Civil Appeal No. 1973 of 2022 Page 1 of 33
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1973 OF 2022
M.P. RAJYA TILHAN UTPADAK SAHAKARI
SANGH MARYADIT, PACHAMA,
DISTRICT SEHORE AND OTHERS ..... APPELLANTS
VERSUS
M/S. MODI TRANSPORT SERVICE ..... RESPONDENT
J U D G M E N T
SANJIV KHANNA, J.
The legal issue arising in the present appeal is whether the
parties had agreed that the subject matter of the suit or a part
thereof should be referred to arbitration under Section 21 of the
Arbitration Act, 1940.1
2. On 03rd September 1993, the respondent before us - M/s. Modi
Transport Service,
2 a partnership firm, had filed a civil suit in the
Court of the District Judge, Sehore Camp, Astha, Madhya Pradesh,
1 We are examining the provisions of the Arbitration Act, 1940 and consequently, the observations and
the findings recorded should not be without proper appreciation of the principles applied to the
proceedings under the Arbitration and Conciliation Act, 1996.
2
‘The plaintiff’, for short.
Civil Appeal No. 1973 of 2022 Page 2 of 33
for the settlement of accounts of transportation of coal undertaken
by them according to the agreement dated 01
st October 1990 and
the supplementary agreement dated 13th December 1991, with
M.P. Rajya Tilhan Utpadak Sahkari Sangh Maryadit, Pachama,
District Sehore, Madhya Pradesh (the first defendant). The General
Manager and Managing Director of the said Sahkari Sangh were
impleaded as second and third defendants.
3 The plaintiff had also
prayed for a grant of the amount due and payable by the defendant
and the amount spent by the plaintiff on the security of the
defendant's goods and all other amounts (sic) with interest @ 2%.
4
3. The plaint, in brief, states that the plaintiff had transported coal on
the delivery orders issued by the defendant from the coal mines to
the defendant's plant. The plaintiff had no connection with the
quality or any deficiency in the quality of the coal. The plaintiff, as
per directions, had loaded the coal from the coal mines of Western
India Coalfields Limited. The plaintiff’s sole responsibility was to
deliver the coal on time at the defendant’s plant. By communication
dated 05
th June 1992, the defendant had informed that the plaintiff
would be paid transportation charges at Rs.1.42p. per tonne per
kilometre till the finalisation of the new agreement. The order would
3 Collectively three defendants are referred to as ‘the defendant’, for short.
4
Interest period was not specified.
Civil Appeal No. 1973 of 2022 Page 3 of 33
remain in force for at least six months. The plaintiff, as required,
had furnished a bank guarantee of Rs.1,00,000/- (rupees one lakh
only) for six months. Thereafter, the defendant had refused to pay
transportation charges @ Rs.1.42p. per tonne per kilometre.
Further, the defendant had made deductions from the bills raised
on the basis of the actual tonnage of coal delivered, though the
plaintiff, as per the agreement, was entitled to a 1% variation or
exemption on the quantum of coal loaded at the coal mine.
Accordingly, transport charges were payable per ton per kilometre
as loaded at the collieries and not on the quantity actually delivered
as long as the shortfall was within 1%. The defendant had also
made false and wrong deductions on account of the high moisture
content in the coal. Interest was charged and deducted from the
bills of the plaintiff by the defendant. Subsequently, the defendant
had issued a telegraph asking the plaintiff not to transport coal. The
plaintiff had to arrange for a plot to store the coal for which he had
to pay a rent of Rs.10,000/- (rupees ten thousand only) per month
and incur security expenses of Rs.5,000/- (rupees five thousand
only) per month for up to five months.
4. The defendant contested the suit by filing a detailed written
statement. As per the defendant, it was an essential duty of the
plaintiff to lift the coal offered only on being satisfied that the coal
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was of good quality. The plaintiff had lifted good quality coal from
the collieries against the release orders of the defendant, but low
quality of coal was delivered to the defendant. The defendant was
cheated. The representatives of the plaintiff were informed about
the low quality of coal on account of excessive moisture, and stone
and dust being mixed with the coal. The truck drivers had showered
water on the coal to intentionally increase the weight of the coal
before delivery. Letter dated 05
th June 1992 in this regard was
issued by the defendant to the plaintiff. The plaintiff was to be paid
transportation charges for the coal actually accepted at the plant of
the defendant and not for the coal which was not delivered. As per
clause 11 of the agreement, shortage up to 1% per truck was the
maximum limit, whereas the plaintiff had claimed that 1% shortage
should be allowed even when there was no difference between the
dispatched and delivered weight. The price of coal was deducted
and recovered from the plaintiff when the shortage was in excess
and beyond the 1% allowable limit. There were delays in the
delivery of coal, sometimes extending to more than a month from
the dispatch date. Accordingly, the defendant had made
deductions on account of wrong and fraudulent acts due to which
the defendant had suffered losses. The plaintiff was also liable to
pay interest as the defendant had suffered due to blockage of
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funds. The defendant was not liable to pay any demurrage or rent
charges for the plot and, in fact, such charges were never paid. The
plaintiff had not delivered and kept huge quantity of coal for six to
seven months after the coal was lifted from the coal mines. Other
defences raised related to incomplete documentation and excess
freight charges by the wrong declaration as to the place from where
the coal was lifted. The letter dated 05
th June 1992 enhancing the
rate to Rs.1.42p. per tonne per kilometre was withdrawn/cancelled
retrospectively vide the letter dated 30th September 1992. The letter
dated 05
th June 1992 was issued on wrong facts based on the rate
quoted by a sister concern of the plaintiff in a tender floated in June
1992. Subsequently, the sister concern had voluntarily reduced the
rate to Rs.1.32p. per tonne per kilometre. In fact, the plaintiff and
their sister concern had quoted three different rates in a short period
of time to misguide and confuse the General Manager (Plant) of the
defendant who had issued the letter dated 05
th June 1992. The
plaintiff did not raise any objection to the letter dated 30th
September 1992 and had continued to transport and deliver coal
post the issue of the letter. The plaintiff had accepted the
cancellation of the letter dated 05
th June 1992. Furnishing of the
bank guarantee of Rs.1,00,000/- (rupees one lakh only) for six
months was not on account of an increase in rates but on account
Civil Appeal No. 1973 of 2022 Page 6 of 33
of the fact that the contract for transportation of coal by the plaintiff
has been extended up to December 1992.
