Jivarajbhai Ujamshi Sheth & Ors Vs.
Chintamanrao Balaji & Ors [1963] INSC 223 (19 November 1963)
19/11/1963 SHAH, J.C.
SHAH, J.C.
SARKAR, A.K.
HIDAYATULLAH, M.
CITATION: 1965 AIR 214 1964 SCR (5) 480
CITATOR INFO:
D 1984 SC1072 (30) R 1988 SC2018 (30) RF 1989
SC 606 (7) R 1989 SC 890 (18,30) R 1990 SC1426 (17) D 1991 SC 945 (6) F 1992 SC
232 (23,29)
ACT:
Arbitration-Partnership Agreement-Arbitration
clause-Formula of valuation on dissolution-Arbitrator appointed by deed of
reference-Validity of award questioned-Grounds on which award can be set
aside-Error apparent on the face of the records Arbitrator exceeding
jurisdiction-Validity of AwardSeverability Indian Arbitration Act, 1940 (X of
1940), s. 30.
HEADNOTE:
The appellants and the respondents entered
into a partnership in the business of manufacturing bidis. Under the agreement
a partner was entitled to retire after giving notice of six months to all
partners. It contained a clause for reference of disputes between the partners
relating to the business or dissolution of the firm to arbitration. It also
contained a clause providing how four items including goodwill should be
valued. According to this clause goodwill was equal to five years net profits
for debts due to the firm were to be taken not at their book value but at 85%
of that value, stocks of raw materials were to be valued at book value and
immovable properties were to be valued at their purchase price or, their book
value. About two years later the appellants desired to retire from the
partnership and a deed ,of reference was executed and a sole arbitrator was
appointed. This provided that the remaining partners shall continue the firm
and they shall make full payment to the retiring partners of such amounts in
such manner and on such conditions as shall be decided upon by the arbitrator.
The arbitrator gave the award. He fixed the
value of the goodwill of the firm at Rs.32 lakhs including in that amount the
"depreciation and appreciation of the property, dead stock and dues to be
recovered." The award was filed in the Court under s. 14(2) of the Indian Arbitration
Act, 1940.
481 The respondents applied for an order
setting aside the award on diverse grounds, two out of which survived for
consideration in the present appeal. The first was that the arbitrator in
making this award exceeded his jurisdiction because in fixing Rs. 32 lakhs as
the value of the devisable assets of the firm he included therein the depreciation
and appreciation of the property dead stock and outstandings;
secondly that the arbitrator was guilty of
misconduct. The trial court upheld these and certain other objections and set
aside the award. The High Court confirmed the decision of the trial court
insofar as it related to the two contentions. The present appeal is on a
certificate granted by the High Court.
Held:(i) An award made by an arbitrator is
conclusive as a judgment between the parties and the court is entitled to set
aside an award if the arbitrator has mis-conducted himself in the proceeding or
when the award has been made after the issue of an order by the Court
superseding the arbitration or after arbitration proceedings have become
invalid under s. 35 of the Arbitration Act or where an award has been
improperly procured or is otherwise invalid under s. 30 of the Act. An award
may be set aside by the Court on the ground of error on the face of the award,
but an award is not invalid merely because by a process of inference and
argument it may be demonstrated that the arbitrator has committed some mistake
in arriving at his conclusion.
Champser Bhara and Company v. Jivrai Balloo
Spinning and Weaving Company Ltd., L.R. 50 I.A. 324 and Cruikshank and others
v. Sutherland and others, (1923) 92 L.J. Ch. 136, distinguished.
(ii)It is not open to the Court to speculate,
where no reasons are given by the arbitrator, as to what impelled the
arbitrator to arrive at his conclusions.
(iii)In the present case the arbitrator had
included depreciation and appreciation of certain assets in the value of the
goodwill which he was incompetent to include by virtue of the limits placed
upon his authority by the deed of reference. This was not a case in which the
arbitrator has committed an error of fact or law in reaching his conclusions on
the disputed questions submitted for adjudication. It was a case of assumption
of jurisdiction not possessed by him and that rendered the award to the extent
to which it was beyond the arbitrators' jurisdiction, invalid. It is, however,
impossible to sever from the valuation made by the arbitrator the value of the
depreciation and appreciation included by the arbitrator.
The award must therefore fail in its
entirety.
Per Hidayatullah, J.-(i) If the parties set
limits to action by the arbitrator, then the arbitrator had to follow the
limits set for him and the court can find that he exceeded his jurisdiction on
proof of such excess.
(ii)In the present case the arbitrator in
working out net profits for four years took into account depreciation of
immovable 1/SCI/64-31 482 property. For this reason he must be held to have
exceeded his jurisdiction and it is not a question of his having merely
interpreted the partnership agreement for himself as to which the Civil Court
could have had no say, unless there was an error of law on the face of the
award.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 717 of 1963.
Appeal from the judgment and order dated
April 30, 1962, of the Madhya Pradesh High Court at Jabalpur in Misc. Appeal
No. 75 of 1961.
S.T. Desai and LN. Shroff, for the
appellants.
G.S. Pathak and Remeshwar Nath, for
respondents Nos. 1 to 3.
A. V. Viswanatha Sastri and Remeshwar Nath,
for respondents nos. 4 and 5.
November 19, 1963. The Judgment of A.K.
Sarkar and J.C.
Shah, JJ. was delivered by Shah, J. M.
Hidayatullah, J.
delivered a separate Opinion.
SHAH, J.---Vrajlal Manilal & Company, a
firm consisting originally of four partners (1) Manilal Anandji, (2) Jivrajbhai
Ujamshi Sheth, (3) Punjabhai S. Patel, and (4) Chintamanrao, has been doing
business of manufacturing bidis at Sagar and Delhi since 1944. From time to
time fresh partnership deeds were executed readjusting the shares of the partners
admitting new partners and adjusting the shares of the partners. In 1954
Manilal Anandji retired from the firm and on January 27,1955, Punjabhai S.
