2021 (4) TMI 1392 - HC - Indian Laws

Jurisdiction of the Arbitral Tribunal to entertain claims against the appellant - Section 37 of the Arbitration and Conciliation Act, 1996 - Impleadment of the appellant as a party respondent in the arbitral proceedings - adjudication of the disputes arising only between the parties - award against a third party in respect of a private transaction not falling under bye-law 248 (a) would amount to lack of inherent jurisdiction or not - effect of the respondent not raising an issue of jurisdiction specifically under Section 16 of the Arbitration Act before the Arbitral Tribunal in case of the Arbitral Tribunal having inherent lack of jurisdiction. HELD THAT - There was no express or oral understanding given by the appellant that any amount lying to the credit of his account shall be adjusted against the account of the respondent no. 2. The question of adjustment of the credit balance lying in the account of the appellant by the respondent no. 1 with the debit balance of respondent no. 2 did not arise. Though the Arbitral Tribunal took cognizance of this Byelaws requiring express authority of a client for adjustment of the credit and debit balance as the case may be, the Arbitral Tribunal approved the illegal transfer of the credit balance of the appellant in the account of the respondent no. 2 without any express authority or otherwise in violation of Bye-law 247A and also the SEBI guidelines - The Arbitral Award ought to have been set aside by the learned Single Judge on the ground of such perversity or patent illegality. The Arbitral Tribunal thus committed perversity and patent illegality by holding the appellant and respondent no. 2 as a family unit for the purpose of joint and several liabilities. Despite the fact that there were separate client code, separate contract notes and bills and separate bank accounts, the Arbitral Tribunal has also rendered a perverse finding that the broker member may not have seen other family members except their photographs on compulsory Broker Client Agreement Form. The entire adjustment made by the respondent no. 1 by transferring the credit balance lying in the account of the appellant with the debit balance lying in the account of the respondent no. 2 with the respondent no. 1 was without any express authority which was mandatory before carrying out any such adjustment under Clause IX of the SEBI Guidelines - There was a separate loan agreement between the appellant and the respondent No. 1. In view of Bye-law 248(a), neither there could be any tripartite agreement between the parties nor the respondent No. 1 produced any such Tripartite Agreement. Admittedly, the respondent no. 1 had not invoked the arbitration agreement between the appellant and the respondent no. 1 and had illegally clubbed the two separate causes of action in the same arbitration by invoking arbitration agreement only between the respondent no. 1 and the respondent no. 2. In this case, the appellant who was impleaded as a party respondent had raised an objection that there was misjoinder of parties and no reliefs could be granted against the appellant by the arbitral tribunal in those proceedings - even if the appellant had entered into any such oral understanding with the respondent no. 1 to clear the dues of the respondent no. 2, respondent no. 1, such alleged understanding given by the appellant would not fall within the purview of Bye-law 248(a). No third party even by consent of the party could be impleaded as a party respondent to the arbitral proceedings under the said Bye-law 248(a) which was admittedly a statutory arbitration. In this case, admittedly the respondent no. 1 did not invoke the arbitration agreement between respondent no. 1 and the appellant. The cause of action between the respondent nos. 1 and 2 was arising out of the transactions allegedly having taken place between the respondent nos. 1 and 2 on the floor of the stock exchange, Mumbai, whereas the cause of action between the appellant and the respondent no. 1 was totally different and was a private transaction. The arbitral tribunal could not have allowed the respondent no. 1 to mix up the two separate causes of action in the statement of claim filed by the respondent no. 1, when one cause of action out of two was outside the purview of arbitration clause. There is no merit in the submission of the learned senior counsel for the respondent no. 1 that various findings of the facts rendered by the Arbitral Tribunal in this case were rightly not interfered with by the learned Single Judge. In our view, the learned Single Judge ought to have set aside the award on the ground of inherent lack of jurisdiction. Be that as it may, the findings rendered by the Arbitral Tribunal being totally perverse and contrary to bye-laws, rules and regulations of Stock Exchange, Mumbai, award was liable to be set aside on that ground itself. The respondent no. 1 had not made any claim against the appellant as the constituent arising out of two separate accounts, but had filed claim against two separate constituents in the same statement of claim based on two separate causes of action - The alleged cause of action between the respondent No. 1 and the appellant being a private transaction not covered by the said Bye-law 248(a) could not be adjudicated under the said Bye-law. Merely because the appellant was also impleaded as a constituent in the statement of claim along with the respondent no. 1, such pleadings would not confer the jurisdiction upon the arbitral tribunal. A perusal of the record clearly indicates that the appellant was not sued on the basis of transactions on the floor of the exchange between the appellant and the respondent no. 1 but on the basis of an oral understanding/oral guarantee on behalf of the appellant given to the respondent no. 1 for clearing the dues of the respondent no. 2, if any, payable to the respondent no. 1. Appellant could not be impleaded based on an oral arbitration agreement in alleged oral understanding between the appellant and the respondent no. 1. Mr. Jagtiani, learned senior counsel for the respondent no. 1 fairly accepted that the arguments advanced by him in this appeal are contrary to the findings recorded and the observations made by the learned Single Judge. Since the entire award was without jurisdiction and shows perversity, learned Single Judge ought to have interfered with the impugned award rendered by the Arbitral Tribunal. The impugned award dated 26th February, 2004 passed by the Arbitral Tribunal is set aside qua the appellant. Counter claim filed by the Appellant is without jurisdiction - the impugned order dated 23rd August 2005 passed by the learned Single Judge is set aside. Petition allowed.

