Afcon infrastructure case analysis

Table of Content

Case name : Afcon Infrastructure v. cherian varkey Construction Ltd Citation : (2010) 8 SCR 1053

I) In the instant matter, the Cochin Port Trust (Second Respondent) entrusted the work of construction of certain bridges to Afcon Infrastructure Ltd ( Appellants) in 2001. The Appellants sub-contracted a part of the said work to Cherian Varkey Construction (First Respondent) duirng the same year without any provision for reference to arbitration. II) M/s Cherian Varkey Construction filed a suit against the appellant for recovery Rs 2,10,70,881/- along with interest of 18% per annum. In the suit an order of attachment was made in 2004 for the sum of 2.25 crores. Thereafter, the first respondent filed an application under section 89 Code of Civil Procedure praying before the Trial Court to refer the matter to arbitration.

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The Appellant opposed the application stating there disagreement for reference of the matter to arbitration or any other Alternative Dispute Resolution process mentioned under section 89 of CPC. III) Meanwhile, the Appellant filed an appeal against the order of attachment in the High Court of Kerala which was allowed in favour of the Appellant subject to certain conditions. Furthermore, the honorable High Court directed the Trial Court to consider and dispose of the application under section 89. The trial court allowed the said application under section 89 by a reasoned order 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. The appellants filed a revision against the order of the trial court but the revision application was dismissed.

Reason For Dismisal Of Revision Application

IV) 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] Against the said order a Special Leave Petition was filed in Honorable Supreme Court. Issues Before The Supreme Court :

(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? Contention of The Appellant :

The Appellant contended that reference to any ADR process cannot be made without the consent of both the parties. Moreover Order 10 Rule 1 A requires the court to offer the choice of ADR process and then decide.

Contention of The Respondent :
The Respondent contended that the court is empowered under section 89 of the code of civil procedure to suo motto refer the dispute to ADR processes despite the absence of mutual consent of both parties.

Judgment of The Court : Appeal is Allowed

Order of The Court : The Trial Court shall consider and decide upon a non-adjudicatory ADR process.

Reasoning of The Court :
Mutual Consent Essential For ADR Under Section 89 CPC
A) 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.- Reliance was placed on Salem Bar Association Case (I).

B) 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 will be governed by the Legal Services Authorities Act.

No Inconsistency Between Order 10 Rule 1A & Section 89 of Code of Civil Procedure

A) 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 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.

Binding Nature of The ADR Process

A) 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. B) If 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. C) 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.

Important Observations of The Court :
The court observed certain anomalies which are enumerated as follows : –

A) 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. B) 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.

Ratio Decidendi : – Mutual Consent of the parties is an essential requirement for reference to ADR process mentioned under section 89 of the

Case Comment :
In the instant matter, the court is correct in holding that Section 89 of CPC is not a special departure from legislation governing the ADR process. However, if the mandatory nature is adopted within the scheme of Section 89 then it would further the cause of justice and expedite the dispute resolution. The underpinning rationale being that it would allow a great deal of flexibility for handling disputes consequentially foster better management of case load in the court. For instance, the trial court could retain dispute for trial with itself if the matter is of public importance or requires urgent attention and pass down cases which can be better resolved by ADR mechanism. In addition, it solves the problems arising out of poor judge to population ratio- the current ratio being 15.5 judges per million of population and may go on to cure many more ills of the formal court process.

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