Is Section 89 of CPC, 1908 really an attempt to put a cart before the horse? Can the clash between Section 89 of CPC and Section 73 of ‘The Arbitration And Conciliation Act,1996’ be resolved ?
The Arbitration Act, 1940 was replaced by the Arbitration and Conciliation Act, 1996. The object of the Act was to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards and also to define law relating to conciliation and for matters connected therewith or incidental thereto. It was in larger compliance with the United Nations Commission on International Trade Law (UNCITRAL)- The Model Law on International Commercial Arbitration in 1985.
Post WTO Free Trade regime and globalisation of world economy, commercial transactions had witnessed a sea-change in its nature. With growing complexities in world trade, there was an urgent need to revamp the conventional mechanism for speedy settlement of domestic and international commercial disputes. This was facilitated through alternative dispute resolution by means of arbitration, conciliation, mediation, and negotiation which are considerably speedy, inexpensive, and confidential as compared to the conventional method of court proceedings.
The Judgement of Afcons Infrastructure and Ors. v. Cherian Verkay Construction and Ors 2010 (8)SCC 24 changed the course of arbitration proceedings in India in addition to Salem Advocate Bar Association case. The scope and interpretation of Section 89 of CPC,1908, suitability and unsuitability of arbitration for various disputes, consent of parties to the suit for arbitration , mandatoriness or voluntariness of ADR process and many other co-related issues were largely settled by the apex court burying the hatchet once and for all.
BRIEF FACTS OF THE CASE
Cochin Port Trust(2nd Respondent) entrusted the work of construction of certain bridges and roads to Afcons Infrastructure(appellants) under an agreement dated 20th April,2001. The appellants sub-contracted a part of the said work to the first respondent i.e. Cherian Varkey Construction (hereinafter referred as CV Constructions) under an agreement dated 1st August,2001. The agreement did not contain any provision for reference of the disputes to arbitration.
The first respondent Cherian Varkey Construction had filed a suit against appellants Afcons Infrastructure for recovery of Rs. 2,10,70,881 which includes the amount due to the appellants from the employer with interest .
In the same suit an order of attachment was made in regards to Rs.2.25 crores. The first respondent , CV Construction thereafter filed an application under section 89 of the CPC,1908 before the trial court praying that court may formulate the terms of settlement and refer the matter to arbitration.
Afcons Infrastructure filed a counter stating that they were not agreed for arbitration process under Section 89. Thus, the first respondent agreed for arbitration, whereas defendants 1 and 2 were not agreeable for arbitration.
The trial court held that since the claim was related to work contract , so dispute should be settled by arbitration. The appellants Afcons Infrastructure filed for revision against order of the trial court in High Court. It was dismissed by High Court holding that apparent tenor of section 89 of CPC permitted court, in appropriate cases to refer the dispute to arbitration even if parties are unwilling. The pre-existing arbitration agreement as mandated under Arbitration and Conciliation Act,1996 for referring the disputes to arbitration is inapplicable under section 89 of CPC,1908, further stated the court.
The said order of the Kerela High Court was thus challenged in Supreme Court through an appeal.
ISSUE BEFORE THE COURT
On the contentions pressed by the appellant, two questions arise for consideration before the apex court –
What is the procedure to be followed by a court in implementing Section 89 of CPC,1908 and Order 10 Rule 1A of the Code ?
Whether Consent of all the parties to the dispute/suit is mandatory for reference to arbitration under Section 89 of the Code?
Section 89 was incorporated in the Code of Civil Procedure, 1908 by the Amendment Act of 1999 to resolve the disputes without going to trial and pursuant to recommendations of the Law Commission and Malimath Committee report. The object, purpose, scope, and tenor of Section 89 was dealt in-depth by the apex court in this case.
Section 89 of CPC deals with Settlement of disputes outside the court and it reads- 1)Where it appears to the court that there exist elements of 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 the dispute has been referred –
a) for arbitration or conciliation , the provisions of Arbitration and Conciliation Act,1996 shall apply as if the proceedings for the arbitration or conciliation were referred for the 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 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 Lok Adalat and all the provisions of the Legal Services Authority Act,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 89.
A bare perusal of Section 89 can seem to be nothing more than importation of Section 73 of the Arbitration and Conciliation Act,1996 which to a much extent is like its replica. Section 73 of the 1996 Act has provision for settlement agreement and it reads- 1) When it appears to conciliator that there exist elements of settlement which may be acceptable to the parties, he shall formulate the terms of a possible settlement and give them to the parties for their observations. After receiving the observations of the parties, the conciliator may reformulate the terms of a possible settlement in light of such observations.
