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TMI Blog2015 (3) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect and accepted. 3. The respondent invoked arbitration under the rules, bye-laws and regulations of the BSE. The respondent filed a statement of claim seeking the amounts awarded together with interest at 18% and an amount of ₹ 2.00 crores as damages. The claim was on the basis of the amount due at the foot of the account maintained by the respondent in respect of the appellant. The parties had entered into purchase, carry forward and sale transactions. On account of the appellant's alleged default, the respondent had also sought to square off certain transactions. The respondent's statement of case contains the following averments. The amounts claimed were in respect of settlement Nos.A-50, A-51 and A-52 towards the appellant's purchases and margin after giving him credit for the amounts deposited by him. The appellant's account was regularized upto statement No.A-49. The prices of the shares dealt in by the appellant crashed resulting in huge pay-in being required by the appellant. The appellant's default resulted in the respondent's default in pay in to the BSE. The appellant's cheques were dishonoured. Proceedings under section 138 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the scrips of ARB Ltd. The appellant had already suffered a loss of ₹ 45.00 crores on account of the illegal transactions by the respondent. The total loss on account thereof could be computed only upon inspection being given. The documents of which inspection was sought were listed in Exhibit 4 to the written statement. The demand for inspection of the documents has been made at almost every stage of the written statement. The respondent's refusal to grant inspection is also averred in the written statement. The appellant, referring to his letter to the BSE, stated that he suspected that the respondent had short sold the shares belonging to him without any order for sale; that the respondent had short sold the shares of ARB Ltd. against the appellant's long opposition contrary to the directives of the SEBI. None of the contracts annexed to the statement of case had been acknowledged by the appellant and therefore, the same were not binding on him. The appellant put the respondent to strict proof of the contracts and requested an opportunity to cross-examine the respondent. Paragraph 14 of the written statement which was heavily relied by the appellant reads as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The sales matched against the purchases by the respondent on behalf of the appellant were alleged to be short sales conducted by the market participants, including the respondent without any preceding purchase position or deliveries. The appellant stated that he had been given to understand that a preliminary investigation by the SEBI and NSE found that the respondent's sister concern had resorted to short sales and fictitious dealings which had driven down the security market, including in the scrips of ARB Ltd. After setting out the mechanism by which the transactions are carried out on the BSE, the appellant contended that the validity of the transactions can be ascertained only if the records of the SEBI, the BSE and the NSE are produced and the information revealing the identity of the brokers is disclosed. The records are available with the SEBI and the exchanges. In paragraph (C)(I)(s) the appellant stated that if it is found that the purchase transactions entered into by the respondent are illegal and/or unlawful and are therefore, liable to be annulled, the same would result in a benefit to the respondent himself as the respondent would then be in a position to cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Re :- (I). The respondent's membership having been suspended by the Bombay Stock Exchange was not entitled to invoke arbitration under the rules of the BSE notwithstanding the transactions in question having been entered into prior to the order of suspension. 9. In respect of the submission, Mr.Dwarkadas relied upon Bye-laws 248(a) and 315(d) and Rules 5, 269 and 270 of the Bombay Stock Exchange, which read as under :- BYE-LAWS ARBITRATION OTHER THAN BETWEEN MEMBERS Reference to Arbitration Bye-law 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, authorized 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, obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 270:- Consequences of Expulsion The expulsion of a member shall have the following consequences namely:- (i) the expelled member shall forfeit to the Exchange his right of membership and all rights and privileges as a member of the Exchange including any right to the use of or any claim upon any interest in any property or funds of the Exchange (or of the Trade Guarantee Fund) but any liability of any such member to the Exchange (to the Clearing House, to the Trade Guarantee Fund) or to any member of the Exchange shall continue and remain unaffected by his expulsion; Lapse of Right of Nomination (ii) the right of nomination shall vest in the Exchange and shall not be exercised by the expelled member; Office Vacated (iii) the expulsion shall create a vacancy in any office or position held by the expelled member; Rights of Creditors Unimpaired (iv) the expulsion shall not affect the rights of the members who are creditors of the expelled member; Fulfillment of Contracts (v) the expelled member shall be bound to fulfill transaction outstanding at the time of his expulsion and he may with the permission of the Governing Board close such outstanding tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not refer to such rights. In our opinion it refers to the rights of a suspended member qua the exchange and not to the rights between the parties to an arbitration agreement. A right to have a dispute decided by arbitration is not a right qua the exchange but qua the parties to the transaction such as between a member and his constituents. 13. A view to the contrary would lead to the most startling consequence whichever way the matter is considered. 14. 