Banwari Lal v. Jagannath Prasad

D.N Roy, J.:— In suit for the dissolution of partnership and for the taking of accounts filed by the plaintiff-respondent against the defendant-appellant, the matter in dispute was referred to the arbitration of Sri Brij Nath Mittal, an advocate practising at Meerut. The agreement of reference, inter alia, provided that the arbitrator will be empowered to decide the points at issue between the parties after the taking of evidence which the parties may choose to produce before him, or without taking evidence but on his own personal knowledge, and the award which he would thereafter make will be binding upon the parties.

2. It further provided that it will not be incumbent upon the arbitrator to reduce evidence into writing. It also provided that he may decide the matter in any manner he thinks fit. The terms of agreement, therefore, clothed the arbitrator with full powers to decide the points in controversy between the parties (a) after the taking of evidence, or (b) on his personal knowledge. Those terms cannot be interpreted to mean that the arbitrator could decide the points in controversy, though not on personal knowledge but on taking evidence of one party, or upon contacting one party, behind the back of the other. In fact the true import of the agreement of reference had rightly been understood by the arbitrator when he expressed in the opening paragraph of his award that—

“I have been given full powers to decide the points in controversy between the parties after taking evidence or on my personal knowledge.”

3. It appears from the award that proceedings were held before the arbitrator on the 21st of November, 1951, 23rd of November, 1951, and finally on the 24th of November, 1951, when the parties were present in person and were represented on some of the hearings by their counsel. Before the arbitrator genuine efforts were made to arrive at settlement and although in the beginning, to quote the words of the arbitrator, “there was acute controversy on almost all the points”, the parties ultimately agreed that the business together with all its assets and liabilities including the rights with regard to the site belonging to the P.W.D and the land taken on lease from Lala Paras Ram under the lease dated the 15th of February, 1946, be held in future by one of the parties only and the other be paid compensation in cash after fixing reasonable valuation over the rights of one party including the right in the good-will of the business.

4. The arbitrator, therefore, in order to arrive at proper valuation individually, but separately, consulted the parties and ascertained their respective viewpoints; and before him it had first been suggested on behalf of the plaintiff that this should be done by calling open bids. The arbitrator, however, did not approve of that suggestion as, according to him, it necessarily involved unhealthy competition and there was risk of unnecessary inflation of the price.

5. The arbitrator, therefore, secretly took the offers or bids by the two contending parties. The offer that was made by the plaintiff was an offer of Rs. 30,000/- plus the value of the goodwill of the business which may be Axed upon by the arbitrator. The valuation or bid that had been made by the defendant was in the sum of Rs. 21,000/-. The arbitrator did not disclose the offer of the one to the other.

6. He, however, as result of the inspection of accounts and after ascertaining the viewpoints of the parties in the manner stated above, came to the conclusion that sum of Rs. 25,500/- will be paid by the defendant Banwari Lal as compensation as half share of the plaintiff as heir of Pandit Murlidhar in the business, including his rights in the site of the petrol pump and the land held under lease from Lala Paras Ram and the constructions and all accessories and stock-in-trade and all articles as found by the commissioner and entered by him in the list prepared in the suit and all the outstandings due to the firm.

7. By the award he further directed that the plaintiff will no longer be liable for any of the liabilities of the firm and the income-tax already assessed or that may be assessed on the income of the preceding year and the rent due from the defendant and all other taxes or payments to be made will be paid and made by the defendant Banwari Lal. He further held that the goodwill of the business will henceforth belong to the defendant who will be entitled to carry on the business in the name and style of Banwari Lal and Company or any other name which he may choose to adopt.

8. Certain other minor suggestions had also been made by him in the award. Objection was taken against the award on the ground, inter alia, of legal misconduct of the arbitrator. The court below set aside the award holding that there was legal misconduct on the part of the arbitrator. Aggrieved by that order the defendant has come up in appeal to this Court.

9. The legal misconduct which was alleged against the arbitrator was that he took the offers or bids from the parties secretly, each party's bid having been given in the absence of the other: and it was contended on behalf of the plaintiff that even though the petition for reference to arbitration empowered the arbitrator to decide the matter in either of the two ways, namely upon the taking of evidence or on his personal knowledge, it did not empower him to make secret inquiry from the parties.

10. It was further contended on behalf of the plaintiff that the arbitrator acted arbitrarily and capriciously by throwing away the offer or the bid that had been made by the plaintiff, and, finally, in coming to the conclusion that the plaintiff's half share in the business and the partnership assets would reasonably be valued at Rs. 25,000/-. On that part of the case the trial court was of the view that the valuation reached by the arbitrator was not really perverse. And that finding was based largely upon the consideration that the plaintiff had tentatively valued his claim in the plaint at Rs. 5,100/- and the money which will now be awarded to him under the award itself was far more than that value and was several times of the approximate value put by the plaintiff in the plaint.

11. It has been contended by the defendant appellant in this Court that the trial court entirely misunderstood the procedure adopted??? the arbitrator, which had been adopted by him with the consent of both the parties, and the was nothing to be disclosed to the other or??? be explained by the other party and since??? idea of auction between the parties had been abandoned by agreement, there was no point??? one party knowing the figure mentioned by??? other.

