Court’s Decision
The Supreme Court of India set aside the judgment of the High Court, which had absolved the husband (Respondent No. 1) of liability in an arbitration dispute concerning stock trading losses incurred by his wife (Respondent No. 2). The Court ruled that the arbitral tribunal had correctly held the husband jointly and severally liable for the trading losses in the wife’s account based on an oral contract.
The Court found that the arbitration clause under Bye-law 248(a) of the Bombay Stock Exchange (BSE) Bye-laws, 1957 applied in this case, allowing arbitration between a stockbroker and a non-member (client) for disputes arising out of trading transactions. The Supreme Court ruled that:
- An oral contract undertaking joint and several liability falls within the scope of arbitration.
- The High Court wrongly reappreciated evidence under Section 37 of the Arbitration and Conciliation Act, 1996, leading to the improper setting aside of the arbitral award against the husband.
By reversing the High Court’s decision, the Supreme Court restored the arbitral award in full, upholding the husband’s liability for the outstanding stock trading losses in the wife’s account.
Facts
- Background:
- The appellant (a stockbroker and a registered member of the BSE) had opened separate trading accounts for Respondents 1 and 2 (husband and wife) in 1999.
- The broker claimed that Respondent No. 1 agreed that both accounts would be jointly operated and that both spouses would be jointly and severally liable for any losses.
- Financial Transactions:
- By January 2001:
- Respondent No. 1 (husband) had a credit balance of ₹7,40,020, which increased to ₹9,40,020 after he deposited an additional ₹2,00,000.
- Respondent No. 2 (wife) had a growing debit balance, which surged to ₹1,18,48,069 due to a stock market crash in April 2001.
- On March 5, 2001, the appellant, purportedly under Respondent No. 1’s oral instruction, transferred his credit balance of ₹9,40,020 to his wife’s account to offset her losses.
- By January 2001:
- Arbitration Proceedings:
- The broker initiated arbitration under Bye-law 248(a) of the BSE Bye-laws, seeking recovery of ₹1,27,36,670 plus 18% interest from both respondents.
- The arbitral tribunal ruled in favor of the broker, holding both the husband and wife jointly and severally liable for the debt.
- High Court Proceedings:
- The respondents challenged the arbitral award under Section 34 of the Arbitration Act, but the Single Judge of the High Court upheld the award.
- However, in a Section 37 appeal, the Division Bench of the High Court set aside the award against Respondent No. 1 (husband), holding that arbitration was not maintainable against him.
Issues
- Jurisdictional Issue:
- Whether the arbitration under Bye-law 248(a) of the BSE Bye-laws was maintainable against Respondent No. 1 (husband) for payment of the debit balance in Respondent No. 2’s (wife’s) account based on his oral guarantee of joint and several liability.
- High Court’s Exercise of Appellate Powers:
- Whether the High Court correctly exercised jurisdiction under Section 37 while setting aside the arbitral award against Respondent No. 1 on the grounds of perversity and patent illegality.
Petitioner’s Arguments (Stock Broker’s Arguments)
- Arbitration Agreement Binding by Conduct:
- The appellant argued that under Section 7(4)(c) of the Arbitration and Conciliation Act, 1996, an arbitration agreement is deemed to exist if an averment raised to this effect is not disputed.
- Here, Respondent No. 1 participated in arbitration, filed a counter-claim, and never objected to jurisdiction in his Section 34 challenge—hence, he implicitly accepted arbitration.
- Joint and Several Liability Exists:
- The appellant contended that:
- Trading accounts in the respondents’ family functioned as a single entity.
- Respondent No. 1 played an active role in managing both accounts.
- Precedents allow for arbitration to be invoked against non-signatories in composite transactions.
- The appellant contended that:
- High Court Exceeded its Powers Under Section 37:
- The High Court erred by reappreciating evidence, which is impermissible under arbitration law.
- Section 37 does not permit a reexamination of the arbitral tribunal’s factual findings unless they suffer from perversity or patent illegality, neither of which existed here.
Respondent’s Arguments (Husband and Wife’s Arguments)
- Misjoinder of Parties:
- The respondents argued that each of them had separate client codes, contracts, and bank accounts.
- They claimed that trading accounts cannot be treated as a single entity.
- Lack of Written Authorization:
- The respondents contended that the transfer of ₹9,40,020 from Respondent No. 1’s account to Respondent No. 2’s account was unauthorized and violated SEBI guidelines.
- Arbitral Tribunal Lacked Jurisdiction:
- The respondents argued that the oral guarantee by Respondent No. 1 was a private agreement and not a trading transaction conducted on the stock exchange.
- Hence, it did not fall under Bye-law 248(a) and could not be arbitrated.
Analysis of the Law
- Bye-law 248(a) of BSE Bye-laws (Arbitration Clause):
- Covers all disputes between a broker and a non-member (client) arising out of or in relation to stock trading transactions.
- Since Respondent No. 1 agreed to joint and several liability orally, his involvement was directly related to stock transactions.
- Bye-law 247A (SEBI Guidelines on Account Adjustments):
- Requires express consent for transferring money between client accounts.
- However, once the arbitral tribunal found joint liability, the adjustment became legally valid.
- Bye-law 227(a) (Broker’s Lien on Client Funds):
- States that a broker has a lien over the cash balance of a client for any outstanding debts.
- Since the tribunal found that Respondent No. 1 was jointly liable, the transfer was legally justified.
Precedent Analysis
- P.R. Shah, Shares & Stock Brokers v. B.H.H. Securities (2012) – Allowed arbitration against non-signatories in composite transactions.
- ONGC v. Discovery Enterprises (2022) – Held that a non-signatory can be bound by arbitration if there is commonality of transactions and mutual intent.
- Cox & Kings v. SAP India (2024) – Affirmed that conduct can establish an arbitration agreement.
Court’s Reasoning
- The arbitral tribunal had jurisdiction because the oral contract was directly related to trading transactions.
- The High Court exceeded its authority under Section 37 by reappreciating evidence, which is not permitted in arbitration appeals.
- The account transfer was legally valid, as Respondent No. 1 had a financial obligation.
Conclusion
- The Supreme Court restored the arbitral award in full.
- Both respondents were held jointly and severally liable to pay ₹1,18,48,069 with 9% interest from 2001.
Implications
- Strengthens arbitration jurisprudence by limiting judicial interference in commercial disputes.
- Clarifies that oral contracts imposing joint liability can be arbitrated.
- Confirms that a non-signatory can be bound by arbitration if transactions are composite.