Settlement of Disputes Outside the Court
Chapter Forty-Four
Syllabus topic none names it. Section 89 lies outside every printed section range in the syllabus.
Pages 257 to 261 of 365
In one line
Where a court sees that a case could be settled, section 89 requires it to formulate the terms of a possible settlement and send the parties out to one of four forums to try.
Why the Code has this at all
Litigation is slow, expensive and adversarial, and a great many civil disputes are not really about principle. Two neighbours arguing about a wall, or a family about a partition, may be far better served by a settlement than by a decree that leaves them enemies.
Section 89 is the Code's attempt to build that into the process rather than leave it to chance. Notice its structure, because it is unusual: the court does not merely refer the parties out. It first formulates the terms of a possible settlement itself, gives them to the parties, takes their observations, and may then reformulate them. Only after that does it refer.
That design is deliberate. Parties who are told to go and settle often have no idea what a settlement would look like. Parties handed a draft by the judge have something to react to.
The provision
Section 89(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 those observations 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 (d) mediation
Those four are the whole list, and an answer that gives three of them is short. A useful way to hold them is that two are governed by the arbitration statute, one by the legal services statute, and one is now governed by its own Act.
Section 89(2) then routes each of the four:
(a) where the dispute is referred for arbitration or conciliation, the provisions of the Arbitration and Conciliation Act 1996 apply as if the proceedings were referred for settlement under that Act
(b) where it is referred to Lok Adalat, the Court shall refer it in accordance with section 20(1) of the Legal Services Authorities Act 1987, and all the other provisions of that Act apply
(c) where it is referred for judicial settlement, the Court shall refer it to a suitable institution or person, who shall be deemed to be a Lok Adalat, and all the provisions of the Legal Services Authorities Act apply as if the dispute had been referred to a Lok Adalat
(d) where it is referred for mediation, the Court shall effect a compromise between the parties and shall follow such procedure as may be prescribed
Settlement of Disputes Outside the Court
Clause (c) is the one students misread. Judicial settlement is not settlement by the judge. It is a referral to an institution or person who is deemed to be a Lok Adalat, so that the Legal Services Authorities Act machinery, including the finality of a Lok Adalat award, applies to it.
Where it fits in the life of a suit
Order X Rule 1A is the gateway. After recording the admissions and denials under Order X Rule 1, the Court shall direct the parties to the suit to opt either mode of the settlement outside the court as specified in section 89(1), and on their option shall fix the date of appearance before the forum or authority opted for.
Rule 1B requires the parties to appear before that forum or authority.
Rule 1C provides the way back: where the presiding officer of that forum or authority is satisfied that it would not be proper to proceed with the matter further, he shall refer it back to the Court, and the Court shall proceed with the suit from the stage previously reached.
So the sequence is fixed and worth reciting in an answer: pleadings, then admissions and denials under Order X Rule 1, then the section 89 direction under Rule 1A, then appearance before the chosen forum, and either a settlement or a referral back under Rule 1C and the suit resumes where it left off.
The Mediation Act 2023
Mediation used to be the least regulated of the four. Section 89(2)(d) says only that the Court shall effect a compromise and follow "such procedure as may be prescribed", which left the detail to rules.
The Mediation Act 2023 now supplies a general statutory framework for mediation in India, including court-annexed mediation, the conduct of mediation, and the enforcement of mediated settlement agreements. A student writing on section 89 today should know that the mediation limb no longer stands on the bare words of clause (d) alone.
This is worth flagging for a second reason. It is precisely the development that MU's printed module list has no place for, and that the recommended reading confirms is now part of the subject: the current edition of Takwani carries a separate Part on Mediation. A book written only from the topic labels would not mention it at all.
The four forums compared
| Arbitration | Conciliation | Lok Adalat and judicial settlement | Mediation | |
|---|---|---|---|---|
| Governed by | Arbitration and Conciliation Act 1996 | Arbitration and Conciliation Act 1996 | Legal Services Authorities Act 1987 | Section 89(2)(d) and the Mediation Act 2023 |
| Who decides | The arbitrator decides | The parties, assisted | The parties, assisted | The parties, assisted |
| Outcome | An award, binding | A settlement agreement | An award of the Lok Adalat | A mediated settlement agreement |
| Back to court | The suit ends; the award is enforced under the 1996 Act | If it fails, back under Order X Rule 1C | If it fails, back under Order X Rule 1C | If it fails, back under Order X Rule 1C |
Settlement of Disputes Outside the Court
The line that matters runs between the first column and the other three. Arbitration is adjudicative: a third person decides and the parties are bound by his decision. The other three are consensual: nobody decides anything, and the outcome exists only because the parties agreed to it.
