Judgement Briefs

Alternative Dispute Resolution

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

(2010) 8 SCC 24

Citation
(2010) 8 SCC 24
Court
Supreme Court of India
Date
26 July 2010
Bench
R.V. Raveendran and J.M. Panchal, JJ.

Facts

  • Cochin Port Trust awarded infrastructure work involving bridges and roads to Afcons Infrastructure.
  • Afcons subcontracted part of that work to Cherian Varkey Construction Co.
  • The subcontract did not contain an arbitration clause.
  • Cherian Varkey later filed a civil suit seeking recovery of approximately ₹2.10 crore.
  • During the suit, it applied under Section 89 CPC and requested that the dispute be referred to arbitration.
  • Afcons expressly objected to:
  • arbitration; and
  • the other ADR methods proposed at that stage.
  • Despite this objection, the trial court held that a construction dispute was suitable for arbitration and referred it accordingly.
  • The trial court framed sixteen issues for the arbitrator.
  • The Kerala High Court upheld the order.
  • It reasoned that Section 89 permitted courts to refer unwilling parties to arbitration even without a pre-existing arbitration agreement.
  • Afcons appealed to the Supreme Court.

Issue

  • Whether Section 89 permits a civil court to compel parties to arbitrate without their consent.
  • What procedure courts should follow when applying Section 89 and Order X Rule 1A.
  • Which categories of disputes are ordinarily suitable or unsuitable for ADR.

Rule

  • Arbitration is an adjudicatory process based on consent.
  • A court cannot refer parties to arbitration unless:
  • a valid arbitration agreement already exists; or
  • all parties subsequently agree in writing to arbitration.
  • Conciliation similarly depends upon consent.
  • Courts must nevertheless conduct a meaningful Section 89 examination after pleadings are complete and before trial.
  • For non-adjudicatory processes such as mediation, Lok Adalat and judicial settlement, the court has wider power to make a suitable referral.
  • The judge need not formulate detailed settlement terms before reference.
  • It is sufficient to briefly identify the nature of the dispute and choose the appropriate ADR process.

Application

  • The Supreme Court first addressed drafting defects in Section 89.
  • The statutory descriptions of “mediation” and “judicial settlement” had effectively been interchanged.
  • The section also unrealistically appeared to require a judge to formulate and reformulate settlement terms before sending parties to ADR.
  • The Court corrected these anomalies through purposive interpretation.
  • The trial court should not attempt to negotiate the entire settlement itself.
  • It should:
  • examine the pleadings;
  • identify the dispute;
  • consider whether settlement is reasonably possible;
  • hear the parties on the appropriate process; and
  • make a suitable reference.
  • The Court then distinguished arbitration from mediation.
  • Arbitration replaces the civil court with a private adjudicator who gives a binding award.
  • Such transfer of adjudicatory authority cannot occur without party consent.
  • In the present case:
  • the subcontract contained no arbitration clause;
  • Afcons had expressly refused arbitration; and
  • no later written arbitration agreement was created.
  • The trial court therefore had no authority to impose arbitration merely because it considered arbitration efficient.
  • The Court also offered guidance on suitability.
  • Cases ordinarily suitable for ADR include:
  • commercial and contractual claims;
  • money disputes;
  • family disputes;
  • consumer matters;
  • tort claims; and
  • disputes involving continuing relationships.
  • Cases ordinarily unsuitable include:
  • representative suits;
  • election disputes;
  • probate matters;
  • serious allegations of fraud or coercion;
  • cases affecting minors or persons under disability;
  • certain public-law claims; and
  • criminal prosecutions.
  • These categories were guides rather than inflexible rules.
  • The Court emphasised that considering ADR is mandatory, but achieving settlement is not.
  • A court must make an honest assessment and record why reference is or is not appropriate.

Conclusion

  • The Supreme Court set aside the compulsory reference to arbitration.
  • It held that arbitration under Section 89 requires the consent of all parties.
  • The matter was returned to the trial court to consider whether another suitable ADR process could be used.
  • The Court laid down a comprehensive practical roadmap for Section 89 referrals.
  • Use this case for: courts must consider ADR, but they cannot compel parties to arbitrate without an arbitration agreement or subsequent consent.