2025 INSC 174
SUPREME COURT OF INDIA
(HON’BLE
PAMIDIGHANTAM SRI NARASIMHA, J. AND HON’BLE SANDEEP MEHTA, JJ.)
AC CHOKSHI SHARE
BROKER PRIVATE LIMITED
Petitioner
VERSUS
JATIN PRATAP DESAI
Respondent
Civil Appeal No. OF 2025 ARISING OUT
OF SLP (C) No. 18393 OF 2021-Decided on 10-02-2025
Arbitration,
Challenge
(A) Arbitration and
Conciliation Act, 1996, Section 34 and 37 - Bombay Stock Exchange Bye- laws,
1957, Bye-law 248(a) – Arbitration award – Challenge as to - Whether respondent
no. 1, who is the husband of respondent no. 2, could have been made a party to
the arbitration that was invoked by the appellant, who is a registered stock
broker, and held to be jointly and severally liable for the debit balance that
had accrued in the wife’s (respondent no. 2’s) account with the appellant? – Held
that under Bye-law 248(a), the arbitral tribunal could have exercised
jurisdiction over respondent no. 1 on the basis of an oral contract that he
would be jointly and severally liable for the transactions undertaken in
respondent no. 2’s account - Such oral contract would not amount to a “private”
transaction that falls outside the scope of arbitration.
(Para 1 and 32)
(B) Arbitration and
Conciliation Act, 1996, Section 34 and 37 – Arbitration award – Judicial
intervention -
The arbitral tribunal found that both respondents were jointly and
severally liable for repaying the debit balance in respondent no. 2’s
account, and the respondents’ applications under Section 34 of the
Act, 1996 to set aside the arbitral award were dismissed by the learned single
judge of the High Court - However, the division bench of the High Court allowed
the Section 37 appeal preferred by respondent no. 1 and set aside the
arbitral award only against him, which is impugned in the present appeal – Held that the High Court did not correctly
exercise jurisdiction under Section 37 as it re-appreciated evidence
and examined the merits of the award - Upon examination of the findings of the
arbitral tribunal, it is clear that the award is not liable to be set
aside on the grounds of perversity or patent illegality - Settled jurisprudence
on the scope of judicial intervention under Section 34
and Section 37 of the Act, is that the arbitral tribunal arrived at a
reasonable conclusion, based on evidence, as to the joint and several nature of
the respondents’ liability - Impugned order of the High Court liable to be set
aside - As a consequence, the arbitral award upheld in
its entirety - Respondent no. 1 is
jointly and severally liable, along with respondent no. 2, to pay the appellant
the arbitral sum of Rs. 1,18,48,069/- along with 9% interest p.a. from
01.05.2001 till date of repayment as has been directed by the arbitral
tribunal.
(Para
1, 32 and 33)
JUDGMENT
Pamidighantam
Sri Narasimha, J. :- Leave granted.
2.
The issue arising in the present appeal is whether respondent no. 1, who is the
husband of respondent no. 2, could have been made a party to the arbitration
that was invoked by the appellant, who is a registered stock broker, and held
to be jointly and severally liable for the debit balance that had accrued in
the wife’s (respondent no. 2’s) account with the appellant. The
arbitral tribunal found that both respondents were jointly and
severally liable for repaying the debit balance in respondent no. 2’s
account, and the respondents’ applications under Section 34 of the
Arbitration and Conciliation Act, 1996 [Hereinafter
“the Act”.] to set aside the arbitral award were dismissed by the learned
single judge of the High Court. However, the division bench of the High Court
allowed the Section 37 appeal preferred by respondent no. 1 by order
dated 29.04.2021 and set aside the arbitral award only against him, which is
impugned before us in the present appeal. For the reasons detailed below, we
have allowed the appeal and set aside the impugned order based on the following
conclusions: First, by interpreting Bye-law 248(a) of the Bombay Stock Exchange
[Hereinafter “BSE”.] Bye- laws, 1957
that provides for arbitration between members and non-members of the BSE, and
considering the nature of respondent no. 1’s involvement qua transactions
conducted in respondent no. 2’s account, we have held that an oral contract
undertaking joint and several liability falls within the scope of the
arbitration clause and the arbitral tribunal could exercise jurisdiction over
respondent no. 1. Second, considering the settled jurisprudence on the scope of
judicial intervention under Section 34 and Section 37 of
the Act, we have held that the arbitral tribunal arrived at a reasonable
conclusion, based on evidence, as to the joint and several nature of the
respondents’ liability. The arbitral award does not suffer from perversity and
patent illegality as has been held by the High Court in the Section
37 appeal, and therefore, we have upheld the arbitral award in its
entirety.
3.
Facts: The relevant facts are as follows. The appellant is a stock broker and a
registered member of the BSE. In 1999, the respondent nos. 1 and 2, who are
husband and wife respectively, approached the appellant for opening trading
accounts and to this end, they executed individual Client Registration
Applications on 01.08.1999. As per the appellant, respondent no. 1 represented
that the accounts would be jointly operated by both of them and they would be
jointly and severally liable for any losses.
3.1 At the end of the settlement period on 31.01.2001,
there was an undisputed credit balance of Rs. 7,40,020/- in the account of
respondent no. 1, that was payable by the appellant. On 16.02.2001, respondent
no. 1 further paid a sum of Rs. 2 lakhs to the appellant, that increased his
credit balance to Rs. 9,40,020/-. On the other hand, there was a debit balance
of Rs. 7,77,058/- in respondent no. 2’s account
on 20.01.2001, which further increased to Rs. 11,40,413/- by 17.02.2001. The
appellant’s case is that on oral instruction of respondent no. 1, it
transferred the credit balance of Rs. 9,40,020/- from
the husband’s account to the wife’s account on 05.03.2001 to offset the losses.
