or substituting the words in the Statute.

When faced with an apparently defective provision in a statute, courts prefer

to assume that the draftsman had committed a mistake rather than

concluding that the Legislature has deliberately introduced an absurd or

irrational statutory provision. Departure from the literal rule of plain and

straight reading can however be only in exceptional cases, where the

anomalies make the literal compliance of a provision impossible, or absurd 12

or so impractical as to defeat the very object of the provision. We may also

mention purposive interpretation to avoid absurdity and irrationality is more

readily and easily employed in relation to procedural provisions than with

reference to substantive provisions.

13.1) Maxwell on Interpretation of Statutes (12th Edn., page 228), under the

caption `modification of the language to meet the intention' in the chapter

dealing with `Exceptional Construction' states the position succinctly:

"Where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, which can hardly have been intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence. This may be done by departing from the rules of grammar, by giving an unusual meaning to particular words, or by rejecting them altogether, on the ground that the legislature could not possibly have intended what its words signify, and that the modifications made are mere corrections of careless language and really give the true meaning. Where the main object and intention of a statute are clear, it must not be reduced to a nullity by the draftman's unskilfulness or ignorance of the law, except in a case of necessity, or the absolute intractability of the language used."

This Court in Tirath Singh v. Bachittar Singh [AIR 1955 SC 830] approved

and adopted the said approach.

13.2) In Shamrao V.Parulekar v. District Magistrate, Thana, Bombay

[AIR 1952 SC 324], this Court reiterated the principle from Maxwell:

".....if one construction will lead to an absurdity while another will give effect to what commonsense would show was obviously intended, the construction which would defeat the ends of the Act must be rejected even 13

if the same words used in the same section, and even the same sentence, have to be construed differently. Indeed, the law goes so far as to require the Courts sometimes even to modify the grammatical and ordinary sense of the words if by doing so absurdity and inconsistency can be avoided."

13.3) In Molar Mal vs. Kay Iron Works (P) Ltd. - 2004 (4) SCC 285, this

Court while reiterating that courts will have to follow the rule of literal

construction, which enjoins the court to take the words as used by the

Legislature and to give it the meaning which naturally implies, held that

there is an exception to that rule. This Court observed :

"That exception comes into play when application of literal construction of the words in the statute leads to absurdity, inconsistency or when it is shown that the legal context in which the words are used or by reading the statute as a whole, it requires a different meaning."

13.4) In Mangin v. Inland Revenue Commission [1971 (1) All.ER 179], the

Privy Council held:

"......The object of the construction of a statute, be it to ascertain the will of the legislature, it may be presumed that neither injustice nor absurdity was intended. If, therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted."

13.5) A classic example of correcting an error committed by the draftsman

in legislative drafting is the substitution of the words `defendant's witnesses'

by this Court for the words `plaintiff's witnesses' occurring in Order VII 14

Rule 14(4) of the Code, in Salem Bar-II. We extract below the relevant

portion of the said decision :

"Order VII relates to the production of documents by the plaintiff whereas Order VIII relates to production of documents by the defendant. Under Order VIII Rule 1A(4) a document not produced by defendant can be confronted to the plaintiff's witness during cross-examination. Similarly, the plaintiff can also confront the defendant's witness with a document during cross-examination. By mistake, instead of 'defendant's witnesses', the words 'plaintiff's witnesses' have been mentioned in Order VII Rule (4). To avoid any confusion, we direct that till the legislature corrects the mistake, the words 'plaintiff's witnesses, would be read as 'defendant's witnesses' in Order VII Rule 4. We, however, hope that the mistake would be expeditiously corrected by the legislature."

13.6) Justice G.P. Singh extracts four conditions that should be present to

justify departure from the plain words of the Statute, in his treatise

"Principles of Statutory Interpretation" (12th Edn. - 2010, Lexis Nexis -

page 144) from the decision of the House of Lords in Stock v. Frank Jones

(Tipton) Ltd., [1978 (1) All ER 948] :

"......a court would only be justified in departing from the plain words of the statute when it is satisfied that (1) there is clear and gross balance of anomaly; (2) Parliament, the legislative promoters and the draftsman could not have envisaged such anomaly and could not have been prepared to accept it in the interest of a supervening legislative objective; (3) the anomaly can be obviated without detriment to such a legislative objective; and (4) the language of the statute is susceptible of the modification required to obviate the anomaly."