12. After hearing learned counsel for??? parties we are of opinion that the view take by the trial court that there was legal misconduct on the part of the arbitrator was correct.

13. It is well-established principle of law??? that an arbitrator ought not to hear or??? evidence from one side in the absence of??? other side without giving the side affected??? such evidence the opportunity of meeting an answering it. In Russell on Awards (7th Edition, page 191), the proposition is put thus:

“Neither side can be allowed to use any??? means of influencing his (the arbitrator's) mind??? which are not known to, and capable of being??? and resisted by, the other. As much??? possible the arbitrator should decline to receive??? private communications from either litigant respecting the subject-matter of the reference.

It is prudent course to make rule handing over to the opponent all written statements sent to him by party, and to take??? that no kind of communication concerning the points under discussion be made to him without??? giving information of it to the other side.”

14. And, again, (page 194):—

“This course of conduct, of examining one party, or the witnesses of one party, or receiving evidence from one party in the absence of the other, is often adopted by mercantile arbitrates???. But the Courts in the above instance and 1 many others, have strongly repudiated the idea??? that different course is allowable in this respect in the case of mercantile referees; and also though the lawful usage of merchants may be imported into the contract of reference, they have said that the practice of receiving evidence which the party affected has no opportunity of meeting is not lawful one.”

15. The passage from Russell quoted above had been approved of by Bombay decision in Cursetji Jehangir Khambatta v. W. Crowder, ILR 18 Bom 299 (A), at page 311.

16. In laying down the above proposition it must, however be understood that it is subject to this qualification that the parties may agr that reference may be conducted in any particular way, and such an agreement may be either express or implied from their conduct during the arbitration; and they may also expressly or by their conduct, waive their objection to an irregular course of conduct on the part of the arbitrator.

17. In the present case there is nothing in the agreement which might indicate that they gave the arbitrator the power to make any secret inquiry from the parties with regard to the valuation of the property; nor was there anything, expressly or by their conduct, which might indicate that the parties waived their objection to irregular course of conduct on the part the arbitrator.

18. There is no doubt that the procedure adopted by the arbitrator in taking the offers of the bids from one party in the absence of the other, and not having given an opportunity to the parties of having those offers considered by them or put to test by way of examination of the parties, or by cross-examination, was not reduced to form which may strictly be construed as evidence which could be acted upon by the arbitrator in order to enable him to arrive at just decision regarding the valuation of the property.

19. In the leading case in Harvey v. Shelton (1844) 7 Beav 455 at p. 462 (B), Lord Langdale M.R, observed:

“It is so ordinary principle in the administration of justice, that no party to cause can be allowed to use any means whatsoever to influence the mind of the Judge, which means are not known to and capable of being met and resisted by the other party, that it is impossible, for moment, not to see, that this was an extremely indiscreet mode of proceeding; to say he very least of it. It is contrary to every principle to allow such thing, and I wholly deny the difference which is alleged to exist between mercantile arbitrations and legal arbitrations.

20. The first principles of justice must be equally applied in every case. Except in the few cases where exceptions are unavoidable, both sides must be heard, and each in the presence of the gather. In every case in which matters are litigated, you must attend to the representations made on both sides, and you must not, in the administration of justice, in whatever form, whether in the regularly constituted Courts or in arbitrations, whether before lawyers or merchants, permit one side to use means of influencing the conduct and the decisions of the Judge, which means are not known to the other side.”

21. This case of Harvey v. Shelton (B), which is the leading case on the point, has been followed not only in England but in India. See Vengamma v. Kesanna, 1953 All LJ 73 : (AIR 1953 SC 21) (C).

22. The course of proceeding adopted by the arbitrator was obviously contrary to the principles of natural justice. An award will be set aside on the ground of offers or bids having been demanded by the arbitrator from the parties for he determination of the value of the partnership assets and other properties and this having taken place between the arbitrator and the one tarty in the absence of the other, and the offer of one party not having been disclosed by the arbitrator to the other.

23. Such course of proceeding would amount to judicial misconduct on the part of the arbitrator and would in our opinion perilously come bear negation of doing justice between the paries, more especially when there was nothing to indicate why the arbitrator chose to reject the nigher offer or bid made by the plaintiff. In doing so the arbitrator did not act according to the agreement between the parties, but he adopted mode of procedure different from the agreement.

24. The act of the arbitrator amounted to private inquiry, which under the agreement of reference he was not empowered to do. Apart rom an agreement to allow the arbitrator to do so, private inquiries behind the back of the paries are against the ordinary rules of justice. Unless expressly authorised to do so, the arbitrator cannot be allowed to make private inquiries and allow himself to be influenced by evidence which either party had no opportunity to check or meet.

25. It is true that the mere fact that the arbitrator questioned the parties as to their respective cases would not amount to misconduct so as to vitiate an award. But where, as in the present case, the parties were denied the opportunity of meeting the representations made by the other side in the secret offers or bids to the arbitrator and the arbitrator acted capriciously and arbitrarily in rejecting the higher offer or bid and thereby came to an erroneous conclusion as to the value of the property, it would amount to legal misconduct and the award would be vitiated. In this view of the matter we are of opinion that the order of the court below setting aside the award was eminently just & reasonable. There is no force in this appeal and it is dismissed with costs.

V.R.B

26. Appeal dismissed.