1. Court’s decision
The Bombay High Court dismissed a Section 34 challenge filed by a brokerage house against an appellate arbitral award directing it to release ₹1,75,01,672.92 plus 12% interest to its client. The Court upheld the Appellate Arbitral Tribunal’s finding that profits earned by the trader—using a margin erroneously reflected due to the broker’s system glitch—belonged to the trader and not the broker. The Court rejected the broker’s claims of unjust enrichment, applicability of Contract Act Sections 71 and 163, and risk-management sanctity arguments, holding that the trader used his own skill and bore market risk. The award was found neither perverse nor illegal. Five-week limited stay on disbursement was granted.
2. Facts
The petitioner brokerage allowed its client to trade online in F&O instruments. On 26 July 2022, due to a technical glitch, the client received margin exposure far above his actual available margin of ₹3,175.69. Between 11:46 a.m. and 1:30 p.m., the client executed trades worth ₹94.81 crore—requiring nearly ₹40 crore margin—initially incurring losses of ₹54 lakh before ultimately earning a gross profit of ₹1.83 crore and net profit of ₹1.75 crore. The broker issued contract notes, deducted statutory charges, and credited the profit to the client’s ledger, but soon reversed the entire profit, claiming it belonged to the broker because trades occurred on erroneous margin. The client initiated NSE dispute resolution, eventually succeeding before the Appellate Arbitral Tribunal.
3. Issues
The High Court examined:
• Whether profits earned through trading enabled by a margin glitch belonged to the trader or the broker.
• Whether Sections 71 (finder of goods) and 163 (profits from goods bailed) applied to trading margin.
• Whether the arbitral award was patently illegal or contrary to public policy.
• Whether retaining profits by the brokerage was justified on grounds of unjust enrichment or risk-management sanctity.
• Whether negotiation attempts amounted to admission of liability.
4. Petitioner’s arguments
The brokerage contended that the trader misused a margin never intended for him, violating mandatory NSE rules requiring upfront margin collection. Therefore, the profit constituted a benefit obtained from the broker’s property and had to be returned. Relying on Sections 71 and 163 of the Contract Act, the broker argued that the erroneous margin was akin to “goods bailed,” making all resulting profits the broker’s property. The petitioner argued that allowing retention of profit would undermine market risk systems, encourage illegal trades, and destabilize the integrity of derivatives markets. It also argued that the arbitral tribunal improperly relied on settlement discussions, ignoring Sections 81 (Arbitration Act) and 23 (Evidence Act).
5. Respondent’s arguments
The trader argued that SEBI’s risk-management norms place responsibility on brokers to block trades when margin is insufficient, and that the system repeatedly allowed trading without warnings. The trader pointed out that the broker issued contract notes, deducted statutory charges, and even charged interest for excess exposure—confirming that trades were treated as valid. The trader argued that profits arose from his own skill and risk, not merely from margin availability. He submitted that money is excluded from the statutory definition of “goods,” making Sections 71 and 163 inapplicable. The trader also noted that the broker voluntarily offered a ₹50 lakh settlement before any formal proceedings, demonstrating awareness of wrongful reversal.
6. Analysis of the law
The Court held that margin is essentially monetary security. As “money” is excluded from the Sale of Goods Act definition of “goods,” Sections 71 and 163 cannot apply. The Court found that margin reflection merely opened an opportunity to trade—it did not guarantee profit—and that the trader bore risk and responsibility for outcomes. The broker’s attempt to analogize margin to bailed goods was rejected as legally untenable. The Court emphasized that a Section 34 challenge allows only limited interference, and an award cannot be set aside merely because another view is possible. The Appellate Arbitral Tribunal’s reasoning was deemed coherent, evidence-based, and compliant with Indian law.
7. Precedent analysis
The broker cited Machhindranath Tarade to argue that a person cannot be allowed to profit from his own wrong. The Court held this principle cut against the broker, whose own error created the situation. The trader relied on Punjab State Civil Supplies Corporation v. Sanman Rice Mills to stress judicial restraint under Section 34, and the Court agreed that arbitral awards should not be interfered with unless perverse or contrary to public policy. The Court held that the tribunal’s plausible findings—especially regarding non-applicability of unjust enrichment and Contract Act provisions—attracted no grounds for disturbance.
8. Court’s reasoning
The Court found that:
• The trader used skill and took substantial risk, initially suffering large losses before earning profit; margin alone did not generate profit.
• If the trades had resulted in losses, the broker indisputably would have recovered them—hence profit cannot be treated differently.
• The broker charged levies, interest, and issued contract notes, indicating acceptance of trades as valid.
• Settlement efforts pre-dated formal proceedings, making Section 81 inapplicable.
• The broker sought a windfall by retaining profit arising from its own mistake, amounting to unjust enrichment.
• The appellate tribunal’s view was “not only plausible but correct.”
Accordingly, no ground under Section 34 was made out.
9. Conclusion
The High Court upheld the Appellate Arbitral Tribunal’s direction allowing the trader to retain profit earned through trades executed using erroneous margin. The Court dismissed the Section 34 petition, directed release of the deposited amount with interest to the trader, and disposed of all pending applications. A limited five-week stay was granted only on the actual withdrawal of funds, not on processing. The judgment underscores that mistakes of brokers cannot justify appropriation of trader profits.
10. Implications
This decision has significant implications for India’s securities and arbitration ecosystem:
• Brokers remain fully accountable for system glitches, including erroneous margin exposure.
• Profit retention cannot be justified through unjust enrichment arguments where traders bear market risk.
• Contract Act provisions involving “goods” cannot be stretched to cover monetary margin.
• Section 34 challenges face a high threshold—commercial awards will be upheld if based on plausible reasoning.
• Risk-management failures by brokers may impose financial consequences, reinforcing compliance expectations under SEBI’s framework.
The ruling strengthens trader protection while maintaining judicial respect for arbitral autonomy.
CASE LAW REFERENCES
1. Machhindranath Tarade v. Ramchandra Dhamne (Supreme Court)
Cited by the broker to argue against benefiting from one’s own wrong. Court held the principle applies against the broker, whose system error caused the situation.
2. Punjab State Civil Supplies Corp. v. Sanman Rice Mills (SC, 2024)
Relied upon to emphasise limited judicial interference with arbitral awards under Section 34. Applied to uphold the award.
FAQ SECTION
1. Can a trader legally retain profits earned using margin wrongly shown due to a broker’s glitch?
Yes. The Court held that the trader used his own skill and bore market risk. Since money is not “goods,” Contract Act Sections 71 and 163 do not apply, and profits cannot be seized by the broker.
2. Did the Bombay High Court find the arbitral award perverse?
No. The Court held the award was a plausible and correct view, not contrary to public policy or Indian law, and therefore immune from interference under Section 34.
3. Does SEBI’s risk-management framework protect brokers from liability for system errors?
No. System failures by brokers cannot be used to appropriate trader profits; brokers must enforce risk protocols proactively.