14. All the aforesaid four conditions justifying departure from the literal

rule, exist with reference to section 89 of the Code. Therefore, in Salem Bar 15

-II, by judicial interpretation the entire process of formulating the terms of

settlement, giving them to the parties for their observation and reformulating

the terms of possible settlement after receiving the observations, contained

in sub-section (1) of section 89, is excluded or done away with by stating

that the said provision merely requires formulating a summary of disputes.

Further, this Court in Salem Bar-II, adopted the following definition of

`mediation' suggested in the model mediation rules, in spite of a different

definition in section 89(2)(d) :

"Settlement by `mediation' means the process by which a mediator appointed by parties or by the Court, as the case may be, mediates the dispute between the parties to the suit by the application of the provisions of the Mediation Rules, 2003 in Part II, and in particular, by facilitating discussion between parties directly or by communicating with each other through the mediator, by assisting parties in identifying issues, reducing misunderstandings, clarifying priorities, exploring areas of compromise, generating options in an attempt to solve the dispute and emphasizing that it is the parties' own responsibility for making decisions which affect them."

All over the country the courts have been referring cases under section 89 to

mediation by assuming and understanding `mediation' to mean a dispute

resolution process by negotiated settlement with the assistance of a neutral

third party. Judicial settlement is understood as referring to a compromise

entered by the parties with the assistance of the court adjudicating the

matter, or another Judge to whom the court had referred the dispute. 16

15. Section 89 has to be read with Rule 1-A of Order 10 which requires

the court to direct the parties to opt for any of the five modes of alternative

dispute resolution processes and on their option refer the matter. The said

rule does not require the court to either formulate the terms of settlement or

make available such terms of settlement to the parties to reformulate the

terms of possible settlement after receiving the observations of the parties.

Therefore the only practical way of reading Section 89 and Order 10, Rule

1-A is that after the pleadings are complete and after seeking

admission/denials wherever required, and before framing issues, the court

will have recourse to section 89 of the Code. Such recourse requires the

court to consider and record the nature of the dispute, inform the parties

about the five options available and take note of their preferences and then

refer them to one of the alternative dispute resolution processes.

16. In view of the foregoing, it has to be 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 17

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. Clauses (c) and (d) of section 89(2) of the

Code will read as under when the two terms are interchanged:

(c) for "mediation", the court shall refer the same to a suitable institution or person and such institution or person shall be deemed to be a Lok Adalat and all the provisions of the Legal Services Authority Act, 1987 (39 of 1987) shall apply as if the dispute were referred to a Lok Adalat under the provisions of that Act;

(d) for "judicial settlement", the court shall effect a compromise between the parties and shall follow such procedure as may be prescribed.

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.

Whether the reference to ADR Process is mandatory?

17. Section 89 starts with the words "where it appears to the court that

there exist elements of a settlement". This clearly shows that cases which are

not suited for ADR process should not be referred under section 89 of the

Code. The court has to form an opinion that a case is one that is capable of

being referred to and settled through ADR process. Having regard to the

tenor of the provisions of Rule 1A of Order 10 of the Code, the civil court 18

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.

Where the case is unsuited for reference to any of the ADR process, 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. 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.

18. The following categories of cases are normally considered to be not

suitable for ADR process having regard to their nature :

(i) Representative suits under Order 1 Rule 8 CPC which involve public interest or interest of numerous persons who are not parties before the court.

(In fact, even a compromise in such a suit is a difficult process requiring notice to the persons interested in the suit, before its acceptance).

(ii) 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.).

19

(iii) Cases involving grant of authority by the court after enquiry, as for example, suits for grant of probate or letters of administration.

(iv) Cases involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coercion etc.

(v) Cases requiring protection of courts, as for example, claims against minors, deities and mentally challenged and suits for declaration of title against government.

(vi) Cases involving prosecution for criminal offences.