3.2
However, due to a stock market crash in 2001, the debit balance in respondent
no. 2’s account bludgeoned to Rs. 1,18,48,069/- as on
12.04.2001, which is the recoverable amount in arbitration.
3.3
The appellant initiated arbitration under BSE Bye-law 248(a) and impleaded both
the respondents, seeking an amount of Rs. 1,27,36,670/-
with 18% interest from both of them to recover the losses in respondent no. 2’s
account. The respondents filed separate written statements. In respondent no.
1’s written statement-cum-counter-claim, he alleged that the appellant’s
arbitration claim is not maintainable for misjoinder
of parties and causes of action as each client is a separate legal entity.
Further alleging that the appellant transferred the credit balance from his
account to his wife’s account without express authority or written consent as
is required by SEBI guidelines, he claimed Rs. 10,66,922/- with 18%
interest from the appellant to recover the amount so adjusted. Respondent no.
2, in her separate written statement alleged that the appellant undertook
unauthorised transactions from her account and also took the position that
respondent no. 1 is not jointly and severally liable.
4.
Findings of the arbitral tribunal: The arbitral tribunal allowed the
appellant’s claim and held both respondents to be jointly and severally liable
to pay Rs. 1,18,48,069/- along with interest @ 9% p.a. from 01.05.2001 till the
date of payment. It also dismissed the counter-claim preferred by respondent
no. 1. The reasons by the arbitral tribunal, briefly stated, are:
4.1
The transactions undertaken by the appellant on behalf of respondent no. 2 in
her account were authorised and were as per her instructions. This finding has
not been contested before us. 4.2 Respondent no. 1 is jointly and severally
liable for the debit balance in respondent no. 2’s account. For this, the
arbitral tribunal held that share transactions in a family are “normally and
historically” undertaken by one person, albeit each individual has a separate
client code, contract notes, and bank accounts as these are necessary
documentation under tax laws.
4.3
Further, there was an oral agreement between respondent no. 1 and the
appellant. It held that respondent no. 1 was mostly visiting the appellant’s
office, and respondent no. 2 had given instructions sometimes when respondent
no. 1 was out of town or under his instructions. The arbitral tribunal further
relied on the affidavit of Ms. Deepika Chokshi, who is a director of the appellant company, and
the affidavit of Mr. Parag Jhaveri,
who is a close associate of respondent no. 1 and whose father introduced the
respondents to the appellant.
4.4
The arbitral tribunal also reasoned that despite having a credit balance of Rs.
7 lakhs in his account, respondent no. 1 paid the appellant a further sum of
Rs. 2 lakhs but never demanded the same except at the time of filing the
counter-claim.
4.5
Looking to the financial dealings of the respondents with the appellant, it
held that both respondents have accounts in all the banks from which cheques
were issued, although each of them may have a separate account. On 15.09.1999,
respondent no. 1 issued a cheque of Rs. 1,20,000/-
from Syndicate Bank towards the debit balance in his account. On 06.10.1999, a
cheque of the next serial number was issued from the same bank
account number to be paid into the account of respondent no. 2. Similarly,
on 28.09.1999, a single cheque of Rs. 10,86,188/- was
issued from Syndicate Bank with an instruction to the appellant to credit
Rs.2,21,440/- to respondent no. 2’s account and the balance to respondent no.
1’s account.
4.6
Relying on the above material, the arbitral tribunal held the respondents to be
jointly and severally liable and dismissed respondent no. 1’s counter-claim as
being a counter-blast and being unsustainable as his credit balance was rightly
adjusted to the account of respondent no. 2. It also noted that while SEBI
Guidelines require written instructions to transfer money from one
constituent’s account to another’s, taking a practical view and considering
past experience and joint and several liability, as
well as the marital relationship of the respondents, it held that the
adjustment of balances between the accounts was in order.
5. Section
34 petition: Both respondent nos. 1 and 2 filed separate applications
under Section 34 to set aside the arbitral award, which were
dismissed by the High Court single judge’s order dated 23.08.2005. The Court
held that there is an implied term in the written contract and an oral
agreement to the effect that both husband and wife will be jointly and
severally liable for the debit balance in the wife’s account. Although the
arbitration clause in the agreement between the appellant and respondent no. 2
was invoked, since such an arbitration clause also exists with respondent no.
1, the Court held that there is no jurisdictional error in the award. Further,
that the finding of an oral understanding among the parties was based on
appreciation of the evidence on record by the arbitral tribunal whose members
are appointed by a trade body. Hence, the learned single judge of the High
Court did not interfere with the award.
6.
Impugned order allowing the Section 37 appeal: Respondent no. 1 moved
a Section 37 appeal against the single judge’s order, which was
allowed by the impugned order that set aside the arbitral award only qua
respondent no. 1’s liability. It is necessary to appreciate the reasoning of
the High Court exercising appellate jurisdiction under Section 37 in
setting aside the arbitral award and reversing the findings of the single
judge. After formulating several issues, the High Court proceeded on two broad
reasons:
6.1
First, that the arbitral tribunal lacked jurisdiction
against respondent no. 1 and he could not have been made a party to
the arbitration. The High Court held that there are separate causes of
action against husband and wife – the cause of action against respondent no. 2
(wife) was regarding the debit balance in her account in respect of
transactions on the floor of the BSE.