5. As stated above, the plaintiff had not quantified the amount payable
therein and had sued for settlement of accounts regarding the
quality of coal transported. They had also prayed for the interest @
2% which, it appears, was the amount claimed as payable per
month. For valuation, the plaint had fixed the value of the suit at
Rs.1,00,000/- (rupees one lakh only) and a court fee of Rs.8,180/-
(rupees eight thousand one hundred eighty only) was paid with the
statement that excess court fee could be deposited after the
amount was quantified. However, a number of contestations inter
se parties were raised like the rate and quantification of the
transport charges, lapses and alleged failure by the plaintiff on
different accounts, the deductions made by the defendant and the
plaintiff’s liability to pay interest on excess payments made.
6. During the pendency of the said suit, the plaintiff had filed an
application before the First Additional District Judge, Sehore, which
reads:
“COURT: FIRST ADDITIONAL DISTRICT JUDGE,
SEHORE (M.P.)
CIVIL SUIT NO. 16B/93
M/s Modi Transport Service …..Plaintiff
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Versus
M.P. Rajya Tilhan Sangh etc. ……Defendant
Application for appointment of Arbitrator/Commissioner
1. Present Suit has been filed by the plaintiff against the
Defendants for settlement of accounts. In view of the
pleadings made by the Plaintiff, documents produced
on record and pleadings and documents of Defendant,
it is prima facie clear that there is a dispute between
both the parties is in respect of accounts. For the
purpose of conducting enquiry regarding accounts after
giving opportunity of hearing to both the parties, it is
necessary in the interest that after appointing a
Competent Chartered Accountant as Panch/
Commissioner in the present case he may be directed
to submit report after conducting audit of Accounts.
Since, the transaction took place between both the
parties are much higher, therefore, it is necessary to
handover the aforesaid work to a Chartered
Accountant.
Therefore, it is prayed that by allowing the present
Application, and after appointing Sh. Sushil Kumar
Mantri, Chartered Accountant, Sehore as Panch/
Commissioner as proposed by the plaintiff, kindly direct
him to Submit Report before the Hon’ble Court after
conducting Audit of the Accounts.
Sehore, dated 23.12.1994
Sd/- illegible
Plaintiff
Through Counsel”
The application was signed and moved by the plaintiff. It was
not signed and moved by the defendant.
7. On 23rd December 1994, the date on which the application was filed
and first listed, the First Additional District Judge, Sehore, passed
the following order:
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“COURT OF THE FIRST ADDITIONAL DISTRICT
JUDGE, SEHORE (M.P.)
Civil Suit No. 16B/93
Plaintiff along with Shri Badnairkar and Shri Amit
Agrawal, Advocate
Opposite Parties along with Shri S.K. Verma,
Advocate
This case is fixed for evidence today, but an application
has been submitted on behalf of the plaintiff to the effect
that in this case accounts have to be settled between
the parties and this work can be done only by a welleducated chartered accountant. In such a situation, if
this matter is handed over to a chartered accountant for
decision, then both the parties will not have any
objection. A copy of this application was given to Mr.
Verma. He has no objection to being appointed as
Panch in this case. In the application itself, it has been
proposed to appoint Shri Sushil Kumar Mantri,
Chartered Accountant, Sehore as Panch of the case, on
which no party has any objection. Hence the application
is accepted. The fee of the arbitrator will be payable
according to the fee prescribed in the schedule of the
Arbitration Council of India immediately, if the Arbitrator
demands fee, both the parties should pay half the fee to
the arbitrator before settlement of the matter. The final
liability of the fee will depend on the settlement of the
fees of the case. A notice to this effect on behalf of the
Sessions Court for appointment of the arbitrator. The
arbitrator should present his decision within the
stipulated period by giving notice to the parties
concerned and this matter should be placed before me
at the appointed time after being presented in the
Arbitration Court.
Dated: 23.12.1994”
8. Pursuant to the said order, the court sent the following letter dated
23rd January 1991 to S.K. Mantri, Chartered Accountant, Sehore:
Civil Appeal No. 1973 of 2022 Page 9 of 33
“COURT OF FIRST ADDITIONAL SESSIONS
JUDGE, SEHORE (M.P.)
Sr. No 11/ Sehore Dated – 23.01.1995
To,
Sh. S.K. Mantri
Chartered Accountant
Sehore.
In Suit No. 11/93 of this Court titled Modi Transport Vs.