19. All other suits and cases of civil nature in particular the following

categories of cases (whether pending in civil courts or other special

Tribunals/Forums) are normally suitable for ADR processes :

(i) All cases relating to trade, commerce and contracts, including

- disputes arising out of contracts (including all money claims);

- disputes relating to specific performance; - disputes between suppliers and customers; - disputes between bankers and customers; - disputes between developers/builders and customers; - disputes between landlords and tenants/licensor and licensees; - disputes between insurer and insured;

(ii) All cases arising from strained or soured relationships, including

- disputes relating to matrimonial causes, maintenance, custody of children; - disputes relating to partition/division among family members/co- parceners/co-owners; and 20

- disputes relating to partnership among partners.

(iii) All cases where there is a need for continuation of the pre-existing relationship in spite of the disputes, including

- disputes between neighbours (relating to easementary rights, encroachments, nuisance etc.);

- disputes between employers and employees; - disputes among members of societies/associations/Apartment owners Associations;

(iv) All cases relating to tortious liability including

- claims for compensation in motor accidents/other accidents; and

(v) All consumer disputes including

- disputes where a trader/supplier/manufacturer/service provider is

keen to maintain his business/professional reputation and credibility or `product popularity.

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.

How to decide the appropriate ADR process under section 89?

20. Section 89 refers to five types of ADR procedures, made up of one

adjudicatory process (arbitration) and four negotiatory (non adjudicatory)

processes - conciliation, mediation, judicial settlement and Lok Adalat 21

settlement. The object of section 89 of the Code is that settlement should be

attempted by adopting an appropriate ADR process before the case proceeds

to trial. Neither section 89 nor Rule 1A of Order 10 of the Code is intended

to supersede or modify the provisions of the Arbitration and Conciliation

Act, 1996 or the Legal Services Authorities Act, 1987. On the other hand,

section 89 of the Code makes it clear that two of the ADR processes -

Arbitration and Conciliation, will be governed by the provisions of the AC

Act and two other ADR Processes - Lok Adalat Settlement and Mediation

(See : amended definition in para 18 above), will be governed by the Legal

Services Authorities Act. As for the last of the ADR processes - judicial

settlement (See : amended definition in para 18 above), section 89 makes it

clear that it is not governed by any enactment and the court will follow such

procedure as may be prescribed (by appropriate rules).

21. Rule 1A of Order 10 requires the court to give the option to the

parties, to choose any of the ADR processes. This does not mean an

individual option, but a joint option or consensus about the choice of the

ADR process. On the other hand, section 89 vests the choice of reference to

the court. There is of course no inconsistency. Section 89 of the Code gives

the jurisdiction to refer to ADR process and Rules 1A to IC of Order 10 lay 22

down the manner in which the said jurisdiction is to be exercised. The

scheme is that the court explains the choices available regarding ADR

process to the parties, permits them to opt for a process by consensus, and if

there is no consensus, proceeds to choose the process.

22. Let us next consider which of the ADR processes require mutual

consent of the parties and which of them do not require the consent of

parties.

Arbitration

23. Arbitration is an adjudicatory dispute resolution process by a private

forum, governed by the provisions of the AC Act. The said Act makes it

clear that there can be reference to arbitration only if there is an `arbitration

agreement' between the parties. If there was a pre-existing arbitration

agreement between the parties, in all probability, even before the suit

reaches the stage governed by Order 10 of the Code, the matter would have

stood referred to arbitration either by invoking section 8 or section 11 of the

AC Act, and there would be no need to have recourse to arbitration under

section 89 of the Code. Section 89 therefore pre-supposes that there is no

pre-existing arbitration agreement. Even if there was no pre-existing 23

arbitration agreement, the parties to the suit can agree for arbitration when

the choice of ADR processes is offered to them by the court under section 89

of the Code. Such agreement can be 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. Once there is

such an agreement in writing signed by parties, the matter can be referred to

arbitration under section 89 of the Code; and on such reference, the

provisions of AC Act will apply to the arbitration, and as noticed in Salem

Bar-I, the case will go outside the stream of the court permanently and will

not come back to the court.

24. 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. 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.

