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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 ..... 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" Byelaws, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Kes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the scope of Bye-law 248(a) ought to have been raised in accordance with Section 16 of the Act 20 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 arbit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 reappreciating evidence or interfering with a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) given 34 iii) money which may by mistake or accident have been paid into such account in contravention of para C above. E) Right to lien, setoff 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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