Tilhan Sangh, you have as appointed as Panch. You by
conducting audit of all the disputed records (Accounts)
of both the parties, kindly send your Report by
22.04.1995.
On receiving your Remuneration Report, payment will
be made to you in the Court.
Sd/-
(Satish Chandra Dubey)
First Additional District Judge, Sehore
(M.P.)”
9. On 28th March 1995, S.K. Mantri appeared before the court and
applied for an extension of the date to submit the report, which time
was extended. Another order dated 22nd April 1995 states that the
panch decision was not submitted and that the panch must present
the award within the stipulated period by giving notice to the parties
concerned. Thereafter, the court passed a number of orders
recording the presence of the parties and that they sought time to
arrange the vouchers and the records. Time was also given to verify
the papers, which were checked in the court in front of the parties'
representatives. Order dated 18th May 1995 records that photocopy
and laboratory analysis records had been placed on record. Order
Civil Appeal No. 1973 of 2022 Page 10 of 33
dated 19th May 1995 refers to the account summary submitted by
the plaintiff regarding the pending bills and amounts for the previous
years. Information in that regard was sought from the defendant.
Therefore, it is clear that the proceedings remained pending before
the court. The suit was not treated as disposed of and decided in
view of the order dated 23rd December 1994.
10. On 22nd June 1995, S.K. Mantri submitted his report before the
court stating that an amount of Rs.24,03,300/- (rupees twenty four
lakhs three thousand three hundred only) was due and payable by
the defendant to the plaintiff. This amount included interest of Rs.
9,43,007/- (rupees nine lakhs forty three thousand seven only)
computed @ 24% per annum on different amounts between 23rd
February 1993 to 31st May 1995. He held that the plaintiff is entitled
to get Rs.1.42p. per tonne per kilometre. He held that “in my opinion
the reduction of one per cent per truck should be followed (sicallowed) by a reduction in contract for excess reduction”. Claim of
the defendant for a deduction on account of moisture and low
quality coal was not justified in the absence of evidence. Lastly, the
plaintiff would be entitled to receive rent and security charges, but
because of lack of a clear provision and a specific prayer, the
amount could only be decided by the court. Significantly the second
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paragraph of the report as to the basis on which it was prepared
reads:
“That the report has been prepared on the basis of
records (accounts) which have been presented to me
by the plaintiff and the opposition till date 31.05.95,
which is presented before your goodself.”
11. Order dated 22nd June 1995 passed by the court mentions that the
arbitrator has presented his report and documents along with the
list. If the parties have any objections regarding the arbitral report,
then they should appear on the next date.
12. The defendants filed objections, inter alia, on different grounds
challenging the report, which objections were decided by the court
of Additional District Judge, Sehore, vide order dated 16th May
1996. He held that S.K. Mantri had been appointed as an arbitrator
as provided under Section 21 of the Arbitration Act. The defendant's
contention that S.K. Mantri was appointed as a commissioner under
Order XXVI Rule 9 of the Code of Civil Procedure, 19085 was
rejected. Further, the objections to the award filed on 01
st
November 1995 were beyond 30 days and barred by limitation.
Counsel for the defendant was present in the court when the
arbitrator submitted the award in the court on 22nd July 1995. The
allegation of misconduct on the ground that S.K. Mantri was a
5
‘the Code’, for short.
Civil Appeal No. 1973 of 2022 Page 12 of 33
Chartered Accountant of the defendant, who was actually involved
in the preparation of accounts, was overruled as this objection was
not raised when S.K. Mantri was appointed as an arbitrator. Order
dated 23rd December 1994 appointing S.K. Mantri as an arbitrator
had attained finality as it was not challenged by the defendant.
13. The first appeal preferred by the defendant before the High Court
has been dismissed vide the impugned judgment dated 19th
September 1996. The High Court has affirmed the trial court's view
that during the pendency of the suit, the matter was referred to
arbitration in terms of Section 21 of the Arbitration Act. S.K. Mantri,
Chartered Accountant, was appointed as an arbitrator with the
parties' consent. The fee was payable to S.K. Mantri as per the
prescribed arbitration schedule. The objection that S.K. Mantri was
the Chartered Accountant of the defendant, was rejected as it could
not be said that he had acted in an unfair manner. That apart, the
objections were filed beyond the prescribed period of 30 days.
14. Defendant, namely, M.P. Rajya Tilhan Utpadak Sahkari Sangh
Maryadit, Pachama, District Sehore, Madhya Pradesh and the
General Manager and Managing Director of the Sahkari Sangh
have accordingly filed this appeal before us.
15. Section 21 of the Act, reads as under:
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“21. Parties to suit may apply for order of reference:-
Where in any suit all the parties interested agree that
may matter in difference between them in the suit shall
be referred to arbitration, they may at any time before
judgment is pronounced apply in writing to the Court for
an order of reference.”
The first condition for invoking Section 21 is that the parties
to the suit must agree that any matter of difference between them
shall be referred to arbitration. All interested parties must agree and
apply to the court where the suit is pending to obtain an order of
reference to arbitration. The subject matter of the reference must
be any of the matters between the parties to the suit. Entire subject
matter of the suit may not be referred to arbitration. Parties may
agree to only refer a part or portion of the dispute to arbitration. The
expression ‘agree’ is significant and expressive as to when a court
can exercise jurisdiction under Section 21 of the Act. Word ‘agree’
means any arrangement or understanding or action in concert.6 The
Indian Contract Act,1872 states that an agreement may be oral or
in writing, albeit the command of Section 21 of the Act is that the
parties should apply to the court in writing for an order of reference.