24

24.1) In Salem Bar (I), this Court held :

"It is quite obvious that the reason why Section 89 has been inserted is to try and see that all the cases which are filed in court need not necessarily be decided by the court itself. Keeping in mind the law's delays and the limited number of Judges which are available, it has now become imperative that resort should be had to alternative dispute resolution mechanism with a view to bring to an end litigation between the parties at an early date. The alternative dispute resolution (ADR) mechanism as contemplated by Section 89 is arbitration or conciliation or judicial settlement including settlement through Lok Adalat or mediation. x x x x x If the parties agree to arbitration, then the provisions of the Arbitration and Conciliation Act, 1996 will apply and that case will go outside the stream of the court but resorting to conciliation or judicial settlement or mediation with a view to settle the dispute would not ipso facto take the case outside the judicial system. All that this means is that effort has to be made to bring about an amicable settlement between the parties but if conciliation or mediation or judicial settlement is not possible, despite efforts being made, the case will ultimately go to trial."

(Emphasis supplied)

24.2) In Salem Bar - (II), this Court held :

"Some doubt as to a possible conflict has been expressed in view of used of the word "may" in Section 89 when it stipulates that "the court may reformulate the terms of a possible settlement and refer the same for" and use of the word "shall" in Order 10 Rule 1-A when it states that "the court shall direct the parties to the suit to opt either mode of the settlement outside the court as specified in sub-section (1) of Section 89".

The intention of the legislature behind enacting Section 89 is that where it appears to the court that there exists an element of a settlement which may be acceptable to the parties, they, at the instance of the court, shall be made to apply their mind so as to opt for one or the other of the four ADR methods mentioned in the section and if the parties do not agree, the court shall refer them to one or the other of the said modes. Section 89 uses both the words "shall" and "may" whereas Order 10 Rule 1-A uses the word "shall" but on harmonious reading of these provisions it becomes clear that the use of the word "may" in Section 89 only governs the aspect of reformulation of the terms of a possible settlement and its reference to one of ADR methods. There is no conflict. It is evident that what is referred to one of the ADR modes is the dispute which is summarized in the terms of settlement formulated or reformulated in terms of Section 89. 25

One of the modes to which the dispute can be referred is "arbitration". Section 89(2) provides that where a dispute has been referred for arbitration or conciliation, the provisions of the Arbitration and Conciliation Act, 1996 (for short "the 1996 Act") shall apply as if the proceedings for arbitration or conciliation were referred for settlement under the provisions of the 1996 Act. Section 8 of the 1996 Act deals with the power to refer parties to arbitration where there is arbitration agreement. As held in P.Anand Gajapathi Raju v. P.V.G. Raju [2000 (4) SCC 539] the 1996 Act governs a case where arbitration is agreed upon before or pending a suit by all the parties. The 1996 Act, however, does not contemplate a situation as in Section 89 of the Code where the court asks the parties to choose one or other ADRs including arbitration and the parties choose arbitration as their option. Of course, the parties have to agree for arbitration."

(Emphasis

supplied)

24.3) The position was reiterated by this Court in Jagdish Chander v.

Ramesh Chander [2007 (5) SCC 719] thus :

"It should not also be overlooked that even though Section 89 mandates courts to refer pending suits to any of the several alternative dispute resolution processes mentioned therein, there cannot be a reference to arbitration even under Section 89 CPC, unless there is a mutual consent of all parties, for such reference."

(Emphasis supplied)

24.4) Therefore, where there is no pre-existing arbitration agreement

between the parties, the consent of all the parties to the suit will be

necessary, for referring the subject matter of the suit to arbitration under

section 89 of the Code.

26

Conciliation

25. Conciliation is a non-adjudicatory ADR process, which is also

governed by the provisions of AC Act. There can be a valid reference to

conciliation only if both parties to the dispute agree to have negotiations

with the help of a third party or third parties either by an agreement or by the

process of invitation and acceptance provided in section 62 of AC Act

followed by appointment of conciliator/s as provided in section 64 of AC

Act. If both parties do not agree for conciliation, there can be no

`conciliation'. As a consequence, as in the case of arbitration, the court

cannot refer the parties to conciliation under section 89, in the absence of

consent by all parties. As contrasted from arbitration, when a matter is

referred to conciliation, the matter does not go out of the stream of court

process permanently. If there is no settlement, the matter is returned to the

court for framing issues and proceeding with the trial.