Patel died.
On February 16, 1956, a fresh deed of
partnership was executed. The firm then consisted of eight partners-Jivraj and
his two sons being entitled in the aggregate to annas -/4/3 share in a rupee in
the profits, Chintamanrao and his two sons to annas -/7/6 share in a rupee, and
the two sons of Punjabhai S. Patel to the remaining annas -/4/3 share.
By paragraph-7 the books of account were to
be maintained by the managing partner, the financial year of the firm 483 being
from Diwali to Diwali, and profits and losses were to be ascertained at the
close of the year and a copy of the balance-sheet with profits and loss
statement was to be supplied to each partner, and if no objection regarding the
accounts was raised within four months from the end of the year, the' accounts
were to be deemed conclusive and binding unless vitiated by fraud. By paragraph-12
it was stipulated that a partner desiring to retire from the partnership may,
unless the other partners agreed to' his retirement otherwise, do so after
giving six months notice to all the partners in writing terminable at the' end
of the year i.e., the Diwali immediately following the date of the notice.
Paragraph-13 provided:
"In case of retirement of any partner
the valuation of the Firm will be made on the following, basis for the purpose
of settling the account of the retiring partner:"(a) Goodwill of the
Firm:-That is, right to use the trademarks, trade labels and the name of the
Firm.
In making the valuation of the above the net
profits of the last five years will be taken as the value of the Goodwill of
the Firm.
(b) Outstandings, Udhari (Recoveries) :-That
is, loans and debts outstanding against persons other than partner will be
calculated at 85 % of the book value of the Firm.
(c) Stock of Raw Materials:-That is, tobacco,
bidis, bidi leaves, labels and other moveable property will be valued at the
book value of these in the books of the Firm and all, such stock and moveables,
thus valued shall be given to the remaining partners.
(d) Immoveable Property:-Such as buildings,
godowns, gardens, lands etc. will be valued at the parchase price or their book
value in the books of the Firm as the case may be, and all these shall be given
to the remaining partners." 484 Paragraph-16 incorporated a clause for
reference of disputes between the partners relating to the business or
dissolution of the firm to arbitration.
In April 1958 Jivraj and his two sons
-appellants in this appeal desired to retire from the partnership, and a deed
of reference was executed on April 16, 1958, appointing Ambalal Ashabhai,
Becharbhai Somabhai and Chaturbhuj Jasani as arbitrators to decide the dispute.
It was recited in the deed of reference that since Jivraj and his two sons had
expressed a desire to retire and the remaining five partners had agreed to take
over the entire business of the firm, it was "necessary to effect the
final account of the retiring partners with regard to the matters mentioned
below, as far possible, according to and taking into consideration the terms
and conditions of the Partnership Agreement.
1. Goodwill of Trade Mark.
2. Property.
3. Credits (Udhari) 4. Dead-stock.
5. Stock-in-trade i.e. the raw material, or
the finished goods invested in the business.
6. Other matters connected with these
transactions.
7. Profit and Loss Account.
8. The Receipt ond Payments account of the
amounts of the partners.
By Paragraph 6 it was provided that the firm
shall be continued by the remaining five partners and that those five partners
shall make full payment to the retiring partners Jivraj and his two sons of
such amounts, in such manner, and on such conditions, as shall be decided upon
by the arbitrators. Paragraph 7 set out the powers exercisable by the
arbitrators in the matter of calling for production of account books and
documents and other information from the parties.
The deed of reference was subsequently
modified, and the parties agreed that the reference be 485 " carried out
by the sole arbitrator Shri Jasani". Pursuant to this modified agreement,
Jasani entered upon the reference, and made his award on January 9, 1959. By his
award he fixed the value of the goodwill of the entire firm at Rs. 32 lakhs
including in that amount the "depreciation and appreciation of the
property, dead-stock and dues to be recovered". He also fixed the profits
for the broken period of Samvat year 2014 from the commencement of the year
till April 19, 1958 at Rs. 2,80,000 and after adjusting the personal accounts
of the three retiring partners awarded to Jivraj Rs. 3,46,223.58 nP. to
Amritlal son of Jivraj Rs. 4,04,519.99 nP. and to Bhagwandas son of Jivraj Rs. 3,86,019.14
nP, and directed that the ownership over the assets of the firm i.e.
property-moveable and immoveable,--Trade mark, labels, stock-in-trade,
long-term leases and contracts etc. shall remain with the remaining partners,
subject to the liabilities of the firm, the retiring partners not being
responsible for the liabilities of the firm, nor having any interest in the
firm or its business. This award was filed in the Court of the Additional
District Judge, Sagar, under s. 14(2) of the Indian Arbitration Act, 1940.
Chintamanrao and his sons then applied for an
order setting aside the award on diverse grounds. In this appeal by the
retiring partners, two heads of objections only survive for determination and
we propose to refer only to those two heads, viz:
(1) That the arbitrator in making his award
travelled outside. his jurisdiction delimited by the agreement of reference in
that in fixing Rs. 32 lakhs as the value of the divisible assets of the firm he
included therein the depreciation and appreciation of the property, dead-stock
and outstandings, which he was by the terms of the reference incompetent to
include.
(2) That the arbitrator was guilty of legal
misconduct in that he had in the course of arbitration proceedings admitted in
his record 486 a statement of account prepared by Jivraj and his sons without
the knowledge of the other partners and without giving them an opportunity to
make their submissions thereto.
The retiring partners resisted the petition
to set aside the award and submitted that they were entitled to have the assets
of the firm in which they had a share, fixed at an amount much in excess of Rs.
32 lakhs and that the arbitrator had not overstepped his jurisdiction in fixing
the value of the goodwill at Rs. 32 lakhs, and that the statement of account
referred to by the applicants was prepared under the directions of the
arbitrator and in his presence and it was admitted in the record of the
arbitrator -to the knowledge of the remaining partners who had assented
thereto.
