Jivarajbhai Ujamshi Sheth And Others vs Chintamanrao Balaji And Others

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 717 of 1963

Decision Date: 19 November 1963

Coram: J.C. Shah, A.K. Sarkar, M. Hidayatullah

In the matter styled Jivarajbhai Ujamshi Sheth and Others versus Chintamanrao Balaji and Others, the Supreme Court of India delivered its judgment on 19 November 1963. The judgment was authored by Justice J.C. Shah, and the bench that heard the case consisted of Justices J.C. Shah, A.K. Sarkar, and M. Hidayatullah. The parties are identified as the petitioners, Jivarajbhai Ujamshi Sheth and others, and the respondents, Chintamanrao Balaji and others. The decision appears in the reports as 1965 AIR 214 and 1964 SCR (5) 480, and it has been cited in numerous subsequent decisions, including D 1984 SC 1072, R 1988 SC 2018, RF 1989 SC 606, R 1989 SC 890, R 1990 SC 1426, D 1991 SC 945, F 1992 SC 232, and under the Indian Arbitration Act of 1940, section 30, concerning the validity of an award.

The factual background reveals that the petitioners and respondents had entered into a partnership to manufacture bidis. Their partnership agreement provided that any partner could retire by giving six months’ notice to all other partners. The agreement also contained an arbitration clause that required any dispute relating to the business or to the dissolution of the firm to be referred to arbitration. Additionally, the agreement set out a formula for valuing four specific items, including goodwill, at the time of dissolution. Under that formula, goodwill was to be valued at five times the net profits of the firm; debts owed to the firm were to be taken at eighty‑five percent of their book value; stocks of raw materials were to be valued at their book value; and immovable property was to be valued either at its purchase price or at its book value, whichever was applicable.

Approximately two years after the partnership was formed, the petitioners wished to retire. To effect their retirement, the parties executed a deed of reference and appointed a sole arbitrator. The deed of reference stipulated that the remaining partners would continue the business and that they would make full payment to the retiring partners in the manner and on the conditions that the arbitrator would determine. The arbitrator issued an award in which he fixed the value of the firm’s goodwill at thirty‑two lakh rupees. In arriving at that figure, the arbitrator expressly included amounts for depreciation and appreciation of the property, dead stock, and dues to be recovered. The award was then filed in the court under section 14(2) of the Indian Arbitration Act, 1940.

The respondents moved the court for an order setting aside the award on several grounds. Two of those grounds formed the basis of the present appeal. First, they contended that the arbitrator had exceeded his jurisdiction by incorporating depreciation, appreciation, dead stock, and outstanding dues into the calculation of the value of the de‑visable assets, thereby going beyond the valuation formula prescribed in the partnership agreement. Second, they alleged that the arbitrator had engaged in misconduct during the arbitration proceedings. The trial court examined these objections, along with other submissions, and ultimately set aside the award. The High Court subsequently affirmed the trial court’s decision as to the two contentions raised by the respondents. The appeal before the Supreme Court arose from a certificate granted by the High Court, and the Court was called upon to consider whether the award should be sustained or set aside in light of the alleged excess of jurisdiction and alleged misconduct by the arbitrator.

The Court noted that the trial court’s decision was affirmed only with respect to the two contentions raised by the respondents, and that the present appeal proceeded on a certificate issued by the High Court. The Court then set out its holdings. First, it held that an award rendered by an arbitrator is conclusive as a judgment between the parties, but the court may set aside such an award when the arbitrator has engaged in misconduct during the proceedings, when the award is made after the court has issued an order superseding the arbitration, when the arbitration proceedings have become invalid under section 35 of the Arbitration Act, or when the award has been improperly procured or is otherwise invalid under section 30 of the same Act. The Court further explained that an award may be set aside on the ground of an error apparent on the face of the award, but an award is not rendered invalid merely because, by inference or argument, it can be shown that the arbitrator made a mistake in reaching his conclusion. The decisions in 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 were distinguished. Second, the Court observed that when the arbitrator furnishes no reasons for his findings, the court is not permitted to speculate about what motivated the arbitrator to arrive at those conclusions. Third, the Court found that in the present matter the arbitrator had incorporated depreciation and appreciation of certain assets into the valuation of the goodwill, an inclusion that exceeded the authority granted to him by the deed of reference. This was not a simple error of fact or law in the arbitrator’s adjudication of the disputed questions; rather, it amounted to an assumption of jurisdiction that the arbitrator did not possess, rendering the award invalid to the extent it went beyond his jurisdiction. The Court also observed that it was impossible to separate the valuation of goodwill from the depreciation and appreciation that the arbitrator had incorporated, and therefore the award had to fail in its entirety. In the separate opinion of Justice Hidayatullah, it was reiterated that where the parties have imposed limits on the arbitrator’s powers, the arbitrator must adhere to those limits, and the court may find a jurisdictional excess upon proof of such excess. Applying this principle, Justice Hidayatullah held that the arbitrator, in calculating net profits for four years, had taken into account depreciation of immovable property, identified as 1/SCI/64‑31 482, and that this act constituted a clear exceedance of his jurisdiction. This was not a mere matter of the arbitrator interpreting the partnership agreement for himself—a matter that the civil court could not review unless there was an error of law apparent on the face of the award. The judgment therefore concluded that the award must be set aside. The appeal concerned Civil Appeal No. 717 of 1963, filed against the judgment and order dated April 30, 1962, of the Madhya Pradesh High Court at Jabalpur in Miscellaneous Appeal No. 75 of 1961.

