Bombay High Court
Harinarayan G. Bajaj vs Lkp Securities Ltd. on 11 March, 2004
Equivalent citations: [2005]123COMPCAS744(BOM), (2005)3COMPLJ236(BOM), [2004]52SCL725(BOM)
Author: D.G. Karnik
Bench: D.G. Karnik
JUDGMENT D.G. Karnik, J.
1. By this petition under Section 34 of the Arbitration and Conciliation Act, 1996 (for short 'Arbitration Act'), the petitioner takes exception to the award dated 24th March, 2003 passed by the Arbitral Tribunal in the proceedings held in accordance with the Rules, Regulations and Bye-laws of the National Stock Exchange of India Ltd. (for short 'NSE').
2. The basic facts giving rise to the dispute between the petitioner and respondent No. 1 are summarised below. The respondent No. 1 is a share broker and a member of NSE. The petitioner was its constituent (client), and after entering into a written contract with the respondent No. 1 on 15th February, 2001 began dealing in securities through the respondent No. 1. On 7th March, 2001, in settlement No. 10 (covering the period 7th March, 2001 to 13th March, 2001), the respondent No. 1 on behalf of the petitioner purchased on NSE 55,000 shares of Amar Raja Batteries Ltd. (for short 'ARBL') for a total price of Rs. 1,73,81,100 and issued a contract note bearing No. GE 63/5 in respect of the said purchase to the petitioner who signed a duplicate copy thereof. The average purchase price of the said shares of ARBL works out to be Rs. 315.80 per share. The market price of the shares of ARBL touched Rs. 322 on 8th March, 2001 but started declining thereafter continuously. On 9th March, 2001, the respondent No. 1 called upon the petitioner either to square off his purchase position by sale or to pay additional margin money forthwith to cover the difference between the purchase price and the market price. As the petitioner failed to pay the additional margin required, the respondent No. 1 by its letter dated 12th March, 2001 informed the petitioner:
"We are hereby squaring off your outstanding purchase position of ARBL as you have not furnished extra margin for the above position."
The petitioner received this letter on 13th March, 2001 and signed the receipt on the office copy. On 13th March, 2001 which was the last day of the settlement No. 10, the respondent No. 1 sold on NSE 18,338 shares of ARBL for a sum of Rs. 34,49,744.56. According to the respondent No. 1, though it wanted to sell all the 55,000 shares of ARBL, it could sell only 18,338 shares of ARBL on that date. At the end of the period of the settlement No. 10, the respondent No. 1 sent a bill No. GE 63/563007, in the sum of Rs. 1,39,74,201.8? being the net amount payable by the petitioner to it. This bill showed the amount payable by the petitioner for purchase of 55,000 shares of ARBL less the amount payable to the petitioner in respect of sale of 18,338 shares of ARBL. The respondent No. 1 debited this amount to the account of the petitioner in its books of account on 13th March, 2001. On 16th March, 2001, the respondent No. 1, through its sister concern, sold 7398 shares out of 55,000 shares of ARBL on the Bombay Stock Exchange (for short BSE). However, no credit in respect of the sale proceeds was given to the petitioner immediately as the pay out in respect of the said 7,398 shares of ARBL was withheld by the BSE. After deducting 18,335 shares sold on NSE and 7,398 shares on BSE out of the total of 55,000 shares of ARBL purchased the respondent No. 1 continued to hold remaining 29,267 shares on behalf of the petitioner. By a letter dated 13th March, 2001, the respondent No. 1 called upon the petitioner to pay to it an amount of Rs. 1,04,42,508.40 that was due from him at the foot of his account. The petitioner did not comply but by a letter dated 27th March, 2001 requested the respondent No. 1 to send the daily obligation sheet and delivery statements for the scrip of ARBL and the details of margin money paid to NSE. On 28th March, 2001, the respondent No. 1 sent to the petitioner a copy of the ledger account and demanded payment of Rs. 1,19,03,992.01 being the debit balance upto settlement No. 11. By a letter dated 1st April, 2001, the petitioner acknowledged the receipt of the letter of respondent No. 1 dated 28th March, 2001 and further stated that as the transactions in the shares of ARBL were being probed by Securities and Exchange Board of India (for short 'SEBI') on account of suspicion of large scale short selling, till the outcome of the probe by SEBI he neither denied nor accepted the obligation to pay Rs. 1,19,03,992.01. By further letters dated 4th April, 2001, 10th April, 2001 and 17th April, 2001, the respondent No. 1 called upon the petitioner to pay the outstanding amount and settle the account as early as possible. Again by a reply dated 23rd April, 2001, the petitioner re-iterated that as the investigation was being carried out by SEBI and till the said investigation was complete he would neither deny nor accept the debit balance in his account. The respondent No. 1 followed up its demand for payment by letters dated 22nd May, 2001, 18th June, 2001, 26th June, 2001, 4th July, 2001, 28th August, 2001 and 10th September, 2001. On 27th September, 2001, the petitioner for the first time stated that he categorically denied having done any trading from the broking firm of respondent No. 1 after 9th March, 2001 and also disputed the lability to pay.