The Trial Court upheld these and certain
other objections, and set aside the award. The High Court confirmed the
decision of the Trial Court, insofar as it related to the two objections hereinbefore
set out.
The question which we propose to consider
first is: whether in making the valuation of the firm" for determining the
share to be paid to the retiring partners, did the arbitrator overstep the
limits of his authority under the agreement of reference? It may be recalled
that by cl. 6 of the arbitration agreement the remaining partners had to
"make full payment to the retiring partners of such amount as may be
decided" by the arbitrator. But in determining the amounts to be awarded
to the retiring partners, the authority of the arbitrator was restricted. He
had, in determining the amounts due to the retiring partners, to take
"final accounts with regard to the matters" set out in cl. 4,
"as far as possible, according to and taking into consideration the terms
and conditions of the Partnership agreement". By this direction the
clauses of the partnership agreement were incorporated in the agreement of
reference. The "final account" of the retiring partners with regard
to the eight matters 487 specified in cl. 4 was undoubtedly to be made, as far
as possible, according to and taking into consideration the terms and
conditions of the partnership agreement. The language used in the deed of
reference is of compulsion, not of, option: it means that if there be in the
partnership agreement any term or condition, which deals with any particular
matter of which an account was to be taken under cl. 4 of the -agreement of
reference, it has to be strictly followed. Use of the expression "as far
as possible" did not confer any discretion upon the arbitrator to ignore
the terms and conditions of the partnership agreement. In paragraph-13 of the
partnership agreement, in making "valuation of the firm" for the
purpose of settling accounts, the value of the goodwill, the outstandings,
stock of raw material and moveable and immoveable property had to be taken as
directed therein. In the matter of valuation of the goodwill of the firm,
therefore, no discretion was left to the arbitrator: the value of the goodwill
had to be the aggregate of the net profits of the last five years. Debts due to
the firm from persons other than partners had to be "calculated at 85 % of
the book value of the firm". In respect of the stock of raw materials and
other moveable property the "book value in the books of the firm" had
to be accepted by the arbitrator and in the case of immoveable property such as
buildings, godowns, gardens, lands etc.
"the book value in the books of the
firm" was to be accepted and if none such was available the purchase price
as mentioned in the books was to be accepted. In all these matters the
arbitrator had by cl. 4 of the arbitration agreement to make the final account
of the retiring partners according to and taking into consideration the terms
and conditions of the partnership agreement and had no option.
It is necessary to remember that the
partnership agreement does not grant to a retiring partner a share in the
aggregate of the four items mentioned in cls. (a), (b), (c) & (d) of
paragraph-13 i.e., goodwill of the firm, outstandings, stock of raw materials
including 488 moveable and immoveable property. The partnership agreement
merely provides that the "valuation of the firm" shall be made as set
out therein for the purpose of settling the account of the retiring partners
i.e., in ascertaining the. amount due to the retiring partners valuation of the
assets in cls. (a) to (d) of paragraph-13 shall be made in the manner set out
therein. The arbitrator was therefore bound to adopt the valuation prescribed
by the partnership agreement, but that is not to say that the retiring partner
was entitled to a share equal to the aggregate of the values of the four items
mentioned in paragraph-13. It is necessary to emphasize this matter because on
behalf of the retiring partners a considerable argument was advanced before us
on the assumption that they were entitled to a share equal to the aggregate of
the values of the four items of property mentioned in paragraph1 3 of the
partnership agreement, and that by the method of valuation adopted by the
arbitrator they were awarded much less than what they were under the
partnership agreement entitled to.
Paragraph-13 merely prescribes the valuation
in respect of four out of the items which had to be considered in ascertaining
the "valuation of the firm". The phraseology used in paragraph-13 in
the opening part of the paragraph makes it clear beyond all doubt that the
valuation of the firm had to be made on the basis specified for the purpose of
settling the account of the retiring partner. The specific items in
paragraph-13 do not prescribe any method of valuation of the debts and
liabilities of the firm, but the debts and liabilities must be taken into
account in assessing the value of the share of the retiring partners.
The arbitrator had to make a valuation of the
firm i.e. of all the assets of the firm and of the debts due by the firm and
thereafter to settle the account of the retiring partners.
We may now turn to the award made by the
arbitrator. The dispute between the parties has to be resolved on a true
interpretation of the following clause:
"I assess the value of the goodwill at
Rs. 32 lakhs.
489 This amount includes the depreciation and
appreciation of the property, dead-stock and dues to be recovered." (We have
taken this as the correct rendering into English of the original award which is
in Hindi. It is accepted by both the parties before us as a true rendering.)
The arbitrator has, as he has observed in his award, taken only the value of
the goodwill, in determining the amounts to be allotted to the retiring
partners, and has not expressly referred to the valuation of the three other
items, viz., the outstandings, the stock-in-trade and moveable’s and the
immoveable property mentioned in paragraph-13 of the partnership agreement.
Counsel for the retiring partners urged that on the admission made by
Chintamanrao, the value of the goodwill alone was Rs. 21,70,650/10/and if the
value of the immoveable, stock-in-trade etc. and outstandings be added thereto,
the aggregate would considerably exceed Rs. 32 lakhs. But this argument is
founded on the fallacious assumption that the debts and liabilities of the firm
have to be ignored in determining the shares of the retiring partners. Counsel
for the respondent submitted that in substance the goodwill had alone to be
valued by the arbitrator for the property, moveable and immoveable,
stockin-trade and the outstandings of the firm were approximately equal to the
aggregate of the debts and obligations of the firm. Reliance in this behalf was
placed upon a balance-sheet Ext. A-13 of the assets and liabilities of the
firm, showing the financial position of the firm on April 16,1958, and the
value of the tangible assets, such as the stock of raw-materials, moveable and
immoveable property and outstandings, according to the balance-sheet, was
approximately equal to the debts and liabilities of the firm.