Counsel G.S. Pathak and Remeshwar Nath appeared for respondents numbered one to three, while counsel A. V. Viswanatha Sastri and Remeshwar Nath appeared for respondents numbered four and five. The judgment was pronounced on 19 November 1963. The judgment was delivered by Justices A.K. Sarkar and J.C. Shah, with Justice Shah delivering the main judgment and Justice M. Hidayatullah delivering a separate opinion. The Court recorded that Vrajlal Manilal & Company was originally formed by four partners: Manilal Anandji, Jivrajbhai Ujamshi Sheth, Punjabhai S. Patel, and Chintamanrao. The firm had been engaged in the manufacture of bidis at Sagar and Delhi since 1944. Over time, fresh partnership deeds were executed to readjust the partners’ shares, admit new partners, and modify existing allocations. In 1954, Manilal Anandji retired from the partnership and, on 27 January 1955, Punjabhai S. Patel died. Subsequently, on 16 February 1956 a new deed of partnership was executed, expanding the firm to eight partners. Under the new arrangement, Jivraj and his two sons were entitled, in the aggregate, to annas -/4/3 share in a rupee of the profits; Chintamanrao and his two sons were entitled to annas -/7/6 share in a rupee; and the two sons of Punjabhai S. Patel were entitled to the remaining annas -/4/3 share. Paragraph‑7 of the deed required that the books of account be maintained by the managing partner, that the firm’s financial year run from Diwali to Diwali, and that profits and losses be determined at the close of each year. A copy of the balance‑sheet together with the profit and loss statement was to be supplied to each partner, and if no objection to the accounts was raised within four months after the year‑end, the accounts would be deemed conclusive and binding unless they were vitiated by fraud. Paragraph‑12 stipulated that a partner wishing to retire could do so after giving six months’ written notice to all partners, unless the other partners agreed otherwise, and that such retirement would take effect at the end of the financial year – that is, at the Diwali immediately following the notice. Paragraph‑13 set out the method of valuation of the firm on the retirement of any partner for the purpose of settling the retiring partner’s account. The valuation was to be based on four components: (a) Goodwill of the firm, defined as the right to use the firm’s trademarks, trade labels and name, to be valued by taking the net profits of the last five years as the measure of goodwill; (b) Outstandings or Udhari (recoveries), meaning loans and debts owed by persons other than partners, to be calculated at eighty‑five percent of the book value of the firm; (c) Stock of raw materials, including tobacco, bidis, bidi leaves, labels and other movable property, to be valued at their book value in the firm’s accounts, with such stock and movables being transferred to the remaining partners; and (d) Immovable property, such as buildings, godowns, gardens, lands and similar assets, to be valued…

In the partnership agreement, the valuation of immovable property was to be made either at the purchase price or at the book value recorded in the firm’s books, whichever applied, and such valued assets were to be transferred to the remaining partners. Paragraph 16 of the agreement also provided that any dispute arising between the partners concerning the business or the dissolution of the firm would be referred to arbitration. In April 1958, Jivraj and his two sons, who were appellants in the present appeal, expressed their desire to retire from the partnership. Consequently, a deed of reference was executed on 16 April 1958, appointing three arbitrators—Ambalal Ashabhai, Becharbhai Somabhai, and Chaturbhuj Jasani—to decide the dispute. The deed recorded that, because Jivraj and his sons wished to retire and the remaining five partners had agreed to take over the whole business, it was necessary to settle the final accounts of the retiring partners in accordance with the terms of the Partnership Agreement. The matters to be accounted for were listed as follows: (1) goodwill of the trade mark; (2) property; (3) credits (Udhari); (4) dead‑stock; (5) stock‑in‑trade, meaning raw material or finished goods invested in the business; (6) other matters connected with these transactions; (7) the profit and loss account; and (8) the receipt and payments account of the partners. Paragraph 6 stipulated that the firm would continue under the remaining five partners, who were to make full payment to the retiring partners in such manner, on such conditions, and as decided by the arbitrators. Paragraph 7 described the powers of the arbitrators to call for the production of account books, documents and any other information from the parties. The parties later modified the deed, agreeing that the reference would be conducted by a sole arbitrator, Shri Jasani. Acting under this modified agreement, Shri Jasani entered upon the reference and rendered his award on 9 January 1959. He fixed the value of the goodwill of the entire firm at Rs 32 lakhs, a sum that included depreciation and appreciation of property, dead‑stock and dues to be recovered. He also fixed the profits for the broken period of Samvat year 2014, from the beginning of the year until 19 April 1958, at Rs 2,80,000. After adjusting the personal accounts of the three retiring partners, the award allocated Rs 3,46,223.58 nP to Jivraj, Rs 4,04,519.99 nP to Amritlal, son of Jivraj, and Rs 3,86,019.14 nP to Bhagwandas, son of Jivraj. The award directed that ownership of the firm’s assets—including movable and immovable property, the trade mark, labels, stock‑in‑trade, long‑term leases and contracts—would remain with the remaining partners, subject to the firm’s liabilities, and that the retiring partners would not be responsible for those liabilities nor retain any interest in the firm or its business. This award was subsequently filed in the court.