3. In view of the denial of the liability by the petitioner, the respondent No. 1 by a letter dated 28th December, 2001 invoked arbitration of NSE in accordance with its bye-laws, which provide for resolution of the disputes between the parties by arbitration in accordance with the bye-laws. An Arbitral Tribunal consisting of three arbitrators was constituted and the arbitration proceedings were held in accordance with the bye-laws of the NSE. By an unanimous award dated 24th March, 2003, the Arbitral Tribunal held that the petitioner was liable to pay to the respondent No, 1 an amount of Rs. 99,96,139 and accordingly passed an award in favour of the respondent No. 1 in the said sum together with interest at 18% p.a. from the date of the award till payment and further directed that the respondent No. 1 shall deliver to the petitioner 264 shares of ARBL on receipt of the said amount. This award is impugned in this petition.
4. The learned counsel for the petitioner made several submissions challenging the impugned award, each of which is considered below.
Regarding Limitation
5. The learned counsel for the petitioner submitted that 55,000 shares of ARBL were purchased by the petitioner on 7th March, 1991 and by a letter dated 12th March the respondent No. 1 informed that as the additional margin was not paid it was squaring off the purchase position. The reference to arbitration was made by a letter dated 28th December, 2001 i.e. after 9 months from the date of squaring off. Under bye-law No. 3 of Chapter XI of the bye laws of the NSE, the dispute or difference must be referred to arbitration within a period of six months from the date on which the claim or dispute arose. As the reference was made after the expiry of a period of six months, the reference was barred by limitation. Learned counsel for the petitioner submitted that in view of Section 2(4) of the Arbitration and Conciliation Act, 1996 (for short 'the Act') the provisions of the Limitation Act, 1963 in so far as they were inconsistent with the bye-laws of the NSE would not apply to the arbitration under the bye-laws of the NSE. Hence, the Arbitral Tribunal ought to have dismissed the reference made after six months of the accrual of the cause as provided in bye-law No. 3 of Chapter XI of the bye-laws of the NSE.
6. Learned counsel for the petitioner relied upon a judgment of this Court rendered in the Stock Exchange v. Vinay Bubna [1999] 20 SCL 175, wherein a Division Bench of this Court held that bye-laws of a Stock Exchange are to be regarded as statutory bye-laws having force of an enactment within the meaning of Sub-section (4) of Section 2 of the Act because the bye-laws are framed in exercise of the powers conferred under the provisions of Clause (a) of Sub-section (2) of Section 9 of Securities Contracts (Regulations) Act. The Division Bench further held that to the extent to which the bye-laws of a Stock Exchange are inconsistent with the provisions of the Act, the bye-laws shall prevail over the Act. In view of the judgment of the Division Bench it has to be held that the event of inconsistency between the bye-laws of the NSE and the Limitation Act, 1963 which is made applicable by Section 43 of the Act the provisions of bye-laws over the Act shall prevail. I would now proceed to consider whether the reference was made within the period prescribed under bye-law No. 3 of Chapter XI of the bye-laws of the NSE.
7. Bye-law No. 3 of Chapter XI of the bye-laws of the NSE reads as under:-
"All claims, differences or disputes referred to in clause I shall be submitted to Arbitration within six months from the date on which the claim, difference or dispute arose or shall be deemed to have arisen. The time taken in conciliation proceedings, if any, initiated and conducted as per the provisions of the Act and the time taken by the Relevant Authority to administratively resolve the claim, difference or disputes shall be executed for the purpose of determining the period of six months."
Bye-law No. 3 of Chapter XI of NSE, provides for a special period of limitation of six months for initiation of the arbitration proceedings. This bye-law would prevail over the general provisions of the Limitation Act, 1963. If the reference to an arbitration is made beyond a period of six months, the reference would be barred in view of special period of limitation prescribed under the bye-law No. 3. It is therefore, necessary to see whether the reference to Arbitration made on 28th December, 2001 was within the special period of Limitation of six months. Bye-law No. 3 of Chapter XI of the NSE lays down the starting point for counting the period of limitation of six months from the date on which the claim, difference or dispute arose or shall be deemed to have been arisen. As observed by this Court in Nirav Securities (P.) Ltd. v. Mrs. Prabhuta Motiram Adhvaryu[2002] 39 SCL 372 Arbitration Petition No. 356 of 2000 dated 26-7-2002 by Bobade, J., bye-law No. 3 does not provide that the starting point of limitation is only the date on which the cause of action or cause for arbitration arose. It provides for a limitation of six months to be reckoned from:
(i) the date on which the claim arose or
(ii) the date on which the difference or dispute arose or shall be deemed to have arisen.
