Bombay High Court
Geojit Financial Services Limited vs Kritika Nagpal on 25 June, 2013
Author: D.Y.Chandrachud
Bench: D.Y.Chandrachud, S.C.Gupte
1 of 17 APP.35.2013
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
APPEAL NO.35 OF 2013
IN
ARBITRATION PETITION NO.47 OF 2009
Geojit Financial Services Limited
(Presently known as Geojit BNP Paribas
Financial Services Limited) Appellant
versus
Kritika Nagpal
ig Respondent
WITH
APPAEL NO.33 OF 2013
IN
ARBITRATION PETITION NO.56 OF 2009
Geojit Financial Services Limited
(Presently known as Geojit BNP Paribas
Financial Services Limited) Appellant
versus
Bombay Construction & Engineering Pvt.Ltd. Respondent
WITH
APPEAL NO.34 OF 2013
IN
ARBITRATION PETITION (L) NO.8 OF 2009
Geojit Financial Services Limited
(Presently known as Geojit BNP Paribas
Financial Services Limited) Appellant
versus
Ranjana Nagpal Respondent
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WITH
APPEAL NO.36 OF 2013
IN
ARBITRATION PETITION NO.48 OF 2009
Geojit Financial Services Limited
(Presently known as Geojit BNP Paribas
Financial Services Limited) Appellant
versus
Lalitkumar Nagpal Respondent
WITH
APPEAL NO.41 OF 2013
IN
ARBITRATION PETITION NO.57 OF 2009
Geojit Financial Services Limited
(Presently known as Geojit BNP Paribas
Financial Services Limited) Appellant
versus
Kapil Lalitkumar Nagpal Respondent
Mr.D.V.Merchant, Sr.Advocate with Vaibhav Bajpai and Varghese
Joseph i/by Joseph & Associates for Appellant.
Mr.Simil Purohit i/by Purohit & Co. for Respondents in all petitions.
CORAM : DR.D.Y.CHANDRACHUD AND
S.C.GUPTE, JJ.
DATE : 25 June 2013 JUDGMENT - (PER : DR.D.Y.CHANDRACHUD, J.) :
1. Admit. Learned counsel for the Respondents waives service.
The appeals are taken up for hearing and final disposal, by consent and on the request of the learned counsel.
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2. All these appeals raise a similar question and have been heard together. The principal appeal arises from a judgment of a learned Single Judge dated 17 September 2012 on a petition under Section 34 of the Arbitration and Conciliation Act, 1996. While allowing the petition, the learned Single Judge passed the following order :
"ORDER
a) The impugned award dated 24 September 2008 is set aside.
b) The matter is remanded for re-consideration on all issues.
c) All points are kept open.
d) The Tribunal to reconsider the case after giving
opportunity to all the parties.
e) The matter is expedited.
f) The parties to take steps accordingly.
g) The Petition is accordingly disposed of.
h) There shall be no order as to costs."
3. In the companion petitions which were heard and disposed of on the same day, the learned Single Judge placed reliance on the judgment delivered in the principal petition and disposed of the petitions in terms of the same order.::: Downloaded on - 27/08/2013 21:00:17 :::
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4. The Appellant is a stock broker registered with National Stock Exchange of India Limited (NSEIL). On 3 April 2007 the Appellant and the Respondent entered into a member-client agreement.
Transactions commenced on 10 April 2007. The period in dispute is between 18 January 2008 and 23 January 2008. The Appellant entered into transactions on behalf of the Respondent in the futures and options segment. The facts which are admitted are that :
(i) On 16 January 2008 the Respondent issued a cheque in the amount of Rs.4.00 lakhs to the Appellant;
(ii) On 18 January 2008 the Respondent issued a further cheque in the amount of Rs.5.00 lakhs to the Appellant;
(iii) There was no dispute about the transactions between the parties till 21 January 2008 nor was there any dispute about the contract notes received by the Respondent from the Appellant;
(iv) The market was volatile and due to a steep fall in the market, there was a substantial mark to market loss that occurred in the account of the Respondent;
(v) An amount of Rs.15.00 lakhs was paid by the Respondent to the Appellant on 22 January 2008 by a cheque which was cleared on 23 January 2008; and
(vi) At noon on 22 January 2008 the Appellant squared off the position of the Respondent by selling securities.::: Downloaded on - 27/08/2013 21:00:17 :::
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5. According to the Appellant the mark to market loss on 21 January 2008 was Rs.40,28,241=46 and the margin requirement at opening on 22 January 2008 was Rs.40,30,264=99 making a total debit of Rs.71,28,135=05 (including the value of certain pledged shares). The claim of the Appellant before the arbitral tribunal of the stock exchange was in the amount of Rs.35,19,225=42 on which interest was claimed @ 12% p.a. This represented, according to the Appellant, the dues of the Respondent after the position was squared off on 22 January 2008. The Respondent had a counter claim in the amount of Rs.9,17,203/-, inter alia, on the ground of the loss allegedly suffered by the Respondent in the squaring off which took place on 22 January 2008 and on account of the sale of 6,600 shares of Reliance Petroleum Limited.