In the context of Section 21, the court can refer a dispute/difference
subject matter of a suit when the parties mutually agree to
6 See Section 2 of the Contract Act which vide clause (a) defines proposal, clause (b) which defines
when proposal is accepted, clause (e) which states that every promise and every set of promises,
forming the consideration for each other, is an agreement and clause (h) which states that an
agreement enforceable by law is a contract Clause (h) also has two sub-clauses.
Civil Appeal No. 1973 of 2022 Page 14 of 33
arbitration. There must be a joining or meeting of minds between
the parties to go for arbitration in respect of a subject matter in a
pending suit. Felthouse v. Bindley7 states that the parties agree
when they wilfully agree to perform certain acts or refrain from doing
something. The parties should be agreed about the subject matter
at the same time and in the same sense.
16. Interpreting Section 21 of the Act, a Full Bench of the Punjab and
Haryana High Court in Firm Khetu Ram Bashamber Dass v.
Kashmiri Lal8 has held:
“Thus, before any matter involved in a suit pending in a
Court can be referred to arbitration (a) there must be an
agreement amongst all the parties interested that any
matter in dispute between them in the suit shall be
referred to arbitration; (b) if they come to such an
agreement, then they have to make an application in
writing to the Court concerned; and (c) thereafter, the
Court has to pass an order referring the dispute to the
arbitrator agreed upon between the parties.
There can be no manner of doubt that if there is no
agreement between all the parties who are interested in
the case and if the application is not made on behalf of
them all, the reference made by the Court is bad and
the award based on such a reference is invalid in law.
This view has been consistently taken by all the High
Courts. In Negi Puran Singh v. Hira Singh and others,
while dealing with provisions of Civil Procedure Code,
1882, similar to sections 21 and 23 of the Arbitration
Act, Stanley, C.J. and Banerji, J., of the Allahabad High
Court held that if there was no application signed by all
the parties who were interested in the settlement of the
suit, the reference and the award given, thereafter,
would be invalid. The same view was taken
7
(1862) 142 ER 1037
8 1959 SCC OnLine Punj 102
Civil Appeal No. 1973 of 2022 Page 15 of 33
in Haswa v. Mahbub and another, by another Division
Bench of the same Court. In Gopal Das v. Baij Nath,
Sulaiman, J., (as he then was), referred to a number of
decisions of Allahabad and Calcutta High Courts and
observed as follows:—
“*** it is necessary that all persons who are
interested in the matter which is in difference
between the parties and which is going to be
referred to arbitration, should join. Although it is
not absolutely necessary that they should all sign
the application made to the Court, it is necessary
that they should agree to the reference.”
See also Tej Singh and another v. Ghase Ram and
others , In Ram Harakh Singh v. Mumtaz Hasain, the
question of acquiescence and ratification was also
considered.
Following Gopal Das v. Baij Nath and Subba
Rao v. Appadurai , Ghulam Hasan, J., held that the
foundation of the jurisdiction of the Court is the consent
of the parties and the subsequent ratification does not
validate the reference which was void ab initio. Calcutta
and Madras High Courts have also taken a similar view.
The question was considered by a Full Bench of the
Calcutta High Court in Laduram v. Nandlal, Mookerjee,
J., at page 114 of the report observed as follows:—
“The foundation of jurisdiction here is the
agreement amongst all the parties interested that
the matters in difference between them shall be
referred to arbitration. If all the parties interested
do not apply and yet an order of reference is
made, the order is illegal because made without
jurisdiction. If an award follows on the basis of that
reference, it is equally illegal, because it is
founded upon a reference made without
jurisdiction.”
See also Seth Dooly Chand v. Munuji and others
and Khan Mohmed v. Chella Ram and another and
Subha Rao v. Appadurai.
In Subha Rao v. Appadurai, Devadoss, J., while
considering the provisions of para 1 of Schedule II, Civil
Procedure Code,—which in substance is the same as
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section 21 of the Arbitration Act—observed as
follows:—
“What gives the Court jurisdiction to refer the
matter to arbitration is consent of all the parties.
Consent subsequently given cannot give
jurisdiction to the Court which it did not possess at
the time when it referred the matter to arbitration.”
17. In our opinion, the aforesaid ratio expresses the correct position in
law. Arbitration is an alternative to the court adjudication process
by a private forum chosen by the parties. Normally reference can
be made or even directed to the arbitrator only if a preexisting
arbitration agreement subsists between the parties. In the absence
of a preexisting arbitration agreement, the court has no power,
authority or jurisdiction to refer unwilling parties to arbitration.
Therefore, the word ‘agree’ in Section 21 of the Act refers to
consensus ad idem between the parties who take a considered
decision to forego their right of adjudication before a court where
the suit is pending, and mutually agree to have the subject matter
of the suit or part thereof adjudicated and decided by an arbitrator.