In Nirav Securities (P.) Ltd.'s case (supra) the period of six months was reckoned not from the date on which the claim was made but the date of the reply to the notice in which the demand was rejected and denied. In my opinion, where the claim is admitted but simply the money due is not paid the starting point of limitation would be the date on which the cause for the claim arose. But where one person makes a claim which is denied or deemed to be denied by the other the period of limitation should be counted from the date of first denial or deemed date of denial, as the case may be. If this were not so and the period of limitation is to be reckoned from the date on which the claim arose irrespective of whether the claim was admitted or disputed or denied, the words "difference as dispute arose or shall be deemed to have arisen" appearing in the bye-law No. 3 would become otiose and meaningless. Such construction cannot be accepted. In the present case, the claim of the respondent No. 1 is not admitted, was never admitted. The period of six months, therefore, would have to be counted not from the date of claim made by the respondent No. 1 but from the date on which the dispute arose between the parties.
8. The petitioner purchased the shares on 7th March, 2001. By a letter dated 9th March, 2001, the petitioner was called upon to pay the extra margin money regarding his purchase on account of fall in the price. As the petitioner did not make the payment by a letter dated 12th March, 2001 the respondent No. 1 informed the petitioner that it was squaring off the petitioner's position of ARBL. Part of the position was squared off by sale of 18,335 shares of ARBL on 13th March, 2001. Further, 7,398 shares were sold on BSE on 16th March, 2001. The payment in respect of shares sold on BSE was not received immediately on account of enquiry into the alleged large scale short selling in the shares of ARBL, initiated by SEBI. Hence credit for sale price of 7,398 shares sold on BSE was not immediately given to the petitioner. By letter dated 13th March, 2001, the respondent No. 1 called upon the petitioner to pay the amount due to it after giving credit for the shares sold by the respondent No. 1 on NSE as stated earlier. The petitioner did not admit nor did he deny the claim. By a further letter dated 28th March, 2001, the respondent No. 1 again demanded the payment. By a reply dated 1st April, 2001, the petitioner replied as follows:
"I would like to bring to your notice that as regards the script of ARBL transaction with the sale are being drawn by the NSE, BSE and SEBI since a large scale short selling is suspected to have been instrumental in engineering college of the share price of the sale. Therefore, till the outcome of this probe, I neither deny nor accept pay-in obligations of Rs. 1,19,03,992,01 or any such amount as mentioned in your letter under reply."
The petitioner thus did neither admit nor did he deny the liability to pay but only stated that till decision into the probe by the SEBI is over, he would neither deny nor accept the liability. In other words, the petitioner deferred communication of acceptance or denial of the liability till the probe by SEBI was finally over. By the letter dated 27th September, 2001, the petitioner for the first time denied his liability. The dispute between the petitioner and the respondent No. 1 arose for the first time on 27th September, 2001 when the petitioner denied his liability. In the present case, the starting point of limitation of six months would thus be 27th September, 2001 when the petitioner for the first time denied his liability to make the payment giving rise to a dispute. Till that time, the petitioner had not raised the dispute but had only stated that the claim of respondent No. 1 would be considered only after the decision of SEBI. The reference to arbitration made on 28th December, 2001 was made within a period of six months from the date on which the difference or dispute arose between the parties and was within limitation. The first contention of the learned counsel for the petitioner is therefore rejected.