6. The dispute including the counter claim were adjudicated upon by the arbitral tribunal constituted by NSEIL. The arbitral tribunal noted in paragraph 4.5 of its award dated 24 September 2008 that during the course of the hearing the only issue under consideration was that though the short fall or margin call was informed to the Respondent by the Appellant on different dates, there was a dispute concerning the amount of short fall informed or margin call made to the Respondent. The defence of the Respondent was that as and when a demand had been raised, the Respondent had furnished cheques to the Appellant and on 22 February 2008 when a cheque in the amount of Rs.15.00 lakh was handed over, the Appellant was requested not to square off the position on the assurance that the balance of the short ::: Downloaded on - 27/08/2013 21:00:17 ::: 6 of 17 APP.35.2013 fall, if any, would be made good on the evening of 22 January 2008.
However, according to the Respondent, the Appellant proceeded to square off the position at its head quarters at Kochi at noon on 22 January 2008 without furnishing any intimation to the Respondent. The contention of the Appellant on the other hand was that until 21 January 2008 there was no dispute about the transactions or in regard to the receipt of contract notes and the Respondent was at all material times aware of the short falls and its position consequent upon the fall in the market. The Appellant relied upon Clause-29 of the member-
client agreement which entitled the Appellant to square off the position at its sole discretion without prior notice to the Respondent.
7. The arbitral tribunal by its award dated 29 September 2008 noted that the issue before the Tribunal was whether the amount of short fall was informed by the Appellant to the Respondent. The Tribunal observed that the market had witnessed a fall especially from 17 January 2008; there was a margin deficit on 17, 18 and 21 January 2008 and the Respondent was making repeated requests not to square off the position from its account with an assurance that the short fall would be paid. On 21 January 2008 the Respondent assured the Appellant that the short fall in the account would be paid immediately on the next day while on 22 January 2008 an assurance was made to meet the short fall by the evening of that day. The arbitral tribunal held that the mark to market losses (MTM) were increasing on all days namely 17, 18 and 21 January 2008 and on 21 January 2008, the MTM loss stood at Rs.40.28 lakhs and the ledger balance recorded a debit at Rs.39.36 lakhs without the margin requirement.
::: Downloaded on - 27/08/2013 21:00:17 :::7 of 17 APP.35.2013 On 22 January 2008 the market witnessed a heavy fall and the MTM losses were enhanced as a result of the value of the securities being eroded. The award found that no payment was made apart from Rs.4.00 lakhs on 16 January 2008 and Rs.5.00 lakhs on 18 January 2008 and the Respondent requested the Appellant not to square off the outstanding position though an amount of Rs.15.00 lakh was paid on the margin on 22 January 2008. This was held not sufficient to cover the short fall for the position at the end of the day on 21 January 2008. Hence, the Tribunal concluded that squaring off of the outstanding position on 22 January 2008 was justified. Accordingly, the claim was allowed in the amount of Rs.35,19,225=42. The counter claim has been rejected on the ground that the Respondent had accepted the position as of the end of 21 January 2008 and the alleged loss due to the squaring off the position on 22 January2008 could not be claimed by the Respondent from the Appellant.
8. The Respondent instituted an arbitration petition under Section 34 of the Arbitration and Conciliation Act, 1996. As noted earlier, by a judgment dated 17 September 2012, the learned Single Judge : (i) set aside the award; (ii) remanded the matter for reconsideration; and
(iii) kept all issues open while directing the Tribunal to reconsider the case.