However,
the cause of action against respondent no. 1 (husband) was based on the alleged
oral understanding with the appellant regarding his liability to pay the dues
in case of default by respondent no. 2, which the High Court held is a private
and separate transaction that is not subject to Bye-law 248(a) as it is not
conducted on the floor of the stock exchange. Further, since there is no
tripartite agreement between all three parties, nor did the appellant invoke
the arbitration agreement with respondent no. 1, it could not have clubbed
separate causes of action in a common arbitration. Since respondent no. 1 does
not fall under Bye-law 248(a) in his capacity as a guarantor or third party,
the entire arbitration against him is without jurisdiction. Even if this
jurisdictional objection had not been raised before the arbitral tribunal in
accordance with Section 16 of the Act, the Court held that the
arbitral tribunal inherently lacked jurisdiction to adjudicate on a private
transaction between the appellant and respondent no. 1. Further, since the
arbitration clause is statutory in nature, such jurisdiction cannot be
conferred by consent of the parties, and hence, not raising the objection
under Section 16 does not amount to a waiver under Section
4 of the Act.
6.2
Second, the findings of the arbitral tribunal are perverse and patently
illegal. With regard to joint and several liability of
the respondents, it held that the findings of the arbitral tribunal are
perverse as the respondents are two separate legal entities, having separate
and distinct accounts, separate client codes, separate contracts notes and
bills, and separate bank accounts. The appellant only led oral evidence to
prove joint and several liability, however such oral
evidence cannot be contrary to the documents between the parties. The arbitral
tribunal ignored BSE Bye-laws, Rules and Regulations and SEBI guidelines by
relying on past experience and the respondents’ marital relationship to hold
them jointly and severally liable. Further, with regard to the transfer of the
credit balance from respondent no. 1’s account to offset the debit balance in
respondent no. 2’s account, it held that there was no express or oral
understanding that permitted the same. Despite noting the need for express
authorisation of the client for such adjustment, the arbitral tribunal
held it to be valid. This is in violation of Bye-law 247A and the SEBI
guidelines, making such finding patently illegal and perverse.
6.3
While setting aside respondent no. 1’s liability under the arbitral award, the
High Court however held that his counterclaim before the same arbitral tribunal
was without jurisdiction as he was not correctly impleaded. Rather, respondent
no. 1 should have invoked the arbitration clause against the appellant in a
separate proceeding to recover the amount.
7.
Submissions: We have heard Mr. Dhruv Mehta, learned
senior counsel for the appellant, and Mr. Mayilsamy
K, learned counsel for the respondents. The submissions made by Mr. Mehta are to
the effect that:
7.1
As per Section 7(4)(c) of the Act, an
arbitration agreement is deemed to exist when an averment raised to this effect
is not disputed or denied. Here, respondent no. 1 did not dispute the existence
of an arbitration agreement in his written statement, and even filed a
counter-claim and participated in the arbitral proceedings. Further, a plea of
lack of jurisdiction was neither raised before the arbitral tribunal nor in
the Section 34 petition; it was only raised at the stage of the Section
37 appeal. He submitted that the same is impermissible and relied on
several judgments of this Court. [State of West Bengal v. Sarkar and Sarkar, (2018) 12 SCC 736; MTNL v. Canara
Bank, (2020) 12 SCC 767; Union of India v. Pam Development (P) Ltd, (2014)
11 SCC 366.] Such a jurisdictional plea is governed
by Section 16(2) of the Act and must be raised at the time of
submission of statement of defence. [Relied
on GAIL v. Keti Construction Ltd, (2007) 5 SCC
38.]
7.2
Further, the respondents constitute a ‘single entity’ for the purpose of
trading, which is demonstrated from the transactions executed by them. In any
event, relying on ONGC v. Discovery Enterprise Pvt Ltd[(2022) 8 SCC 42.] and P.R. Shah Share
& Stock Brokers Pvt Ltd v. B.H.H. Securities Pvt Ltd [(2012) 1 SCC
594.], he submitted that a non-signatory can be impleaded as party to the
arbitration if there is a composite transaction. The liability to clear the
debit balance in respondent no. 2’s account, being joint and several, would
enable the appellant to invoke a common arbitration against both spouses as
this is a composite transaction.
7.3
Bye-law 248(a) is widely worded and covers matters that are incidental to
transactions conducted on the floor of the stock exchange, including any oral
guarantee by respondent no. 1 to pay the dues owed by respondent no. 2 to
the appellant. This oral guarantee is incidental to the transactions executed
on the floor of the stock exchange on behalf of respondent no. 2, and gives
rise to a single cause of action against both respondents that is covered by
the arbitration clause.
7.4
The High Court erred in reappreciating evidence in
the Section 37 appeal to hold that there is no joint and several liability. Further, it failed to appreciate that the scope
in the Section 37 appeal is narrower than under Section 34, and the pleas taken at the appellate stage cannot exceed
the grounds in the Section 34 petition. Hence, the jurisdictional
issue could not have been agitated for the first time in the Section 37 appeal.
8.
Mr. Mayilsamy K, learned counsel for the respondents,
has submitted that:
8.1
The jurisdictional issue was validly raised before the High Court. In fact,
such plea was also raised in the written statement before the arbitral tribunal
where respondent no. 1 claimed that there was misjoinder
of parties and that both respondents are separate legal entities. In any case,
since the arbitral tribunal lacked ‘inherent jurisdiction’, the same can be
raised at any stage and the time-limit under Section 16(2) does not
apply. [Relied
on Chief General Manager (IPC), M.P. Power Trading Co. Ltd. v. Narmada
Equipments (P) Ltd, (2021) 14 SCC 548.]
8.2
That both respondents are separate and individual entities, as evidenced by
their separate client agreements and independent client codes. Further, Bye-law
247A of the BSE Bye-laws read with SEBI Guidelines dated 18.11.1993 prohibits a
stock broker from making payments from one client’s account to the other. In
this light, a common arbitration could not have been invoked against both
respondents. In fact, the appellant only invoked and filed a reference against
respondent no. 2.