18. In the present case, the application dated 23rd December 1994 was
moved by the plaintiff and it was not signed by the defendant. As
per the heading, the application was for the appointment of a
commissioner/arbitrator to conduct an ‘enquiry’ in respect of the
accounts by a competent Chartered Accountant who shall act as a
Civil Appeal No. 1973 of 2022 Page 17 of 33
panch/Commissioner and submit a report after conducting an audit
of the accounts. It was stated that the transactions between the
parties are fairly large in number and, therefore, it is necessary to
handover the aforesaid task to a Chartered Accountant. The
application also states that for the enquiry regarding accounts an
opportunity of hearing should be given to both the parties. Name of
S.K. Mantri, Chartered Accountant, to act as panch/commissioner
was proposed. The prayer in the application was that the panch/
commissioner would submit the report to the court after conducting
an audit of the accounts. The application cannot be read as an
application moved on a prior agreement or consensus for reference
to arbitration.
19. In view of the aforesaid discussion, we cannot read the application
dated 23rd December 1994 as an application by the parties under
Section 21 of the Arbitration Act. First, it is not an application for
reference of disputes to an arbitrator for adjudication but a request
for the appointment of an expert, that is, a Chartered Accountant,
who would examine the accounts and papers and submit the report
to facilitate the court. The role assigned to S.K. Mantri is also clear
from the letter of appointment dated 23rd January 1995 which states
that S.K. Mantri has been appointed as a panch and would be
conducting an audit of all disputed accounts of both sides, and that
Civil Appeal No. 1973 of 2022 Page 18 of 33
he should send a report to the court.9 The letter also mentions that
“on receiving your remuneration report, payment would be made to
you in the court”. Secondly, the court’s jurisdiction to finally decide
was not questioned or annihilated. In fact, the court always
remained in the picture, exercised parley as an adjudicator having
dominion over the subject matter of the suit.
20. However, the plaintiff has placed reliance on the order dated 23rd
December 1994 to submit that the defendant had agreed to
arbitration. It is, therefore, necessary for us examine the contents
of the order. The first portion of the order records that the plaintiff
has made an application for settlement of accounts and that the
accounts can be examined only by a well-educated Chartered
Accountant. A copy of the application had been handed over to the
counsel for the defendant who had no objection “to being appointed
as Panch in this case”. This statement is somewhat vague, but we
do not read the statement as an indication or affirmation that the
defendant had agreed to the appointment of an arbitrator as an
alternative and substitute to court adjudication. If it was so, this
should have been clearly stated to enable the parties to respond
and make statement. At best it was restricted to the appointment of
9 Distinction between an arbitrator and expert; and an arbitrator and a commissioner has been
examined and discussed below.
Civil Appeal No. 1973 of 2022 Page 19 of 33
an expert/commissioner who would examine the accounts and
submit his report.
21. The second portion of the order dated 23rd December 1994 states
that in the application name of Sushil Kumar, Chartered Account,
as panch has been proposed to which no party had any objection.
Thereafter, the order records the direction of the court that the fee
of the arbitrator ‘shall be as prescribed in the schedule of the
Arbitration Council of India and if the arbitrator demands a fee the
same should be equally shared by both the parties’. The last portion
does not incorporate and does not refer to any agreement or even
concession given by the defendant agreeing to arbitration as an
alternative to court adjudication and decision. The court had not
disposed of the suit by referring the subject matter or a part of the
subject matter of the suit to arbitration. In our opinion the said order
is for issuing a commission as the court had accepted an
application filed by the plaintiff for verification of the accounts. The
commissioner was to act as an expert or facilitator for the court and
submit a report to the court to help the court adjudicate and finally
decide the suit.
22. We would elaborate these aspects and affirm our reasoning with
reference to case law and statutory provisions.
Civil Appeal No. 1973 of 2022 Page 20 of 33
23. This Court in Kerala State Electricity Board and Another v.
Kurien E. Kalathil and Another,
10 had examined the question of
reference to arbitration in a case where there was no arbitration
agreement between the parties. The question that fell for
consideration was whether the High Court was right to refer the
parties to arbitration on oral consent given by the counsel without
the written consent of the party whom he represents. In this context,
reference was made to Section 89 of the Code and the decision of
this Court in Afcons Infrastructure Ltd. v. Cherian Varkey
Construction Co. (P) Ltd.,
11 which is to the following effect:
“33. Even if there was no pre-existing arbitration
agreement, the parties to the suit can agree for
arbitration when the choice of ADR processes is offered
to them by the court under Section 89 of the Code. Such
agreement can be by means of a joint memo or joint
application or a joint affidavit before the court, or by
record of the agreement by the court in the order-sheet
signed by the parties. Once there is such an agreement
in writing signed by parties, the matter can be referred
to arbitration under Section 89 of the Code; and on such
reference, the provisions of the AC Act will apply to the
arbitration, and as noticed in Salem Bar (I), the case will
go outside the stream of the court permanently and will
not come back to the court.”
24. Thereafter, Kerala State Electricity Board (supra), made a
reference to a similar view expressed by this Court in Shailesh
10 (2018) 4 SCC 793
11 (2010) 8 SCC 24
Civil Appeal No. 1973 of 2022 Page 21 of 33
Dhairyawan v. Mohan Balkrishna Lulla,
12 which stated that resort
to arbitration in a pending suit by the orders of the court would only
be when parties agree for settlement of the dispute through
arbitration. Thus, reference to arbitration is valid only when done by
means of agreement between the parties.
