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Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd.: Its Revolutionary Impact on ADR
Alternate Dispute Resolution has long bene practised in India from the Panchayat system to the establishment of the first Lok Adalat, but its institutionalization is a fairly recent development following in the footsteps of Hong Kong and Singapore – countries globally acclaimed for their arbitration laws and rules. After the United Nations Commission on International Trade Law (UNCITRAL) Model on Commercial International Arbitration was adopted in 1985, India felt the need to institutionalize arbitration to create an appealing environment for international commercial arbitration in the country and so the Arbitration and Conciliation Act, 1996 was enacted[1]. This Act made the arbitration process quite clear, although there were some discrepancies, and to keep it at par with the ever-evolving legal system it has been amended twice. Under the Act, parties resolving a dispute through arbitration must have an arbitration clause in their agreement which specifies the details of submitting a dispute to arbitration. However, a parallel provision, Section 89, existed in the Code of Civil Procedure (CPC) which empowered the court to refer any matter to arbitration or other forms of Alternate Dispute Resolution if they feel like the dispute would be suitable for it. The problem with this Section was that it was unclear as to whether an arbitration agreement must be present between parties for the court to recommend the dispute to arbitration. The matter was left unresolved and to the courts’ discretion until the judgement in the case of Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd.[2] which ended the anomaly and made Alternate Dispute Resolution what it is today.
The facts of the case go like this, Cochin Port Trust contracted the construction of a number of bridges to Afcons Infrastructure Ltd., under an agreement on April 20, 2001. Afcons Infrastructure Ltd, the appellant in the case, sub-contracted some of the work to Cherian Varkey Construction Company, the respondent in the matter, on August 1, 2001. The agreement between the two construction companies did not contain an arbitration clause. Soon enough a dispute arose between the companies and the respondent filed a suit for recovery of around Rs. 21 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[3]. After that the respondent filed an application under Section 89 of the code before the trial court, requesting that the court refer the matter to arbitration. The appellant opposed the application, submitting that they were not willing to refer the matter to arbitration or any of the other ADR processes under Section 89 of the CPC. Furthermore, the appellant filed an appeal against the order of attachment and through an order dated September 8, 2005, the Kerala High Court allowed the appeal directed the Trial Court to consider and dispose of the application filed by the respondent under Section 89 of the CPC. The Trial Court heard the application under Section 89 and recorded that the respondent was agreeable to arbitration, but the appellant was not but, the Court still held that it was appropriate that the dispute be settled by arbitration since the subject matter related to a work contract[4]. Unhappy with the trial court's decision, the appellant filed a revision petition before the High Court, but the petition was dismissed and the Court held that Section 89 of the CPC permits courts, in appropriate cases, to refer even unwilling parties to arbitration. The High Court considered the requirement of a pre-existing arbitration agreement under the Arbitration and Conciliation Act, 1996 but agreed with the judgement in Sukunya Holdings (P) Ltd. v. Jayesh h. Pandya[5], to hold that it was not a necessary requirement for the courts to refer a matter to arbitration under Section 89 of the CPC. The appellant, as a final prayer, filed a Special Leave Petition before the Supreme Court of India.
The Supreme Court deliberated long and hard on the purose of Section 89 and the drafters’ intent behind it before applying purposive construction and deciding that although it is a poorly drafted provision it does presume the existence of an arbitration agreement between the parties[6]. However, if an arbitration agreement does not exist but the courts feel that the dispute would be best settled by arbitration, the dispute can be referred to arbitration but only if the parties consent to it. The Supreme Court read the provision in line with the Arbitration and Conciliation Act, 1996 and held that the courts have no authority, power or jurisdiction to refer unwilling parties to arbitration if there is no arbitration agreement[7].
The Supreme Court’s judgement has been applauded by many pro-ADR advocates, judges and common folk as it reinforces the voluntary nature of Alternate Dispute Resolution and it is also in consonance with the scheme of the Arbitration and Conciliation Act, 1996 which mandates an arbitration agreement. The judgement, with its interpretation of Section 89 of the CPC, has revolutionised Alternate Dispute Resolution in India holding that it is mandatory under the CPC but not if parties are unwilling.
[1] Editor, The Arbitration and Conciliation Act, 1996 – An Analytical Outlook, Shodhganga, (Apr. 10, 2020, 2:56 PM), https://shodhganga.inflibnet.ac.in/bitstream/10603/201576/10/10_chapter%204.pdf.
[2] Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd, (2010) 8 SCC 24.
[3] Manjeet Sahu, Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd, LegalServicesIndia, (Jun. 14, 2014, 7:16 PM), http://www.legalservicesindia.com/article/1248/Afcons-infrastructure-and-Ors.-v.--Cherian-Verkay-Construction-and-Ors.html.
[4] Ravichandran, Parties Must Agree To Have Their Disputes Resolved Through Arbitration – Even Under Section 89 of CPC!, Mondaq, (Jul. 19, 2011, 4:11 PM), https://www.mondaq.com/india/arbitration-dispute-resolution/137680/parties-must-agree-to-have-their-disputes-resolved-through-arbitration-even-under-section-89-of-cpc.
[5] Sukunya Holdings (P) Ltd. v. Jayesh h. Pandya, (2003) 5 SCC 531.
[6] Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd, (2010) 8 SCC 24.
[7] Dushyant Manocha, In the absence of an arbitration agreement, can courts refer parties to arbitration?, InternationalLawOffice, (Sep. 28, 2010, 9:27 PM), https://www.internationallawoffice.com/Newsletters/Litigation/India/Amarchand-Mangaldas-Suresh-A-Shroff-Co/In-the-absence-of-an-arbitration-agreement-can-courts-refer-parties-to-arbitration#3.
- Alternate Dispute Resolution
- Arbitration
- Arbitration Agreement