8.3
The Member-Client Agreement, as approved by SEBI, does not provide for an
indemnity/guarantee clause, and each client is solely liable to the stock
broker for their dues. Hence, the arbitral tribunal could not have assumed the
respondents to be a single entity and could not have held them to be jointly
and severally liable based on their marital status.
8.4
Bye-law 248(a), that provides for arbitration, does
not cover the dispute against respondent no. 1 as it only covers matters
incidental to transactions conducted on the floor of the exchange.
However,
the cause of action against respondent no. 1 pertains to satisfaction of a debt
owed by respondent no. 2, which is a private transaction that was not entered
into on the floor of the exchange, and hence stands excluded from the
arbitration clause.
9.
Issues: From the reasoning and findings of the arbitral tribunal, as well as
the manner in which the impugned order has proceeded to set aside the arbitral
award against respondent no. 1, we find that there are two issues for us to
consider in the present appeal:
(i)
The first is a jurisdictional issue that pertains to the maintainability of
arbitration against respondent no. 1 under Bye-law 248(a) for payment of the
debit balance in respondent no. 2’s account on the basis of his joint and
several liability?
(ii) The second issue
pertains to whether the High Court correctly exercised jurisdiction
under Section 37 while setting aside the arbitral award against
respondent no. 1 on the grounds of perversity and patent illegality by finding
that there is no joint and several liability?
10.
Jurisdiction of the arbitral tribunal: The arbitration reference by the
appellant has been made under Bye-law 248(a) of the BSE Bye-laws, 1957, which
has been reproduced for ready reference:
“Arbitration other
than between members
Reference to
Arbitration
248. (a) All claims
(whether admitted or not) difference and disputes between a member and a
non-member or non-members (the terms ‘non-member’ and ‘non members’ shall
include a remisier, authorised clerk, a sub-broker
who is registered with SEBI as affiliated with that member or employee or any
other person with whom the member shares brokerage) arising out of or in
relation to dealings, transactions and contracts made subject to the Rules, Bye-laws
and Regulations of the Exchange or with reference to anything incidental
thereto or in pursuance thereof or relating to their construction, fulfillment or validity or in relation to the rights,
obligations and liabilities of remisiers, authorised
clerks, sub-brokers, constituents, employees or any other persons with whom the
member shares brokerage in relation to such dealings, transactions and
contracts shall be referred to and decided by arbitration as provided in the
Rules, Bye-laws and Regulations of the Exchange.”
(emphasis supplied)
11.
Based on the decisions of this Court in Bombay Stock Exchange v. Jaya I.
Shah [(2004) 1 SCC 160, para 36.] and P.R. Shah, Shares and Stock
Brokers (supra) [P.R. Shah, Shares
and Stock Brokers Private Limited v. B.H.H. Securities Private
Limited (supra), para 13.], an arbitration
reference under Bye-law 248(a) is statutory in nature, as opposed to being
based on an arbitration agreement between the parties in terms of Section
7 of the Act. The scope and interpretation of Bye-law 248(a) falls for our
consideration to determine the first issue.
12.
Bye-law 248(a) specifically deals with disputes, claims, and differences
between “members”, i.e. stock brokers and “non- member(s)”, i.e. client(s). It
is undisputed that both respondents are non-members or clients, but they
entered into individual and separate client registration agreements, leading to
separate client codes and accounts in each of their names. However, the
appellant has invoked arbitration against both of them for the debit balance in
respondent no. 2’s account based on an oral contract among the parties that
both husband and wife will be jointly and severally liable for the transactions
in each of their accounts.
13.
While the existence of such an oral contract is a finding of fact that must be
based on evidence, at this stage, the simple question is, presuming such an
oral contract exists, whether the arbitral tribunal can exercise jurisdiction
over respondent no. 1 on its basis. Through such an oral understanding, the
respondents consented to treat their independent client agreements with the
appellant as joint and composite. They have effectively entered into the transactions
undertaken in each of their trading accounts together, i.e., the performance of
the transactions in respondent no. 2’s trading account is not only on her
behalf but also on behalf of respondent no. 1. Therefore, respondent no. 1
is effectively a party to the client agreement between the appellant and
respondent no. 2.
14.
In this light, the High Court’s reasoning in the impugned order that
arbitration was only invoked against respondent no. 2 as only her client code
and client agreement were referenced by the appellant is a hyper-technical
approach as the claim had been filed against both respondents. While
interpreting contracts, courts must acknowledge the practicalities of how
parties execute and participate in transactions and how they understand and
perform mutual obligations under the contract. [See Cox and Kings v. SAP India Pvt Ltd, (2024) 4 SCC 1, paras
97, 132, 133 (Chandrachud, J).] To
facilitate ease of contract and to prevent respondent no. 1 from mischievously
wriggling out of his liability for the transactions, it is necessary to take
into account the reality of the situation. The appellant conducted the
transactions in each their accounts based on an oral agreement among all the
parties that the respondents will jointly operate and manage both accounts and
undertake liability for the same. Therefore, in these facts, even respondent
no. 1 is a “non-member” or client under Bye-law 248(a) with respect to the
account in respondent no. 2’s name.
