September 28 2010
In Afcons Infrastructure Ltd v Cherian Varkey Construction Co (P) Ltd(1) the Supreme Court was faced with the question of whether the court, in the absence of an arbitration agreement between the parties, was competent to refer the parties to arbitration under Section 89 of the Code of Civil Procedure 1908.(2) After an elaborate discussion on the scheme of alternate dispute resolution enshrined within the code, the court held that unless both parties consent to such referral, the courts cannot refer the parties to arbitration under Section 89 of the code.
Cochin Port Trust contracted out the construction of a number of bridges and roads to M/s Afcons Infrastructure Ltd, the appellant, under an agreement dated April 20 2001. The appellant subcontracted part of the work to M/s Cherian Varkey Construction Co (P) Ltd, the respondent, under an agreement dated August 1 2001. This agreement contained no provision for referral of disputes to arbitration.
When disputes arose between the appellant and the respondent, the respondent filed a suit for recovery of around Rs21 million against the appellant and its assets or the amounts due to the appellant from the Cochin Port Trust, with interest charged at 18% a year. On September 15 2004 an order of attachment was made with regard to a sum of Rs22.5 million. Thereafter, in March 2005 the respondent filed an application under Section 89 of the code before the trial court, requesting that the court formulate the terms of settlement and refer the matter to arbitration. The appellant opposed the application, submitting that it was not agreeable to refer the matter to arbitration or any of the other alternative dispute resolution processes under Section 89 of the code.
Furthermore, the appellant filed an appeal against the order of attachment. Through an order dated September 8 2005, the Kerala High Court allowed the appeal and raised the attachment granted by the trial court, subject to certain conditions. The high court also directed the trial court to consider and dispose of the application filed by the respondent under Section 89 of the code.
The trial court heard the application under Section 89 and recorded that the respondent was agreeable to arbitration, but the appellant was not. However, the trial court allowed the application and held that as the appellant's claim in the suit related to a work contract, it was appropriate that the disputes be settled by arbitration.
Aggrieved by the trial court's decision, the appellant preferred a revision petition before the high court. Through an order dated October 11 2006 the court dismissed the revision petition and held that Section 89 permits courts in appropriate cases to refer even unwilling parties to arbitration. The court held that the concept of a pre-existing arbitration agreement, which was necessary for referral to arbitration under the provisions of the Arbitration and Conciliation Act 1996, was inapplicable to referrals under Section 89 with regard to the Supreme Court decision in Sukanya Holdings (P) Ltd v Jayesh H Pandya.(3)
Aggrieved by the high court's decision, the appellant filed a special leave petition before the Supreme Court.
After an elaborate discussion on the scheme of Section 89, the Supreme Court observed that Section 89 was a poorly drafted provision of law. However, applying the principle of purposive construction, the court held that the section presupposes the non-existence of an arbitration agreement. However, even in the absence of an arbitration agreement, the parties, if willing, could opt for arbitration under Section 89, and it is only in such situations (ie, where the parties are willing) that a court is competent to refer the dispute to arbitration.
The Supreme Court held that if there is no agreement between the parties for reference to arbitration, the court cannot refer the matter to arbitration under Section 89, and that the same is clear from the provisions of the Arbitration and Conciliation Act. The court observed that a court has no power, authority or jurisdiction to refer unwilling parties to arbitration if there is no arbitration agreement. Although the legal position in India has consistently been that Section 89 mandates reference to alternative dispute resolution processes, reference to arbitration under Section 89 can be made only with the consent of both sides.
The Supreme Court has correctly held that in the absence of an arbitration agreement, the courts cannot refer an unwilling party to arbitration. It is stated that since arbitration is essentially an adjudicatory mechanism resulting in the exclusion of other conventional remedies, the parties must be willing and the court cannot force such a mechanism on unwilling parties. This interpretation given by the Supreme Court to Section 89 of the Code of Civil Procedure is also in consonance with the scheme of the Arbitration and Conciliation Act, which presupposes the existence of an arbitration agreement for parties to be mandatorily referred to arbitration.
For further information on this topic please contact Vijayendra P Singh or Dushyant Manocha at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email (firstname.lastname@example.org or email@example.com).
(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:
(c) judicial settlement including settlement through Lok Adalat; or
(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."
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Vijayendra P Singh