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 arbitrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would then have to invoke arbitration. The suit would have to be withdrawn resulting in his losing court fees and incurring expenditure for filing the suit for no fault of his. This would be especially so when the suspension is set aside as being unjustified. We are certain that the framers of the rules, bye-laws and the regulations did not even remotely contemplate putting their members and the members of the public in such difficulties and in such a state of confusion. To accept Mr. Dwarkadas' contention would to ascribe to the BSE, an intention to confront its members and the public with a jigsaw puzzle with no purpose whatever. 18. What we have said here is also the first answer to Mr.Dwarkadas' alternate submission that the suspension of a member operates as a bar at least against the suspended member to invoke arbitration even if it does not operate as a bar against the non-member/client of the suspended member to invoke the arbitration agreement. 19. What we have just said regarding the difficulty in accepting such a view on account of limitation would equally apply to the suspended member as well as to his client - non-member. It is clear to us that the BSE ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... member to elect after such member files his proceedings. 25. The point of vital importance in all this is not whether the difficulties can be solved but whether the BSE ever intended creating them to start with. We are not inclined to ascribe to the BSE an intention to present its members and the trading public with such a meaningless and convoluted process. 26. Mr.Dwarkadas submitted that rule 269(ii) provides that the suspension of a member shall not affect the rights of the members who are creditors of the suspended member. Though the rights of members who are the creditors of the suspended member have been preserved the rights of the non-members have not been preserved. According to him therefore, the rights of the non-members to have the disputes and differences referred to and decided by arbitration under bye-law 248 stand impliedly extinguished upon such non-member's broker being suspended or expelled. Mr.Dwarkadas submitted that the express mention of the right/privilege provided to other members to proceed against the suspended member implied that the suspended member's rights to proceed against the other members and non-members is excluded. 27. We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember is not necessarily a suspended or expelled member. He can also be a member who has surrendered or transferred/assigned his membership. 31. 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. 32. The contention is liable to be rejected on another ground. It is not open to the appellant to raise this contention as it had not been raised either before the arbitral tribunal or before the learned single Judge. It was not open to the appellant to urge this contention even in the petition under section 34, as it has not been raised before the arbitral tribunal. A Division Bench of this Court in O.N.G.C. v. Comex Services SA [2003] 5 Bom.C.R. 145 held that a party is not entitled to challenge an award on a ground that is not taken in the petition for setting aside the award. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the first time in oral submission when no such contention was raised either before the learned Single Judge or even in the memo of appeal. Mr. Advani, learned counsel for the respondent submitted and not without sufficient force that Cl. 27.0 of the contract prohibits consequential damages and not damages resulting directly and naturally from the breach of the contract. He submitted that the concept of consequential damages is different from general or ordinary damages. This is also a complete answer to this ground of challenge. 33. Mr.Dwarkadas however, relied upon the following observations from the judgment of the Supreme Court in Gas Authority of India Ltd. v. Keti Construction (I) Ltd. [2007] 5 SCC 38 :- 25. Where a party has received notice and he does not raise a plea of lack of jurisdiction before the Arbitral Tribunal, he must make out a strong case why he did not do so if he chooses to move a petition for setting aside the award under Section 34(2)(a)(v) of the Act on the ground that the composition of the Arbitral Tribunal was not in accordance with the agreement of the parties. If plea of jurisdiction is not taken before the arbitrator as provided in Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tificate of registration granted by them to the respondent as a stock broker for a period of two years with effect from 27.06.2002. The affidavit therefore, expressly states that it is the SEBI that suspended the respondent's certificate of registration. It does not state that the respondent's membership was suspended by the BSE. Mr.Dwarkadas' reliance upon paragraph 5 of the said affidavit is therefore, unfounded. Further, the affidavit was filed by the SEBI. The question of the respondent admitting the contents thereof does not arise. These facts are sought to be introduced only in the appeal by filing an affidavit dated 11.10.2004. 37. The appellant stated that he had obtained a copy of the letter dated 20.07.2001 addressed by the BSE to the SEBI, which was referred to in the SEBI's said affidavit. The letter indeed states that the membership rights of the respondent were suspended by the BSE and that the exchange de-activated his bolt with effect from 23.03.2001. Ms.Kumbhat, however, stated that whether through inadvertence or otherwise the statement in the letter is incorrect and that there is in fact no such order. As Ms.Kumbhat pointed the suspension of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the Applicant herein is seeking production of are produced before the Arbitral Tribunal and it is found that the purported purchase transactions of the Respondent herein were in fact illegal and/or unlawful and are therefore liable to be annulled and in any event not binding upon the Applicant herein, the same is bound to result in a benefit to the Respondent herein in as much as the Respondent broker would then be in a position to contend that the order passed by the BSE of suspending the Respondent herein from the Exchange is also liable to be revoked, declared illegal, cancelled and/or set aside. [Emphasis supplied] 40. It is clear, therefore, that the appellant knew of the alleged suspension even during the course of the arbitral proceedings. It is, therefore, in the facts of this case, in any event, not permissible for him to raise this contention before us. 41. The contention that the arbitral tribunal had no jurisdiction to decide the disputes is rejected on both the grounds. RE: VI THE AWARD IS BASED ON EXTRANEOUS AND IRRELEVANT MATERIAL AND THE ARBITRATORS FAILED TO APPLY THEIR MINDS INDEPENDENTLY. 