15. In
ONGC v. Discovery Enterprise, this Court comprehensively laid down the factors
to determine when a non-signatory can be made party to an arbitration, [ONGC Ltd v. Discovery Enterprises Pvt Ltd (supra), para 40.]
which has been subsequently affirmed by a Constitution
Bench in Cox and Kings (supra)
[Cox and Kings v. SAP India Pvt Ltd (supra), paras 132-133, 170.8 (Chandrachud,
J) and para 223.5, 229 (Narasimha,
J).]. They are: (a) the mutual intention of the parties, as is evidenced by
their conduct and participation in the formation and performance of the
underlying contract; (b) the relationship between the signatory and
non-signatory; (c) commonality of subject-matter; and (d) composite nature of
transaction. [ibid, paras 132, 229.] This test has been evolved in
the context of determining when a non-signatory can be made party to an
arbitration agreement. In the present matter, although arbitration is not based
on consent of the parties but is under the statutory Bye-laws of BSE,
application of this test only strengthens our conclusion. The oral
contract of joint and several liability reflects the
mutual intention of the parties that the respondents will enter into and
perform trading transactions together, even if they are conducted only
from one of their accounts, leading to a composite transaction. The marital
relationship of the respondents and them approaching the appellant together as
well as opening accounts at the same time, through the same referee as is seen
from their client registration forms, further strengthens this conclusion.
16.
At this juncture, it would also be relevant to note this Court’s decision
in P.R. Shah v. B.H.H. Securities (supra), that arose in somewhat
similar facts. There, the first respondent referred a dispute against the
appellant and the second respondent for arbitration under the BSE Bye-laws. The
appellant, which was also a stock broker, was a sister company of the second
respondent. The first respondent executed certain trades in the account of the
second respondent, but claimed that even the appellant was jointly and
severally liable to pay the amounts due. It invoked arbitration against both of
them and the arbitral tribunal therein held both of them to be liable. This
Court held that while arbitration between a broker and client is under Bye-law
248(a) and arbitration between two brokers is governed by Bye-law 282 of the
BSE [Bye-law 282 of the BSE Bye-laws,
1957 reads: [“282. All claims, complaints, differences and disputes between
members arising out of or in relation to any bargains, dealings, transactions
or contracts made subject to the Rules, Bye-laws and Regulations of the
Exchange or with reference to anything incidental thereto (including claims,
complaints, differences and disputes relating to errors or alleged errors in
inputting any data or command in the Exchange's computerised trading system or
in execution of any trades on or by such trading system) or anything to be done
in pursuance thereof and any question or dispute whether such bargains,
dealings, transactions or contracts have been entered into or not shall be
subject to arbitration and referred to the Arbitration Committee as provided in
these Bye-laws and Regulations.”] ], a common reference to arbitration is
maintainable as it is in regard to the same claim and there is an arbitration
agreement between the first respondent and the second respondent, as well as
between the first respondent and the appellant. [P.R. Shah, Shares and Stock Brokers (supra), para
19.] Here as well, the broker who was the first respondent entered
into transactions with the second respondent on an understanding that the
appellant will also be liable. [ibid, para 18.]
17.
While the primary issue in P.R. Shah (supra) was a composite
reference to arbitration despite the existence of different arbitration mechanisms
under Bye-laws 248(a) and 282, it is clear that this Court also upheld the
invocation of arbitration under BSE Bye-laws against a person other than the
client from whose account the transactions were undertaken by relying on an
understanding of joint and several liability.
18.
The High Court in the impugned order differentiated the decision in P.R.
Shah (supra) on the ground that the first respondent therein invoked
arbitration against both parties, but this was not the case here. However, as
held hereinabove, this conclusion is incorrect and the appellant in this case
did in fact invoke arbitration against both respondents.
19.
The other reason offered by the High Court to differentiate P.R.
Shah (supra) and to also hold that the cause of action against respondent
no. 1 does not fall within the scope of Bye-law 248(a) is that his oral
contract with the appellant is a separate and “private” transaction that was
not conducted on the floor of the stock exchange. We are of the opinion that
this conclusion is incorrect. In another decision of the Bombay High Court
in Syntrex Corporation v. Rajkumar
Keshardev [2007
SCC OnLine Bom 620, paras 2 and 5.], it was held that disputes in respect
of transactions that were not conducted on the floor of the BSE, using its
trading system, would not be covered by Bye-law 248(a). However, there is no
contention by the respondents that the transactions in respondent no. 2’s
account were not conducted on the floor of the stock exchange. In this light,
and considering the broad wording of the Bye-law 248(a) to refer disputes
arising out of, in relation to, incidental to or in pursuance of transactions,
contracts, and dealings to arbitration, [See Vidya Drolia v. Durga Trading Corpn., (2021) 2
SCC 1, wherein para 151 held “…The third approach is
to avoid either broad or restrictive interpretation and instead the intention
of the parties as to scope of the clause is understood by considering the
strict language and circumstance of the case in hand. Terms like ‘all’, ‘any’,
‘in respect of ’, ‘arising out of ’ etc. can expand
the scope and ambit of the arbitration clause. Connected and incidental
matters, unless the arbitration clause suggests to the contrary, would normally
be covered.”] the oral contract between the
appellant and respondents cannot be termed as a “private” transaction. The
liability to pay the appellant directly arises out of transactions conducted on
the floor of the exchange and the oral contract is squarely on who bears this
liability. Therefore, it falls within the ambit of Bye-law 248(a).
20.
The High Court in the impugned order relied on this rationale of a “private”
transaction to hold that the arbitral tribunal lacked inherent jurisdiction to
decide the claim against respondent no. 1, and such a jurisdictional plea could
be raised at any stage even if it was not raised before the arbitral tribunal.
From the above reasons, it is clear that there is no inherent lack of
jurisdiction. [See Hindustan Zinc
Limited v. Ajmer Vidyut Vitran
Nigam Limited, (2019) 17 SCC 82, paras
17-19; M.P. Power Trading Co. Ltd. v. Narmada Equipments Pvt.