Regarding application made by the petitioner to the Arbitral Tribunal on 16th September, 2002 under Section 27 of the Act
9. The petitioner made an application to the Arbitral Tribunal on 16th September, 2002 requesting it to take assistance of the Court for production of 12 documents mentioned in para No. C(ii) of the application. The Arbitral Tribunal rejected the said application for the reasons mentioned in paragraph Nos. 29 to 32 of its award. Learned counsel for the petitioner submitted that the Arbitral Tribunal erred in law in rejecting the petitioner's application by not seeking the aid of the Court to issue witness summonses and call for the documents mentioned above. Rejection of the application amounts to misconduct on the part of the arbitrators and in any event, failure on the part of the Arbitral Tribunal to exercise the jurisdiction vested in it under Section 27 of the Act. On account of non-production of the documents the petitioner was denied the opportunity of adducing the evidence and therefore, the award is bad in law. On being asked about the relevancy of the documents called for the learned counsel for the petitioner submitted that the documents were related to the investigation carried out by the SEBI regarding the large scale short selling of the shares of ARBL. According to the petitioner, at the relevant time, a cartel of brokers indulged in a large scale short selling of the shares of ARBL resulting in a crash of the price of the shares of ARBL. SEBI therefore, made investigations into the short selling. The petitioner wanted to know whether the respondent No. 1 was involved in short selling of the shares of ARBL and therefore wanted to summon the documents and for no other purpose. I am unable to find that the documents called for by the petitioner were relevant. Assuming that the respondent No. 1 on its own account or on account of its some other client had indulged in short sales of the shares of ARBL that would not affect the liability of the petitioner to honour the transaction of purchase of 55,000 shares of ARBL on the NSE through the respondent No. 1. If any short sale was made by the respondent No. 1 on behalf of and/or on account of its other client, it was not bound to pass on - indeed it could not without the consent of the other client have passed on - this information to the petitioner. If the petitioner was indulging in a short sale of the shares of ARBL on its own proprietary account, it could be charged by SEBI for violation of any of its Rules but the petitioner cannot avoid the contract of purchase of 55,000 shares of ARBL on the NSE or the liability arising out of it on that count. The documents called for were, therefore, not relevant. Furthermore, by a letter dated 21st June, 2001 the NSE after investigation, had directed release of pay-out to the eligible members and therefore, the Arbitral Tribunal did not find it necessary to ask for further evidence. The view taken by the Arbitral Tribunal is a possible view and cannot be set aside in a petition under Section 34 of the Act.
Regarding jurisdiction of the Arbitral Tribunal
10. Learned counsel for the petitioner submitted that there was no arbitration agreement between the petitioner and the Arbitral Tribunal and so the Arbitral Tribunal had no jurisdiction and bad-in-law. The contention is stated only to be rejected. The petitioner had entered into a written agreement with the respondent No. 1 on 15th February, 2001. A copy of the contract was filed before the Arbitral Tribunal is also filed in the compilation of documents filed in this Court. The petitioner has not denied the execution of this agreement. Clause No. 1 of the agreement stipulates that the agreement was subject to the Government notifications, rules, regulations and guidelines issued by the SEBI as also to the rules, regulations and bye-laws of the Stock Exchange. Thus, there was a specific agreement between the parties that all transactions of purchase and sale in the securities made on the Stock Exchange by the respondent No. 1 on behalf of the petitioner would be subject to the bye-laws of the Stock Exchange. Bye-law No. 1 of Chapter XI of the bye-laws of the NSE provides that all claims, differences or disputes between the members and the constituents arising out of or in relation to dealings, contracts and transactions made subject to the bye-laws, rules and regulations of the Stock Exchange shall be referred to arbitration in accordance with the said bye-laws. Bye-laws of the NSE, which were incorporated in the contract between the parties, contains a provision for reference of the disputes to arbitration. Hence, there was an agreement between the parties to refer the dispute to arbitration in accordance with the Bye-laws of the Exchange and the Arbitral Tribunal had the jurisdiction to arbitrate upon the dispute.
11. Learned counsel for the petitioner secondly submitted that the case of the respondent No. 1 was that the petitioner did not pay margin money in respect of the purchase of 55,000 shares of ARBL on the stock Exchange and the respondent No. 1 therefore, was required to square off or close out the transaction and sell the shares. As the respondent No. 1 had closed out the transaction and effected the sale of the shares, and it is admitted by the respondent No. 1 that it has sold all but 264 shares of ARBL, then what the respondent No. 1 was claiming from the petitioner was not the price of 55,000 shares of ARBL purchased by him but the damages, i.e., the difference in the contracted purchase price and the amount which was recovered by the respondent No. 1 by sale of the said shares. The claim of the respondent No. 1, thus, ceased to be the claim for purchase price of 55,000 shares of ARBL and became a claim for damages being the difference between the purchase price and the sale price. Such claim for damages was outside the arbitration clause contained in bye-law No. 1 of Chapter XI of the bye-laws of the NSE.
