Interpretation of S 89 CPC, 1908

Introduction

With this decision, the pro gratis alternate dispute resolution process for the Indian judicial  system has finally come to an end. Section 89 of the CPC, 1908, was necessary and brought  about a transformation in India’s ADR processes. The 238th Law Commission Report, dated  December 2011, about the amendment of Section 89 of the Code of Civil Procedure, provides  a thorough knowledge of the current process of Alternative Dispute Resolution and how the  dynamism of Section 89 could be stopped.

Afcons Infrastructure Ltd. & Anr. Vs. Cherian Varkey Construction Co.

With this decision, the pro gratis alternate dispute resolution process for the Indian judicial  system has finally come to an end. Section 89 of the CPC, 1908, was necessary and brought  about a transformation in India’s ADR processes. The 238th Law Commission Report, dated  December 2011, about the amendment of Section 89 of the Code of Civil Procedure, provides  a thorough knowledge of the current process of Alternative Dispute Resolution and how the  dynamism of Section 89 could be stopped.

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CPC

Facts of the case 

The Cochin Port Trust (2nd Respondent) hired Afcons Infrastructure and Ors. to develop bridges and highways under a contract dated April 20, 2001. The Afcons Infrastructure and Ors. subcontracted Cherian Varkey Construction (1st Respondent) to execute part of the aforementioned work on 1.8.2001.

Cherian Varkey Construction sued Afcons Infrastructure and Others for Rs. 210,70,881, including the employer’s debt to the appellants and 18% interest.

A court attached Rs. 2.25 crores in the same action on September 15, 2004. In March 2005, Cherian Varkey Construction applied to the trial court under section 89 of the CPC to determine settlement terms and refer the issue to arbitration.

On October 24, 2005, Afcons Infrastructure and Ors. responded to the application, claiming that they will not submit the issue to arbitration or other ADR procedures as provided for in Section 89 of the Code.

The High Court of Kerala accepted the appellants’ appeal against the attachment order dated 8.9.2005 and raised the trial court’s attachment order with some conditions. The High Court further ordered the trial court to consider the first respondent’s Code section 89 application.

The trial court allowed the Section 89 Code application after hearing from the parties. Appellants then appealed the trial court’s decision.

The High Court dismissed the revision petition by the challenged order of 11.10.2006, ruling that section 89 of the Code authorised the court to submit even reluctant parties to arbitration. Supreme Court contested this order in an appeal.

Why did Parliament think it fit to introduce S 89? Object of S 89.

S 89 of The Code which provides for the alternative dispute resolution mechanism allows court  to formulate the terms of settlement between the parties and give any of the four terms vis a vis  – arbitration, conciliation, mediation, Lok Adalat.

This is done after the parties to the settlement agree.

The purpose of sending the parties to alternate dispute forums was thought important by the  legislature as the use of alternative dispute resolution (ADR) procedures is needed to provide  quick and efficient relief to the parties involved in a dispute as well as to lessen the load on the  courts.

Thus, the object of S 89 is to require that, before a case goes to trial, an appropriate ADR  process be used to try and reach a settlement.

What is wrong with S 89 of The Code?

  1. Mixing up of definitions

The definitions of “mediation” and “judicial settlement” are mixed up.

Judicial Settlement in general means, settlement of a civil case with the help of a judge,  who is not assigned to adjudicate upon that dispute.

Mediation means non binding dispute resolution where dispute is resolved in the  presence of a neutral third party.

While in S 89 the Clause c of sub section 2, says that judicial settlement to be done  under any institution or person deemed to be Lok Adalat and Clause (d) of sub section  2 says that in mediation, court shall effect a compromise.

  1. Anomaly related to final stage of conciliation

Section 73(1) of the AC Act which mentions the final stage of conciliation is actually  the pre ADR reference stage in S 89 of The Code.

If sub section (1) of The Code is to be literally followed then, every trial judge will first  ascertain whether there is any scope of settlement, then, the court will formulate the  terms of reference, give them to parties for observation, and in this process, there is  nothing left to be done by ADR.