Ltd. (supra), para 14. In these decisions, this
Court has held that a plea of inherent lack of jurisdiction, i.e., when there
is a lack of subject-matter jurisdiction, renders a decree nullity and cannot
be cured by the consent of the parties. Therefore, this plea can be raised at
any stage even if it was not raised before the arbitral tribunal.]
Consequently, any issue regarding the scope of Bye-law 248(a) ought to have
been raised in accordance with Section 16 of the Act[Section 16 of the Act reads:
“16. Competence of
arbitral tribunal to rule on its jurisdiction.—(1) The arbitral tribunal may
rule on its own jurisdiction, including ruling on any objections with respect
to the existence or validity of the arbitration agreement, and for that
purpose,—
(a) an arbitration
clause which forms part of a contract shall be treated as an agreement
independent of the other terms of the contract; and
(b) a
decision by the arbitral tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause.
(2) A plea that the
arbitral tribunal does not have jurisdiction shall be raised not later than the
submission of the statement of defence; however, a party shall not be precluded
from raising such a plea merely because that he has appointed, or participated
in the appointment of, an arbitrator. (3) A plea that the arbitral tribunal is
exceeding the scope of its authority shall be raised as soon as the matter
alleged to be beyond the scope of its authority is raised during the arbitral
proceedings.
(4) The arbitral
tribunal may, in either of the cases referred to in sub-section (2) or
sub-section (3), admit a later plea if it considers the delay justified. (5)
The arbitral tribunal shall decide on a plea referred to in sub-section (2) or
sub-section (3) and, where the arbitral tribunal takes a decision rejecting the
plea, continue with the arbitral proceedings and make an arbitral award.
(6) A party aggrieved
by such an arbitral award may make an application for setting aside such an
arbitral award in accordance with section 34.”] , i.e. during the
arbitration, not later than the submission of statement of defence. [McDermott International Inc v. Burn
Standard Co. Ltd, (2006) 11 SCC 181, para
51; Gas Authority of India Ltd v. Keti
Construction (I) Ltd (supra), paras 24 and 25;
M/s Vidyawati Construction Company v. Union of
India, 2025 INSC 101, paras 13-15.] Neither respondent has, in their statements of defence or Section
34 petitions, raised an objection to the arbitral tribunal’s jurisdiction
in clear terms beyond stating that there is a misjoinder
of parties as they are not jointly and severally liable. A clear jurisdictional
issue was only raised at the Section 37 appeal stage, as has also
been noted by the High Court in the impugned order.
21.
This Court has held, in several judgments, that when the jurisdictional issue
has not been raised in accordance with Section 16, it is deemed that the
objecting party has waived his right, in terms of Section 4 of
the Act [Section 4 of the Act reads:
“4. Waiver of right to
object.—A party who knows that—
(a) any
provision of this Part from which the parties may derogate, or
(b) any requirement
under the arbitration agreement, has not been complied with and yet proceeds
with the arbitration without stating his objection to such non-compliance
without undue delay or, if a time limit is provided for stating that objection,
within that period of time, shall be deemed to have waived his right to so
object.” ]
to raise the same at a later stage. [Union of India v. Pam
Development (P) Ltd (supra), para 17.]
Such objection cannot be raised for the first time when the party is
challenging the award under Section 34. [ibid, para 18; Gas Authority of India
Ltd (supra), para 25; MSP Infrastructure
Limited v. Madhya Pradesh Road Development Corporation Limited, (2015) 13 SCC
713, paras 13-16; MP Rural Road Development
Authority v. L.G. Chaudhary Engineers and
Contractors, (2018) 10 SCC 826, para 19, as clarified
in Sweta Construction v. Chhattisgarh State
Power Generation Company Ltd., (2024) 4 SCC 722, paras
13-17.] Here, respondent no. 1 not only filed his statement of
defence and participated in the arbitral proceedings but also filed a
counter-claim, thereby submitting to the arbitral tribunal’s jurisdiction. [See Govind
Rubber Ltd v. Louis Dreyfus Commodities Asia Pvt Ltd,
(2015) 13 SCC 477, para 21; State of West Bengal
v. Sarkar and Sarkar (supra),
para 11.] Hence, any jurisdictional
objection must be rejected on this ground as well.
22.
Whether the arbitral award ought to have been set aside: The limited
supervisory role of courts while reviewing an arbitral award is stipulated
in Section 34 of the Act, beyond whose grounds courts cannot
intervene and cannot correct errors in the arbitral award. [McDermott International Inc (supra), para 52.] The appellate jurisdiction
under Section 37 is also limited, as it is constrained by the grounds
specified in Section 34 and the court cannot undertake an independent
assessment of the merits of the award by re-appreciating evidence or
interfering with a reasonable interpretation of contractual terms by the
arbitral tribunal. [MMTC
Ltd v. Vedanta Ltd, (2019) 4 SCC 163, para 14; Konkan Railway Corporation Ltd v. Chenab Bridge Project
Undertaking, (2023) 9 SCC 85, para 25.]
The court under Section 37 must only determine whether
the Section 34 court has exercised its jurisdiction properly and
rightly, without exceeding its scope. [MMTC Ltd (supra), 14; Bombay Slum Redevelopment
Corporation Pvt Ltd v. Samir
Narain Bhojwani, (2024) 7
SCC 218, para 26.]
23.
Since the Section 34 petition in this case was filed prior to the
2015 Amendment to the Act, the pre-amendment statutory position must be
considered, [Batliboi
Environmental Engineers Ltd v. Hindustan Petroleum Corporation Ltd, (2024) 2
SCC 375, para 31.] the relevant portion of which
reads as follows:
“34. Application for
setting aside arbitral award.—(1) Recourse to a court against an arbitral award
may be made only by an application for setting aside such award in accordance
with sub- section (2) and sub-section (3).