25. On the question whether a counsel can give consent for arbitration
on behalf of the parties, Kerala State Electricity Board (supra)
referred to the decision in Byram Pestonji Gariwala v. Union
Bank of India,
13 which has settled the law that a counsel should
not act on implied authority unless there is an exigency of
circumstances demanding immediate adjustment of the suit by
agreement or compromise and the signature of the party cannot be
obtained without delay. Reference was made to paragraph 37 in
Gariwala case (supra), which reads as under:
“37. We may, however, hasten to add that it will be
prudent for counsel not to act on implied authority
except when warranted by the exigency of
circumstances demanding immediate adjustment of suit
by agreement or compromise and the signature of the
party cannot be obtained without undue delay. In these
days of easier and quicker communication, such
contingency may seldom arise. A wise and careful
counsel will no doubt arm himself in advance with the
necessary authority expressed in writing to meet all
such contingencies in order that neither his authority nor
integrity is ever doubted. This essential precaution will
12 (2016) 3 SCC 619
13 (1992) 1 SCC 31
Civil Appeal No. 1973 of 2022 Page 22 of 33
safeguard the personal reputation of counsel as well as
uphold the prestige and dignity of the legal profession.”
26. The Kerala State Electricity Board (supra) decision rightly records
that referring the parties to arbitration has serious civil
consequences, substantial and procedural. Once an award is
passed, it can be only challenged on limited grounds. When there
was no arbitration agreement between the parties, without joint
application the High Court ought not to have referred the matter to
arbitration. This Court in Bihar State Mineral Development
Corpn. v. Encon Builders (I) (P) Ltd.14 emphasised that the
arbitration agreement must contain a broad consensus between the
parties that the disputes and differences should be referred to a
private tribunal. Further, such a tribunal must be an impartial one.
27. In ITC Ltd. v. George Joseph Fernadez and Another,
15 this Court
had interpreted Section 2016 of the Contract Act, which provides that
where both the parties to an agreement are under a mistake as to
a matter of fact essential and integral to the agreement, the
agreement is void. However, this does not apply if the mistake
relates to an erroneous opinion as to the valuation of the thing that
14 (2003) 7 SCC 418
15 (1989) 2 SCC 1
16 20. Agreement void where both parties are under mistake as to matter of fact.—Where both
the parties to an agreement are under a mistake as to a matter of fact essential to the agreement,
the agreement is void.
Explanation.—An erroneous opinion as to the value of the thing which forms the subject-matter of
the agreement, is not to be deemed a mistake as to a matter of fact.
Civil Appeal No. 1973 of 2022 Page 23 of 33
forms the subject matter of the agreement. A mistake as to the
quality of an article or attributes on the other hand is a debatable
question as it may not always lead to the conclusion that the
contract is void. Further, this provision relating to the voidness of
the contract does not apply to cases of a common mistake of fact,
as distinguished from a mutual mistake made or entertained by
each of the persons towards or with regard to each other. Where a
party is mistaken as to the other's intention, though neither realises
that the respective promises have been misunderstood, there is a
mutual mistake. The ascertainment of whether or not there was a
mutual mistake is to be ascertained by applying what reasonable
third parties would infer from their words or conduct. The mistake
or error must be such that it either appears on the face of the
contract that the matter as to which the mistake existed was an
essential and integral element of the subject matter of the contract
or was an inevitable inference from the nature of the contract that
all parties so regarded it. A contract is void at law only if some term
can be implied in both offer and acceptance, which prevents the
contract from coming into force. These principles are relevant when
the dispute arises as to the existence of a pre-existing arbitration
agreement. Albeit in the case of Section 21, the requirement is even
stricter – the “parties interested agree…in writing before the court”,
Civil Appeal No. 1973 of 2022 Page 24 of 33
which is an inflexible mandate which requires that the parties must
agree, or affirm an agreement before the court to refer the subject
matter as agreed to arbitration.
28. This Court in K.K. Modi v. K.N. Modi and Others,
17 after referring
to Mustill and Boyd in their book on Commercial Arbitration, pointed
out that there is an immense variety of tribunals differing
fundamentally as regards their composition, their functions and
sources from which their powers are derived. Tribunals, including
those which derive their jurisdiction from the consent of the parties,
apart from the arbitration tribunal, may be persons who are not
properly called tribunals, but by mutual consent entrusted with the
power to affect the legal rights of two parties inter se in a manner
creating legally enforceable rights to do so by a procedure of a
ministerial but not judicial in nature, such as persons appointed by
contract to value property or certify compliance of building works
with the specification. Other examples given are of conciliation
tribunals of local religious bodies or privately appointed persons to
act as mediators. Such consent terms lack some of the attributes
necessary for an arbitration agreement. The judgment enlists some
17 (1998) 3 SCC 573
Civil Appeal No. 1973 of 2022 Page 25 of 33
of the attributes which must be present in an agreement to be
considered as an arbitration agreement as:
“17... (1) The arbitration agreement must contemplate
that the decision of the tribunal will be binding on the
parties to the agreement,
(2) that the jurisdiction of the tribunal to decide the rights
of parties must derive either from the consent of the
parties or from an order of the court or from a statute,
the terms of which make it clear that the process is to be
an arbitration,
(3) the agreement must contemplate that substantive
rights of parties will be determined by the agreed
tribunal,
(4) that the tribunal will determine the rights of the parties
in an impartial and judicial manner with the tribunal
owing an equal obligation of fairness towards both sides,
(5) that the agreement of the parties to refer their
disputes to the decision of the tribunal must be intended
to be enforceable in law and lastly,
(6) the agreement must contemplate that the tribunal will
make a decision upon a dispute which is already
formulated at the time when a reference is made to the
tribunal.”
