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Role of Courts in the absence of an Arbitration Agreement

Introduction:

The laws governing arbitration agreements in India and enforcement of foreign arbitral awards are embodied in the Arbitration and Conciliation Act, 1999. Section 89 of the Code of Civil Procedure 1908 (“Code”) gives authority to the courts to refer some cases to arbitration. Provision under Order 10, Rule 1A of the Code also deals with direction of the courts to opt for any of the modes of alternate dispute resolution. 

In the recent case of Afcons Infrastructure Ltd v Cherian Varkey Construction Co (P) Ltd.,[1] the Supreme Court (“SC”) was challenged with a situation whether the court can refer the parties to arbitration under section 89 of the Code in theabsence of an arbitration agreement between the parties. After an elaborate and detailed analysis, the Division bench held that the Civil Courts are not empowered to refer a suit to arbitration without the consent of both parties and the consent of all parties to the suit is mandatory for reference to arbitration under section 89 of the Code. 

In this case, Cochin Port Trust (“the second respondent”) was entrusted with the work of construction of certain bridges and roads for Afcons Infrastructure (“the appellants”) under an agreement dated 20th April, 2001. The appellants sub-contracted a part of the construction work to Cherian (“the first respondent”) under an agreement dated 1st August, 2001. The agreement between the appellants and the first respondent did not contain any provision for reference of the disputes in case of any to arbitration.

When disputes arose, the first respondent filed a suit in the trial court against the appellants for recovery of approximately Rs. 2.10 crores and their assets and/or the amounts due to the appellants from the second respondent, with interest @ 18% p.a. The trial court passed an order of attachment for a sum of Rs. 2.25 crores. Thereafter in March 2005, the first respondent filed an application under section 89 of the Code before the trial court praying that the court may formulate the terms of settlement and refer the matter to arbitration.

The appellants filed a counter statement dated 24th October, 2005 to the above application of the first respondent submitting, that they were not agreeable for referring the matter to arbitration or any of the other alternate dispute resolution processes under the Code. Simultaneously, the appellants also filed an Appeal against the order of attachment in the High Court of Kerala which by an order allowed the appeal filed by the appellants against the order of attachment and raised the attachment granted by the trial court subject to certain conditions. While doing so, the High Court also directed the trial court to consider and dispose off the application filed by the first respondent under section 89 of the Code which deals with referring the parties to arbitration.

The order was challenged before the SC by the appellant who filed a Special Leave Petition. When the matter was heard, two imperative questions were raised by the SC:

(i) What is the procedure to be followed by a court in implementing section89 and Order 10 Rule 1A of the Code? and

(ii) Whether consent of all parties to the suit is necessary for reference to arbitration under section 89 of the Code?

After in-depth discussions and analysis of the various provisions under the Code dealing with arbitration the SC reiterated and confirmed the order which was passed in the case of Jagdish Chander v. Ramesh Chander[2] stating that no reference can be made to arbitration even under section 89 of the Codeunless there is a mutual consent of all parties, for such reference. 

Under the circumstances, the above questions were answered as follows:

(i) The trial court did not adopt the proper procedure while enforcing section 89 of the Code. Failure to invoke section 89 of the Code suo moto after completion of pleadings and considering it only after an application under section 89 was filed was erroneous; and

(ii) A civil court exercising power under section 89 of the Code cannot refer a suit to arbitration unless all the parties to the suit agree for such reference.

The appeal filed by the appellants was allowed and the order of the trial court referring the matter to arbitration and the order of the High Court affirming the said reference are set aside.

Conclusion:

The provisions of section 8 of the Arbitration and Conciliation Act, 1996 also clearly indicate that parties can be referred to arbitration only in the presence of an arbitration agreement and not otherwise. Thus, the SC was right in holding that parties cannot be referred to arbitration in the absence of an arbitration agreement unless by their mutual consent.  

Endnotes


[1]SLP (C) No. 760 of 2007 

[2]2007 (5) SCC 719

Author: Punthi Shah, Associate

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