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TMI Blog2025 (2) TMI 414X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Patent illegality - HELD THAT:- 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "nonmember( 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitration 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. (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, ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reappreciating 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... okers 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, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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