The additional district judge of Sagar exercised jurisdiction pursuant to section 14 of the Indian Arbitration Act, 1940, and entertained an application filed by Chintamanrao and his sons seeking the setting aside of the arbitrator’s award on a number of grounds. In the appeal that was brought by the retiring partners, only two distinct heads of objection remained for determination, and the Court limited its consideration to those two matters. The first objection alleged that the arbitrator had exceeded the jurisdiction defined by the agreement of reference by fixing the value of the divisible assets of the firm at Rs 32 lakhs and, in doing so, had incorporated depreciation and appreciation of the property, dead‑stock and outstanding dues—matters that, according to the terms of the reference, the arbitrator was not empowered to include. The second objection contended that the arbitrator had committed legal misconduct because, during the arbitration proceedings, he admitted into the record a statement of account prepared by Jivraj and his sons without informing the other partners and without affording those partners an opportunity to make submissions in response to that account. The retiring partners opposed the petition to set aside the award and argued that they were entitled to a share of the firm’s assets fixed at an amount considerably higher than Rs 32 lakhs. They further maintained that the arbitrator had not exceeded his authority by valuing the goodwill at Rs 32 lakhs, and that the statement of account cited by the petitioners had been prepared under the arbitrator’s direction, in his presence, and had been admitted to the arbitrator’s record with the knowledge and assent of the remaining partners. The trial court accepted these arguments and also upheld certain other objections, consequently setting aside the award. The High Court affirmed the trial court’s decision to the extent that it dealt with the two objections identified above. The foremost issue for consideration, therefore, was whether the arbitrator, in arriving at a valuation of the firm for the purpose of determining the sum payable to the retiring partners, had transgressed the limits of his authority as delineated in the agreement of reference. Clause 6 of the arbitration agreement required the remaining partners to “make full payment to the retiring partners of such amount as may be decided” by the arbitrator. However, the arbitrator’s power to determine the amount was not unfettered; he was mandated to prepare “final accounts with regard to the matters” enumerated in clause 4, and to do so “as far as possible, according to and taking into consideration the terms and conditions of the Partnership agreement.” This provision incorporated the substantive provisions of the partnership agreement into the reference deed. Consequently, the “final account” concerning the eight matters specified in clause 4 had to be prepared, insofar as practicable, in conformity with, and mindful of, the terms and conditions of the underlying partnership agreement.

The Court observed that the language of the deed of reference imposed a mandatory duty rather than an optional one. Accordingly, whenever the partnership agreement contained a term or condition that addressed a specific matter listed in clause 4 of the deed of reference, that term or condition had to be followed strictly. The phrase “as far as possible” did not give the arbitrator any discretion to disregard the partnership agreement’s provisions.

Clause 13 of the partnership agreement prescribed the method for valuing the firm when settling the accounts of retiring partners. Under that clause, the arbitrator was required to take into account the value of goodwill, the outstanding receivables, the stock of raw material, and both movable and immovable property exactly as directed in the agreement. For goodwill, the agreement left no room for discretion; the goodwill had to be measured by the aggregate net profits of the preceding five years. Debts owed to the firm by persons other than the partners were to be calculated at eighty‑five percent of the firm’s book value. The stock of raw materials and other movable assets had to be valued at the book value recorded in the firm’s books, and the same approach applied to immovable assets such as buildings, godowns, gardens and land. If a book value for an immovable asset was unavailable, the purchase price recorded in the books was to be used.

Thus, under clause 4 of the arbitration agreement, the arbitrator was bound to prepare the final account of the retiring partners by adhering to, and taking into consideration, the terms and conditions set out in the partnership agreement, without any option to deviate from them.

The Court further clarified that the partnership agreement did not grant a retiring partner a share equal to the total of the four items listed in clauses (a), (b), (c) and (d) of paragraph 13—that is, goodwill, outstanding receivables, stock of raw materials, and movable and immovable property. Instead, the agreement merely required that the “valuation of the firm” be carried out in the manner specified, solely for the purpose of determining the amount due to the retiring partners. Consequently, while the arbitrator was obliged to use the valuation method prescribed by the partnership agreement, this obligation did not translate into a right for the retiring partner to receive a share equal to the aggregate value of those four categories of assets.

The Court emphasized this point because substantial argument had been raised on behalf of the retiring partners, asserting that they were entitled to a share equal to the combined value of the assets described in paragraph 13. The Court noted that such an assumption was incorrect, as the agreement’s language limited the arbitrator to the prescribed method of valuation without creating a proportional entitlement to the total value of the listed assets.

The Court observed that the retiring partners contended they were entitled under the partnership agreement to a larger amount than the arbitrator ultimately awarded, and that the method of valuation adopted by the arbitrator resulted in a substantially lower sum than the agreement prescribed. Paragraph‑13 of the partnership agreement, the Court noted, merely sets out the valuation of four specific items that must be taken into account when ascertaining the “valuation of the firm.” The language at the beginning of paragraph‑13, according to the Court, leaves no doubt that the valuation of the firm had to follow the basis specified therein for the purpose of settling the retiring partner’s account. The Court further explained that while paragraph‑13 identifies particular assets, it does not prescribe any method for valuing the firm’s debts and liabilities; nevertheless, those debts and liabilities must be considered when assessing the value of the retiring partners’ share. Accordingly, the arbitrator was required to value the entire firm, that is, all of the firm’s assets together with the debts owed by the firm, and subsequently to settle the retiring partners’ accounts on that basis.

Turning to the arbitrator’s award, the Court noted that the dispute centered on the proper interpretation of the clause wherein the arbitrator declared, “I assess the value of the goodwill at Rs 32 lakhs. This amount includes the depreciation and appreciation of the property, dead‑stock and dues to be recovered.” The Court clarified that this English rendering was taken from the original Hindi award and was accepted by both parties as an accurate translation. The arbitrator, the Court observed, had expressly taken only the goodwill value in determining the amounts to be allotted to the retiring partners and had not separately addressed the valuation of the three other items listed in paragraph‑13, namely the outstandings, the stock‑in‑trade and moveables, and the immoveable property.

Counsel for the retiring partners argued, relying on an admission by Chintamanrao, that the goodwill alone was valued at Rs 21,70,650/10/, and that if the values of the immoveable property, stock‑in‑trade and outstandings were added, the aggregate would considerably exceed Rs 32 lakhs. The Court rejected this argument as based on the erroneous assumption that the firm’s debts and liabilities could be ignored in calculating the retiring partners’ shares. Conversely, counsel for the respondent submitted that, in substance, only the goodwill needed to be valued by the arbitrator, because the combined value of the property, moveables, immoveable assets, stock‑in‑trade and outstandings was roughly equal to the total debts and obligations of the firm. To support this position, the respondent relied on balance‑sheet Exhibit A‑13, which displayed the firm’s assets and liabilities as of 16 April 1958, showing that the tangible assets—including raw‑material stock, moveable and immoveable property, and outstandings—were approximately equal to the firm’s debts and liabilities.