The other three ADR Processes

26. If the parties are not agreeable for either arbitration or conciliation,

both of which require consent of all parties, the court has to consider which 27

of the other three ADR processes (Lok Adalat, Mediation and Judicial

Settlement) which do not require the consent of parties for reference, is

suitable and appropriate and refer the parties to such ADR process. If

mediation process is not available (for want of a mediation centre or

qualified mediators), necessarily the court will have to choose between

reference to Lok Adalat or judicial settlement. If facility of mediation is

available, then the choice becomes wider. It the suit is complicated or

lengthy, mediation will be the recognized choice. If the suit is not

complicated and the disputes are easily sortable or could be settled by

applying clear cut legal principles, Lok Adalat will be the preferred choice.

If the court feels that a suggestion or guidance by a Judge would be

appropriate, it can refer it to another Judge for dispute resolution. The court

has used its discretion in choosing the ADR process judiciously, keeping in

view the nature of disputes, interests of parties and expedition in dispute

resolution.

Whether the settlement in an ADR process is binding in itself ?

27. When the court refers the matter to arbitration under Section 89 of the

Act, as already noticed, the case goes out of the stream of the court and

becomes an independent proceeding before the arbitral tribunal. Arbitration 28

being an adjudicatory process, it always ends in a decision. There is also no

question of failure of ADR process or the matter being returned to the court

with a failure report. The award of the arbitrators is binding on the parties

and is executable/enforceable as if a decree of a court, having regard to

Section 36 of the AC Act. If any settlement is reached in the arbitration

proceedings, then the award passed by the Arbitral Tribunal on such

settlement, will also be binding and executable/enforceable as if a decree of

a court, under Section 30 of the AC Act.

28. The other four ADR processes are non-adjudicatory and the case does

not go out of the stream of the court when a reference is made to such a non-

adjudicatory ADR forum. The court retains its control and jurisdiction over

the case, even when the matter is before the ADR forum. When a matter is

settled through conciliation, the Settlement Agreement is enforceable as if it

is a decree of the court having regard to Section 74 read with Section 30 of

the AC Act. Similarly, when a settlement takes place before the Lok Adalat,

the Lok Adalat award is also deemed to be a decree of the civil court and

executable as such under Section 21 of the Legal Services Authorities Act,

1987. Though the settlement agreement in a conciliation or a settlement

award of a Lok Adalat may not require the seal of approval of the court for

its enforcement when they are made in a direct reference by parties without 29

the intervention of court, the position will be different if they are made on a

reference by a court in a pending suit/proceedings. As the court continues to

retain control and jurisdiction over the cases which it refers to conciliations,

or Lok Adalats, the settlement agreement in conciliation or the Lok Adalat

award will have to be placed before the court for recording it and disposal in

its terms. Where the reference is to a neutral third party (`mediation' as

defined above) on a court reference, though it will be deemed to be reference

to Lok Adalat, as court retains its control and jurisdiction over the matter,

the mediation settlement will have to be placed before the court for

recording the settlement and disposal. Where the matter is referred to

another Judge and settlement is arrived at before him, such settlement

agreement will also have to be placed before the court which referred the

matter and that court will make a decree in terms of it. Whenever such

settlements reached before non-adjudicatory ADR Fora are placed before the

court, the court should apply the principles of Order 23 Rule 3 of the Code and

make a decree/order in terms of the settlement, in regard to the subject matter of

the suit/proceeding. In regard to matters/disputes which are not the subject matter

of the suit/proceedings, the court will have to direct that the settlement shall be

governed by Section 74 of AC Act (in respect of conciliation settlements) or

Section 21 of the Legal Services Authorities Act, 1987 (in respect of settlements

by a Lok Adalat or a Mediator). Only then such settlements will be effective. 30

Summation

29. Having regard to the provisions of Section 89 and Rule 1-A of

Order 10, the stage at which the court should explore whether the matter

should be referred to ADR processes, is after the pleadings are complete,

and before framing the issues, when the matter is taken up for preliminary

hearing for examination of parties under Order 10 of the Code. However, if

for any reason, the court had missed the opportunity to consider and refer the

matter to ADR processes under Section 89 before framing issues, nothing

prevents the court from resorting to Section 89 even after framing issues.

