2010 (7) TMI 844 - SC - Companies Law

Whether the Section 89 of the Code of Civil Procedure empowers the court to refer the parties to a suit to arbitration without the consent of both parties arise for consideration in this appeal? Held that - Failure to invoke Section 89 suo moto after completion of pleadings and considering it only after an application under Section 89 was filed is erroneous. 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. Appeal is 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.

Issues Involved:
1. Procedure for implementing Section 89 and Order 10 Rule 1A of the Code of Civil Procedure.
2. Necessity of consent from all parties for reference to arbitration under Section 89 of the Code.
3. Interpretation and practical application of Section 89 of the Code.
4. Determination of suitable ADR processes under Section 89.
5. Binding nature of settlements in ADR processes.
6. Proper stage for considering reference to ADR processes.

Detailed Analysis:

1. Procedure for Implementing Section 89 and Order 10 Rule 1A of the Code:
The judgment discusses the procedure a court must follow under Section 89 and Order 10 Rule 1A of the Code of Civil Procedure. The court must first ascertain if there are elements of settlement acceptable to the parties, formulate and reformulate terms of settlement, and then refer the matter to one of the ADR processes: arbitration, conciliation, judicial settlement, or mediation. However, the court should merely describe the nature of the dispute and make the reference without formulating or reformulating terms of settlement.

2. Necessity of Consent from All Parties for Reference to Arbitration:
The court emphasized that arbitration requires mutual consent. Without an existing arbitration agreement, the court cannot refer the matter to arbitration unless all parties agree. This principle is consistent with the Arbitration and Conciliation Act, 1996, which mandates that arbitration can only proceed with mutual consent.

3. Interpretation and Practical Application of Section 89 of the Code:
Section 89 is intended to promote ADR to reduce court burdens and provide speedy relief. Despite drafting anomalies, the court interpreted Section 89 to require only a summary of disputes, not detailed terms of settlement, before referring to ADR. The definitions of 'judicial settlement' and 'mediation' in Section 89(2) were interchanged to correct drafting errors, ensuring the section's practical application.

4. Determination of Suitable ADR Processes:
The court must determine if a case is suitable for ADR and which process is appropriate. Cases involving public interest, serious fraud, or requiring court protection are generally unsuitable for ADR. Trade, commerce, contractual disputes, family disputes, and consumer disputes are typically suitable for ADR. The court should consider parties' preferences and the nature of the dispute when selecting an ADR process.

5. Binding Nature of Settlements in ADR Processes:
Arbitration results in a binding award enforceable as a court decree. Other ADR processes (conciliation, Lok Adalat, mediation, judicial settlement) require court approval of the settlement. The court retains control over the case, and settlements must be recorded and disposed of in terms of the court's decree.

6. Proper Stage for Considering Reference to ADR Processes:
The appropriate stage for considering ADR is after pleadings are complete and before framing issues. However, the court can consider ADR even after framing issues but before evidence commences. In family disputes, mediation should be considered immediately after service of the respondent, before filing objections.

Conclusion:
The trial court erred by not following the proper procedure under Section 89 and referring the matter to arbitration without mutual consent. The appeal was allowed, setting aside the trial court and High Court orders. The trial court must now consider a non-adjudicatory ADR process.

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