In this case the arbitrator’s award recorded that the goodwill of the firm was valued at Rs. 32 lakhs, while he did not assign any value to the other assets of the firm and did not explain the basis for arriving at the Rs. 32 lakhs figure. The award, however, showed that in assessing the goodwill the arbitrator had taken into account the depreciation and appreciation of the property, the dead‑stock and the outstanding receivables. The arbitrator could have issued a single lump‑sum valuation of the firm, because there was no direction requiring him to break down that lump sum into separate components. The award therefore did not have to provide separate valuations for each of the items mentioned in paragraph 4 of the deed of reference or in paragraph 13 of the partnership agreement, nor did it have to disclose the extent of the debts and obligations that he had considered. The question then arose as to what effect the inclusion of depreciation and appreciation of the property, dead‑stock and dues would have on the Rs. 32 lakhs figure. Counsel for the appellants argued that such inclusion did not exceed the arbitrator’s jurisdiction. The court noted that the arbitrator’s powers were expressly limited by clause 4 of the deed of reference, which required him to take a final account of the retiring partners in accordance with the terms and conditions of the partnership agreement. The deed expressly restricted the arbitrator’s authority to value the property, dead‑stock and outstanding receivables, insisting that he could not use any method other than that prescribed in paragraph 13 of the partnership agreement. Nevertheless, the arbitrator himself stated that the Rs. 32 lakhs valuation of goodwill incorporated the depreciation and appreciation of those items. Counsel for the appellant further contended that reducing the firm’s outstanding receivables by fifteen per cent, in respect of dues from persons other than the partners, was the manner prescribed by clause (b) of paragraph 13 for determining depreciation, and that the arbitrator’s consideration of that depreciation was therefore within his jurisdiction. The court observed, however, that it would be difficult to characterise the method of valuation applied to the outstanding receivables as “including depreciation.”

The Court observed that the method described for treating the outstandings could not be said to “include depreciation.” Even if the reduction of the firm’s outstandings that were due from persons other than the partners by fifteen percent, as directed in clause (b) of paragraph‑13 of the partnership agreement, were treated as depreciation of assets, the partnership deed did not permit the inclusion of both depreciation and appreciation for the other assets. Regarding the valuation of movable property, including raw‑material stock, the arbitrator was restricted to the valuation specified in clause (c) of paragraph‑13 of the partnership agreement, which required the use of the book value recorded in the firm’s accounts. In the same way, for the valuation of immovable property such as buildings, godowns, gardens and lands, the arbitrator had to rely on the book value shown in the firm’s accounts; where no book value existed, the purchase price recorded in the books was to be accepted. The arbitrator possessed no authority to adjust those items by adding either depreciation or appreciation. The Court further held that the principle laid down in Cruikshank and others v. Sutherland and others (1) could not be applied to the present case. In that precedent, although an article of the partnership stipulated that a deceased partner’s share in the partnership assets should be determined by reference to the annual account prepared on 30 April following the death, the articles were completely silent about the principle to be used in preparing a full and general account of the property. Moreover, there was no established usage or course of dealing among the partners that allowed the inference that a deceased partner’s share should be paid on the basis of book value. The executors of the deceased partner had insisted that the share be determined “at the fair value of the firm.” At page 138, Lord Wrenbury observed that even if there existed a usage for preparing an account for one purpose in a particular manner, that usage did not automatically extend to a different purpose in the same way. He referred to Blisset v. Daniel (10 Hare, at p. 515) as a useful passage, noting that an account prepared for one purpose is not necessarily suitable for another. The Court pointed out that, in this partnership, an account had never been prepared with a view to accommodating the situation of a retiring partner, a deceased partner, or a senior partner exercising an option to take over all assets. The partners had never contemplated such events when making their accounts, and consequently no account had ever been prepared that was intended to meet the various contingencies that might arise in those circumstances.

In the matter before the Court, it was undisputed that the arbitrator’s duty was to carry out a “valuation of the firm” in accordance with paragraph‑13 of the partnership agreement. The parties even conceded that, for the purpose of arriving at that valuation, the arbitrator might not have been bound by the provisions of paragraph‑7; however, the Court expressly declined to express any opinion on that particular issue. Nevertheless, the values set out in the various clauses of the agreement had to be taken as definitive when preparing the partnership account for the four matters that were specifically enumerated in the contract. The Court observed that the rule articulated in Cruikshank’s case (1) was inapplicable because the partnership agreement itself mandated the acceptance of the book value recorded in the firm’s accounts. The citation to Cruikshank’s case reads as follows: (1) [1923] 92 L.J. Ch. 136. Within the context of the agreement, the term “book value” was interpreted to mean the figure that had been entered in the books of account. Consequently, the Court held that the adoption of the book value was compulsory and that no adjustment could be made to that figure on the basis of any depreciation or appreciation of property, outstanding receivables, stock‑in‑trade, or dead‑stock, except to the extent such adjustments were already reflected in the book value itself. In other words, the book value alone was to be used. If the partners had already factored depreciation or appreciation into the assessed book value, such adjustments were deemed part of the book value as recorded in the accounts. Conversely, where no book value had been entered for any immovable property, the purchase price of that property was to be treated as the decisive value. The parties then argued that it was the arbitrator’s role to interpret the true meaning of the partnership agreement and to give effect to that meaning; they further contended that, if the arbitrator, in forming his valuation of the firm, believed that depreciation and appreciation of certain asset items should be incorporated into the partners’ account, the Court possessed no jurisdiction to set aside the award merely because the Court’s own interpretation of the arbitration agreement differed. The Court replied that, when the partnership agreement was incorporated into the deed of reference, the limits of the arbitrator’s jurisdiction were to be defined by the Court, not by the arbitrator himself. By assuming that he could add, in addition to the values of the four items specified in paragraph‑13, an additional amount representing appreciation of those items, the arbitrator was effectively disregarding the specific directions contained in the agreement. The Court reiterated that an award rendered by an arbitrator is conclusive as a judgment between the parties, but that the Court is empowered to set aside such an award if the arbitrator has misconducted himself during the proceedings, if the award was made after the Court had issued an order superseding the arbitration, if the arbitration proceedings had become invalid under section 35 of the Arbitration Act, or if the award had been improperly procured or was otherwise invalid.