But once evidence is commenced, the court will be reluctant to refer the

matter to the ADR processes lest it becomes a tool for protracting the trial.

30. Though in civil suits, the appropriate stage for considering reference

to ADR processes is after the completion of pleadings, in family disputes or

matrimonial cases, the position can be slightly different. In those cases, the

relationship becomes hostile on account of the various allegations in the

petition against the spouse. The hostility will be further aggravated by the

counter-allegations made by the respondent in his or her written statement or

objections. Therefore, as far as Family Courts are concerned, the ideal stage 31

for mediation will be immediately after service of respondent and before the

respondent files objections/written statements. Be that as it may.

31. We may summarize the procedure to be adopted by a court under

section 89 of the Code as under :

a) When the pleadings are complete, before framing issues, the court shall fix a preliminary hearing for appearance of parties. The court should acquaint itself with the facts of the case and the nature of the dispute between the parties.

b) The court should first consider whether the case falls under any of the category of the cases which are required to be tried by courts and not fit to be referred to any ADR processes. If it finds the case falls under any excluded category, it should record a brief order referring to the nature of the case and why it is not fit for reference to ADR processes. It will then proceed with the framing of issues and trial.

c) In other cases (that is, in cases which can be referred to ADR processes) the court should explain the choice of five ADR processes to the parties to enable them to exercise their option.

d) The court should first ascertain whether the parties are willing for arbitration. The court should inform the parties that arbitration is an adjudicatory process by a chosen private forum and reference to 32

arbitration will permanently take the suit outside the ambit of the court. The parties should also be informed that the cost of arbitration will have to be borne by them. Only if both parties agree for arbitration, and also agree upon the arbitrator, the matter should be referred to arbitration.

e) If the parties are not agreeable for arbitration, the court should ascertain whether the parties are agreeble for reference to conciliation which will be governed by the provisions of the AC Act. If all the parties agree for reference to conciliation and agree upon the conciliator/s, the court can refer the matter to conciliation in accordance with section 64 of the AC Act.

f) If parties are not agreeable for arbitration and conciliation, which is likely to happen in most of the cases for want of consensus, the court should, keeping in view the preferences/options of parties, refer the matter to any one of the other three other ADR processes :

(a) Lok Adalat; (b) mediation by a neutral third party facilitator or mediator; and (c) a judicial settlement, where a Judge assists the parties to arrive at a settlement.

(g) If the case is simple which may be completed in a single sitting, or cases relating to a matter where the legal principles are clearly settled and there is no personal animosity between the parties (as in the case of motor accident claims), the court may refer the matter to Lok Adalat. In case where the questions are complicated or cases which may require several rounds of negotiations, the court 33

may refer the matter to mediation. Where the facility of mediation is not available or where the parties opt for the guidance of a Judge to arrive at a settlement, the court may refer the matter to another Judge for attempting settlement.

(h) If the reference to the ADR process fails, on receipt of the Report of the ADR Forum, the court shall proceed with hearing of the suit.

If there is a settlement, the court shall examine the settlement and make a decree in terms of it, keeping the principles of Order 23 Rule 3 of the Code in mind.

(i) If the settlement includes disputes which are not the subject matter of the suit, the court may direct that the same will be governed by Section 74 of the AC Act (if it is a Conciliation Settlement) or Section 21 of the Legal Services Authorities Act, 1987 (if it is a settlement by a Lok Adalat or by mediation which is a deemed Lok Adalat). This will be necessary as many settlement agreements deal with not only the disputes which are the subject matter of the suit or proceeding in which the reference is made, but also other disputes which are not the subject matter of the suit.

(j) If any term of the settlement is ex facie illegal or unforceable, the court should draw the attention of parties thereto to avoid further litigations and disputes about executability.

34

32. The Court should also bear in mind the following consequential

aspects, while giving effect to Section 89 of the Code :

(i) If the reference is to arbitration or conciliation, the court has to record that the reference is by mutual consent. Nothing further need be stated in the order sheet.

(ii) If the reference is to any other ADR process, the court should briefly record that having regard to the nature of dispute, the case deserves to be referred to Lok Adalat, or mediation or judicial settlement, as the case may be. There is no need for an elaborate order for making the reference.