But it is not necessary for us to decide
whether the submission of the respondents is correct. The arbitrator has in his
award stated that Rs. 32 lakhs is the value of the goodwill alone, and for some
reason not disclosed by him he has not valued the other 490 assets. He has also
not disclosed in his award how he has arrived at the valuation of Rs. 32 lakhs.
One thing, however, stands out prominently in the award, that in assessing the
value of the goodwill, he has included the depreciation and appreciation of the
property, dead-stock and the outstandings. The arbitrator could undoubtedly
make a lump-sum valuation of the firm in the award made by him.
He was not obliged in the absence of a
direction in that behalf to set out in his award the valuation of the different
components which aggregated to the lumpsum. The arbitrator had to "value
the firm", and in doing so to abide by the specific directions, but he was
not obliged to set out in the award separate valuations of all or any of the
items mentioned in para 4 of the deed of reference, or in paragraph-13 of the
partnership agreement, nor to set out the extent of the debts and obligations
assessed by him.
What then is the effect of the inclusion by
the arbitrator in the valuation of Rs. 32 lakhs, of the depreciation and
appreciation of the property, deadstock and dues to be recovered? Diverse
arguments were submitted by counsel for the appellants in support of the plea
that the inclusion of what is called the depreciation and appreciation in
respect of the various items does not amount to overstepping the limits of the
jurisdiction of the arbitrator. It may be reiterated that the powers of the
arbitrator were, by the terms of cl. 4 of the deed of reference, clearly
restricted.
He was "to take final account of the
retiring partners with regard to the matters mentioned therein, as far as
possible, according to and taking into consideration the terms and conditions
of the partnership agreement". Restriction on the power of the `rbitrator
in valuing the property, deadstock and outstandings was explicit. He could not
therefore adopt any valuation different from the valuation prescribed by
paragraph-13 of the partnership agreement. But the arbitrator has, as he has
himself stated, in valuing the goodwill at Rs. 32 lakhs included in that amount
the value of the depreciation and appreciation of the property, dead stock and
dues to be recovered.
491 Counsel for the appellant submitted that
reduction of outstanding of the firm by 15 % in respect of the dues from
persons other than the partners was a mode of ascertaining the depreciation in
respect of that item provided by cl. (b) of paragraph-13 of the partnership
agreement, and the arbitrator in taking into consideration that depreciation
has not acted outside his jurisdiction. It would be difficult to regard the
method of valuation as prescribed in respect of the outstanding as "including
depreciation".
Even assuming that the reduction of the outstanding
of the firm from persons other than the partners by 15 % as directed in cl. (b)
of paragraph-13 of the partnership agreement be regarded as depreciation of the
assets, inclusion of depreciation and appreciation in respect of the other
assets was not permitted by the deed of partnership.
In valuing the moveable property including
the stock of raw materials, the arbitrator could not adopt any valuation other
than that mentioned in cl. (c) of paragraph -1 3 of the partnership agreement,
namely, the book value as given in the books of the firm. Similarly, in the
valuation of immoveable such as buildings, godowns, gardens, lands etc., he had
to accept the book value as mentioned in the books of account of the firm and
if no book value was available the. purchase price as mentioned in the books
was to be accepted.
The arbitrator had no power to make any
adjustment in respect of those items by including depreciation or appreciation
in their value.
The principle of Cruikshank and others v.
Sutherland and others(1) on which reliance was placed by counsel for the
retiring partners, has, in our judgment no application to this case, because in
that case though there was an article of the partnership providing that the
share of a deceased partner in the assets of the partnership should be
ascertained by reference to the annual account made up on April 30 next after
the death, the articles were wholly silent as to the (1) [1923] 92 L.J. Ch. 136
492 principle to be adopted in preparing a full and general account of the
property. There was no usage or course of dealings between the partners from
which an inference could be drawn that on the death of a partner his share
shall be paid out on the footing of book value. The executors of the deceased
partner claimed that his share be determined "at the fair value of the
firm". At p. 138 it was observed by Lord Wrenbury.
"Even if there were a usage to state an
account for one purpose in one way, that is not a usage to state it for another
purpose in the same way. There is a passage in Blisset v. Daniel (10 Hare, at
p. 515) which is useful reading in this connection. An account stated for one
purpose is not necessarily stated for another purpose. The fact is, that in
this partnership an account has never been stated with a view to fitting the
case of a retiring partner, or a deceased partner, or a senior partner who is
going to exercise an option of taking over all the assets. The partners have
never had any such event in view in making the account which they have made.
There has never been an account prepared which was intended to meet all the
various contingencies of events such as these.
In the case before us there is no dispute
that the duty of the arbitrator was to make "valuation of the firm"
subject to paragraph-13 of the partnership agreement and it may even be granted
that in arriving at that valuation he was not bound by paragraph-7, but on this
question we express no opinion. But the values as mentioned in the different
clauses had to be accepted in making up the partnership account in respect of
the four matters specifically enumerated. The principle of Cruikshank's case(1)
did not apply, because the partnership agreement in this case itself provides
that the book value in the books of the firm shall be accepted.
(1) [1923] 92 L.J. Ch. 136.
493 The expression "book value" in
the context in which it occurs in the partnership agreement means, the value
entered in the books of account. Adoption of the book value is therefore
obligatory and there is no scope. of any adjustment in the value in the light
of any depreciation or appreciation of the property, outstandings,
stock-in-trade or dead-stock, apart from what may actually be included in the
book value, in the books. It is the book value alone which has to be taken. If
the depreciation or appreciation has been taken into account by the partners in
assessing the book value, that was evidently part of the book value as entered
in the books of account. If there was no book value entered in respect of any
immoveable property, the decisive value was to be the purchase price.
