2015 (3) TMI 112 - HC - Indian Laws

Arbitration & Conciliation Act, 1996 - Suspension of membership - Held that - The suggestion that the arbitration clauses ceases to operate altogether the moment a member is suspended is unsustainable. It would defeat the rights of the suspended or expelled member's constituent's/client's right to have the disputes between them referred to and decided by arbitration. The right of the non-member (i.e. the suspended member's client) cannot be defeated for the default or wrong doing of the suspended or expelled member. The consequences of accepting Mr.Dwarkadas' submission would be to prevent the non-member such as the suspended member's client being denied the right of having the disputes between himself and the suspended or expelled member referred to and decided by arbitration for no fault of his and indeed only on account of the fault of such member. This would, in many cases, put a premium on the default of the suspended member. In our view, therefore, the disputes and differences can be referred to and decided by arbitration as provided in the rules, bye-laws and the regulations of the exchange even where a member has been suspended or expelled or where the persons membership has been terminated. The provisions in the rules, bye-laws and regulations of the BSE relating to arbitration remain unaffected upon a member being suspended or expelled or his membership being terminated. We are however, unable to agree that mere refusal to permit the appellant to cross examine the respondent would not be a ground for setting aside the award. Nor does it establish that there has been a breach of the rules of natural justice. The respondent was not bound to examine himself. The appellant was not entitled as a matter of right to cross examine him. It was always open for the appellant to contend that his evidence, if any, on affidavit ought not to be taken into consideration or that an adverse inference ought to be drawn on account of respondent not having examined himself or made himself available for cross examination. In these circumstances, the appeal is allowed. The impugned order and judgment is set aside. The Award is set aside. It is however declared and clarified that the arbitration agreement remains unaffected even assuming that the respondents membership was suspended or cancelled and even if the respondent was expelled by the BSE. - Appeal allowed and award is set aside.

Issues Involved:
1. Jurisdiction of the arbitral tribunal.
2. Validity of transactions without contract notes.
3. Denial of natural justice due to lack of cross-examination and rejection of Section 27 application.
4. Lack of prior notice before closing out positions.
5. Award based on extraneous and irrelevant material.

Detailed Analysis:

1. Jurisdiction of the Arbitral Tribunal:
The appellant argued that the respondent, whose membership was suspended by the Bombay Stock Exchange (BSE), was not entitled to invoke arbitration under BSE rules. The court rejected this argument on two grounds: it was raised for the first time on appeal, and on principle, it was unfounded. The court noted that the suspension of a member affects rights qua the exchange, not the arbitration agreement between parties. The arbitration agreement remains valid even if a member is suspended or expelled. The court emphasized that accepting the appellant's argument would unfairly penalize innocent clients and create significant procedural complications, especially concerning limitation periods.

2. Validity of Transactions Without Contract Notes:
The appellant contended that the transactions were null and void as the respondent failed to provide contract notes. The court noted that the appellant had consistently challenged the validity of transactions from March 12 onwards and sought inspection of relevant documents, including contract notes. The arbitral tribunal's rejection of the Section 27 application, which sought these documents, was not satisfactorily reasoned. The tribunal relied heavily on a SEBI enquiry report, which was preliminary and not conclusive. The court held that the tribunal should have independently verified the transactions' validity rather than relying on the SEBI report.

3. Denial of Natural Justice:
The appellant argued that the award violated natural justice principles as he was denied the opportunity to cross-examine the respondent and his Section 27 application was rejected. The court found that the arbitral tribunal did not provide adequate reasoning for rejecting the application for cross-examination and inspection of documents. The tribunal's reliance on the SEBI enquiry report, rather than independent verification of the transactions, constituted a breach of natural justice. The court emphasized that the tribunal must base its findings on its own assessment rather than external reports.

4. Lack of Prior Notice Before Closing Out Positions:
The appellant claimed that the respondent did not provide prior notice before closing out positions, rendering the transactions void. The court did not specifically address this issue in detail, as the primary focus was on the tribunal's reliance on the SEBI report and the rejection of the Section 27 application. However, the court's overall findings suggest that the tribunal's failure to independently verify the transactions and consider the appellant's defenses warranted setting aside the award.

5. Award Based on Extraneous and Irrelevant Material:
The court found that the award was based primarily on the SEBI enquiry report, which was preliminary and not conclusive. The tribunal failed to independently assess the transactions' validity and relied on the absence of annulment by any authority. This approach was deemed invalid, as the tribunal should have made its own findings. The court concluded that the award was unsustainable due to its reliance on extraneous material and lack of independent verification.

Conclusion:
The court allowed the appeal, setting aside the impugned order and the arbitral award. It clarified that the arbitration agreement remains unaffected despite the respondent's suspension or expulsion from BSE. The court emphasized the need for the arbitral tribunal to independently verify the transactions and provide adequate reasoning for its decisions, ensuring adherence to principles of natural justice.

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