29. K.K. Modi (supra) refers to Russell on Arbitration,
18 which observes
that whether a chosen form of dispute resolution is expert
determination or arbitration is a matter of construction of a contract
that involves an objective enquiry into the intention of the parties.
Specific words like ‘arbitrator’, ‘arbitration proceedings’ or ‘an expert
and not an arbitrator’ can be used to describe how the dispute
resolver is to act. However, the words are persuasive, although not
always conclusive. The authors on the distinction between
18 21st Edn., at page 37, para 2-014
Civil Appeal No. 1973 of 2022 Page 26 of 33
arbitration and an expert’s opinion have elucidated that an arbitral
tribunal arrives at its decision based on the evidence and
submissions of the parties by applying the law and its principles,
whereas an expert decides on his own expert opinion, applying his
own expertise.
19
30. In Bharat Bhushan Bansal v. U.P. Small Industries Corporation
Ltd,
20 reference was made to S.K. Chawla’s Law of Arbitration and
Conciliation21 to highlight that an expert primarily acts on his
knowledge and experience supplemented if he thinks fit by: (i) his
own investigations; and/or (ii) material (which need not conform to
the rules of ‘evidence’) put before him by either party. On the other
hand, an arbitrator primarily acts on the material put before him by
the parties. Determination by an expert would involve less to
thorough investigation. Reference is also made to Hudson’s
Building and Engineering Contracts,
22 which distinguishes a certifier
and an arbitrator in a building contract observing that the certifier in
a construction contract will often perform an administrative rather
than a judicial function. Certifiers have been described as
19 Russel on Arbitration, 21st Edition
20 (1999) 2 SCC 166
21 Justice S.K. Chawla Law of Arbitration and Conciliation at Page 164.
22 See Eleventh Edition, Volume 1, in Paragraph 6.065
Civil Appeal No. 1973 of 2022 Page 27 of 33
preventers of disputes in contradistinction with arbitrators, whose
function can only arise once a dispute is in existence.
31. With regard to the significance and effect of the report submitted by
an expert, this Court in Dayal Singh and Others v. State of
Uttaranchal23 states that the purpose of an expert opinion is
primarily to assist the court in arriving at a final conclusion. Such
report is not binding upon the court. The court is expected to
analyse the report, read it in conjunction with the other evidence on
record and then form its final opinion as to whether such report is
worthy of reliance or not. An expert report, duly proved, has its
evidentiary value but such appreciation has to be within the
limitations prescribed and with careful examination by the court.
Simply put, an expert deposes and does not decide,
24 his duty is to
furnish the court with necessary scientific/technical criteria so as to
enable the judge to form his own independent judgment by the
application of these criteria to the facts proved in evidence.
25
32. There is also a distinction between the scope and functions of an
arbitral tribunal and a commissioner appointed under Order XXVI
23 (2012) 8 SCC 263
24 Murari Lal v. State of M.P. (1980) 1 SCC 704
25 Vide Lord President Cooper in Davis v. Edinburgh Magistrate, 1953 SC 34 quoted by Professor
Cross in his Evidence.
Civil Appeal No. 1973 of 2022 Page 28 of 33
Rules 9 and 1126 of the Code. For submission to arbitration, there
must be an arbitration agreement or an agreement in terms of
Section 21 of the Act that the difference or dispute between the
parties for which they intend to be determined in a quasi-judicial
manner. Commissioners are appointed by the court. Appointment
may be with consent of the parties, or even when there is objection
to the appointment. Preexisting agreement or the requirement that
the parties agree before the court, as is mandatory in case of
arbitration, is not necessary when a court directs appointment of a
commissioner. In the case of a reference to a commissioner, all that
the parties expect from the commissioner is a valuation/
examination of the subject matter referred, which he would do
according to his skill, knowledge and experience, which may be
without taking any evidence or hearing argument.27 In light of the
aforesaid decisions, we would like to introduce the principle of a
26 9. Commissions to make local investigations.– In any suit in which the Court deems a local
investigation to be requisite or proper for the purpose of elucidating any matter in dispute, or of
ascertaining the market-value of any property, or the amount of any mesne profits or damages or
annual net profits, the Court may issue a commission to such person as it thinks fit directing him to
make such investigation and to report thereon to the Court:
Provided that, where the State Government has made rules as to the persons to whom such
commission shall be issued, the Court shall be bound by such rules.
xx xx xx
11. Commission to examine or adjust accounts.– In any suit in which an examination or adjustment
of the accounts is necessary, the Court may issue a commission to such person as it thinks fit directing
him to make such examination or adjustment.
27 Halsbury, Vol.1, Edn. 2 at Pg. 622
Civil Appeal No. 1973 of 2022 Page 29 of 33
‘facilitator’ which a court may appoint, be it a commissioner or an
expert, for a specific purpose and cause for ascertainment of a fact
which may be even disputed. In some cases, the commissioner
may even hear the parties and give his expert opinion based on the
material or evidence produced by the parties before the
commissioner, as in this case when the court appointed a
Chartered Account who as an expert was required to give his
opinion on the statement on accounts to facilitate and help the court
arrive at a fair and just decision. It was to save the court's time and
cut delay in the decision by the court.
