Supreme Court Clarifies Arbitration Under Section 21 of the Arbitration Act, 1940: M.P. Rajya Tilhan Utpadak vs. Modi Transport (2022)

Date of the Judgment: May 11, 2022
Citation: Civil Appeal No. 1973 of 2022
Judges: Sanjiv Khanna, J. and Bela M. Trivedi, J.

Can a court refer a matter to arbitration if all parties involved in a lawsuit haven’t explicitly agreed to it? The Supreme Court of India recently addressed this critical question in a civil appeal concerning a dispute over transportation charges. The core issue was whether the parties had consented to resolve their dispute through arbitration under Section 21 of the Arbitration Act, 1940, or if the appointment of a Chartered Accountant was merely for expert opinion. The Supreme Court, in this judgment, clarified the requirements for a valid reference to arbitration under the said provision. The judgment was delivered by a two-judge bench comprising Justice Sanjiv Khanna and Justice Bela M. Trivedi.

Case Background

M/s. Modi Transport Service, a partnership firm (referred to as “the plaintiff”), filed a civil suit on September 3, 1993, in the District Court of Sehore, Madhya Pradesh, against M.P. Rajya Tilhan Utpadak Sahkari Sangh Maryadit (referred to as “the defendant”) and its officers. The suit sought settlement of accounts related to coal transportation under agreements dated October 1, 1990, and December 13, 1991. The plaintiff also claimed pending dues, security expenses, and interest.

The plaintiff contended that they transported coal from mines to the defendant’s plant as per delivery orders, with no responsibility for coal quality. They were to be paid transportation charges based on the quantity loaded at the mines, with a 1% variation allowance. The defendant, however, made deductions for moisture content, low quality, and delays, and also charged interest on the bills. The plaintiff also claimed rent and security expenses for storing coal after the defendant stopped the transportation.

The defendant argued that the plaintiff was responsible for ensuring the quality of coal lifted from the mines and that they delivered low-quality coal with excessive moisture and other impurities. The defendant also stated that the plaintiff was to be paid for the coal actually accepted at the plant, not the quantity loaded at the mines. The defendant also claimed that the letter dated June 5, 1992, which mentioned the rate of Rs.1.42p per tonne per kilometer, was withdrawn retrospectively.

Timeline

Course of Proceedings

The plaintiff filed a suit for settlement of accounts in the Court of the District Judge, Sehore. During the pendency of the suit, the plaintiff applied to the First Additional District Judge, Sehore, for the appointment of an arbitrator/commissioner to conduct an inquiry regarding the accounts. The court appointed a Chartered Accountant, S.K. Mantri, as a ‘Panch’. The Additional District Judge held that S.K. Mantri was appointed as an arbitrator under Section 21 of the Arbitration Act, and the objections filed by the defendant were barred by limitation. The High Court affirmed the trial court’s view.

Legal Framework

The core legal provision in question is Section 21 of the Arbitration Act, 1940, which states:

“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.”

This section allows parties in a suit to agree to refer their dispute to arbitration. The key requirements are that all interested parties must agree, and they must apply to the court in writing for an order of reference. The subject matter of the reference can be the entire suit or a part of it.

The Supreme Court also referred to Section 2 of the Indian Contract Act, 1872 to explain the meaning of agreement. It states that an agreement may be oral or in writing. However, Section 21 of the Arbitration Act, 1940 requires the parties to apply to the court in writing for an order of reference.

The Court also discussed the provisions of Order XXVI Rules 9 and 11 of the Code of Civil Procedure, 1908, which deal with the appointment of commissioners for local investigations and examination of accounts, respectively.

The Court also referred to Section 14A of the Specific Relief Act, 1963, which allows the court to engage experts to assist it on specific issues involved in a suit.

Arguments

The plaintiff argued that the defendant had agreed to refer the matter to arbitration by consenting to the appointment of S.K. Mantri as a ‘Panch’ and that the order of the court dated December 23, 1994, reflects this agreement. They also argued that the defendant’s objections to the award were filed beyond the prescribed limitation period.

