AC Chokshi Share Broker Private Limited v. Jatin Pratap Desai & Anr.

From the Judgment and Order dated 29.04.2021 of the High Court of Judicature at Bombay in AN No. 126 of 2006 Appearances for Parties Dhruv Mehta, Sr. Adv., Dharav Shah, Dhawal Desai, Ms. Nishi Sangtani, Pranaya Goyal, Advs. for the Appellant. Mayilsamy K, G Ananda Selvam, Dr. Gayathiri A. S, Arun Pandiyan S, V. Pavel, Nihangam R Maurya, P. Soma Sundaram, Kabilan Manoharan, K Vijay Anand, Advs. for the Respondents. Judgment / Order of the Supreme Court Judgment Pamidighantam Sri Narasimha, J.

Leave granted.

The issue arising in the present appeal is 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. The arbitral tribunal found that both respondents were jointly and severally liable for repaying the debit balance in respondent no. 2’s account, and the respondents’ applications under Section 34 of the Arbitration and Conciliation Act, 19961 to set aside the arbitral award were dismissed by the learned 1 Hereinafter “the Act”. AC Chokshi Share Broker Private Limited v. Jatin Pratap Desai & Anr. 1548 [2025] 2 S.C.R. single judge of the High Court. However, the division bench of the High Court allowed the Section 37 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 Exchange2 Bye-laws, 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 appeal, and therefore, we have upheld the arbitral award in its entirety.

Facts: The relevant facts are as follows. The appellant is a stock broker and a registered member of the BSE. In 1999, the respondent nos. 1 and 2, who are husband and wife respectively, approached the appellant for opening trading accounts and to this end, they executed individual Client Registration Applications on 01.08.1999. As per the appellant, respondent no. 1 represented that the accounts would be jointly operated by both of them and they would be jointly and severally liable for any losses.

3.1 At the end of the settlement period on 31.01.2001, there was an undisputed credit balance of Rs. 7,40,020/- in the account of respondent no. 1, that was payable by the appellant. On 16.02.2001, respondent no. 1 further paid a sum of Rs. 2 lakhs to the appellant, that increased his credit balance to Rs. 9,40,020/-.On the other hand, there was a debit balance of Rs. 7,77,058/- in respondent no. 2’s account on 20.01.2001, 2 Hereinafter “BSE”. Supreme Court Reports [2025] 2 S.C.R. 1549 which further increased to Rs. 11,40,413/- by 17.02.2001. The appellant’s case is that on oral instruction of respondent no. 1, it transferred the credit balance of Rs. 9,40,020/- from the husband’s account to the wife’s account on 05.03.2001 to offset the losses.

3.2 However, due to a stock market crash in 2001, the debit balance in respondent no. 2’s account bludgeoned to Rs. 1,18,48,069/- as on 12.04.2001, which is the recoverable amount in arbitration.

3.3 The appellant initiated arbitration under BSE Bye-law 248(a) and impleaded both the respondents, seeking an amount of Rs. 1,27,36,670/- with 18% interest from both of them to recover the losses in respondent no. 2’s account. The respondents filed separate written statements. In respondent no. 1’s written statement-cum-counter-claim, he alleged that the appellant’s arbitration claim is not maintainable for misjoinder of parties and causes of action as each client is a separate legal entity. Further alleging that the appellant transferred the credit balance from his account to his wife’s account without express authority or written consent as is required by SEBI guidelines, he claimed Rs. 10,66,922/- with 18% interest from the appellant to recover the amount so adjusted. Respondent no. 2, in her separate written statement alleged that the appellant undertook unauthorised transactions from her account and also took the position that respondent no. 1 is not jointly and severally liable.

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 AC Chokshi Share Broker Private Limited v. Jatin Pratap Desai & Anr. 1550 [2025] 2 S.C.R. 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. 2 had given instructions sometimes when respondent no. 1 was out of town or under his instructions. The arbitral tribunal further relied on the affidavit of Ms. Deepika Chokshi, who is a director of the appellant company, and the affidavit of Mr. Parag Jhaveri, who is a close associate of respondent no. 1 and whose father introduced the respondents to the appellant.

4.4 The arbitral tribunal also reasoned that despite having a credit balance of Rs. 7 lakhs in his account, respondent no. 1 paid the appellant a further sum of Rs. 2 lakhs but never demanded the same except at the time of filing the counter-claim.

4.5 Looking to the financial dealings of the respondents with the appellant, it held that both respondents have accounts in all the banks from which cheques were issued, although each of them may have a separate account. On 15.09.1999, respondent no. 1 issued a cheque of Rs. 1,20,000/- from Syndicate Bank towards the debit balance in his account. On 06.10.1999, a cheque of the next serial number was issued from the same bank account number to be paid into the account of respondent no. 2. Similarly, on 28.09.1999, a single cheque of Rs. 10,86,188/- was issued from Syndicate Bank with an instruction to the appellant to credit Rs. 2,21,440/- to respondent no. 2’s account and the balance to respondent no. 1’s account.