33. Order XXVI Rule 9 of the Code gives wide powers to the court to
appoint a commissioner to make local investigations which may be
requisite or proper for elucidating any matter in dispute,
ascertaining the market value of any property, account of mesne
profit or damages or annual net profits. Under Order XXVI Rule 11,
the court has the power to issue a commission in a suit, in which
examination of adjustment of accounts is necessary, to a person as
it thinks fit directing him to make such examination or adjustment.
When a court issues such a commission to such a person, it can
direct the commissioner to make such an investigation, examination
and adjustment and submit a report thereon to the court. The
commissioner so appointed does not strictly perform a ‘judicial act
Civil Appeal No. 1973 of 2022 Page 30 of 33
which is binding’ but only a ‘ministerial act’. Nothing is left to the
commissioner’s discretion, and there is no occasion to use his
judgment or permitting the commissioner to adjudicate and decide
the issue involved; the commissioner’s report is only an opinion or
noting, as the case may be with the details and/or statement to the
court the actual state of affairs. Such a report does not
automatically form part of the court’s opinion, as the court has the
power to confirm, vary or set aside the report or in a given case
issue a new commission. Hence, there is neither abdication nor
delegation of the powers of functions of the court to decide the
issue. Sometimes, on examination of the commissioner, the report
forms part of the record and evidence.28 The parties can contest an
expert opinion/commissioner’s report, and the court, after hearing
objections, can determine whether or not it should rely upon such
an expert opinion/commissioner’s report. Even if the court relies
upon the same, it will merely aid and not bind the court. In strict
sense, the commissioners’ reports are ‘non-adjudicatory in nature’,
and the courts adjudicate upon the rights of the parties.
34. By Act 18 of 2018, Section14A29 has been inserted in the Specific
Relief Act, 1963. The provision states that without prejudice to the
28 A. Nagarajan v. A. Madhanakumar 1996 SCCOnLine Mad 17
29 14A. Power of court to engage experts.—(1) Without prejudice to the generality of the provisions
contained in the Code of Civil Procedure, 1908 (5 of 1908), in any suit under this Act, where the court
Civil Appeal No. 1973 of 2022 Page 31 of 33
provisions of the Code in any suit under the Act in question where
a court considers it necessary to get expert opinion to assess it on
a specific issue involved in the suit, it may engage one or more
experts and direct to report to it on such issue. The court may
secure the expert's attendance for providing evidence, including the
production of documents on the issue. The opinion or report of the
expert would form part of the record of the suit as is the case with
the commissioner’s report. With the court's permission, the parties
to the suit may examine the expert personally in the open court on
any of the matters referred to him or as to his opinion or report or
as to the manner in which he has made the inspection.
35. The matter referred to S.K. Mantri was limited to examination of the
accounts. The issues and questions of dispute in the suit were far
broader and wider. These included questions as to the agreed price
or the rate of transportation in view of the letter dated 05
th June
1992, which was withdrawn by letter dated 30th September 1992,
considers it necessary to get expert opinion to assist it on any specific issue involved in the suit, it may
engage one or more experts and direct to report to it on such issue and may secure attendance of the
expert for providing evidence, including production of documents on the issue.
(2) The court may require or direct any person to give relevant information to the expert or to produce,
or to provide access to, any relevant documents, goods or other property for his inspection.
(3) The opinion or report given by the expert shall form part of the record of the suit; and the court, or
with the permission of the court any of the parties to the suit, may examine the expert personally in
open court on any of the matters referred to him or mentioned in his opinion or report, or as to his
opinion or report, or as to the manner in which he has made the inspection.
(4) The expert shall be entitled to such fee, cost or expense as the court may fix, which shall be payable
by the parties in such proportion, and at such time, as the court may direct.]
Civil Appeal No. 1973 of 2022 Page 32 of 33
computation of the transportation costs payable to the plaintiff
under the contract in case the coal delivered was within or beyond
the 1% stipulation, whether or not the defendants were right in
making deductions on account of bad quality coal, higher moisture
content etc. whereby the weight of the coal had increased, delay in
delivery on the part of the plaintiff, whether the defendants are
entitled to charge interest while making recoveries, etc. It is
interesting to note that the S.K. Mantri himself did not decide
whether or not the plaintiff is entitled to rent of the plot or security
charges observing that this was an aspect for the court to decide.
However, he forgot that his ‘jurisdiction’ was limited to checking and
verifying accounts and not deciding any issue or questions beyond
the accounts on issues and questions referred to above.
36. In view of the aforesaid discussion, we allow the present appeal
and set aside the impugned order dated 19th September 2019 of
the High Court affirming the order dated 16th May 1996 passed by
the Additional District Judge, Sehore Camp Astha. It is held that the
report of the Chartered Accountant is not an award and is to be
treated as a report of a commissioner appointed by the Court under
Order XXVI Rule 11 of the Code. Objections of the defendant to the
said report will be considered in light of the aforesaid discussion
and our findings, and after hearing both the sides the trial will
Civil Appeal No. 1973 of 2022 Page 33 of 33
proceed as per law. We clarify that the observations made in this
judgment are for the disposal of the present appeal. The civil suit
will be decided on merits without being influenced by any findings
recorded by us that only relate to the limited aspect of the report
dated 22nd June 1995 of the commissioner.
37. All pending applications are disposed of. There would be no order
as to costs.
......................................J.
(SANJIV KHANNA)
......................................J.
(BELA M. TRIVEDI)
NEW DELHI;
MAY 11, 2022.