Section thirty of the Arbitration Act provides that a Court may set aside an award on the ground of an error appearing on the face of the award. However, an award does not become invalid merely because, by inference or argument, it can be shown that the arbitrator has made some mistake in reaching his conclusion. The Court explained this principle by referring to the decision in Chempsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd., where it was observed that an error in law on the face of the award is present only when the award itself, or a document incorporated into it such as a note appended by the arbitrator stating the reasons for his judgment, contains a legal proposition that is erroneous. The Court clarified that a mere narrative reference to a party’s contention does not open the door to examining the underlying contract to determine whether that contention is correct.

When dealing with an application to set aside an award, the Court emphasized that it is not required to assess whether the arbitrator’s view of the evidence is justified. The arbitrator’s adjudication is generally binding between the parties because the arbitrator is a tribunal chosen by the parties, and the Court’s power to set aside an award is confined to the situations enumerated in section thirty. Consequently, the Court may not speculate about the arbitrator’s motives or reasoning when no reasons are supplied in the award. Even if an assumption is made that the arbitrator must have followed a certain line of reasoning, the Court cannot decide whether the conclusion is right or wrong, nor may it probe the mental process that led to the arbitrator’s conclusion when that process is not disclosed in the award.

In the present case, the arbitrator expressly stated in his award that, in arriving at his valuation, he had included depreciation and appreciation of the property, outstandings and dead‑stock. By doing so, the arbitrator stepped outside the jurisdiction conferred on him by the deed of reference and the partnership agreement. The Court therefore held that the award is liable to be set aside on that ground. The issue before the Court was not the interpretation of paragraph thirteen of the partnership agreement; rather, it was the determination of the arbitrator’s jurisdictional limits. The primary duty of the arbitrator, as laid down in the deed of reference which incorporated the partnership agreement, was to value the net assets of the firm and to award to the retiring partners a share of those assets. The arbitrator’s authority to perform the valuation was expressly limited by paragraph thirteen of the partnership agreement, which did not permit the inclusion of appreciation in the valuation. Accordingly, the arbitrator’s act of adding appreciation to the valuation exceeded his jurisdiction, rendering the award susceptible to being set aside.

It was submitted that the depreciation and appreciation which had been entered in the assessment of the book value were merely “other matters connected with” the “transactions” described in the deed of reference. The submission, however, was that those other matters were clearly distinct from the valuation of the goodwill, the property, the outstandings and the dead‑stock. The argument further contended that when the arbitrator stated in his award that he had included depreciation and appreciation of certain assets in the value of the goodwill, he was only indicating that such depreciation and appreciation were taken into account insofar as the circumstances permitted. The court observed that accepting this view would disregard the explicit wording of the award. Moreover, the scheme of valuation set out by the partnership agreement and, consequently, by the deed of reference left no room for the inclusion of appreciation of the assets in the calculation. The contention that the arbitrator could lawfully incorporate depreciation and appreciation in the amount of Rs 32 lakhs relating to the property, dead‑stock and dues was therefore untenable, because the deed of reference did not empower him to add appreciation to the valuation. To reach a conclusion that appreciation could be included required assuming a premise that the deed expressly forbade, rendering the conclusion logically inconsistent with the defined limits of the arbitrator’s authority.

The other line of argument suggested that the expressions “depreciation” and “appreciation” did not denote a decrease or increase in the market value of the property, dead‑stock and outstandings, but merely referred to the factors that had been considered in forming the book value of those items. The court noted, however, that the arbitrator did not qualify his statement by saying that he had merely taken into consideration the depreciation and appreciation that were part of the partners’ book valuation. Instead, he explicitly declared that he had included the depreciation and appreciation of those assets in the valuation of the goodwill. The submission that this recital was surplusage and should be ignored was also rejected. The court found it difficult to treat a clear statement by the arbitrator about what he had included in the goodwill valuation as meaningless, especially in view of the orders he issued requiring the production of documentary evidence and specific books of account from the respondent. Clause 7 of the deed of reference conferred very wide powers on the arbitrator to call upon either party to produce any accounts, papers or documents he deemed necessary and to answer any enquiry, verbal or written, in any form. The exercise of those powers, demonstrated by the orders directing the production of documents, indicated that the arbitrator considered himself competent to determine and incorporate depreciation and appreciation on the various items in the firm’s overall valuation.