It was then urged that it was for the
arbitrator to adjudicate upon the true meaning of the partnership agreement and
to give effect thereto, and if in making a "valuation of the firm" he
was of the opinion that depreciation and appreciation in respect of certain
items of assets should be included for the purpose of making up the account of
the partners, the Court had no jurisdiction to set aside the award on that
account, merely because the Court took a different view as to the true meaning
of the arbitration agreement. But if the partnership agreement was incorporated
in the deed of reference, the limits of the jurisdiction of the arbitrator must
be determined by the Court and not by the arbitrator. By assuming that he was
entitled to include, beside the value of the four items as mentioned in
paragraph-13, some amount by way of appreciation in the value of those items,
the arbitrator purported to set at naught the specific directions given in that
behalf An award made by an arbitrator is conclusive as a judgment between the
parties and the Court is entitled to set aside an award if the arbitrator has miss
conducted himself in the proceedings or when the award has been made after the
issue of an order by the Court superseding the arbitration or after 494
arbitration proceedings have become invalid under s.35 of the Arbitration Act
or where an award has been improperly procured or is otherwise invalid: s.30 of
the Arbitration Act. An award may be set aside by the Court on the ground of
error on the face of the award, but an award is not invalid merely because by a
process of inference and argument it may be demonstrated that the arbitrator
has committed some mistake in arriving at his conclusion. As observed in
Chempsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company
Ltd.(" at p. 331:
"An error in law on the face of the
award means, in their Lordships' view, that you can find in the award or a
document actually incorporated thereto, as for instance a note appended by the
"arbitrator stating the reasons for his judgment, some legal proposition
which is the basis of the award and which you can then say is erroneous. It
does not mean that if. in a narrative a reference is made to a contention of
one party, that opens the door to seeing first what that contention is, and
then going to the contract on which the parties' rights depend to see if that
contention is sound." The Court in dealing with an application to set aside
an award has not to consider whether the view of the arbitrator on the evidence
is justified. The arbitrator's adjudication is generally considered binding
between the parties, for he is a tribunal selected by the parties and the power
of the Court to set aside the award is restricted to cases set out in s. 30. It
is not open to the Court to speculate, where no reasons are given by the
arbitrator, as to what impelled the arbitrator to arrive at his conclusion. On
the assumption that the arbitrator must have arrived at his conclusion by a
certain process of reasoning, the Court cannot proceed to determine whether the
conclusion is right or wrong. It is not open to the Court to attempt to probe
the mental process by which the arbitrator has reached his conclusion where it
(1) L.R. 50 I.A. 324.
495 is not disclosed by the terms of his
award. But the arbitrator has in the present case expressly stated in his award
that in arriving at his valuation, he has included the depreciation and
appreciation of the property, outstandings and dead-stock, and in so doing in
our judgment the arbitrator has travelled outside his jurisdiction and the
award is on that account liable to be set aside. The question is not. one of
interpretation of paragraph-13 of the partnership agreement but of ascertaining
the limits of his jurisdiction. The primary duty of the arbitrator under the
deed of reference in which was incorporated the partnership agreement, was to
value the net assets of the firm and to award to the retiring partners a share
therein.
In making the "valuation of the
firm". his jurisdiction was restricted in the manner provided by
paragraph-13 of the partnership agreement.
It was next urged that the depreciation or
appreciation which had been entered in the assessment of the book value were
"other matters connected with" the "transactions" mentioned
in the deed of reference. But manifestly those other matters were apart from
the valuation of the goodwill, property, outstandings and the dead-stock.
It was then urged that when the arbitrator
stated that he had included depreciation and appreciation of certain assets in
the value of the goodwill in the award, he merely meant that such depreciation
and appreciation was included as was in the circumstances permissible. But that
would be ignoring the express recital in the award. In fact under the scheme of
valuation envisaged by the partnership agreement and therefore the deed of
reference, there was no scope for including in the valuation, appreciation of
the assets. Again to argue, as was sought to be done, that even though the
arbitrator stated that he had included in the amount of Rs. 32 lakhs "the
depreciation and appreciation" of the property, dead-stock and dues, there
being no power to include appreciation, appreciation in the property and the
496 dead-stock could not have been included amounts to reaching a conclusion
from an assumed premise of which the conclusion was a component.
It was also urged that the expression
depreciation and appreciation had no such meaning as decrease or increase in
the market value of the property, ,dead-stock and outstandings, and the clause
merely meant that in fixing the valuation such depreciation or appreciation as
had gone into the assessment of the book value of the different items was taken
into consideration. But the arbitrator has not said that he merely took into
consideration the depreciation and appreciation which went into the book value
assigned by the partners to the assets in the account: he has clearly stated
that he had included the depreciation and appreciation in those assets in the
valuation of the goodwill.
Finally it was urged that the recital about
the inclusion of depreciation or appreciation was a mere surplusage and should
be discarded. But it would be difficult to regard a statement made by the
arbitrator relating to what he says he had included in the valuation of the
goodwill, as a mere surplusage, especially having regard to the orders made by
him insisting upon the production of documentary evidence and certain books of
account from Chintamanrao. It may be pointed out that by cl. 7 of the deed of
reference very wide powers were conferred upon the arbitrator to call upon the
disputing parties to produce the accounts etc. which the arbitrator desired and
to produce any other papers or documents which the arbitrator would like to
inspect, and to reply to any enquiry verbal or written of any sort or in any
connection and in any form the arbitrator wanted. The orders passed by the
arbitrator in exercise of these powers tend to indicate that in his view he was
competent to ascertain and include in the valuation of the firm the
depreciation and appreciation on the various items which were taken into
account in arriving at the valuation. By order dated September 16, 1958, the
arbitrator gave direction, amongst 497 others, to Chintamanrao to file a
statement of houses etc.