42. This to our minds is the principal ground for challengi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Broker to purchase shares of Amaraja Batteries and certain other shares on his behalf which instruction was executed. The Applicant could not have been and it is not borne out from the record that he was aware of a corresponding short sale in the scrip by another broker. In any event, in the absence of any allegations of collusion between the Applicant Broker and the so-called short selling broker we can not see as to how an Application u/s 27 can be maintained. Undoubtedly, the Arbitral Tribunal is bound to afford adequate opportunity to the parties to make their case. However, it cannot permit the use of judicial machinery to go on a fishing expedition so that the possibility of some evidence which would help the Respondent would surface. In our opinion we have afforded enough opportunity to the Respondent to prove his case. This will be borne out by the following paragraphs. As stated in the foregoing paragraphs this Tribunal was not inclined to accept the prayers in the Application u/s 27. As has been set out in the earlier paragraphs the only defence of the Respondent was that these transactions corresponded through alleged short sales. No other worthwhile defence was put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been annulled by any authority as on date and therefore a claim based thereon is entitled to succeed. We have therefore no hesitation in accepting the principle claim of the Applicant which is ₹ 1,58,39,459.87. Coming to the counter-claim of the Respondent that has been made by ignoring the transactions which were debited to the account of the Respondent. The total claim is a sum of ₹ 45 Crores. Apart from the claim of refund of margins of ₹ 27,62,427,27 the Respondent in addition has claimed a sum of ₹ 45 Crores on account of loss and damages which the Respondent has suffered on account of the alleged illegal acts of the Applicant Broker. Neither in the written statement nor in the Counter - claim is there even a whisper as to how this figure of ₹ 45 crores has been arrived at. We have therefore no option but to disregard the same. As regards the margins of ₹ 27, 62, 427.27 these were against the purchase transactions. We have already held that in our considered view these transactions were validly executed therefore no claim in regard thereto shall lie. The counter claim of the Respondent is rejected in toto. Thereafter the arbitral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Securities And Exchange Board of India dated 12th June, 2002. Perusal of that order shows that allegation against the broker was that they aided the Petitioner in manipulating the market. The Chairman of Securities and Exchange Board of India has also referred to the dues payable by the Petitioner to the Broker. In my opinion, therefore, as the position that the shares were purchased by the Petitioner, was not in dispute, it cannot be said that principle of natural justice has been violated, by denying the opportunity to the Petitioner to cross examine the witness. Same is the case in respect of the application under Section 27 of the Act filed by the Petitioner. 2. The primary contention of the Petitioner before the Arbitral Tribunal as noted by the Tribunal in the Award was that as the broker had short-sold the shares, the transaction would be annulled and therefore, he would not be liable to pay loss. That contention has been rejected by the Arbitral Tribunal. 3. Taking overall view of the matter and after having gone through the record. I find that considering the extremely limited jurisdiction of this Court under Section 34 of Arbitration and Conciliation Act, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Tribunal. In the present case, however, the application under section 27 was rejected without a satisfactory consideration thereof. The Arbitral Tribunal merely referred to the appellant's contention and observed that they were not inclined to accept the same. The Arbitral tribunal held that the respondent's main contention in the application under section 27 was that the purchase of shares of ARB Ltd. corresponded to certain short selling allegedly in violation of the orders of SEBI and BSE. The Tribunal noted that the applicant could not have been aware of the corresponding short sales in the scrip by another broker and that in any event in the absence of allegations of collusion between the respondent and the so called short selling broker, the Tribunal could not see as to how an application under section 27 was maintainable. 46. Firstly, the entire defence of the appellant was not based only on the aforesaid ground. The appellant also denied the other transactions namely the carry forward transactions and squaring off transactions. To have denied inspection on the basis of the findings on only one ground is not sustainable. 47. Moreover, one of the grounds on wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is entitled to succeed . 50. This is not a valid approach. Merely because an authority has not set aside the transactions, it does not follow that the same are binding between the parties. The Arbitrators were bound to consider themselves whether the transactions were binding between the parties. They abdicated their duty to do so. There is no finding whatsoever on merits. The other findings are based essentially on the SEBI Report. Ms.Kumbhat was unable to show any part of the award which deals with the merits of the case. 51. In the result, we find that the rejection of the application under section 27 and the findings on merits are unsustainable in view of the fact that they are based essentially, if not, solely on the enquiry report of the SEBI and on the ground that no authority has set aside the transactions. In this view of the matter it is not necessary to go into the various detailed arguments on merits. The merits are for the Arbitral Tribunal to consider. 52. The learned Judge rejected the petition on a fundamentally different basis. He observed that the only contention raised by the appellant was that he did not agree to the sale of the shares by the broker. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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