4.6 Relying on the above material, the arbitral tribunal held the respondents to be jointly and severally liable and dismissed respondent no. 1’s counter-claim as being a counter-blast and being unsustainable as his credit balance was rightly adjusted to the account of respondent no. 2. It also noted that while SEBI Guidelines require written instructions to transfer money from one constituent’s account to another’s, taking a practical view and considering past experience and joint and several liability, as well as the marital relationship of the respondents, it held that the adjustment of balances between the accounts was in order. Supreme Court Reports [2025] 2 S.C.R. 1551

Section 34 petition: Both respondent nos. 1 and 2 filed separate applications under Section 34 to set aside the arbitral award, which were dismissed by the High Court single judge’s order dated 23.08.2005. The Court held that there is an implied term in the written contract and an oral agreement to the effect that both husband and wife will be jointly and severally liable for the debit balance in the wife’s 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.

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 Court held that there are separate causes of action against husband and wife – the cause of action against respondent no. 2 (wife) was regarding the debit balance in her account in respect of transactions on the floor of the BSE. However, the cause of action against respondent no. 1 (husband) was based on the alleged oral understanding with the appellant regarding his liability to pay the dues in case of default by respondent no. 2, which the High Court held is a private and separate transaction that is not subject to Bye-law 248(a) as it is not conducted on the floor of the stock exchange. Further, since there is no tripartite agreement between all three parties, nor did the appellant invoke the arbitration agreement with respondent no. 1, it could not have clubbed separate causes of action in a common arbitration. Since respondent no. 1 does AC Chokshi Share Broker Private Limited v. Jatin Pratap Desai & Anr. 1552 [2025] 2 S.C.R. not fall under Bye-law 248(a) in his capacity as a guarantor or third party, the entire arbitration against him is without jurisdiction. Even if this jurisdictional objection had not been raised before the arbitral tribunal in accordance with Section 16 of the Act, the Court held that the arbitral tribunal inherently lacked jurisdiction to adjudicate on a private transaction between the appellant and respondent no. 1. Further, since the arbitration clause is statutory in nature, such jurisdiction cannot be conferred by consent of the parties, and hence, not raising the objection under Section 16 does not amount to a waiver under Section 4 of the Act.

6.2 Second, the findings of the arbitral tribunal are perverse and patently illegal. With regard to joint and several liability of the respondents, it held that the findings of the arbitral tribunal are perverse as the respondents are two separate legal entities, having separate and distinct accounts, separate client codes, separate contracts notes and bills, and separate bank accounts. The appellant only led oral evidence to prove joint and several liability, however such oral evidence cannot be contrary to the documents between the parties. The arbitral tribunal ignored BSE Bye-laws, Rules and Regulations and SEBI guidelines by relying on past experience and the respondents’ marital relationship to hold them jointly and severally liable. Further, with regard to the transfer of the credit balance from respondent no. 1’s account to offset the debit balance in respondent no. 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.

Submissions: We have heard Mr. Dhruv Mehta, learned senior counsel for the appellant, and Mr. Mayilsamy K, learned counsel Supreme Court Reports [2025] 2 S.C.R. 1553 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 participated in the arbitral proceedings. Further, a plea of lack of jurisdiction was neither raised before the arbitral tribunal nor in the Section 34 petition; it was only raised at the stage of the Section 37 appeal. He submitted that the same is impermissible and relied on several judgments of this Court.3 Such a jurisdictional plea is governed by Section 16(2) of the Act and must be raised at the time of submission of statement of defence.4

7.2 Further, the respondents constitute a ‘single entity’ for the purpose of trading, which is demonstrated from the transactions executed by them. In any event, relying on ONGC v. Discovery Enterprise Pvt Ltd 5 and P.R. Shah Share & Stock Brokers Pvt Ltd v. B.H.H. Securities Pvt Ltd 6, he submitted that a non-signatory can be impleaded as party to the arbitration if there is a composite transaction. The liability to clear the debit balance in respondent no. 2’s account, being joint and several, would enable the appellant to invoke a common arbitration against both spouses as this is a composite transaction.

7.3 Bye-law 248(a) is widely worded and covers matters that are incidental to transactions conducted on the floor of the stock exchange, including any oral guarantee by respondent no. 1 to pay the dues owed by respondent no. 2 to the appellant. This oral guarantee is incidental to the transactions executed on the floor of the stock exchange on behalf of respondent no. 2, and gives rise to a single cause of action against both respondents that is covered by the arbitration clause. 3 4 5 6