Gobardhan Das vs Lachhmi Ram And Ors.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 24 March 1954

Coram: B.K. Mukherjea, Ghulam Hasan

In this case, the appeal originated from arbitration proceedings and challenged the judgment and order dated 8 November 1949 issued by a Division Bench consisting of Reuben and Sinha JJ. of the Patna High Court, which had affirmed the decision of the Additional Subordinate Judge at Motihari in the Champaran district. The appeal was filed on a certificate under Article 133(1) of the Constitution. The appellant, Gobardhan Das, had entered into a partnership with respondents 1 and 2 for a grain‑trading business. The appellant supplied the entire capital and was entitled to an eight‑annas share of the profits, while each of the other partners was to receive four annas for providing labour and skill. A dispute later developed, with the appellant alleging that the two partners had misappropriated approximately Rs 35,000. To resolve the dispute, the parties executed an arbitration agreement on 29 September 1945, appointing respondents 3, 4 and 5 as arbitrators; one of these arbitrators died while the petition for leave to appeal was pending before the Patna High Court.

The arbitration tribunal rendered its award on 29 January 1946. The award directed respondent 1 to pay Rs 3,500 to the appellant in instalments and permitted the appellant, upon default, to claim the entire sum in one lump‑sum payment. The tribunal also held that any additional amount due from respondent 1 under the “bahi khata” account should be remitted because of his “labour and poverty”. Similarly, it remitted the amount found due from respondent 2 on the same grounds. Regarding amounts owed by other persons under the “bahi khata” account, the arbitrators awarded the whole amount to the appellant. On 13 February 1946, the appellant filed an application to set aside the award, notwithstanding that such an application had not yet been presented before the court. The two partners and the arbitrators were named as opposite parties. The appellant’s application contained several allegations, describing the award as illegal, arbitrary, dishonest and beyond the arbitrators’ jurisdiction. He asserted that respondents 1 and 2 had falsified accounts and misappropriated business funds, and that a proper accounting would reveal a liability of Rs 31,793 3⁄6 payable to him. The arbitrators responded with a written statement refuting every allegation and contended that the award fell within the scope of the arbitration agreement. Respondent 1 also filed a written statement denying the appellant’s accusations and rejecting any claim of falsification or embezzlement.

Respondent 1 denied that he had falsified any accounts or misappropriated any funds and asserted that he bore no liability for any amount. On 3 August 1946 the appellant submitted an application seeking to withdraw his petition on the ground that it was premature, and the Subordinate Judge permitted this withdrawal. On the same day respondent 1 filed an application requesting that a decree be issued in accordance with the arbitral award; the court rejected this request because the award had not been presented within the statutory period of limitation. Respondent 1 subsequently filed a revision before the Patna High Court challenging the Subordinate Judge’s order. The High Court set aside the trial‑court decision and remanded the matter, directing the Subordinate Judge to entertain respondent 1’s claim after giving the appellant another opportunity to re‑file objections to the award. Accordingly, proceedings commenced anew in the Subordinate Judge’s court, and on 2 December 1947 the appellant lodged fresh objections, contending, inter alia, that the arbitrators possessed no authority to remit any portion of the liability that had been found against respondents 1 and 2. The matter was scheduled for hearing on 13 March 1948. The appellant’s counsel sought a further extension of time, but the request was denied, and on that same date the court issued an ex‑parte order that gave the award the force of a rule of court. The appellant then filed an application under Order IX, Rule 13 seeking to set aside the ex‑parte order; this application was dismissed. Subsequently the appellant instituted two separate appeals in the Patna High Court—one challenging the judgment pronounced in accordance with the award and the other contesting the refusal to set aside the ex‑parte order. Both appeals were dismissed by a common judgment dated 8 November 1949, although leave to appeal to this Court was later granted under Article 133(1) of the Constitution. A preliminary objection raised by the respondents argued that the order under review amounted only to an affirmation and that leave should not have been granted unless the High Court had certified that the appeal raised a substantial question of law. It is noted that, with respect to the dismissal of the appeal against the order refusing to set aside the ex‑parte order, the matter is finally concluded and the appellant has not filed any application seeking leave to appeal to this Court. Concerning the order that made the award a rule of court, the High Court’s direction states: “It is certified that as regards the value and nature of the case, it fulfills the requirements of Article 133(1) of the Constitution of India.” There is no dispute about the valuation of the case, and although the certification does not expressly mention the existence of a substantial question of law, it is the view of this Court that the certification was granted on that basis. Accordingly, there is no defect in the certificate.