(2) An arbitral award may be set aside by the court
only if— ***
(b) the court finds that—
(i)
the subject-matter of the dispute is not capable of
settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of
India.
Explanation.—Without
prejudice to the generality of sub-clause (ii), it is hereby declared, for the
avoidance of any doubt, that an award is in conflict with the public policy of
India if the making of the award was induced or affected by fraud or corruption
or was in violation of Section 75 or Section 81.”
(emphasis supplied)
24.
The term “public policy” in Section 34(2)(b)(ii) has
been interpreted by this Court as meaning (a) the fundamental policy of Indian
law, or (b) the interest of India, or (c) justice or morality. [Renusagar
Power Co Ltd v. General Electric Co, 1994 Supp (1) SCC 644, para
66.] In ONGC v. Saw Pipes,
[ONGC v. Saw Pipes Ltd, (2003) 5 SCC 705.] this Court further held that an
arbitral award can be set aside as being contrary to public policy if it is
patently illegal. The illegality must go to the root of the matter and must be
so unfair and unreasonable that it shocks the court’s conscience; it cannot be
of a trivial nature. [ibid,
para 31; McDermott International
Inc (supra), para 59.] Such patent illegality includes a
situation where the award is in contravention with substantive law. [ONGC v. Saw Pipes
(supra), para 54; Associate Builders v. DDA,
(2015) 3 SCC 49, para 42.1.]
24.1
Further, an award can be set aside as being opposed to the “fundamental policy
of India” if it is perverse, [ONGC v.
Western Geco Internation
Ltd, (2014) 9 SCC 263, para 39.] i.e., the
finding is not based on evidence, or the arbitral tribunal takes
something irrelevant into account, or ignores vital evidence. [Associate
Builders (supra), para 31.] However,
an award is not perverse if the finding of fact is a possible view that is
based on some reliable evidence. [Kuldeep Singh v. Commr of Police,
(1999) 2 SCC 10, para 10, as cited in Associate
Builders (supra), paras 32,33.]
25.
The High Court, while exercising jurisdiction under Section 37, has set
aside the arbitral award against respondent no. 1 on the grounds of patent
illegality and perversity in the following manner: first, that the arbitral
award is contrary to Bye-law 247A of the BSE Bye-laws, 1957 and the SEBI
Guidelines that mandate express authorisation of the client for adjustment of
accounts, and second, that the finding of joint and several liability is based
on the respondents’ marital relationship and past experience, contrary to their
distinct legal entities and separate accounts, thereby making it perverse.
26.
We will first deal with the issue of perversity of the finding of joint and
several liability. We have already stated the material
relied on by the arbitral tribunal and its reasons to arrive at such finding.
Broadly, the arbitral tribunal considered the oral evidence of Ms. Deepika Chokshi and Mr. Parag Vinod Jhaveri,
both of whom have stated in their affidavits that the respondents agreed
to be jointly and severally liable and that their account balances would be
netted off. These witnesses were also cross-examined but the respondents could
not bring out anything to the contrary. The arbitral tribunal also considered
the fact that respondent no. 1 would visit the appellant’s office and manage
both accounts, as well as the manner of financial dealings vis-à-vis both
accounts. Based on this material on the conduct of the parties as well as the
oral representations made by the respondents to the appellant, the arbitral
tribunal arrived at the finding that there was an oral contract of joint and
several liability. This is a pure finding of fact,
arrived at by the arbitral tribunal, on the basis of oral and documentary
evidence adduced by the parties.
27.
Applying the test for perversity under Section 34 as explained above,
it is clear that the High Court, while exercising jurisdiction
under Section 37, adopted an incorrect approach. The arbitral tribunal’s
findings are definitely based on evidence, as has been rightly held by
the Section 34 court. The High Court, at the stage of
the Section 37 appeal, took an alternative view on this finding of
fact by reappreciating evidence. The arbitral
tribunal’s conclusion was based on oral and documentary evidence regarding
the conduct of the parties, which leads to a reasonable and possible view that
there is joint and several liability. Hence, the High
Court, while exercising jurisdiction under Section 37, has incorrectly
held the award to be perverse. [See P.R.
Shah, Shares & Stock Brokers (supra), para
21; Dyna Technologies Pvt
Ltd v. Crompton Greaves Ltd, (2019) 20 SCC 1, paras
24-25; Anglo American Metallurgical Coal Pty Limited v. MMTC Limited,
(2021) 3 SCC 308, para 48; UHL Power Company
Ltd. v. State of Himachal Pradesh, (2022) 4 SCC 116, para
22.]
28.
Coming to the issue of patent illegality, the High Court held that despite
noting the need for a client’s express authorisation for adjustment of
accounts, the arbitral tribunal approved an illegal transfer of the credit
balance from respondent no. 1’s account to that of respondent no. 2. On going
through the arbitral award, the finding of the arbitral tribunal is based on
“past experience” – meaning the conduct of respondent no. 1 all along acting on
behalf of respondent no. 2, joint and several liability,
and the respondents’ marital relationship.
29.