12. In my opinion, the contention is not well founded. Under bye-law No. 1 of Chapter III of the bye-laws of the NSE, the Board of Directors of the Stock Exchange is authorised to make regulations from time to time for the proper functioning and operations of the exchange and to regulate the functioning and operations of the trading members of the exchange. In accordance with the said power, the Board of Directors have framed National Stock Exchange (Capital Market) Trading Regulations, 1994 (for short the Capital Market Regulations). The said regulations inter alia regulate the trading on the NSE. The NSE is authorised to fix a settlement period. At the relevant time, the settlement period used to be of a week. The NSE is also authorised to fix pay-in and pay-out days. On a day fixed for pay-in of a money, a trading member is required to pay to the Exchange the price of the shares purchased by him on behalf of his constituents during the relevant, settlement period. On a pay-in day of the securities, a trading member is required to deliver to the Exchange the shares sold by him during the relevant settlement period on behalf of his constituents. On a pay-out day of money, the Exchange pays to a trading member who has sold the shares the price of the shares sold by him in the relevant settlement period and the trading member is required to pay the same to the constituent on whose behalf he had made the transaction. On a pay out day for securities, the Exchange delivers to a trading member the shares and securities purchased by him during the relevant settlement period which he is required to deliver to the constituents on whose behalf the transaction was made. Pay-in day usually precedes the pay-out day. Thus, the petitioner was required to pay the price of 55,000 shares of ARBL purchased by him on a pay-in day. Between the day of purchase and the pay-in day, if the price had fallen, he was required to pay the additional margin money.
13. The bye-law No. 3 of Chapter X of the bye-laws of the NSE provides that a trading member would be entitled to demand from its constituent the margin money - initial margin as well as additional margin according to changes in market price. This is to prevent default. Bye-law Nos. 19 to 22 of Chapter IX make a provision for margin to be furnished by a trading member to the NSE. Bye-law No. 5 of Chapter X of the bye-laws of the NSE contains provisions for close out of a transaction. If a constituent of a trading member does not make the payment of the margin money or the price on the pay-in day, the trading member is entitled to close the transaction with the constituent. Bye-law No. 5(b) of Chapter X of the Bye-laws of the NSE provides that on closing out the trading member would be entitled to recover the expenses incurred and the loss suffered by him from the constituent. The claim made by the respondent No. 1 against the petitioner was thus not a claim for damages de horse the bye-laws of the NSE The claims arose under the bye-laws of the Stock Exchange and was therefore, governed by the arbitration clause in the bye-laws of the NSE. The contention raised by the learned counsel for the petitioner that the claim for the respondent No. 1 was for damages and therefore not arbitrable, has to be rejected.
Merits - Whether the award is contrary to law or agreement ?
14. Learned counsel for the petitioner submitted that the award was contrary to law and contrary to the bye-laws of the NSE which were incorporated into the agreement dated 15th February, 2001 between the parties. On failure of the petitioner to pay the margin money as demanded by the respondent No. 1 by a letter dated March 12, 2001, the respondent No. 1 was entitled to close out the account of the petitioner under bye-law No. 5(b) of Chapter No. X of the bye-laws of the NSE. Bye-laws No. 5 of Chapter X reads as under :
"Closing-out of Constituent's Account.--
5(a) The Exchange may close-out open positions of a constituent or transfer his open positions to another trading member under such circumstances and in respect of such trading segment of the Exchange as may be specified by the relevant authority from time to time.
(b) When closing out the account of a constituent a trading member may assume or take over such transactions to his own account as a principal at prices which are fair and justified by the condition of the market or he may close-out in the open market and any expense incurred or any loss arising therefrom shall be borne by the constituent. The contract note in respect of such closing-out shall disclose whether the trading member is acting as a principal or on account of another constituent.
(c) Notwithstanding anything contained in (a) above closing out of Participants account shall be in such manner and subject to such stipulations as may be prescribed from time to time."
15. Bye-law No. 5(a) relates to the close-out by the Exchange and is not applicable to the present case. Under bye-law No. 5(b) which is relevant in the present case, a trading member has an option to close out the account of a constituent in two ways, viz:
(i) The trading member may assume or take over the transactions made by it on client's account to its own account as a principal at prices which are fair and justified by conditions of the market; or
(ii) The trading member may close out the transactions made by it on client's account in the open market.
