2025 (2) TMI 414 - SC - Indian Laws

Arbitral award upheld holding husband and wife jointly liable for wife's trading account debit balance under Section 37

AC CHOKSHI SHARE BROKER PRIVATE LIMITED Versus JATIN PRATAP DESAI & ANR.

SC allowed appeal and upheld arbitral award holding husband and wife jointly and severally liable for debit balance in wife's trading account with stock ... Joint and several liability to repay debit balance in the bank account - Whether respondent no. 1, who is the husband of respondent no. 2, could have been made a party to the arbitration that was invoked by the appellant, who is a registered stock broker, and held to be jointly and severally liable for the debit balance that had accrued in the wife’s (respondent no. 2’s) account with the appellant?. Perversity of the finding of joint and several liability - HELD THAT:- Applying the test for perversity under Section 34, it is clear that the High Court, while exercising jurisdiction under Section 37, adopted an incorrect approach. The arbitral tribunal’s findings are definitely based on evidence, as has been rightly held by the Section 34 court. The High Court, at the stage of the Section 37 appeal, took an alternative view on this finding of fact by reappreciating evidence. The arbitral tribunal’s conclusion 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 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. Conclusion - The arbitral tribunal had jurisdiction over respondent no. 1, and the High Court erred in setting aside the arbitral award. The arbitral award was upheld in its entirety, holding both respondents jointly and severally liable for the debit balance in respondent no. 2's account. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether arbitration under Bye-law 248(a) of the Bombay Stock Exchange Bye-laws can extend to a non-signatory (the husband) on the basis of an alleged oral agreement of joint and several liability for debts arising from transactions executed in the wife's trading account. 2. Whether the appellate court exercising jurisdiction under Section 37 misapplied the limited scope of judicial review by setting aside the arbitral award as perverse or patently illegal for (a) holding joint and several liability on the basis of oral and conduct evidence, and (b) validating adjustment of a credit balance from the husband's client account to offset the wife's debit balance contrary to Bye-laws/SEBI guidelines. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction: Scope of Bye-law 248(a) and impleading a non-signatory on oral joint and several liability Legal framework: Bye-law 248(a) provides for arbitration of claims between a member (broker) and a non-member (client) arising out of or incidental to dealings, transactions and contracts subject to exchange rules. Section 16(1)-(2) of the Arbitration and Conciliation Act requires jurisdictional objections to be raised by the time of the statement of defence, subject to consequences of waiver under Section 4. Precedent treatment: The Court's prior decisions treating Bye-law 248(a) as statutory in nature (as distinct from a pure contractual arbitration clause) and authorities permitting impleading of non-signatories where mutual intention, conduct, commonality of subject-matter and composite transaction exist (as explained in ONGC v. Discovery/confirmed in later authority) were relied upon. Interpretation and reasoning: The Court accepted that, on the factual premise of an oral understanding that both spouses would operate and bear liability for trading accounts, the husband becomes effectively a party to transactions conducted in the wife's account. Applying the non-signatory test factors - mutual intention evidenced by conduct, relationship between signatory and non-signatory, common subject-matter and composite nature of transactions - the Court held that such an oral contract is not a 'private' transaction outside Bye-law 248(a). The Court criticized a hyper-technical reading that focused solely on the client code referenced in documents, emphasizing practical commercial realities and parties' conduct. Because the dispute directly related to liabilities arising from transactions conducted on the exchange floor, the oral undertaking as to who bears that liability fell within the Bye-law's broad wording covering matters incidental to such transactions. Ratio vs. Obiter: Ratio - Bye-law 248(a) can encompass liabilities arising from oral agreements between client parties where the evidence shows mutual intention and composite transaction such that a non-signatory may be subject to statutory arbitration under Bye-law 248(a). Obiter - observations on practical contracting norms and citation of other authorities for interpretative methods (to the extent not necessary for the specific holding). Conclusion: The arbitral tribunal could validly exercise jurisdiction over the husband under Bye-law 248(a) based on the oral agreement of joint and several liability; the husband's objection to jurisdiction raised for the first time on appeal constituted waiver under Section 16/Section 4 principles, absent a demonstrated inherent lack of subject-matter jurisdiction. Issue 2 - Merits review under Section 37: Whether the award was perverse or patently illegal (joint and several liability and account adjustment) Legal framework: Section 34(2)(b) (pre-2015 amendment) permits setting aside awards where subject-matter is not arbitrable or the award conflicts with public policy (including patent illegality). Jurisprudence distinguishes perverse findings (not based on evidence or ignoring vital material) from reasonable factual conclusions; appellate interference under Section 37 is constrained by the Section 34 grounds and does not allow reappreciation of evidence. Precedent treatment: Authorities requiring courts to uphold arbitral fact-findings that are possible views supported by evidence and to limit intervention to cases of perversity or patent illegality were applied. Prior stock-exchange arbitral jurisprudence (including upholding composite references and non-signatory liability in similar contexts) was relied upon. Interpretation and reasoning - joint and several liability: The arbitral tribunal relied on oral testimony (affidavits and cross-examination), consistent conduct (management of accounts by the husband, cheque patterns, payment behaviour), and documentary indicia indicating composite financial dealings. The Court found that these form reliable evidence supporting a possible view of an oral contract of joint and several liability. The High Court's contrary conclusion amounted to impermissible reappreciation of evidence in a Section 37 appeal; thus the finding was not perverse. Interpretation and reasoning - account adjustment and Bye-laws/SEBI: Bye-law 247A (client accounts and permitted withdrawals) and Bye-law 227(a) (broker's lien) were examined. Once joint and several liability was established, withdrawal/adjustment of a client credit balance to satisfy a debt due by the client (or where joint liability exists) fell within permitted withdrawals and the broker's lien. The arbitral tribunal's reliance on 'past experience' and conduct did not render the adjustment illegal; nothing in Bye-law 247A or the SEBI guidelines was found to mandatorily require written authorisation for such adjustment where a liability permitted withdrawal. Therefore, the award did not exhibit patent illegality. Ratio vs. Obiter: Ratio - An arbitral finding of joint and several liability based on oral agreement and consistent conduct will not be set aside as perverse where it represents a possible view grounded in evidence; where such liability exists, withdrawals pursuant to Bye-law 247A and broker's lien under Bye-law 227(a) are permissible and do not necessarily require express written authorisation. Obiter - broader remarks on interpreting exchange bye-laws and the impracticality of formalism in client-broker dealings. Conclusion: The High Court erred in setting aside the award under Section 37 by reappreciating evidence and substituting its view; the arbitral award is neither perverse nor patently illegal on the grounds advanced and must be upheld in full. Cross-references and final determination 1. The jurisdictional and merits issues are interlinked: jurisdiction under Bye-law 248(a) can validly include disputes arising from oral undertakings that render a non-signatory effectively a party to exchange-related transactions; this conclusion affects the analysis of permitted withdrawals and broker's lien under Bye-law 247A and 227(a). 2. The Court affirmed that failure to raise a clear jurisdictional objection in accordance with Section 16 and implicit waiver principles under Section 4 precludes belated jurisdictional challenges on appeal, absent a true inherent lack of subject-matter jurisdiction.