Bye-law 247A was inserted by way of an amendment to incorporate the SEBI
Guidelines on Regulation of Transactions Between
Clients and Brokers dated 18.11.1993. It reads:
“247A. Notwithstanding anything to the contrary contained in these
Bye-laws, the following shall regulate the transactions between Clients and
Brokers:
“(1) It shall be
compulsory for all Member brokers to keep the money of the clients in a
separate account and their own money in a separate account. No payment for
transactions in which the Member broker is taking a position as a principal will
be allowed to be made from the client’s account. The above principles and the
circumstances under which transfer from client’s account to Member broker’s
account would be allowed are enumerated below.
|
A)
Member Broker to keep Accounts |
Every
member broker shall keep such books of accounts, as will be necessary, to
show and distinguish in connection with his business as a member- (i) Moneys received from or on account of and moneys paid
to or on account of each of his clients and, (ii)
the moneys received and the moneys paid on Member’s
own account. |
|
B)
Obligation to pay money into-“client account” |
Every member broker who holds or receives money on account of a client shall forthwith pay such money to current or deposit account at bank to be kept in the name of the member in the title of which the word “clients” shall appear (hereinafter referred to as “clients account”. Member broker may keep one consolidated clients accounts for all the clients or accounts in the name of each client, as he thinks fit: Provided
that when a Member broker receives a cheque or draft representing in part
money belonging to the client and in part money due to the Member, he shall
pay the whole of such cheque or draft into the clients account and effect
subsequent transfer as laid down in para D(ii). |
|
C)
What moneys to be paid into “clients account |
i) money held or
received on account of clients; ii)
such money belonging to the member as may be necessary for the purpose of
opening or maintaining the account; iii)
money for replacement of any sum which may by mistake or accident have been
drawn from the account in contravention of para D
given below: iv)
a cheque or draft received by the Member
representing in part money belonging to the client and in part money due to
the member. |
|
D)
What moneys to be withdrawn from “clients account” |
No
money shall be drawn from clients account other than i) money properly
required for payment to or on behalf of clients or for or towards payment of
a debt due to the member from clients or money drawn
on client’s authority, or money in respect of which there is a liability of
clients to the
Member, provided that money so drawn shall not in any case exceed the total
of the money so held for the time being for such each client; ii)
such money belonging to the Member as may have been paid into the client
account under para 1C(ii) or 1(C)(iv) given iii)
money which may by mistake or accident have been
paid into such account in contravention of para C above. |
|
E)
Right to lien, set_off etc.,
not affected. |
Nothing
in this para 1 shall deprive a Member broker of any
recourse of right, whether by way of lien, set-off, counter-claim charge or
otherwise against moneys standing to the credit of clients account. |
It shall also be
compulsory for all Member brokers/Sub-brokers to receive or to make all
payments from or to the clients strictly by way of account payee crossed
cheques or demand drafts or direct credit into the bank account through EFT or
any other modes as so permitted by the Reserve Bank of India. Member brokers
shall accept cheques drawn only by clients and issue cheques only in favour of
the clients. However, in exceptional circumstances Member broker may receive
payment in cash, to the extent that there is no violation of the Income Tax
requirement for the time being in force.”
30.
Bye-law 247A provides that a broker shall not withdraw money from a client’s
account other than money required for payment on behalf of the client, for
payment of debt due to the broker from the client, or money in respect of which
there is a liability of the client to the broker. Once the arbitral
tribunal arrived at a finding that respondent no. 1 is jointly and severally
liable for the debit balance in respondent no. 2’s account, which we have
upheld above, Bye-law 247A in fact permits the withdrawal of the credit balance
from respondent no. 1’s account. Therefore, the adjustment of accounts on
05.03.2001 is legal and valid. Although the arbitral tribunal has held that
written authorisation for such adjustment is required, we find nothing in
Bye-law 247A or in the SEBI Guidelines, on which this Bye-law is based, that
mandates the same.
31.
Bye-law 227(a) also supports the adjustment of accounts, although it has not
been considered in detail at the earlier stages. It provides for the broker’s
lien, which remains unaffected as per clause (E) of Bye-law 247A, and reads:
“Whenever and so often
as a constituent is indebted to a member all securities and other assets from
time to time lodged with the members by such constituent or held by the member
for and on behalf of such constituent and any cash lying to the credit of such
constituent with the member shall be subject to the lien of such member for any
general balance of account or margin or other monies that may be due at any
time by such constituent singly or jointly with another or others to such
member in respect of any business done subject to the Rules, Bye-laws and
Regulations of the Exchange and shall be deemed a general security for payment
to such member of all such monies (including interest, commission, brokerage
and other expenses) as may be due by such constituent in such manner.”
(emphasis supplied)
As
per Bye-law 227(a), the appellant had lien over the cash balance lying in the
account of respondent no. 1 on account of his joint liability with respondent
no. 2. Therefore, from this perspective as well, the adjustment of accounts was
in accordance with the BSE Bye-laws and was not against the legal provisions
governing the issue. Therefore, the arbitral award does not suffer from patent
illegality that warrants interference with its findings.
32.
In view of the above reasons, we answer the two issues that we set out in the
beginning in the following manner:
i. Under Bye-law
248(a), the arbitral tribunal could have exercised jurisdiction over respondent
no. 1 on the basis of an oral contract that he would be jointly and severally
liable for the transactions undertaken in respondent no. 2’s account. Such oral
contract would not amount to a “private” transaction that falls outside the
scope of arbitration.
ii. The High Court did
not correctly exercise jurisdiction under Section 37 as it re-appreciated
evidence and examined the merits of the award. Upon examination of the findings
of the arbitral tribunal, it is clear that the award is not liable to be
set aside on the grounds of perversity or patent illegality.
33.
We therefore set aside the impugned order of the High Court in Appeal No.
126/2006 in Arbitration Petition 309/2004 dated 29.04.2021 and allow the
present appeal. As a consequence, the arbitral award dated 26.02.2004 is upheld
in its entirety and respondent no. 1 is jointly and severally liable, along
with respondent no. 2, to pay the appellant the arbitral sum of Rs.
1,18,48,069/- along with 9% interest p.a. from 01.05.2001 till date of
repayment as has been directed by the arbitral tribunal.
34.
Pending applications, if any, stand disposed of.
35.
No order as to costs.
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