16. By writing a letter dated 12th March, 2001, the respondent No. 1 informed the petitioner that it was squaring off, i.e., closing out the purchase position of the petitioner in respect of the shares of ARBL as the petitioner had not furnished the extra margin but did not inform in which of the two ways provided under bye-law No. 5(6) of the Bye-laws of NSE the close-out was being effected. However, claim made by the respondent No. 1 before the Arbitral Tribunal shows that the respondent No. 1 had chosen the second mode of close-out, viz., sale of the shares of ARBL in the open market. In the claim statement, the respondent No. 1 stated that he began to effect sales of 55,000 shares on 13th March, 2001 but could sell only 18,338 shares on that day; he was further able to sell 7,598 shares on BSE on 16th March, 2001 through its sister concern. It thus appears that the respondent No. 1 did not exercise the first option of assuming the transaction of purchase of 55,000 shares of ARBL to his own account as a principal at the fair price but he chose the second option to close-out the transaction by sale in the open market and recover the loss arising therefrom. As the respondent No. 1 chose the second option, he ought to have sold the entire 55,000 shares of ARBL in the market and claim the loss arising out of such sale. It was however, contended by the learned counsel for the respondent No. 1 that it was able to sell only 18,338 shares of NSE on 13th March, 2001 and 7,398 shares on BSE on 16th March, 2001 and was unable to sell the balance shares of ARBL. The contention does not appear to be correct. The learned counsel for the parties handed in trading data in respect of the shares of ARBL on the NSE as well as BSE for the relevant period. The trading data shows that on 13th March, 2001 18,439 shares of ARBL were transacted on NSE. Therefore, the contention of the learned counsel for the respondent No. 1 that the respondent No. 1 could sell only 18,338 shares on the NSE on 13th March, 2001 appears to be well founded. However, the trading data shows that on 16th March, 2001, when the respondent No. 1 is alleged to have sold 7,398 shares of ARBL on BSE, 47,908 shares of ARBL were traded on the BSE. No. explanation was offered before the Arbitral Tribunal and also before me as to why the respondent No. 1 could not sell the remaining 37,662 shares (55,000 -18,338 sold on NSE on 13th March, 2001) on BSE on 16th March, 2001 in spite of there being sufficient volume of transactions on that day. Furthermore, trading data of the NSE shows that 5,08,996 shares of ARBL were traded on 20th March, 2001, 3,16,500 shares of ARBL were traded on 21st March and 1,47,413 shares of ARBL were traded on 22nd March, 2001 on the NSE. Similar position is noticed on BSE. 18,530 shares of ARBL were traded on 19th March, 2001, 7,80,996 shares were traded on 20th March, 2001, and 3,25,334 shares were traded on 21st-March, 2001 on the BSE. There were thus, sufficient volume of transactions in the shares of ARBL between 20th March, 2001 and 22nd March, 2001. If under bye-law No. 5(6) of Chapter X the respondent No. 1 had exercised the option of closing out by sale of the shares of ARBL in the open market, it could have and should have sold the shares immediately on exercise of the option or as soon thereafter as was practicable. If the respondent No. 1 chose to sell only part of the shares of ARBL after closing out the transaction, he continued to hold those shares at his own peril and he cannot claim the loss on account of the further fall in the price after the close-out on 13th March, 2001 or so soon thereafter when he could have sold the remaining shares. In the alternative, if after selling 18,338 shares of ARBL on 13th March, 200 J and on being unable to sell them on the day following the date of close-out, the respondent No. 1 was to hold the remaining 37,662 shares on his own account as a principal by exercising the first option under the first part of bye-law No. 5(6), he was bound to do so at a price which was fair and justified by the conditions of the market on the date of close out, viz., 13th March, 2001. As the benchmark minimum and maximum price of the shares of ARBL on 13th March 2001 as well as on all previous and subsequent dates is available in the data sheets of trading and in the records of the NSE as well as BSE it was possible for the Arbitral Tribunal to determine the price which was fair and justified by the conditions of the market as on 13th March, 2001. The Arbitral Tribunal therefore, could and should have determined such fair price in respect of unsold shares that were remaining with the respondent No. 1.
17. Initially, the respondent No. 1 claimed before the Arbitral Tribunal that after disposing of 18,338 shares on NSE on 13th March, 2001 and 7,398 shares on BSE on 16th March, 2001, it continued to hold 29,267 shares of ARBL, out of the 55,000 shares purchased by it on behalf of the petitioner. It made a claim of Rs. 1,17,27,511.45 being the amount due from the petitioner at the foot of the account on the date of the reference, i.e., on 28th December, 2001, on the basis that 29,267 shares of ARBL could not be sold on close-out and the respondent No. 1 continued to hold them. However, subsequently, the respondent No. 1 amended the claim by saying that on 2nd November, 2001, it had sold 29,000 shares of ARBL on NSE for Rs. 18,73,686 and therefore, reduced the claim by the said sum and claimed only balance sum of Rs. 99,96,138.82. The respondent No. 1 offered to return unsold 264 shares of ARBL still remaining with it. The average sale price of 29,000 shares of ARBL allegedly sold on 2nd November, 2001 works out to Rs. 64.60 per share which is far less than the prevailing price on the date of close-out, viz., 13th March, 2001. The average sale price of 18,338 shares sold on 13th March, 2001 was 188.25 per share before brokerage and 188.12 per share after the brokerage. The learned counsel for the petitioner submitted that petitioner is not liable for the loss arising out of the difference in the price on 13th March, 2001 and on 2nd November, 2001. The contention is well founded and in consonance with the Section 73 of the Contract Act as well as bye-law No. 5(b) of Chapter X of the bye-laws of the NSE.