The Court dismissed the preliminary objection raised by the respondents. The sole issue for determination in this appeal, as the Court identified, was whether the arbitrators had acted within the limits of the authority that was granted to them by the arbitration agreement. After hearing the counsel representing each side, the Court formed the view that the arbitrators had gone beyond the scope of their delegated powers and therefore their award could not be sustained. It was undisputed that the controversy between the parties centred on the question of whether, upon the settlement of accounts, respondents 1 and 2 were liable to make any payment to the appellant. The appellant contended that respondents 1 and 2 owed him a sum of thirty‑five thousand rupees based on the entries recorded in the “bahi khata” accounts. The arbitrators had been appointed with the specific purpose of adjudicating this dispute and of determining whether the respondents were liable to the appellant for any amount and, if liability existed, the exact quantum of that liability. The arbitration agreement itself stated that the dispute was long‑standing and that, because the parties were anxious to avoid the losses that might result from resorting to litigation, they considered it desirable to have the matter resolved by arbitrators. The original Hindi text of the agreement employed the phrase “Jo kuchh tai tasfiya faisaala karenge Fricain ko qabul o manzur hoga,” and further provided that the arbitrators were to sit together, record statements of the parties, hear and consider the arguments advanced, inspect all relevant documents, take any other evidence and witness testimony, and that whatever award they rendered, whether by unanimous or majority decision, would be accepted by the parties, deemed true, correct, and valid in every court, and binding upon all executant parties. Justice Reuben, whose judgment was concurred in by Justice Sinha, interpreted the terms “tai tasfiya” and “faisaala” to signify that the parties intended to empower the arbitrators to make concessions whenever they deemed such concessions to be fair. Counsel for the appellant, Mr Isaacs, did not challenge the motives or the good‑faith conduct of the arbitrators; instead, he limited his submissions to the proposition that the arbitrators had been tasked with settling and deciding the dispute concerning the liability of respondents 1 and 2 to the appellant in a proper and judicial manner. Rather than fulfilling that mandate, the arbitrators, according to the appellant, granted a partial exemption from liability to respondent 1 and a total exemption to respondent 2 on considerations that lay outside the matters appointed for determination, thereby exceeding their authority and rendering the award subject to set‑aside. The factual background, as outlined, indicated that the appellant was to provide the entire capital for the business, whereas respondents 1 and 2 were to contribute only their labour and skill. In return, the appellant was to receive an eight‑anna share of the profits, while each of the respondents was to receive a four‑anna share. The award issued by the arbitrators reflected these arrangements.

The Court observed that the arbitrators had held both respondents liable under the “bahi khata” account, yet they had not fixed a precise monetary amount for each liability. Although the arbitrators awarded a sum of Rs 3,500 against respondent 1 out of a larger amount that had been found due, they completely remitted the liability of respondent 2, describing it as “in toto.” The Court found it evident that by failing to determine a specific sum payable by respondents 1 and 2 to the appellant, the arbitrators had not resolved the dispute in the manner contemplated by the arbitration agreement. Moreover, the arbitrators had gone beyond their ordinary function by stating that any amount exceeding the Rs 3,500 awarded to respondent 1 was to be remitted on account of his “labour and poverty,” and that the entire unspecified amount due from respondent 2 was likewise to be remitted in full because of his “labour and poverty.”

Respondents argued that the term “remitted” should be interpreted as “rejected” and that the rejected amount represented the fair remuneration due for the labour of the two respondents. The Court rejected this contentions, explaining that the respondents were entitled to share in the profits as compensation for their labour and skill, and therefore no separate remuneration for labour could be granted. The Court further noted that the suggestion that the claim was rejected on the ground of poverty was internally inconsistent. Either the claim was due, in which case the arbitrators possessed no authority to reject it on the basis of the respondents’ poverty, or the claim was not due, in which case the poverty argument was irrelevant.

The Court concluded that the arbitrators had essentially dismissed the appellant’s claim on extraneous considerations, namely the respondents’ contribution of labour and their alleged poverty, contrasted with the appellant’s purported wealth. Consequently, the award did not constitute a settlement of the dispute that had necessitated arbitration. While the Court agreed with the High Court that an arbitration agreement should be interpreted liberally to favor the enforcement of an award, it held that such liberal construction could not uphold an award where the arbitrators had clearly acted beyond their jurisdiction. The Court interpreted the agreement’s phrasing “Jo kuchh tai tasfiya faisaala karenge Ham ko kabool‑o‑manzoor hoga” to mean that the arbitrators were to resolve the liability issue definitively and that the parties were bound by that decision, but not to exceed the powers expressly conferred upon them by the reference.

In this case, the Court examined the limits of the arbitrators’ authority. It held that the arbitrators were not authorised to go beyond the matters expressly referred to them and could not resolve the dispute by considering issues that were wholly unrelated to the reference. The Court explained that when arbitrators act within the powers granted to them, their determination must be regarded as valid and binding on the parties. However, the Court found that in the present proceedings the arbitrators had exceeded the scope of their authority. Consequently, the Court concluded that the award rendered by the arbitrators could not stand and had to be set aside. Accordingly, the Court allowed the appeal filed by the appellant and ordered that the award be vacated. The Court further directed that costs of the appeal be awarded to the appellant against respondents numbered one and two. The Court then turned to the status of a related civil suit. It noted that the appellant had instituted a suit on 7 August 1946 seeking dissolution of the partnership, accounting, and realization of a sum of thirty‑five thousand rupees against respondents one and two. That suit had been stayed by the High Court pending the outcome of the arbitration appeal. In view of the present decision, the Court vacated the stay order, thereby permitting the suit to proceed before the trial court for determination in accordance with the law.