In this case the arbitrator considered that depreciation and appreciation of various items were relevant factors that had been taken into account when the valuation of the firm was arrived at. By an order dated 16 September 1958 the arbitrator directed the respondent, Chintamanrao, to file a statement showing the immovable property held by the firm, to provide the valuation of such property as reflected in the books of account, and also to give an approximate value statement of the property as it existed on the date of demand according to Chintamanrao’s own estimate. The note annexed to that order observed that Chintamanrao had produced some papers but that those papers were incomplete; consequently he was ordered to produce copies of the incomplete papers together with the papers that had not been sent previously. On 10 October 1958 Chintamanrao produced a statement of the net profits of the five years preceding the dissolution, which he referred to as the price of the goodwill, covering the Samvat years 2009 to 2013. The aggregate of those net profits was Rs 21,70,650‑10/‑, which he described as the price of the goodwill. He also submitted a statement of the outstanding amounts of the various shops, which summed to Rs 9,16,366/‑, together with the value of goods purchased and other property. From this he calculated that the total value of the goodwill, after taking into account the profits of the firm for the last five years as shown in the statement, was Rs 21,70,650‑10/‑; after deducting fifteen per cent of the shop outstandings, which he treated as irrecoverable, the balance amounted to Rs 20,33,295‑12/‑. He asserted that this balance was the amount from which the shares of the retiring partners were to be computed. On 2 December 1958 Chintamanrao filed an application drawing the arbitrator’s attention to the agreement of reference and to specific paragraphs of the deed of partnership, particularly paragraphs 7 and 13. He submitted that the book values of items (2) to (5) listed in paragraph 4 of the agreement of reference were already recorded in the books of account and could be located without any detailed or elaborate examination, and that a thorough inspection of the various entries was therefore unnecessary. In response, on 5 December 1958 the arbitrator ordered that an inspection of the books of account should commence on 21 December 1958, to be conducted in his presence at the office of Messrs Virajlal Mannilal and Company in Sagar, and he directed Chintamanrao to make the necessary arrangements to facilitate the inspection of all the books. The following day, 22 December 1958, Chintamanrao submitted another application arguing that it was not necessary to produce certain registers and manufacturing accounts, that the orders directing such production were beyond the arbitrator’s jurisdiction, and that he was unable to produce the documents demanded. He further contended that the type of inspection sought and granted amounted to a reopening of the accounts for the last five years, which had been closed with the consent and knowledge of all the partners, and that, as a matter of law, those closed accounts could not be reopened.

In this case, the Court noted that on 1958 an application was filed by Amrat Lal, the son of Jivraj and one of the retiring partners, in which it was submitted that the arbitrator was required to value the goodwill and that such valuation had to be based on ascertaining the profits of the preceding five years. The application further contended that, for that purpose, the arbitrator was entitled to determine the yearly profits by scrutinising the partnership’s account books and by establishing the net profit for each year. On 25 December 1958 the arbitrator issued a direction requiring Chintamanrao to produce the documents listed as item No. 2 in the order dated 16 September 1958, specifically the gross and net profits for the last five years, and also to produce the other documents that had been ordered for production by the same September order. Subsequently, on 9 January 1959 the arbitrator rendered his award. The Court observed that the arbitrator’s insistence on obtaining the gross and net profit figures for the five‑year period demonstrated his belief that he was authorised to consider, in addition to the book value of the assets recorded in the partnership accounts, the depreciation and appreciation of those assets. The arbitrator’s explicit use of the expression that he had included the depreciation and appreciation of various items of property, together with the description of the procedure he followed, confirmed that this terminology was not a mere surplusage. It was clear, therefore, that the arbitrator had incorporated into his valuation an amount which, by virtue of the limitations imposed on his authority in the deed of reference, he was incompetent to include. This was not characterised as a simple error of fact or law in reaching his conclusion on the disputed question, but rather as an assumption of jurisdiction that he did not possess, rendering the award, to the extent that it exceeded the arbitrator’s jurisdiction, invalid. Because it was impossible to separate the valuation of depreciation and appreciation from the overall valuation made by the arbitrator, the Court held that the award had to fail in its entirety. In this view, the Court found it unnecessary to consider the remaining partners’ contention that the award was vitiated because the arbitrator had accepted documents prepared by the retiring partners from the books of account without affording the remaining partners an opportunity to explain those documents. It was alleged by Chintamanrao that those documents had been prepared and handed to the arbitrator without any prior notice to him, whereas the retiring partners contended that the documents consisted merely of extracts of entries in the books of account and that, in any event, Chintamanrao had consented to their inclusion in the arbitrator’s record. For the reasons set out by us in dealing with the first plea for

After setting aside the arbitration award and finding that the first plea succeeded, the Court stated that it was unnecessary to consider the parties’ arguments on the second ground. Accordingly, the Court affirmed that the lower courts had correctly set aside the award. The counsel for the retiring partners urged that, on the basis of the Court’s view, the award ought to be sent back to the arbitrator under section 16 of the Arbitration Act, 1940. The Court noted that the retiring partners had never made such a request in either the Trial Court or the High Court, and therefore it could not, in the circumstances, accede to a request that had not been raised before. The Court further observed that it had not heard any counsel on whether, given the facts and the conclusion reached, it possessed the power under section 16 to remit the award to the arbitrator. Moreover, the retiring partners had not asked the Court to supersede the arbitration agreement by exercising the powers granted under section 19. Because these issues were not pressed by the parties, the Court declined to examine them. Consequently, the appeal was dismissed, and the Court ordered that costs be awarded in a single lump sum.

This appeal originated from an arbitration award that the Additional District Judge of Sagar had set aside on the respondents’ objection. The decision of that judge was upheld on appeal by the High Court, and the present appeal was filed on a certificate granted by the High Court under article 133(1)(c) of the Constitution. The arbitration had proceeded without any court intervention. Initially, three arbitrators were appointed, but the Additional District Judge, at the parties’ joint request, revoked the authority of two of them. The arbitration then continued before a single arbitrator, Chaturbhuj V. Jasani, who rendered his award on 9 January 1959. The arbitration was required because the appellants were retiring from the partnership firm Virajlal Mannilal & Co., which at that time comprised eight partners divided into three groups: the three appellants (Jivraj and his two sons) holding a 4⁄3 share, respondents numbered 1‑3 (Chintamanrao and his two sons) holding a 7⁄6 share, and two brother respondents holding the remaining balance. The parties had agreed that the retirement would take effect on 15 April 1958. In setting aside the award, the High Court, agreeing with the lower court, affirmed two objections: first, that the arbitrator had acted beyond his jurisdiction, and second, that he had committed misconduct by receiving evidence without the knowledge of Chintamanrao. The partnership was governed by a deed of partnership dated 16 February 1956, which replaced earlier deeds. Under that deed, the partnership maintained annual accounts from Diwali to Diwali, preparing a balance sheet and a profit‑and‑loss account each year, copies of which were furnished to all partners.