Summary

Issues Involved:

1. Jurisdiction of the Arbitral Tribunal to entertain claims against the appellant.
2. Impleadment of the appellant as a party respondent in the arbitral proceedings.
3. Scope of Bye-law 248(a) of the Stock Exchange, Mumbai.
4. Misjoinder of parties and causes of action.
5. Effect of not raising jurisdictional objections under Section 16 of the Arbitration Act.

Detailed Analysis:

1. Jurisdiction of the Arbitral Tribunal:

The core issue was whether the Arbitral Tribunal had the jurisdiction to entertain claims made by the respondent no. 1 against the appellant. The Tribunal's jurisdiction was challenged on the basis that the arbitration agreement invoked was between respondent no. 1 and respondent no. 2, not the appellant. The appellant argued that there was no arbitration agreement between them and respondent no. 1, thus the Tribunal lacked jurisdiction. The Tribunal's decision to hold the appellant liable was based on an alleged oral understanding, which was not documented or proven as per the requirements of Section 7 of the Arbitration Act, which mandates a written arbitration agreement.

2. Impleadment of the Appellant:

The appellant was impleaded as a party respondent in the arbitral proceedings, although the arbitration agreement invoked was between respondent no. 1 and respondent no. 2. The appellant contended that this was a misjoinder of parties, as there were separate client agreements for the appellant and respondent no. 2. The Tribunal's decision to hold the appellant jointly and severally liable with respondent no. 2 was based on an alleged oral agreement, which was not substantiated by evidence. The court found this decision to be perverse and contrary to the Rules, Bye-laws, and Regulations of the Stock Exchange and SEBI guidelines.

3. Scope of Bye-law 248(a):

Bye-law 248(a) of the Stock Exchange, Mumbai, was a focal point in determining the scope of arbitration. The court held that the arbitration clause under Bye-law 248(a) could only be invoked for disputes arising out of dealings, transactions, and contracts made subject to the Rules, Bye-laws, and Regulations of the Exchange. The alleged oral understanding between the appellant and respondent no. 1 did not fall within this scope, as it was a private transaction, not subject to the Bye-laws. The court emphasized that the arbitration agreement invoked did not cover the alleged oral agreement, thus rendering the award against the appellant without jurisdiction.

4. Misjoinder of Parties and Causes of Action:

The appellant argued that the claim filed by respondent no. 1 was bad for misjoinder of parties and causes of action, as there were separate agreements and transactions for the appellant and respondent no. 2. The court agreed, noting that the arbitration proceedings improperly combined two separate causes of action: one involving transactions on the stock exchange between respondent no. 1 and respondent no. 2, and another based on an alleged oral understanding with the appellant. The Tribunal's decision to combine these was found to be without jurisdiction.

5. Effect of Not Raising Jurisdictional Objections:

The appellant did not raise a jurisdictional objection under Section 16 of the Arbitration Act during the arbitral proceedings, which respondent no. 1 argued constituted a waiver of the right to challenge jurisdiction. However, the court held that in cases of inherent lack of jurisdiction, such objections could be raised even at the stage of challenging the award under Section 34 of the Arbitration Act. The court cited precedents establishing that a party cannot confer jurisdiction on an arbitral tribunal by consent if the tribunal inherently lacks it.

Conclusion:

The court set aside the arbitral award against the appellant, finding that the Tribunal lacked jurisdiction to adjudicate the claims against the appellant based on an alleged oral understanding not covered by the arbitration agreement invoked. The court also set aside the order of the learned Single Judge, emphasizing the Tribunal's lack of inherent jurisdiction and the misjoinder of parties and causes of action. The appeal was allowed, and the arbitration petition was granted in favor of the appellant.