18. The learned counsel for the petitioner submitted, with considerable force, that the transaction of the alleged sale of 29,000 shares of ARBL effected on 2nd November, 2001 was sham and fictitious. There are several factors which indicate that 29,000 shares of ARBL were not sold by the respondent No. 1 on 2nd November, 2001 on the NSE, They are :
(i) If the sale had really taken place on 2nd November, 2001, the respondent No. 1 would have made an entry of sale in its books of account on 2nd November 2001 itself - or in any event on the pay out day when he received the payment. No entry of sale was made in the books of account of the respondent No. 1 on 2nd November 2001 and even till 28th December, 2001 when the reference to arbitration was made.
(ii) No contract note in respect of the alleged sale of 29,000 shares of ARBL on 2nd November, 2001 was issued to the petitioner. This must be contrasted with the fact that a contract note was issued to the petitioner on 13th March, 2001 on sale of 18,338 shares on NSE.
(iii) The rules, regulations and bye-laws of the NSE require the broker to issue a contract note in specified form with specified details on the same day of the transaction. If the respondent No. 1 had really sold 29,000 shares of ARBL on 2nd November, 2001, he would have issued such contract note as required by the rules, regulations and bye-laws of the NSE. The non-issuance of a contract note shows that either the transaction was not made or the respondent No. 1 itself was committing breach of rules, regulations and bye-laws of the NSE by not issuing the contract note.
19. The first two circumstances are in the realm of evidence - preponderance of probability - and the Arbitral Tribunal was the best judge of the evidence. However, as the Arbitral Tribunal has believed in the sale effected on 2nd November, 2001 it ought to have held that non-issuance of the contract note was breach of the bye-laws of the NSE. The fact that the respondent continued to hold 29,264 shares on 28th December, 2001 (or at least till 2nd November, 2001) shows that in respect of those 29,264 shares of ARBL, the respondent closed out the transaction or must be deemed to have closed out the transaction by exercising the first option under bye-law No. 5(b) of Chapter X of the bye-laws of NSE, i.e., treating the transaction in respect of 29,264 shares of ARBL on his own account as a principal. If so he was required to pay the fair price as on the date of close out which would be 188.12 per share or thereabout. The learned counsel for the petitioner submitted that the respondent No. 1 falsely contended that he had sold 29,000 shares of ARBL on 2nd November, 2001 without actually effecting the sale, only in order to avoid the liability to pay the fair price as on the date of close out. The learned counsel further submits that the Arbitral Tribunal should not have allowed the amendment of the claim statement permitting the respondent No. 1 to claim that it had sold 29,000 shares of ARBL on 2nd November, 2001. The contention is meritorious. The amendment was sought to be made nearly 11 months after commencement of the Arbitration proceedings. The period of limitation for filing of arbitration proceedings is six months of the date of the dispute. If the arbitration proceedings or the amended claim were to be filed on the date of the amendment, the claim would have been barred by limitation, and hence the amendment should not have been allowed. Furthermore, the claim about the alleged sale of 29,000 shares of ARBL on 2nd November, 2001 was dubious and in any event, no notice of such sale was given, and no contract for sale was sent to the petitioner. Furthermore, the respondent No. 1 was either bound to sell the 29,000 shares on 13th March, 2001 when he closed out the transaction or as soon thereafter was practical and the price at that time would be the relevant factor and not the sale price on 2nd November, 2001 which is far less.
20. The respondent No. 1 claims that it sold 18,338 shares of ARBL on NSE on 13th March, 2001 in pursuance of the close out made by him by letter dated 12th March, 2001. Two different contract notes of the same date appear to have been issued and there xerox copies are at page No. 'tt' and 'www' of the compilation of documents. Contract note at page No. 'tt' bears printed Sr. No. G 062364 while contract note at page No. 'www' bears printed Sr. No. G 062391. It is not clear why two contracts notes bearing two different serial numbers containing indentical details in respect of the same transaction were issued by the respondent No. 1. The contract notes have 3 printed main vertical columns and each main column has vertical sub-columns. The first column does not bear a title. The second column bears a title 'Securities bought for you' and third column bears a title 'Securities sold for you'. Details of 18,338 shares sold are written in the third column. The first column has three sub-columns viz. (i) Order number, (ii) Trade number and (iii) Trade time. No details of orders number, trade number or trade time are written in either of the two contract notes. Regulation No. 3.5.1 of the National Stock Exchange (Capital Market) Trading Regulations, 1994 (for short Capital Market Regulations) reads as under:--
"3.5.1 Every trading member shall issue a contract note to his constituent for tradings executed in such format as specified in Annexure II with all relevant details as required therein to be filled in and issued in such manner and in such time as prescribed by the Exchange."
