Code of Civil Procedure, 1908 (CPC)
Section 89 CPC: Settlement of Disputes Outside the Court
A court's first duty under the modern Code is not to try the case but to ask whether it needs to be tried at all. Section 89 of the Code of Civil Procedure, 1908, inserted by the Amendment Act of 1999 and brought into force in 2002, requires the court, where it appears that there exist elements of a settlement which may be acceptable to the parties, to formulate the terms and refer the dispute to one of five modes of resolution outside the court. Order X Rules 1A to 1C supply the procedure. These notes cover each mode, the court's duty, and the two Supreme Court decisions that made the section workable.
The five modes under Section 89, how Afcons works the section, and the cases unsuited to reference
1. Section 89: The Provision
§ Section 89, CPC 1908 (in substance) (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 — (a) arbitration; (b) conciliation; (c) judicial settlement including settlement through Lok Adalat; or (d) mediation. (2) Where a dispute has been referred — (a) for arbitration or conciliation, the provisions of the Arbitration and Conciliation Act, 1996 shall apply as if the proceedings were referred for settlement under that Act; (b) to Lok Adalat, the Court shall refer it in accordance with section 20(1) of the Legal Services Authorities Act, 1987 and all other provisions of that Act shall apply; (c) for judicial settlement, the Court shall refer it to a suitable institution or person, who shall be deemed to be a Lok Adalat and the provisions of the 1987 Act shall apply; (d) for mediation, the Court shall effect a compromise between the parties and shall follow such procedure as may be prescribed. |
2. The Five Modes
Mode | Governing law | Consent needed? | Outcome |
|---|---|---|---|
Arbitration | Arbitration and Conciliation Act, 1996 | Yes, of all parties | An arbitral award, binding and enforceable as a decree; the suit does not return to the court |
Conciliation | Part III of the 1996 Act | Yes, of all parties | A settlement agreement having the status of an arbitral award on agreed terms |
Lok Adalat | Legal Services Authorities Act, 1987 | No | An award deemed to be a decree of a civil court, against which no appeal lies; court fee is refunded |
Judicial settlement | Referred to a suitable institution or person, deemed a Lok Adalat | No | A settlement with the status of a Lok Adalat award under the 1987 Act |
Mediation | Such procedure as may be prescribed, under the High Court's mediation rules | No | A settlement returned to the court, which records it and passes a decree under Order XXIII Rule 3 |
§ Why the consent distinction matters Arbitration and conciliation are consensual. Both rest on the parties' agreement: arbitration substitutes a private tribunal for the court, and conciliation is a process the 1996 Act itself makes voluntary. A court cannot impose either. The other three are not. Lok Adalat, judicial settlement and mediation do not take the dispute away from the court's ultimate control, and a party who refuses to settle simply returns and has his case tried. Referring him costs him nothing but an attempt. The consequence for practice. Where the parties do not agree to arbitration or conciliation, the court is not helpless: it may still refer to mediation or Lok Adalat without consent. |
3. The Court's Duty and the Procedure
§ Order X Rules 1A, 1B and 1C Rule 1A. After recording the admissions and denials, the Court shall direct the parties to the suit to opt either mode of the settlement outside the Court as specified in sub-section (1) of section 89. On the option of the parties, the Court shall fix the date of appearance before such forum or authority as may be opted by the parties. Rule 1B. Where a suit is referred under rule 1A, the parties shall appear before such forum or authority for conciliation of the suit. Rule 1C. Where the presiding officer of the forum or authority is satisfied that it would not be proper in the interest of justice to proceed with the matter further, it shall refer the matter again to the Court and direct the parties to appear before the Court on the date fixed by it. |
i. When the question arises. After the pleadings are complete and the admissions and denials have been recorded under Order X Rule 1, so that the court knows what is genuinely in dispute.
ii. The court's duty is to consider, not to compel. Section 89 requires the court to explore settlement; it does not require the parties to settle. A party who declines returns to the suit and is tried.
iii. The matter comes back if it fails. Rule 1C provides the return route, so a failed reference costs the parties a date rather than the suit.
iv. Court fee is refunded. Where the dispute is settled on a reference, Section 16 of the Court-fees Act, 1870 provides for the refund of the fee paid, which is a practical inducement to settle.
v. Commercial suits. For commercial disputes, Section 12A of the Commercial Courts Act, 2015 now requires pre-institution mediation before a suit not contemplating urgent interim relief may be instituted, a requirement the Supreme Court has held mandatory in Patil Automation Pvt. Ltd. v. Rakheja Engineers Pvt. Ltd., (2022) 10 SCC 1.