2) If parties reach agreement on a settlement of the dispute, they may draw up and sign a written agreement. If requested by the parties, the conciliator may draw up, or assist the parties in drawing up, the settlement agreement.
3) When the parties sign the settlement agreement, it shall be final and binding on the parties and the persons claiming under them respectively.
4) The conciliator shall authenticate the settlement agreement and furnish a copy thereof to each of the parties.
One may infer that Section 89 is trying to transcend the express powers of ADR mechanism provided under Section 73 of 1996 Act. Furthermore, Section 89 also empowers the court to formulate and reformulate the terms of settlement at a stage prior to reference to an ADR process. Even if court draws the terms of settlement , those will be totally redundant in any subsequent ADR process. Thus, civil courts are unnecessarily burdened with the task of formulating the terms of settlement at a pre-reference stage.
Apex Court has thus aptly observed that Section 89 of CPC,1908 is like “putting a cart before the horse and is wholly impracticable, if not impossible, yet the object behind it was laudable.”
Section 89 of CPC presupposes that there is no-preexisting arbitration agreement between the parties. Its only when by means of a joint application, the parties to the dispute agree for ADR before the court , the matter can be referred to arbitration under section 89 of CPC and on such reference, the provisions of Section 8 or Section 11 of the Arbitration and Conciliation Act,1996 would apply. This will take the dispute out of the court stream once and for all.
Furthermore, the apex court pointed out various drafting errors in Section 89 of the Code of Civil Procedure,1908 . The first anomaly is the mixing up of the definitions of ‘mediation’ and ‘judicial settlement’ under the clauses (c) and (d) of the Sub-section( 1) of Section 89 of the Code.
Clause (c) states 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 reference is to mediation, the court shall affect 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 a mediation as is done in clause (d). One even wonders how can a reference of a dispute made by court to a suitable institution or a person for settlement purpose be described as a ‘judicial settlement’. The mix-up of terms ‘Judicial Settlement’ and ‘Mediation’ in Section 89 has indeed created a jumble and confusion and appear as typographical or clerical errors in drafting.
JUDGEMENT
Supreme Court pronounced that it’s not necessary for the court to formulate and reformulate the terms of possible settlement before referring the dispute to arbitration. It’s sufficient even if court merely describes the nature of dispute or its summary and makes the reference.
Section 89 starts with words- ‘where it appears to the court that there exists elements of settlement’. This amply implies that only those cases suitable for ADR should be referred by courts to ADR and cases which are not suited for ADR process should not be referred under Section 89 of the Code.
The suitability and unsuitability of cases for ADR process was elaborated by apex court by providing an illustrative list. The Supreme Court stated that all cases of civil nature whether pending in civil courts or any tribunals can be referred to ADR process such as-
All cases relating to trade, commerce, and contracts
All cases arising from strained relationship , such as matrimonial cases
All cases where there is a need for continuation of pre-existing relationship such as disputes between neighbours and members of societies
All cases relating to tortious liability, including motor accident claims and all consumer disputes.
The apex court also held that it’s not ‘Mandatory’ to refer the parties to any ADR process in all cases. Where case falls under an excluded category, the court need not refer it to ADR process. In all other cases, reference to ADR is a must.
It was also held that a civil court cannot refer a suit to arbitration unless all the parties to the suit agree for such a reference. Thus, consent of parties in suit will be necessary for referring the subject-matter of the suit to arbitration.
CONCLUSION
ADR mechanism facilitates speedy resolution of disputes. It also reduces the burden of civil courts that are already dealing with whopphing number of pending cases yet to be cleared by them. Furthermore, only those cases capable of being resolved through arbitration are referred to ADR mechanism. Under the Act of 1996, the award of arbitration is enforceable as if it were a decree of court. The Afcons case thus put an end to most of the debatable issues that were a bone of contention in ADR mechanism.
The author is a budding lawyer at Delhi.
The Arbitration Act, 1940 was replaced by the Arbitration and Conciliation Act, 1996. The object of the Act was to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards and also to define law relating to conciliation and for matters connected therewith or incidental thereto. It was in larger compliance with the United Nations Commission on International Trade Law (UNCITRAL)—The Model Law on International Commercial Arbitration in 1985.