1963 (11) TMI 76 - SC - Companies Law

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? Held that - 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. 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. 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. 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. Accordingly hold that the award was properly set aside by the Courts below. Appeal dismissed.

Summary

Issues involved:

1. Arbitrator's jurisdiction in valuation of firm assets.
2. Alleged legal misconduct by the arbitrator in admitting evidence without knowledge of all partners.

Issue-wise detailed analysis:

1. Arbitrator's Jurisdiction in Valuation of Firm Assets:

The primary issue was whether the arbitrator overstepped his jurisdiction under the agreement of reference by including depreciation and appreciation of property, dead-stock, and outstandings in the valuation of the firm. The partnership agreement stipulated specific methods for valuing the firm's assets upon the retirement of a partner. The arbitrator was bound to follow these methods, which included valuing goodwill based on the net profits of the last five years, calculating debts at 85% of their book value, and using book values for raw materials and immovable properties.

The arbitrator valued the firm's goodwill at Rs. 32 lakhs, including depreciation and appreciation of property, dead-stock, and dues to be recovered. This inclusion was beyond the arbitrator's jurisdiction as the partnership agreement did not permit such adjustments. The agreement required strict adherence to the specified valuation methods without discretion for additional adjustments. The arbitrator's action of including depreciation and appreciation in the valuation of goodwill was a clear overstepping of his authority, rendering the award invalid.

2. Alleged Legal Misconduct by the Arbitrator in Admitting Evidence:

The second issue was whether the arbitrator committed legal misconduct by admitting a statement of account prepared by the retiring partners without the knowledge of the other partners. The remaining partners contended that the arbitrator admitted documents prepared by the retiring partners without giving them an opportunity to explain or object to these documents. The retiring partners argued that the documents were prepared under the arbitrator's direction and in his presence, with the knowledge and assent of the remaining partners.

Given that the award was set aside on the first issue of jurisdictional overreach, the court did not find it necessary to delve into the second issue of alleged misconduct. The primary ground for setting aside the award was the arbitrator's inclusion of depreciation and appreciation in the valuation of the firm's assets, which was beyond his jurisdiction as defined by the partnership agreement and the deed of reference.

Conclusion:

The court upheld the decisions of the lower courts to set aside the award. The arbitrator's inclusion of depreciation and appreciation in the valuation of the firm's assets was beyond his jurisdiction, rendering the award invalid. The court did not address the second issue of alleged misconduct due to the resolution of the first issue. The appeal was dismissed with costs.