4. The Two Supreme Court Decisions
📖 Salem Advocate Bar Association v. Union of India (II), (2005) 6 SCC 344 In settling the working of the 1999 and 2002 amendments, the Supreme Court considered Section 89 and the model rules prepared by the Committee it had constituted. It held the section valid and workable, commended the draft rules on alternative dispute resolution and mediation to the High Courts for adoption, and emphasised that the object of the provision is to reduce the burden on the courts and to give litigants a speedier and less expensive route to resolution. The Court noted the drafting difficulties in the section, particularly the requirement that the court formulate terms of settlement, and indicated that the provision must be read so as to advance rather than obstruct its object. Rule: Section 89 is valid and is to be worked in a practical way; the High Courts were directed to frame rules for the modes it prescribes. |
📖 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., (2010) 8 SCC 24 The Supreme Court addressed the drafting problems in Section 89 directly and laid down how it is to be applied. It held that the requirement that the court formulate and reformulate the terms of settlement cannot be read literally, since a court cannot draft a settlement before the parties have chosen a mode; the court need only make a summary of the dispute and refer it. It held that reference to arbitration or conciliation requires the consent of all parties, while reference to Lok Adalat, judicial settlement or mediation does not. It also identified categories of case normally unsuitable for reference, including cases involving serious and specific allegations of fraud or fabrication, cases involving prosecution for criminal offences, claims against the public at large such as representative suits, matters requiring the protection of the court such as those involving minors, and cases where a decision in rem or on a question of law is required. Rule: the leading authority on Section 89. It fixes the stage of reference, the consent requirement for two of the five modes, and the categories unsuited to reference. |
5. Section 89 Compared with Order XXIII Rule 3
Basis | Section 89 | Order XXIII Rule 3 |
|---|---|---|
What it is | A power and duty of the court to refer a dispute for resolution outside the court | A power of the court to record a compromise the parties have already reached, and to decree it |
Stage | After the pleadings are complete and admissions and denials recorded, under Order X Rule 1A | At any stage, whenever the parties have adjusted the suit |
Who acts first | The court, which must consider whether elements of a settlement exist | The parties, who present the agreement to the court |
Consent | Required for arbitration and conciliation; not for Lok Adalat, judicial settlement or mediation | Necessarily present: the compromise is the parties' own agreement |
Form required | None at the reference stage; the form depends on the mode chosen | The agreement must be lawful, in writing and signed by the parties |
The outcome | An award, a settlement agreement, or a settlement returned to the court | A decree in the terms of the compromise, so far as it relates to the parties to the suit |
How they connect | A mediation or judicial settlement under Section 89 that succeeds comes back to the court | and is recorded and decreed under Order XXIII Rule 3 |
The relationship is therefore sequential rather than competitive. Section 89 sends the dispute out; Order XXIII Rule 3 brings the result back in. Where the mode chosen is arbitration or conciliation, the 1996 Act governs the outcome and the suit does not return; where it is Lok Adalat or judicial settlement, the 1987 Act gives the award the status of a decree; and where it is mediation, the settlement is recorded and decreed under Order XXIII Rule 3.
6. Landmark Points
- Section 89(1). Where elements of a settlement exist that may be acceptable to the parties, the court shall formulate the terms and refer the dispute to arbitration, conciliation, judicial settlement including Lok Adalat, or mediation.
- Order X Rules 1A to 1C. The procedure: reference after admissions and denials are recorded, appearance before the forum, and return to the court where it would not be proper to proceed.
- Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co., (2010) 8 SCC 24. Consent is needed only for arbitration and conciliation; the court need only summarise the dispute; and certain categories of case are unsuited to reference.
- Salem Advocate Bar Association v. Union of India (II), (2005) 6 SCC 344. Section 89 is valid and workable; the High Courts were directed to frame rules for its modes.
- Section 16, Court-fees Act, 1870. Where a dispute is settled on a reference under Section 89, the court fee paid is refunded.
- Section 12A, Commercial Courts Act, 2015, with Patil Automation Pvt. Ltd. v. Rakheja Engineers, (2022) 10 SCC 1. Pre-institution mediation is mandatory in commercial suits that do not contemplate urgent interim relief.
7. Frequently Asked Questions
What does Section 89 of the CPC provide?
That where it appears to the court that there exist elements of a settlement which may be acceptable to the parties, it shall formulate the terms of settlement, give them to the parties for observations, and refer the dispute for arbitration, conciliation, judicial settlement including settlement through Lok Adalat, or mediation.
What are the modes of settlement under Section 89?
Five: arbitration and conciliation under the Arbitration and Conciliation Act, 1996; Lok Adalat and judicial settlement under the Legal Services Authorities Act, 1987; and mediation under the procedure prescribed by the High Court's rules.
Which modes require the consent of the parties?
Arbitration and conciliation. Afcons Infrastructure holds that reference to those two requires the consent of all parties, while reference to Lok Adalat, judicial settlement or mediation does not, since those modes do not take the dispute out of the court's ultimate control.
At what stage is a reference under Section 89 made?
After the pleadings are complete and the admissions and denials have been recorded under Order X Rule 1, so that the court knows what is really in dispute. Order X Rule 1A then requires the court to direct the parties to opt for a mode and to fix a date before the chosen forum.
Must the court draft the terms of settlement?
Not in a literal sense. Afcons holds that the requirement to formulate and reformulate terms cannot be read literally, since a court cannot draft a settlement before a mode is chosen; the court need only make a summary of the dispute and refer it.
Which cases are unsuitable for reference under Section 89?
Afcons identifies cases involving serious and specific allegations of fraud or fabrication, cases involving prosecution for criminal offences, claims against the public at large such as representative suits, matters requiring the protection of the court such as those involving minors or persons under disability, and cases requiring a decision in rem or on a question of law.
What happens if the reference fails?
Under Order X Rule 1C, where the presiding officer of the forum or authority is satisfied that it would not be proper in the interest of justice to proceed, he refers the matter back to the court and directs the parties to appear before it on the date fixed. The suit then proceeds in the ordinary way.
What is the difference between Section 89 and Order XXIII Rule 3?
Section 89 is the court's power to send a dispute out for resolution; Order XXIII Rule 3 is its power to record a compromise the parties have reached and to decree it. They are sequential: a mediation or judicial settlement under Section 89 that succeeds returns to the court and is recorded under Order XXIII Rule 3.
8. Related Topics in This CPC Series
- Order X: Examination of Parties and Reference to Settlement
- Compromise of a Suit under Order XXIII Rule 3
- Commercial Courts Act Amendments to the CPC
- Order XV-A: Case Management Hearings in Commercial Suits