M.P. RAJYA TILHAN UTPADAK SAHAKARI SANGH MARYADIT, PACHAMA, DISTRICT SEHORE VS M/S. MODI TRANSPORT SERVICE

M.P. RAJYA TILHAN UTPADAK SAHAKARI SANGH MARYADIT, PACHAMA, DISTRICT SEHORE VS M/S. MODI TRANSPORT SERVICE

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

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

Civil Appeal No. 1973 of 2022 Page 4 of 33

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

Civil Appeal No. 1973 of 2022 Page 5 of 33

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

Civil Appeal No. 1973 of 2022 Page 7 of 33

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:

Civil Appeal No. 1973 of 2022 Page 8 of 33

“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

Civil Appeal No. 1973 of 2022 Page 11 of 33

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:

Civil Appeal No. 1973 of 2022 Page 13 of 33

“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

Civil Appeal No. 1973 of 2022 Page 16 of 33

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.