The contract notes as page 'tt' and 'www' are in the format prescribed in Annexure II to the Capital Market Regulations but do not contain the details of order number, trade number and trade time. The details of trade number and trade time enable a constituent to verify whether the transaction which is alleged to have been made by the trading member on the NSE at a particular rate was really made on the specified date and time and whether the rate specified in the contract note is the same rate at which the transaction was made or whether the trading member was cheating him on the rate. It is therefore very necessary to give the details of trade number and trade time in the contract note. Regarding the transaction of purchase of 55,000 shares made by the respondent No. 1 for the petitioner on 7th March, 2001, the relevant details of order number, trade number and trade time have been written in the contract notes. In respect of other contracts of other transactions made by the respondent No. 1 for the petitioner all the details of order number, trade number and trade time are written in the contract notes. However, only in respect of the sale made on 13th March, 2001, on close-out of the petitioner's purchase position, the details have not been written in the contract note. The position in respect of 7,398 shares alleged to have been sold by the respondent No. 1 on BSE the position is worse. No contract note is issued by the respondent No. 1 to the petitioner, in respect of that sale contrary to the bye-laws of the Exchange. Thus, in respect of sale allegedly made by the respondent on closing out the respondent No. 1 has not given the relevant details, though it was required to do so under the Capital Market Regulations. The sale in respect of 29,000 shares of ARBL on 2nd November, 2001 was not even reported and informed to the petitioner. Thus, the action taken in pursuance of the close-out made on 12th/13th March, 2001 by the respondent No. 1 were not in consonance with the Capital Market Regulations and bye-laws of the NSE. The Arbitral Tribunal has not considered the effect of the breach of the bye-laws and the Capital Market Regulations. The award to that extent is contrary to the provisions of contract which incorporated the Rules, Regulations and bye-laws of the NSE.
21. In Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. [2003] 44 SCL 89, the Supreme Court has laid down the grounds on which an award can be set aside. In sub-para 2(ii)(c) of para No. 74 of the judgment, the Supreme Court has held that the award passed by the Arbitral Tribunal can be set aside if it is in contravention of the provisions of the Arbitration Act or any other substanting law governing the parties or is against the terms of the contract. The rules, regulations and bye-laws of the NSE form a part of the contract between the parties. The award passed without considering the effect of violation of the Capital Market Regulations and bye-laws of the NSE requiring the trading member to issue the contract notes with all the relevant details prescribed to the constituent, is contrary to the contract. The award is, therefore, required to be set aside.
22. Having held that the Arbitral award is not in accordance with the contract, the only question that is required to be decided now is whether the Arbitral award needs to be set aside in toto or whether recourse can be had to Sub-section (4) of Section 34 of the Arbitration Act which reads as under:--
"(4) On receipt of an application under Sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the Arbitral Tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of Arbitral Tribunal will eliminate the grounds for setting aside the arbitral award."
Power under Sub-section (4) can be exercised in order to give to the Arbitral Tribunal an opportunity to resume the arbitral proceedings or take such action as would eliminate the grounds for setting aside the arbitral award. In the present case, there is no dispute that the respondent No. 1 purchased 55,000 shares of ARBL on the NSE on behalf of the petitioner. As the petitioner failed in his obligation to pay the margin money required as demanded by the respondent No. 1, the transaction was closed out under bye-law No. 5(b) of Chapter X of the bye-laws of the National Stock Exchange. When the transaction is closed out, the trading member is entitled to recover any expenses incurred or any loss arising on account of such transaction and the close out from the constituent. Thus, the respondent No. 1 also is entitled to recover the loss. The decision of the Arbitral Tribunal holding that the petitioner was liable to pay to the respondent a sum of Rs. 99,96,138.82 is contrary to the bye laws of the NSE for the reasons mentioned in this judgment and in particular paragraph Nos. 14 to 21 hereof setting aside the award without anything else may bar the remedy of the respondent No. 1 to claim this loss. Hence, exercise of power under Section 34(4) appears to be a proper course to follow. Accordingly, the matter is sent back to the Arbitral Tribunal to decide the matter afresh and determine how much amount the petitioner is liable to pay to the respondent No. 1 under bye-law No. 5(b) of Chapter X of the Bye-laws of the National Stock Exchange.
23. At the request of the learned counsel for the petitioner, operation of this order is stayed for a period of four weeks.