(iii) The requirement in Section 89(1) that the court should formulate or reformulate the terms of settlement would only mean that court has to briefly refer to the nature of dispute and decide upon the appropriate ADR process.

(iv) If the Judge in charge of the case assists the parties and if settlement negotiations fail, he should not deal with the adjudication of the matter, to avoid apprehensions of bias and prejudice. It is therefore advisable to refer cases proposed for Judicial Settlement to another Judge.

(v) If the court refers the matter to an ADR process (other than Arbitration), it should keep track of the matter by fixing a hearing date for the ADR Report. The period allotted for the ADR process can normally vary from a week to two months (which may be extended in exceptional cases, depending upon the availability of the alternative forum, the nature of case etc.). Under no circumstances the court should allow the ADR process to 35

become a tool in the hands of an unscrupulous litigant intent upon dragging on the proceedings.

(vi) Normally the court should not send the original record of the case when referring the matter for an ADR forum. It should make available only copies of relevant papers to the ADR forum. (For this purpose, when pleadings are filed the court may insist upon filing of an extra copy).

However if the case is referred to a Court annexed Mediation Centre which is under the exclusive control and supervision of a Judicial Officer, the original file may be made available wherever necessary.

33. The procedure and consequential aspects referred to in the earlier two

paragraphs are intended to be general guidelines subject to such changes as

the concerned court may deem fit with reference to the special circumstances

of a case. We have referred to the procedure and process rather elaborately

as we find that section 89 has been a non-starter with many courts. 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. 36

Conclusion

34. Coming back to this case, we may refer to the decision in Sukanya

Holdings relied upon by the respondents, to contend that for a reference to

arbitration under section 89 of the Code, consent of parties is not required.

The High Court assumed that Sukanya Holdings has held that section 89

enables the civil court to refer a case to arbitration even in the absence of an

arbitration agreement. Sukanya Holdings does not lay down any such

proposition. In that decision, this Court was considering the question as to

whether an application under section 8 of the AC Act could be maintained

even where a part of the subject matter of the suit was not covered by an

arbitration agreement. The only observations in the decision relating to

Section 89 are as under:

"Reliance was placed on Section 89 CPC in support of the argument that the matter should have been referred to arbitration. In our view, Section 89 CPC cannot be resorted to for interpreting Section 8 of the Act as it stands on a different footing and it would be applicable even in cases where there is no arbitration agreement for referring the dispute for arbitration. Further, for that purpose, the court has to apply its mind to the condition contemplated under Section 89 CPC and even if application under Section 8 of the Act is rejected, the court is required to follow the procedure prescribed under the said section."

The observations only mean that even when there is no existing arbitration

agreement enabling filing of an application under section 8 of the Act, there

can be a reference under section 89 to arbitration if parties agree to 37

arbitration. The observations in Sukanya Holdings do not assist the first

respondent as they were made in the context of considering a question as to

whether section 89 of the Code could be invoked for seeking a reference

under section 8 of the AC Act in a suit, where only a part of the subject-

matter of the suit was covered by arbitration agreement and other parts were

not covered by arbitration agreement. The first respondent next contended

that the effect of the decision in Sukanya Holdings is that "section 89 of

CPC would be applicable even in cases where there is no arbitration

agreement for referring the dispute to arbitration." There can be no dispute

in regard to the said proposition as Section 89 deals, not only with

arbitration but also four other modes of non-adjudicatory resolution

processes and existence of an arbitration agreement is not a condition

precedent for exercising power under Section 89 of the Code in regard to the

said four ADR processes.

35. In the light of the above discussion, we answer the questions as

follows :

(i) The trial court did not adopt the proper procedure while enforcing

Section 89 of the Code. Failure to invoke Section 89 suo moto after 38

completion of pleadings and considering it only after an application under

Section 89 was filed, is erroneous.

(ii) 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.

36. Consequently, this appeal is allowed and the order of the trial court

referring the matter to arbitration and the order of the High Court affirming

the said reference are set aside. The Trial Court will now consider and

decide upon a non-adjudicatory ADR process.

.............................J. (R V Raveendran)

New Delhi; ............................J. July 26, 2010. (J M Panchal)