of immoveable property, valuation of the same
as shown in the books of account, i.e. figures regarding it, and "also the
approximate value statement as it existed" at the date of demand according
to the estimate of Chintamanrao. In the note to the order, it was stated that
Chintamanrao had produced certain papers but they were incomplete, and
therefore he was ordered to bring copies of the incomplete papers and also
those papers which were not sent by him. On October 10, 1958, Chintamanrao
produced a statement of the net profits of the five years preceding the date of
dissolution-which he called the price of the goodwill-for Samvat years 2009 to
2013. The aggregate of the net profits was Rs. 21,70,650/10/which he called
"price of the goodwill". He then submitted a statement of the
outstandings of the different shops aggregating to Rs. 9,16,366/and the value
of the goods purchased, and other property, and submitted that the total value
of the goodwill of the firm by taking into account the profits of the firm for
the last five years "as per the statement filed was Rs. 21,70,650/10/3 and
deducting therefrom 15 % of the outstandings of the firm considered as
irrecoverable, the balance was Rs. 20,33,295/12/9" and that this was the
amount from which the shares of the retiring partners were to be computed. On
December 2, 1958, an application was filed by Chintamanrao inviting the
attention of the arbitrator to the agreement of reference and to the terms of
the deed of partnership, especially paragraphs 7 and 13, and submitting that
the book values of items (2) to (5) in paragraph-4 of the agreement of
reference were already in the books of account and could be easily found
without any detailed or elaborate examination of the books of account, it was
unnecessary to enter upon any detailed inspection of the various entries. On
this application an order was passed on December 5, 1958, by the arbitrator
that the inspection of the books of account do start on December 21, 1958, in
his presence at Sagar in the office of Messrs Virajlal Mannilal and Company and
that Chintamanrao do 1 SCI/64-32 498 make arrangements for giving inspection of
all the books of account. On December 22, 1958, another application was
submitted by Chintamanrao stating that it was not necessary to produce certain
registers and manufacturing accounts and that the orders in that behalf were
beyond the jurisdiction of the arbitrator and that he was unable to produce the
,documents demanded. It was submitted by that application that the kind of
inspection claimed and granted amounted to re-opening of the accounts for the
last five years which were closed with the consent and to the knowledge of all
the partners and which could not in law be re-opened. On December 23, 1958, an
application was made by Amrat Lal son of Jivraj (one of the retiring partners)
submitting that the arbitrator had to value the goodwill and this had to be
done by ascertaining the value of the profits of the five years, and for that
purpose the arbitrator was entitled to ascertain yearly profits by scrutinising
the account books and finding out the yearly net profits. On these applications
on December 25, 1958 the arbitrator gave a direction that Chintamanrao do
produce the papers mentioned in item No. 2 in the order dated September 16,
1958, namely, the gross and net profits of the last five years, and that he do
produce the other papers which were ordered to be produced by the order dated
September 16, 1958. Thereafter on January 9, 1959, the arbitrator made his
award. The insistence of the arbitrator upon production of the gross and net
profits of the last five years indicate that it was the opinion of the
arbitrator that he was entitled to take into consideration not only the book
value of the assets given in the partnership books of account but the
depreciation and appreciation of those assets. The specific use of the
expression by the arbitrator that he had included the depreciation and
appreciation of various items of property and the procedure followed by him
including the orders therefore clearly establish that the expression used by
him was not a mere surplusage.
499 It is clear that the arbitrator has
included in his valuation some amount which he was incompetent, by virtue of
the limits placed upon his authority by the deed of reference, to include. This
is not a case in which the arbitrator has committed a mere error of fact or law
in reaching his conclusion on the disputed question submitted for his
adjudication. It is a case of assumption of jurisdiction not possessed by him,
and that renders the award, to the extent to which it is beyond the
arbitrator's jurisdiction, invalid. It is, however, impossible to sever from the
valuation made by the arbitrator the value of the depreciation and appreciation
included by the arbitrator.
The award must, therefore, fail in its
entirety.
In this view of the case, we do not think it
necessary to consider whether the plea raised by the remaining partners that
the award is vitiated on the ground that the arbitrator accepted from the
retiring partners documents prepared from the books of account without giving
an opportunity to the remaining partners to explain those documents. It was the
case of Chintamanrao that these documents were prepared and handed over to the
arbitrator without giving any notice to him. It was the case of the retiring
partners that the documents consisted merely of extracts of entries in the
books of account, and that in any event Chintamanrao had assented to those
documents being included in the record of the arbitrator. For the reasons set
out by us in dealing with the first plea for setting aside the award, and that
plea having succeeded, we do not think it necessary to enter upon the
respective contentions of the parties on the second ground.
We accordingly hold that the award was
properly set aside by the Courts below.
Counsel for the retiring partners submitted
that on the view taken by us, the award should be remitted to the arbitrator
under s. 16 of the Arbitration Act, 1940. No such request was, however, made by
them in the Trial Court or in the High Court, and we will not be justified in the
circumstances of the case in 500 acceding to that request. We may observe that
we have not heard counsel on the question whether in the circumstances of the
case and on the conclusion recorded, we have the power under s. 16 to remit the
award to the arbitrator. The retiring partners have also not asked for an order
for supersession of the arbitration agreement in exercise of the powers of the
Court under s. 19. We have, therefore, refrained from considering that question
also.
The appeal fails and is dismissed with costs
in one set.
HIDAYATULLAH, J.-This appeal arises out of an
arbitration award which was set aside by the Additional District Judge, Sagar
on the objection of the respondents. The judgment of the Additional District
Judge was confirmed on appeal by the High Court and the present appeal has been
filed on a certificate granted by the High Court under Art. 133 (1)(c) of the
Constitution. The arbitration was without the intervention of the Court.
Previously it proceeded before three arbitrators but the authority of two of
the arbitrators was revoked by the Additional District Judge, Sagar, at the
agreed request of the parties to the reference. It then proceeded before one
Chaturbhuj V. Jasani who gave his award on January 9, 1959.
The arbitration proceedings were necessary
because of the retirement of the appellants from a firm called Virajlal
Mannilal & Co. which at that time consisted of eight partners in three
groups. These groups were the three appellants (Jivraj and his two sons) owning
-/4/3 share, respondents Nos. 1-3 (Chintamanrao and his two sons) owning -/7/6
share and the two remaining respondents, who are brothers, owning the balance.