9. Broadly, for the purposes of these appeals, the correctness of the order of the learned Single Judge can be considered from three perspectives. The first and perhaps the most fundamental perspective relates to the test which has been applied by the learned Single Judge ::: Downloaded on - 27/08/2013 21:00:17 ::: 8 of 17 APP.35.2013 while exercising his jurisdiction under Section 34 of the Act. The second, which is of some significance is whether the learned Single Judge was correct in deducing that he has an unrestricted power to remand the proceedings to the arbitral tribunal having once set aside the award on merits under Section 34. For considering this aspect, it will be necessary to interpret the provisions of Section 34(3) of the Act. The third aspect of the judgment relates to the actual decision on merits to set aside the arbitral award.
10. The grounds on which recourse can be taken against a domestic award are exhaustively defined in Section 34 of the Act. This is evident from sub-section 1 of Section 34 under which recourse to a court against an arbitral award may be made only by an application for setting aside such an award in accordance with the provisions of sub-sections 2 and 3. Sub-section 2 defines the grounds on which an arbitral award can be set aside, while sub-section 3 specifies the limitation for moving a petition under Section 34. The grounds for setting aside an arbitral award are :
(i) the incapacity of a party to the arbitration agreement;
(ii) the invalidity of an arbitration agreement under the law to which it is subject;
(iii) the absence of proper notice to a party of the making of an application for the appointment of the arbitrator or of the arbitral proceedings or the inability of the party otherwise to present its case;::: Downloaded on - 27/08/2013 21:00:17 :::
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(iv) an arbitral award dealing with a dispute not contemplated or falling within the terms of submission to arbitration or containing decisions on matters beyond the scope of the submission;
(v) the composition of the arbitral tribunal or the arbitral procedure not being in accordance with the agreement of the parties;
and
(vi) if the Court finds that the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force or that the arbitral award is in conflict with the public policy in India.
11. In the present case, the test which has been applied by the learned Single Judge under Section 34 is formulated in the judgment as follows :
"9. It is not the only case of reasons of the Arbitral decisions and/or reasons to be looked into while testing the challenges so raised by the aggrieved parties, under Section 34 of the Arbitration Act, we have to consider the discretion, as initiated and/or exercised by the trading member. The nature of transaction and the business in question, if provides and gives sole discretion to the member, even to square off and/or sale of securities, without any reference and/or prior notice to the client as stated, just cannot be permitted to proceed without considering the basic principle of power to exercise discretions and due notice and/or intimation before taking such drastic steps. The purpose of notice/intimation is not only that the constituent should know the market situation and its law and/or assist so that an appropriate arrangement and/or ::: Downloaded on - 27/08/2013 21:00:17 ::: 10 of 17 APP.35.2013 deposit can be made, but also to see and protect his/her commercial interest based upon the situation of the day."
Again in another part of the judgment, the learned Judge has observed as follows :
"13. Merely because the trading members have knowledge of the market and/or they are experts of the market, still the Court under Section 34 of the Arbitration Act, needs to consider the wrong exercise of the discretion and/or the supporting reasons so given, as it goes to the root of the matter. The learned Arbitrator has confirmed the decisions given by the trading member. The challenge is basically to such discretion. Importantly, the Court needs to consider, even under Section 34 of the Arbitration Act, the nature of commerce, the transaction and the trade practice of such transactions, in such stock exchange business. it is not only a question of interpretation of agreed clauses and/or the clauses so referred and relied upon, but the basic requirement of prior notice/intimation referring to the understanding and practice between the parties. It is always noted that, every discretion so exercised by the authority and/or tribunal, the Court should not interfere with the same. As noted, in such transactions, the uncontrolled discretion so provided and given to the member and as the Arbitral Tribunal accepted the same, that in my view, required to be tested by the Court. The general approach, just cannot be accepted and/or utilized while dealing with the specialized and/or special subjects and the transactions."