The defendant contended that they never agreed to arbitration. They argued that the application for appointment of a ‘Panch’ was not an application for reference to arbitration under Section 21 of the Arbitration Act, 1940. The defendant also stated that the ‘Panch’ was appointed to assist the court in examining the accounts and not as an arbitrator. They also contested the findings of the ‘Panch’ on various grounds.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. 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.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

The Court also referred to:

• Section 2 of the Indian Contract Act, 1872 to define agreement.
• Section 21 of the Arbitration Act, 1940 to explain the requirements for a valid reference to arbitration.
• Order XXVI Rules 9 and 11 of the Code of Civil Procedure, 1908 relating to appointment of commissioners for local investigations and examination of accounts.
• Section 14A of the Specific Relief Act, 1963 relating to the power of court to engage experts.

Judgment

The Supreme Court held that the parties had not agreed to refer the matter to arbitration under Section 21 of the Arbitration Act, 1940. The Court stated that the application filed by the plaintiff was for the appointment of a commissioner/expert to examine the accounts and not for referring the matter to arbitration. The Court also held that the order dated December 23, 1994, did not indicate that the defendant had agreed to arbitration.

The Court clarified that the appointment of S.K. Mantri was as a commissioner under Order XXVI Rule 11 of the Code of Civil Procedure, 1908, and not as an arbitrator. The Court stated that the commissioner’s report is not an award and is only an opinion to assist the court in arriving at a final conclusion.

The Court also discussed the difference between an arbitrator and an expert, stating that an arbitrator decides on the basis of evidence and submissions of the parties, whereas an expert decides on his own expert opinion.

The Court also distinguished between a commissioner and an arbitrator, stating that a commissioner is appointed by the court to assist it in arriving at a final conclusion, whereas an arbitrator is appointed by the parties to resolve their dispute.

The Court set aside the impugned order of the High Court and held that the report of the Chartered Accountant was not an award but a report of a commissioner appointed by the Court under Order XXVI Rule 11 of the Code. The Court directed the trial court to consider the defendant’s objections to the report and proceed with the trial as per law.

“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.”

“In the present case, the application dated 23rd December 1994 was moved by the plaintiff and it was not signed by the defendant.”

“The commissioner so appointed does not strictly perform a ‘judicial act which is binding’ but only a ‘ministerial act’.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to ensure that arbitration is only resorted to when there is a clear and unequivocal agreement between all parties involved in a suit. The Court emphasized that the term ‘agree’ in Section 21 of the Arbitration Act, 1940, requires a meeting of minds between the parties to forego their right to adjudication before a court. The Court was also keen to highlight the distinction between an arbitrator and an expert, underscoring that the role of an expert is to assist the court and not to adjudicate the dispute. The Court also wanted to clarify the difference between an arbitrator and a commissioner, stating that a commissioner is appointed by the court to assist it in arriving at a final conclusion, whereas an arbitrator is appointed by the parties to resolve their dispute.

Key Takeaways

• A reference to arbitration under Section 21 of the Arbitration Act, 1940, requires a clear and explicit agreement between all parties involved in a suit.
• The application for reference to arbitration must be made in writing to the court.
• The appointment of a commissioner/expert to examine accounts is different from referring the matter to arbitration.
• A commissioner’s report is not an award and is only an opinion to assist the court.
• The court’s power to appoint a commissioner is different from the power to refer a matter to arbitration.

Directions

The Supreme Court directed the trial court to consider the defendant’s objections to the commissioner’s report and proceed with the trial as per law.

Development of Law

The ratio decidendi of the case is that a reference to arbitration under Section 21 of the Arbitration Act, 1940, requires a clear and explicit agreement between all parties involved in a suit. The Court clarified that the appointment of a commissioner/expert to examine accounts is different from referring the matter to arbitration. This judgment reinforces the principle that arbitration is a consensual process and cannot be imposed on parties without their explicit agreement. The Court also clarified the distinction between an arbitrator, an expert and a commissioner.

Conclusion

The Supreme Court’s judgment in M.P. Rajya Tilhan Utpadak Sahakari Sangh Maryadit vs. M/s. Modi Transport Service clarifies the requirements for a valid reference to arbitration under Section 21 of the Arbitration Act, 1940. The Court emphasized that a clear and explicit agreement between all parties is necessary for a matter to be referred to arbitration. The judgment also distinguishes between the roles of an arbitrator, an expert, and a commissioner, providing clarity on the different mechanisms for dispute resolution and expert assistance in court proceedings.