A worked example
Sana sues Tarun over the partition of a family house. At the first hearing the Court records the admissions and denials under Order X Rule 1 and forms the view that the parties are not far apart.
What must the Court do? Under section 89(1) it must formulate the terms of a possible settlement, give them to Sana and Tarun for their observations, and after receiving those observations it may reformulate them. Under Order X Rule 1A it then directs the parties to opt for one of the four modes and fixes a date for their appearance before it.
They choose mediation. The reference is under section 89(1)(d), and the process is now governed by the Mediation Act 2023 as well as by section 89(2)(d).
Mediation fails. Under Order X Rule 1C the presiding officer refers the matter back to the Court, which proceeds with the suit from the stage previously reached. Nothing is lost; the case resumes where it stopped.
They choose Lok Adalat instead, and settle. Under section 89(2)(b) the reference is made under section 20(1) of the Legal Services Authorities Act 1987, and the provisions of that Act apply, including as to the effect of the award.
They choose arbitration. Under section 89(2)(a) the Arbitration and Conciliation Act 1996 applies as if the matter had been referred under that Act, and the dispute is now decided by the arbitrator rather than by the Court.
Change one fact. Suppose the Court simply orders the parties to go to mediation without formulating any terms. It has skipped the first and most distinctive step of section 89(1), which requires the Court to formulate and give the terms and to receive the parties' observations before referring.
What it does not mean
Section 89 is not merely a power to refer. It requires the Court to formulate the terms of a possible settlement first, take the parties' observations, and reformulate if needed.
Judicial settlement is not settlement by the judge. It is a reference to an institution or person deemed to be a Lok Adalat.
Settlement of Disputes Outside the Court
A failed reference does not end the suit. Order X Rule 1C sends it back, and the Court proceeds from the stage previously reached.
The four modes are not interchangeable. Arbitration ends in a binding decision by a third person; the other three end only in the parties' own agreement.
Mediation is no longer regulated only by rules under clause (d). The Mediation Act 2023 now supplies a statutory framework.
Quick revision
Section 89(1): where elements of a settlement acceptable to the parties appear to exist, the Court shall formulate the terms of settlement, give them to the parties for observations, may reformulate them, and refer the dispute for arbitration, conciliation, judicial settlement including Lok Adalat, or mediation.
Section 89(2) routes them: arbitration and conciliation to the Arbitration and Conciliation Act 1996; Lok Adalat under section 20(1) of the Legal Services Authorities Act 1987; judicial settlement to an institution or person deemed to be a Lok Adalat under the same Act; and mediation, where the Court shall effect a compromise and follow the prescribed procedure, now with the Mediation Act 2023 behind it.
Order X Rule 1A: after recording admissions and denials, the Court directs the parties to opt for a mode and fixes the date of appearance. Rule 1B: the parties appear. Rule 1C: where it is not proper to proceed, the matter goes back to the Court, which resumes from the stage previously reached.
The dividing line: arbitration is adjudicative; conciliation, Lok Adalat and mediation are consensual.
Test yourself
1. What does section 89 require the Court to do? 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 those observations may reformulate the terms of a possible settlement and refer the dispute for arbitration, conciliation, judicial settlement including settlement through Lok Adalat, or mediation.
2. Name the four modes of settlement under section 89. Arbitration; conciliation; judicial settlement including settlement through Lok Adalat; and mediation.
3. Which statute governs each? Arbitration and conciliation are governed by the Arbitration and Conciliation Act 1996; a reference to Lok Adalat is made under section 20(1) of the Legal Services Authorities Act 1987 and that Act applies; judicial settlement is referred to an institution or person deemed to be a Lok Adalat, so the same Act applies; and mediation is governed by section 89(2)(d) and the prescribed procedure, now with the Mediation Act 2023 supplying a statutory framework.
Settlement of Disputes Outside the Court
4. What is judicial settlement? A reference under section 89(2)(c) to a suitable institution or person, who shall be deemed to be a Lok Adalat, so that all the provisions of the Legal Services Authorities Act 1987 apply as if the dispute had been referred to a Lok Adalat under that Act. It is not settlement by the judge himself.
5. At what stage of the suit does the section 89 direction come? Under Order X Rule 1A, after the Court has recorded the admissions and denials of the parties under Order X Rule 1, whereupon it directs the parties to opt for one of the modes specified in section 89(1) and fixes the date for their appearance before the forum or authority chosen.
6. What happens if the settlement attempt fails? Under Order X Rule 1C, where the presiding officer of the forum or authority is satisfied that it would not be proper to proceed with the matter further, he shall refer it back to the Court, and the Court shall proceed with the suit from the stage previously reached before the reference.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.