12. We have reservations in regard to the broad sweep with which the learned Single Judge has formulated the ambit of the jurisdiction under Section 34. The jurisdiction in a petition under Section 34 is not equivalent to the jurisdiction of the Court exercising power in a ::: Downloaded on - 27/08/2013 21:00:17 ::: 11 of 17 APP.35.2013 first appeal against a decree in a civil suit. Parliament has carefully circumscribed the power under which recourse under Section 34 can be taken. Under section 34(2)(b)(ii), an award can be set aside if it is in conflict with the public policy in India. The learned Judge seems to suggest that in a petition under Section 34, the Court is not bound to look at the reasons for the arbitral decision and that in an award of a tribunal which has been constituted by the Stock Exchange, the Court would have to be mindful of the discretion which has been exercised by the trading member. The formulation by the learned Single Judge confounds the jurisdiction of the arbitrator to decide issues of fact with the jurisdiction of the Court under Section 34. One cannot be equated with the other. The jurisdiction of the Court to set aside an arbitral award is circumscribed by Section 34. The limits of that jurisdiction cannot be expanded by judicial interpretation. The jurisdiction of the arbitrator, when parties submit a dispute before him, is circumscribed by the terms of the contract and by the prevailing law. Section 28(1)(a) of the Act requires the arbitral tribunal to decide the dispute submitted for arbitration, except an international commercial arbitration, in accordance with the substantive law for the time being in force in India. Sub-section (3) of Section 28 provides that in all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. In a petition under Section 34, the Court does not sit in judgment over the exercise of discretion by a trading member nor does the Court exercise appellate jurisdiction over the decision of the arbitrator. The limited nature of the jurisdiction is to determine as to whether the ::: Downloaded on - 27/08/2013 21:00:17 ::: 12 of 17 APP.35.2013 arbitral tribunal has committed a transgression that falls within the ambit of Section 34. Consequently, when the Tribunal ignores the terms of the contract or acts in violation of the substantive law for the time being in force in India, a petition under Section 34 can lie for the purpose of determining whether this would constitute, in a given case, a ground for setting aside the arbitral award under Section 34(2)(b).
The broad and sweeping assumption of jurisdiction under Section 34, as formulated by the learned Single Judge is plainly contrary to the legislative intent of circumscribing the interference of Courts in arbitral awards. The learned Single Judge was, in our view, patently in error in holding that under Section 34, the Court needs to consider the exercise of discretion by the trading member. When parties accept arbitration of a specialized body, they repose confidence in the expertise of such a body and by constituting it as an arbitral tribunal, parties are conscious of the specialized knowledge of the members of the arbitral tribunal. This is not to indicate that the Court will lay its hands off under Section 34 merely because the jurisdiction in arbitration has been exercised by a specialized tribunal. The Court must in all cases apply the parameters which have been specified in Section 34 but importantly, must bear in mind that the grounds for interference must be confined to those which are specified in Section
34. That is evident from Section 34(1) under which recourse against an arbitral award can be made only by an application which conforms with sub-sections (2) and (3) of Section 34. The assumption by the learned Single Judge of an unbridled discretion vesting in the Court under Section 34 would negate the efficacy of arbitration as an alternate forum of dispute resolution. We have, therefore, considered ::: Downloaded on - 27/08/2013 21:00:17 ::: 13 of 17 APP.35.2013 it appropriate to deal with this aspect at some length in order to set the legal position right and to emphasise the danger in the Court assuming and exercising a wide and sweeping jurisdiction under Section 34. That was never the intent of Parliament.
13. The second aspect of the case is, to our mind, of equal significance. The learned Single Judge set aside the arbitral award on the ground that though the Respondent had deposited payments whenever a demand was made, though in part on some occasions, the Appellant had been requested not to square off the outstanding position in the account with an assurance to make good the short fall on 22 January 2008. The view of the learned Single Judge was that the award did not indicate whether the Appellant had informed or communicated to the Respondent the outstandings nor was the Respondent furnished a clear demand notice "before taking such drastic steps." The view of the learned Single Judge is that the discretionary decision of the Appellant to square off the amount on 22 January 2008 was in breach of the understanding and practice between the parties. At this stage, all that needs to be observed is that the award was set aside by the learned Single Judge by taking a view on merits. Once that is done, it is impossible to comprehend as to why the proceedings should be remanded back to the tribunal for reconsideration of all issues and keeping all points open. But the objection to the order of remand does not lie merely in the fact that the learned Single Judge had entertained a view on merits. Section 34(4) provides as follows :
::: Downloaded on - 27/08/2013 21:00:17 :::14 of 17 APP.35.2013 "34. Application for setting aside arbitral award.-
(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 aide the arbitral award."
