Mandatory margin regulations override broker discretion, and an award ignoring them was set aside for perversity and patent illegality.

An arbitral award may be set aside under section 34 where it ignores a mandatory market regulation governing margin demand and close-out of positions. The Court held that Regulation 3.10 of the NSE F&O Segment imposed a compulsory duty to demand margin and permitted close-out only within the regulatory framework, but the tribunal relied mainly on the broker-client agreement and treated liquidation as discretionary. As no documentary proof supported the alleged additional margin demand or exchange instructions, the findings upholding the close-out and rejecting the counterclaim were perverse and unsupported by evidence. The awards were therefore set aside.

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Issues: Whether the arbitral awards were liable to be set aside under section 34 for ignoring the mandatory margin requirements under the NSE F&O regulations and for being based on no evidence and perversity.

Analysis: The Court held that Regulation 3.10 of the NSE F&O Segment cast a mandatory duty on the trading member to demand margin from the constituent and permitted close-out only in accordance with the regulatory framework. The arbitral tribunal relied principally on the broker-client agreement and treated the broker's power to liquidate positions as discretionary, but did not consider the overriding effect of the regulation. The Court found that the respondent failed to prove any demand for margin beyond the amount admittedly paid, and no documentary proof of the alleged additional demand or exchange instructions was produced. The findings sustaining the broker's close-out and rejecting the counterclaim were therefore held to be perverse and unsupported by evidence.

Conclusion: The awards were held liable to be set aside and the petitions were allowed.

Ratio Decidendi: An arbitral award that ignores a mandatory market regulation governing margin demand and close-out of positions, and that is sustained without proof of the alleged demand or default, suffers from patent illegality and perversity and is amenable to interference under section 34.

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