Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd. (2010) 8 SCC 24

The case of Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. P. Ltd. stands as a cornerstone in the development and interpretation of Alternative Dispute Resolution (ADR) mechanisms in India. The Supreme Court’s decision clarified ambiguities in Section 89 of the Code of Civil Procedure, 1908 (CPC), providing a definitive framework for its application. Below is a detailed discussion of the case.

Facts of Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd. 

The dispute arose from a contractual relationship between the parties. The Cochin Port Trust engaged Afcons Infrastructure Ltd. (the appellant) to undertake certain construction projects, including bridges and roads. Afcons subsequently subcontracted a portion of the work to Cherian Varkey Construction Co. (the first respondent).

Cherian Varkey alleged non-payment for the work performed under the subcontract and filed a suit claiming Rs. 210,70,881 along with interest. The subcontract did not include an arbitration clause. In March 2005, Cherian Varkey filed an application under Section 89 of the CPC, requesting the trial court to formulate settlement terms and refer the matter to arbitration. Afcons opposed this, arguing that arbitration could not proceed without mutual consent.

The trial court allowed the application under Section 89, prompting Afcons to appeal to the Kerala High Court. The High Court upheld the trial court’s decision, stating that Section 89 did not require a pre-existing arbitration agreement. Dissatisfied, Afcons escalated the matter to the Supreme Court.

Issues Before the Court

The Supreme Court in Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. P. Ltd.  addressed the following critical issues in this case:

• Whether Section 89 of the CPC permits the court to refer disputes to arbitration without the mutual consent of the parties.
• What is the appropriate procedure for implementing Section 89 and Order 10 Rule 1A of the CPC?
• Whether settlements reached through ADR processes are binding in themselves.
• Is it mandatory for courts to consider referral to ADR processes in all cases?

Observations of the Court in Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd. 

Interpretation of Section 89

The Supreme Court in Afcons Infrastructure Ltd. versus Cherian Varkey Construction Co. P. Ltd emphasised that the language of Section 89 must be read plainly and logically. The provision starts with the words, “Where it appears to the court that there exist elements of a settlement,” signalling that the court must first evaluate whether ADR is appropriate for the case at hand.

Consent for Arbitration

The court clarified that arbitration and conciliation require mutual consent, as these processes are governed by the Arbitration and Conciliation Act, 1996. Without such consent, courts cannot refer a matter to arbitration under Section 89. However, mediation, judicial settlement, and Lok Adalat do not require consent.

Mandatory Consideration of ADR

The court observed that while courts must consider ADR in every case, referral is not mandatory for disputes falling under excluded categories, such as fraud, minors, and probate cases. When ADR is deemed unsuitable, the court must briefly record the reasons for not referring the matter to an alternative forum.

Correcting Drafting Errors in Section 89

The definitions of “Judicial Settlement” and “Mediation” in Section 89(2) clauses (c) and (d) were interchanged to rectify a drafting error. Judicial Settlement involves dispute resolution facilitated by a judge not presiding over the case, while Mediation involves non-binding facilitation by a neutral third party.

Binding Nature of ADR Outcomes

The court differentiated between adjudicatory and non-adjudicatory ADR mechanisms. Arbitration results in binding awards independent of court proceedings, whereas non-adjudicatory processes like mediation allow courts to retain supervisory control.

Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd. Judgement

The Supreme Court in Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd. ruled that the trial court had not followed the correct procedure in implementing Section 89. The trial court erred in waiting for an application under Section 89 instead of invoking the provision suo moto after the pleadings were completed.

Key highlights of the Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd judgement include:

• A civil court cannot refer a case to arbitration under Section 89 without mutual consent.
• Courts must mandatorily consider ADR for all cases unless they fall under specific excluded categories.
• ADR mechanisms, except arbitration and conciliation, do not require mutual consent.

The court provided a detailed procedural framework to ensure uniformity in applying Section 89.

Procedure for Implementing Section 89

The Supreme Court in Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd laid down specific guidelines for courts to follow while applying Section 89:

1. Timing of ADR Consideration: Courts must evaluate ADR suitability post-pleadings, after admission/denial of documents, and before framing issues under Order 10 Rule 1A.
2. Formulating Terms of Settlement: Courts need not draft detailed settlement terms but must briefly describe the dispute and select the appropriate ADR mechanism.
3. Role of Judges in Judicial Settlement: Judges facilitating settlement discussions must not adjudicate the case if negotiations fail, to avoid bias.
4. Recording Consent: For arbitration or conciliation, the court must explicitly record mutual consent.
5. Reasons for Non-Referral: If ADR is unsuitable, courts must briefly explain their rationale for not referring the dispute.

Conclusion

The Supreme Court’s decision in Afcons Infrastructure Ltd. v Cherian Varkey Construction Co. P. Ltd. is a milestone in the evolution of ADR in India. It provides much-needed clarity on the interpretation of Section 89, particularly in the context of arbitration, consent requirements, and procedural implementation. 

By addressing ambiguities and setting guidelines, the judgement paves the way for more effective utilisation of ADR processes in India’s judicial system. It underscores the critical role of ADR in alleviating the burden on courts while ensuring fair and equitable resolution of disputes.