14. Under sub-section 4 of Section 34, the Court is vested with the discretion, where it is appropriate and where the court is requested by a party, to adjourn the proceedings for a period of time. An adjournment is granted in order to furnish the arbitral tribunal with an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of the Tribunal will eliminate the grounds for setting aside the award. Sub-section 4 of Section 34, therefore, does not contemplate a situation where the proceedings are remanded back to the arbitrator after setting aside the arbitral award. Once an arbitral award is set aside under Section 34, that brings to a conclusion a proceeding before the Court. What sub-section 4 of Section 34 envisages is an opportunity to the arbitral tribunal to resume the arbitration proceedings or to take such other action as would eliminate the grounds for setting aside the award. Without meaning to be exhaustive, we can conceive of a situation where the arbitral tribunal has overlooked a particular item of claim on which parties have led evidence and have addressed arguments. A challenge to the arbitral award in such a case would be on the ground that the arbitral tribunal has failed to decide a claim which was raised, controverted and submitted upon. The provisions of Section 34 enable the Court to ::: Downloaded on - 27/08/2013 21:00:17 ::: 15 of 17 APP.35.2013 adjourn the petition under Section 34 so that instead of setting aside the award, the arbitral tribunal can resume the proceedings and take necessary steps to eliminate a ground of challenge. Section 34(4), however, does not contemplate or vest a power in the Court to remand proceedings back to the arbitral tribunal once the Court has set aside the award. Once an award has been set aside, recourse cannot be taken to Section 34(4) since it is evident that the power can be exercised by the Court while adjourning a petition under Section 34.
15. The jurisdiction under Section 34(4) can be exercised in a manner which is strictly consistent with that provision. The equitable jurisdiction which the Court exercises under Article 226 of the Constitution is clearly inapposite when dealing with a petition under Section 34. The learned Single Judge has relied upon his earlier decision in Angel Capital and Debt Market Limited Vs. Sharad Munot1, which seems to suggest that the Court has while setting aside an award a general power to remand the proceedings for reconsideration. We clarify that this would not reflect the correct position in law.
16. Before concluding our discussion of this aspect, we may note that Section 16 of the Arbitration Act, 1940 specifically conferred upon the Court a power to remit an award subject to stated conditions. A provision analogous to Section 16 has advisedly not been incorporated in the Act of 1996 and a circumscribed power has been vested in the Court by the provisions of Section 34(4).
1 Arbitration Petition No.972 of 2009 decided on 31 August 2012 ::: Downloaded on - 27/08/2013 21:00:17 ::: 16 of 17 APP.35.2013
17. The third and the final aspect of the case relates to the basis on which the learned Single Judge has set aside the award under Section
34. We have already come to the conclusion that the basis on which the learned Single Judge has exercised the jurisdiction under Section 34 does not reflect the correct position in law. The learned Single Judge was evidently of the view that notwithstanding his decision on merits, there was some scope for reconsideration of the entire matter on merits. That is why the Court proposed to remand the proceedings, a course of action which we have found to be unsustainable. Since the learned Single Judge has applied a patently incorrect test in law for entertaining a petition under Section 34, we indicated to the learned counsel that it would be inappropriate for this Court in appeal to revisit the challenges to the award in appeal. This exercise must in the first instance be carried out by the learned Single Judge. For the sake of record, we must note that it has been urged on behalf of the Respondent that the Appellant had in the present case not complied with Regulation 3.10 of Regulations of NSEIL for the futures and options segment by failing to make a demand on the Respondent. Since a decision on the issues which have been raised on merits and which were kept open by the learned Single Judge would have to be considered primarily in the exercise of the jurisdiction under Section 34, we are of the view that it would not be appropriate or proper for this Court to decide on the merits of the challenge under Section 34 for the first time in appeal.
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18. For these reasons, we are inclined to set aside the impugned judgment and order of the learned Single Judge dated 17 September 2012 and to restore the arbitration petitions under Section 34 for fresh consideration. While doing so, we clarify that we have not expressed any view on merits, on the admissibility of the grounds which have been raised in challenge to the arbitration award under Section 34 which are left open to be determined by the learned Single Judge on remand. To facilitate this exercise, we quash and set aside the impugned judgment and order dated 17 September 2012 and restore the petitions to the file of the learned Single Judge for a fresh decision. We request the learned Single Judge to expedite the final disposal on remand.
19. The appeals are allowed in the aforesaid terms. There shall be no order as to costs.
(DR.D.Y.CHANDRACHUD, J.) (S.C.GUPTE, J.) MST ::: Downloaded on - 27/08/2013 21:00:17 :::