The Court observed that the partnership deed stipulated that the partners’ accounts, which were prepared annually from Diwali to Diwali, would become final and binding on all partners if no objection was raised against them. The deed also contained specific provisions governing the retirement of any partner. In the thirteenth paragraph of the deed, the parties agreed that, upon a partner’s retirement, the value of the firm would be calculated for the purpose of settling the retiring partner’s account according to four distinct components. The first component identified the goodwill of the firm, which comprised the right to use the firm’s trade marks, trade labels and name, and the parties agreed that the net profits of the preceding five years would be taken as the measure of that goodwill. The second component dealt with outstanding loans and debts recoverable from persons other than partners, and it was agreed that such recoveries would be valued at eighty‑five percent of the firm’s book value. The third component concerned the stock of raw materials, including tobacco, bidis, bidi leaves, labels and other moveable property; this stock was to be valued at the book value appearing in the firm’s accounts, and the resulting value would be allocated to the remaining partners. The fourth component related to immovable property such as buildings, godowns, gardens and lands, which would be valued either at the purchase price or at the book value recorded in the firm’s books, whichever was appropriate, and this value would also be transferred to the remaining partners.

Following a separate agreement reached outside of court, the parties decided to divide the businesses that each of them owned under various firm names and locations. The appellants sought to retire from Virajlal Mannilal and Co., and the parties therefore executed a deed of reference on 16 April 1958 to refer the dispute to arbitration. After the customary introductory clauses, the deed of reference required that the arbitrator prepare a final account of the partners in accordance with eight matters, subject to the terms of the partnership agreement. The eight matters listed were: (1) goodwill of the trade mark; (2) property; (3) credits or udhari; (4) dead stock; (5) stock‑in‑trade, meaning the raw material or finished goods invested in the business; (6) other matters connected with these transactions; (7) the profit and loss account; and (8) the receipt and payments account of the partners’ amounts. The deed further provided that, after the appellants retired, the firm Virajlal Mannilal would continue under the respondents, and that the appellants would receive a payment to be determined by the arbitrator, on such terms and conditions as the arbitrator might direct.

The arbitrator subsequently filed his award in the court. The respondents objected to the award, and of the several objections raised, only two were sustained by the lower court, resulting in the setting aside of the award. The Court therefore indicated that it would proceed directly to consider the two objections, noting that only the first objection had been fully argued before the Court.

In the award, the arbitrator allotted to each of the three appellants a share of one‑fourth‑plus‑one‑third of a lump sum of Rs 32,00,000 that he described as the “goodwill” of the firm. He stated that, in determining each appellant’s respective share, he had taken into account all amounts that were either credit or debit to them in the firm’s account books, as the case required. The arbitrator also valued the goodwill for the period extending from Diwali to the date of the appellants’ retirement and made appropriate additions to that valuation. The substantive portion of the arbitrator’s decision is contained in only three or four lines of the award, although the award itself addresses other matters. The award was drafted in Hindi, but the words “appreciation” and “depreciation,” which appear in English, have been rendered in the record of the case by two different translations. The first translation reads: “The value of the goodwill of the whole firm is assessed at Rs 32,00,000 (Rupees thirty‑two lakh). In this sum property, dead stock and depreciation and appreciation of Udhari are also included.” The second translation states: “The value of the goodwill of the whole firm is assessed at Rs 32,00,000 (Rupees thirty‑two lakh). In this sum the depreciation and appreciation of property, dead stock and Udhari is also included.” The second rendering is probably more accurate than the first, but the central issue is not merely the wording but what the arbitrator actually did. Because the award was issued in Hindi, the English terms “appreciation” and “depreciation” may have been employed loosely, perhaps only to indicate that the arbitrator had considered all the matters that the parties asked him to examine, without attaching any substantive legal meaning to those terms.

The question before the Court was whether the arbitrator had exceeded his jurisdiction by adding back depreciation to the book value of the assets and by allowing for appreciation of property, matters which the respondents had successfully argued before the High Court and the lower tribunal to be beyond his authority. The appellants contended that the partnership deed and the order of reference granted the arbitrator a free hand, and that even if he had misinterpreted the deed and incorporated depreciation or appreciation, such an error would not create a jurisdictional defect. They relied on the observations of the Judicial Committee in the well‑known case of Chamsey Bhara and Co. v. Jivraj Balloo Spg. and Wvg. Co., wherein 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.” The appeal argued that the arbitrator’s interpretation of the partnership deed, even if mistaken, fell within his jurisdiction, and that only a clear legal proposition on the face of the award could render the award invalid.

The Court explained that when a party puts forward a contention, the first step is to identify precisely what that contention is, and only after that should the contract on which the parties’ rights depend be consulted to determine whether the contention is sustained by the terms of the agreement. In the present matter, the Court found that it was impossible, based solely on the language visible on the face of the arbitral award, to ascertain the exact mistake that the arbitrators might have committed. The learned judges had arrived at their conclusion about the alleged mistake by reasoning that, “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.” The Court stressed, however, that the arbitrators were entitled to give their own interpretation of Rule 52 or any other provision, and that an award would remain effective unless, on its face, the arbitrators had bound themselves to a specific legal proposition that, upon scrutiny, proved to be unsound.