By agreement this retirement was to take place on April 15, 1958. In revoking
the award the High Court, in concurrence with the court below, has upheld two
objections-(a) that the arbitrator exceeded his jurisdiction and (b) that he
was guilty of misconduct in receiving some evidence behind the back of
Chintamanrao.
501 The firm of which the several parties
here were partners had a written deed of partnership executed on February 16,
1956.
This deed replaced earlier deeds to which
reference is not necessary. The partnership kept its accounts from Diwali to
Diwali and every year it drew up a balance sheet and a profit and loss account,
copies of which documents were given to all the partners. The accounts so
stated were subject to objection but if none was made, they were conclusive and
binding on the partners. All this was provided in the deed of partnership which
also provided for the retirement of partners and its 13th paragraph laid down
special terms as follows:
"In case of retirement of any partner
the valuation of the Firm will be made on the following basis for the purpose
of settling the account of the retiring partner:(a) Goodwill of the Firm: That
is, right to use the trademarks, trade labels and the name of the Firm.
In making the valuation of the above, the net
profits of the last five years will be taken as the value of the Goodwill of the
Firm.
(b) Outstandings, Udhari (Recoveries): That
is, loans and debts outstanding against persons other than partner will be
calculated at 85 % of the book value of the Firm.
(c) Stock of Raw Materials: That is, tobacco,
bidis, bidi leaves, labels and other moveable property will be valued at the
book value of these in the books of the Firm and all such stocks and moveables,
thus valued shall be given to the following partners.
(d) Immovable Property: Such as buildings,
godowns, gardens, lands etc. will be valued at the purchase price or their book
value in the books of the firm as the case may be, and all these shall be given
to the remaining partners." 502 As a result of an arrangement reached
aliunde by which the businesses of these partners, which were in different firm
names and various places, were to be divided between the appellants on the one
hand and the respondents on the other, the parties desired an arbitration to
separate the shares of the appellants as partners retiring from the firm Virajlal
Mannilal & Co. A deed of reference was executed by them on April 16, 1958.
After the usual recitals, it provided that a final account of the partners
should be taken with regard to eight mattersas far as possible according to and
taking into consideration the terms and conditions of the partnership
agreement." The eight matters were:
1. Goodwill of Trade Mark.
2. Property.
3. Credits (Udhari).
4. Dead Stock.
5. Stock-in-trade i.e., the raw material or
the finished goods invested in the business.
6. Other matters connected with these
transactions.
7. Profit and Loss Account.
8. The Receipt and Payments account of the
amounts of the partners.
It was further provided that the firm
Virajlal Mannilal was to continue with the respondents after the appellants had
retired there from and the appellants were to be. paid an amount to be
determined by the arbitrator and in such a manner and on such conditions as he
might direct.
The arbitrator having filed the award in
Court, the respondents filed objections, only two of which noticed above
succeeded and the award was set aside. I shall therefore proceed straight to
those objections of which only the first was fully argued before us. In making
his award the arbitrator gave the appellants a -14/3 share from a lump amount
of RS. 32 lacs which he described as "goodwill" of the firm,
adjusting, in the respective shares of the three appellants in that sum, all
amounts standing to their credit 503 or debit, as the case may be, in the
account books of the firm. He also assessed the "goodwill" for the
period from Diwali to the date of retirement and made suitable additions. His
real decision is contained in three or four lines in the award which of course
contains other matters and his exact words in Hindi have given rise to some
difference because they have been translated in two different ways on the
record of the case. The two translations are(1) The value of the goodwill of
the whole firm 1 assess at Rs. 32,000,00,-(Rupees thirty two lacs). In this sum
property, dead stock and depreciation and appreciation of Udhari are also
included;
(2) The value of the goodwill of the whole
firm 1 assess at Rs. 32,000,00/(Rupees thirtytwo lacs). In this sum the
depreciation and appreciation of property, dead stock and Udhari is also
included." The second translation is probably more accurate than the
first, but to my mind it is not a matter of mere words but of what the
arbitrator has done. The award is in Hindi and the two words
"appreciation" and "depreciation" are in English. They
might well have been used to still all controversy about issues which the
parties had raised before him relating to these matters. The arbitrator might,
in other words, have used these words loosely without meaning anything except
to show that he had looked into everything which the parties desired him to
see. The dispute is thus whether the arbitrator exceeded his jurisdiction by
adding back depreciation amounts to the book value and/or allowing for
appreciation of property which was successfully claimed by the respondents in
the High Court and the Court below to be not open to him? In this appeal it was
contended on behalf of the appellants that the deed of partnership as well as
the order of reference left the arbitrator a free hand and even if the
arbitrator wrongly interpreted the deed of partnership and did add back the
depreciation and/or 504 appreciation, no question of jurisdiction could arise.
Reliance is placed upon the observations of
the Judicial Committee in the well-known case of Chamsey Bhara & Co. v. Jivraj
Balloo Spg. & Wvg. Co.(1) where it was observed:
"An error in law on the face of the
award means, in their Lordships' view, that you can find in the award or a
document actually incorporated thereto, as for instance, a note appended by the
arbitrator stating the reasons for his judgment, some legal proposition which
is the basis of the award and which you can then say is erroneous. It does not
mean that if in a narrative a reference is made to a contention of one party
that opens the door to seeing first what that contention is, and then going to
the contract on which the parties' rights depend to see if that contention is
sound. Here it is impossible to say, from what is shown on the face of the
award, what mistake the arbitrators made. The only way that the learned judges
have arrived at finding what the mistake was is by saying;
"inasmuch as the arbitrators awarded
so-and so, and inasmuch as the letter shows that the buyer rejected the cotton,
the arbitrators can only have arrived at that result by totally misinterpreting
Rule 52". But they were entitled to give their own interpretation to Rule
52 or any other Article, and the award will stand unless, on the face of it,
they have tied themselves .down to some special legal proposition which then,
when examined, appears to be unsound." Mr. Desai contends that the
arbitrator might have interpreted the partnership deed wrongly but that was a
matter within his jurisdiction and the error, if any, not being one of law on the
face of the award, the Civil Court had no authority or jurisdiction to set
aside the award.