What is referred to as ADR is the dispute and not terms of settlement, thus, this marks  a major flaw in the section.

  1. The terms of settlement by court is only after the matter is discussed in detail with both the parties, mere settling on pleadings is not possible.

The court therefore, in Salem Bar(II) equated the “terms of settlement” with “summary  of disputes”

How should S 89 be interpreted?

Justice R.V. Raveendran held that,

Firstly, the court doesn’t have to formulate the terms of reference before referring the parties  to ADR, it can describe the nature of dispute (in short) and make the reference.

Second, to fix the draftsman’s mistake, the meanings of “judicial settlement” and “mediation”  in clauses (c) and (d) of section 89(2) must be switched.

What type of cases come under ADR?

It was held that the cases which are not suited for ADR process should not be referred under S  89 of the Code and the court has to briefly record the reasons of not referring a case under  ADR.

Justice R.V.Raveendran, gave a fair idea of types of cases that can come under ADR and that  cannot.

Cases that cannot come under ADR can be– Representative suits, election disputes, suit for  grant of probate or letters of administration, cases involving serious and specific allegations  (fraud,forgery.coercion etc), cases requiring protection of courts( minors, deities, mentally  challenged, title against government)

Cases that can come under ADR can be – all cases relating to trade, commerce, contract, dispute  arising out of contracts, between neighbours, tortious liability, consumer disputes.

Which of the ADR processes requires mutual consent of the parties?

  1. Arbitration 
  • Adjudicatory dispute resolution process.
  • Governed by the AC Act
  • There should be an “arbitration agreement” between the parties as per the above act.
  • If there is no agreement between the parties for reference to arbitration, the court cannot refer the matter to arbitration under this Code.
  • Thus, mutual consent is necessary before agreeing to the avenue of arbitration.
  1. Conciliation
  • Non adjudicatory ADR process.
  • Governed by provisions of AC Act.
  • Both parties should agree to conciliation, otherwise there won’t be any conciliation.
  • Consent by all parties is necessary for the court to refer the matter to conciliation.
  1. Mediation , Judicial Settlement, Lok Adalat
  • Does not require the consent of the parties for reference.

Whether the ADR process is binding in itself?

Arbitration – being an adjudicatory process always ends in decision and also the matter becomes  an independent proceeding, once its out of the court so, there is no question of failure of ADR  process matter being returned to the court.

Mediation, Lok Adalat, conciliation, Judicial Settlement – non adjudicatory thus, cases do not  go out of the stream of the court. Even if the matter is before the ADR forum, court retains its  control.

When should the court explore whether that matter should be referred to ADR?

  • After the pleadings, before framing issues, matter taken up of preliminary hearing under Order 10 of the Code.

Judgment

In this particular case, the Supreme Court cited the decision in Sukanya Holdings Case and  found that

  • the consent of the parties is not necessary to argue for a reference to arbitration under section 89 of the Code.
  • The Supreme Court has assumed that even in the absence of an arbitration agreement, section 89 permits the civil court to submit a case to arbitration. Sukanya Holdings doesn’t stipulate any such idea.
  • This Court was deciding whether an application under Section 8 of the AC Act could be maintained even while a portion of the lawsuit’s subject matter was not covered by an arbitration agreement in that ruling. The decision merely makes the following  observations in relation to Section 89:

The claim that the dispute ought to have been sent to arbitration was made with reference to  Section 89 CPC.

 The Court inferred that even in the absence of an arbitration agreement, the parties may  choose to use alternative dispute resolution (ADR) with mutual consent. Ultimately, the  Supreme Court shed clarity on this issue by issuing a landmark decision that reads as  follows:

  1. When enforcing Section 89 of the Code, the trial court did not follow the correct procedure. It is incorrect to ignore Section 89 suo moto after the pleadings are finished and to take it into account only after an application under Section 89 has been submitted.
  2. Unless all parties to the litigation agree, a civil court exercising its authority under Section 89 of the Code cannot send a case to arbitration.

Author: Himanshi Gupta, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

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