Mr. Desai submitted that even if the arbitrator had interpreted the partnership deed incorrectly, such interpretation fell within the arbitrator’s jurisdiction, and because any error was not a question of law apparent on the face of the award, the Civil Court possessed no authority or jurisdiction to set aside the award. The opposing side argued, as had been held earlier in the case, that the reference, when read together with the partnership deed, created a jurisdictional field that the arbitrator had exceeded. The Court therefore identified the primary issue as the determination of the limits of the arbitrator’s authority as disclosed by the reference and the deed of partnership, followed by an examination of what the arbitrator actually did, rather than relying on any loosely worded statements in his award. This approach, the Court said, was the only proper method for discovering an excess of jurisdiction.

The Court further observed that if the interpretation of the deed of partnership was expressly left to the arbitrator, then an appeal on that interpretation would not be permissible, citing the passage quoted from Champsey’s case. Conversely, if the parties had imposed specific limits on the arbitrator’s action, the arbitrator was required to act within those limits, and the court could find a jurisdictional excess on proof that the arbitrator acted beyond them. The Court noted that the arbitrator derived his authority from the reference and that the reference’s terms must be examined first. The material portion of the reference, as quoted, indicated that because of the retirement of Jivraj and his sons, the parties deemed 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,” after which eight specific items were listed. Although the words “as far possible” suggested a degree of latitude, the Court held that the overall force of those words was to ensure that the division of assets be carried out in accordance with the terms of the partnership agreement.

The Court observed that the phrase “according to and taking into consideration …” made clear that the terms of the partnership agreement were to govern any personal views of the parties. The partners had appointed arbitrators to resolve eight specific matters, and clause 7 of the reference required the arbitrators to obtain from the parties all accounts, documents and information that they might need. The partnership deed, which was to prevail wherever its terms were applicable, stipulated that the final settlement of the retiring partners’ accounts must value four categories of assets in a prescribed manner. Those valuation directions were set out in clause 13 of the deed and had been noted earlier. Accordingly, goodwill was to be measured as five years’ net profit; debts due to the firm were to be taken at eighty‑five percent of their book value; stocks of raw materials were to be valued at book value; and immovable property was to be valued either at purchase price or at its book value in the firm’s records, whichever was appropriate. The calculation of goodwill was to rely solely on net profits. The Court accepted that the net profits for the preceding five years amounted to Rs 21,70,650/10/‑, thereby satisfying sub‑clause (a) of clause 13 of the partnership agreement. It also accepted that the outstanding loans (Udhari) totaled Rs 9,16,366/‑ at book value, and that fifteen percent of that amount, i.e., Rs 1,37,354/13/6, was to be deducted, leaving a net Udhari of Rs 7,79,011/2/6. Discrepancies arose concerning the valuation of raw materials and immovable properties. In this regard, the appellants requested that the arbitrator order Chintamanrao to produce an account of gross profits for the past five years. The arbitrator issued such an order, and the appellants maintained that the property values furnished by Chintamanrao were based on written‑down values, whereas the agreement required a figure of Rs 16,57,000/‑ rather than the Rs 6,24,369/‑ stated by Chintamanrao. Chintamanrao replied that the firm did not ordinarily prepare a gross‑profit account but suggested that the gross profit could be computed from the existing books by the opposite party or by the arbitrator, and he offered to engage an accountant to prepare the account. The documents that the arbitrator is said to have received, albeit not from all respondents, were abstracts showing the gross profits and the items excluded to arrive at net profit. The net profit figures in these abstracts corresponded with the net profit figure supplied by Chintamanrao. The Court noted that the dispute over the production of these documents was not argued before it, and therefore it would not address that point. Nevertheless, the abstracts appeared on their face to demonstrate that, in computing net profit for the five‑year period, depreciation of immovable property and goods had been accounted for. The same depreciation seemed to have been reflected in the balance sheet when valuing the assets against the liabilities.

In examining the balance sheets, the Court observed that depreciation of immovable property and goods for the five‑year period used to calculate goodwill had been accounted for twice. Although a deeper investigation might have been possible, the Court noted that this duplicated depreciation could not fully explain the disparity between a profit of Rs 21 lakh and Rs 32 lakh. The balance sheets displayed only a narrow gap between total assets and total liabilities over the same period, suggesting that the values of udhari, raw materials and immovable property were essentially offset by the liabilities. Consequently, after adjusting for the duplicated depreciation, only a negligible amount of profit remained to be carried forward as an addition to goodwill. The Court therefore concluded that the arbitrator’s inclusion of both appreciation and depreciation in the valuation of the properties exceeded the arbitrator’s jurisdiction, and it was not merely a matter of the arbitrator interpreting the partnership agreement in a manner that the Civil Court could not review, absent a clear error of law on the face of the award.

The Court referred to the authority in Cruickshank and others v. Suiherland and others, which holds that when accounts were not originally prepared for the retirement of a partner, the accounts must be recast for that specific purpose and the arbitrator is free to value the property in his own manner rather than relying on the partners’ historical statements. The intention, the Court said, was that the arbitrator should prepare final accounts as the partners themselves would have done under the partnership agreement, and therefore he was bound by clause 13 of that agreement. The agreement expressly limited valuation to either the purchase price or, where available, the book value, and it made no reference to market value or fair value. Accordingly, no authority existed to adopt a fair‑value approach. The Court declined to override the arbitration agreement under section 19, finding no circumstance that warranted such a step. Although the Court might have considered remitting the matter to the arbitrator under section 16 of the Arbitration Act 1940, the other judges differed on that point, and the matter was left as decided. The appellants’ challenge to the arbitrator’s jurisdiction therefore failed, and the appeal was dismissed with costs.