The other side contends, as has so far been
held in the case, that the reference, read with the partnership deed, created
an area of (1) I.L.R. 47 Bom. 578 at 586.
505 jurisdiction which the arbitrator has
outstepped. The first point is therefore to decide what were the limits of the
arbitrator's action as disclosed by the reference and the deed of partnership
and then to see what the arbitrator has actually done and not what we may have
stated loosely in his award. This is the only way in which the excess of
jurisdiction can be found If the interpretation of the deed of partnership lies
with the arbitrator, then there is no question of sitting in appeal over his
interpretation, in view of the passage quoted above from Champsey's case but if
the parties set limits to action by the arbitrator, then the arbitrator had to
follow the limits set for him, and the court can find that he has exceeded his
jurisdiction on proof of such action.
The arbitrator derived his authority from the
reference and we must turn to its terms in the first instance. The material
portion has been quoted and it shows that in view of the retirement of Jivraj
and his sons, parties considered it necessary "to effect the final account
of the retiring partners with regard to the matters mentioned below as.' far
possible according to and taking into consideration the terms and conditions of
the partnership agreement" and then followed the eight items. The words
underlined are in the recitals but they do show that the parties desired a
division in accordance with the terms of the partnership agreement. The words
"as far possible" show some latitude in one sense, but the force of
those words is to be discovered with the aid of the other words "according
to and taking to consideration etc." which lay down that the terms of the
partnership agreement must prevail over personal opinion. The partners
appointed the arbitrators to decide the eight matters and to enable them to
give their decision undertook by cl. 7 of the reference to furnish all
accounts, documents and information which the arbitrators might require of
them.
Now the deed of partnership which was to
prevail as far as its terms were applicable provided that to settle the final
account of the retiring partners 506 four items of assets should be valued in a
particular way.
These directions were contained in cl.' 13 of
the deed already set out earlier. Thus goodwill was equal to five years' net
profits; debts due to the firm were to be taken not at their book value but at
85 % of that value; stocks of raw materials were to be valued at book value;
and immovable properties at purchase price or their book value in the books of
the firm as the case may be. The goodwill took no account of anything but the
net profits. Admittedly, the net profits of the preceding five years were Rs.
21,70,650/ 10/-. This set at rest sub-clause (a) of cl. 13 of the partnership
agreement. Admittedly also the outstandings (Udhari) came to Rs. 9,16,366/at
their book value and 15% thereof came to Rs. 137,354/13/6. The net Udhari
therefore was Rs. 7,79,011/2/6. Differences really arose in the matter of
valuation of raw materials and immovable properties and in this connection. the
appellants asked to see an account of gross profits for the past five years
which the arbitrator ordered Chintamanrao to produce.
According to the appellants the value of
properties given by Chintamanrao was the written down value and the right
figure according to the agreement was not Rs. 6,24,369/as stated by
Chintamanrao but Rs. 16,57,000/-. In reply Chintamanrao stated that it was not
the practice of the firm to prepare an account of gross profits but he added
that gross profits could be calculated from the account books by the other side
or by the arbitrator and he offered the services of an accountant to prepare
such an account. The documents which the arbitrator is said to have received
behind the back of Chintamanrao (though not some of the other respondents) are
the abstracts which show the gross profits and what was excluded to reach the
net profits. The net profits in these accounts and the net profits given by
Chintamanrao agree. I do not refer to the dispute about the production of the
documents since that part of the case was not argued before us, but these
accounts prime facie do show that in working out net profits for the five
years, depreciation of immovable property and goods was taken 507 into account.
The same depreciation appears to have been taken into account in the balance
sheet while valuing the assets against the liabilities. In other words
depreciation of immovable properties and goods over the five years for which
the goodwill was to be calculated appeared to have been taken twice over.
I would have persuaded myself to go into this
matter more deeply but for the fact that such depreciation does not altogether
account for the difference between 21 lacs and 32 lacs. The balance sheets show
a very slender difference between the assets and liabilities over the five
years and it may be taken that the value of Udhari, raw materials and immovable
properties is offset by the liabilities. Nothing remains except a very petty
sum as profit to be carried over for addition to the goodwill. The duplicated
depreciation does not in fact account for the increase from Rs. 21 lacs to Rs.
32 lacs. The conclusion is therefore inescapable that the arbitrator meant what
he said when he spoke of including appreciation and depreciation in the
valuation of the properties etc. For this reason he must be held to have
exceeded his jurisdiction and it is not a question of his having merely
interpreted the partnership agreement for himself as to which the Civil Court
on authority could have had no say, unless there was an error of law on the
face of the award.
Reliance is placed upon the case of
Cruickshank and others v. Suiherland -and others'-" that if accounts in
the past were not prepared to meet the contingency of retiring partners, the
accounts must be recast for this special purpose and the arbitrator must
necessarily have freedom to value property in his own way and not by accepting
old accounts already made by the partners. The intention here was that the
arbitrator should prepare the final accounts as the partners would themselves
have done under the partnership agreement, and the arbitrator had to follow cl.
13 of the partnership agreement which was binding on (1) [1923] 92 L. J. Ch. 136.
508 the partners and therefore on him. The
partnership agreement did not speak of market value or fair value. It stated
that the purchase price or the book value as the case may be alone could be
taken into account. This meant that the book value where available and the
purchase price in other cases only were to enter in the calculations. There was
thus no option to go to fair value or market price at all.
I do not think that we should supersede the
arbitration agreement under s.19. No circumstance was made out for such a
course. I would have directed a remit to the arbitrator under s. 16 of the Arbitration
Act 1940 but my brethren take a different view of the matter and I leave the
matter there.
The contention of the appellants on the
question of jurisdiction decided against them must fail and I agree that the
appeal should be dismissed with costs.
Appeal dismissed.
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