Bombay High Court
Smt. Ashalata S. Lahoti vs M/S. Hiralal Lilladhar on 15 October, 1998
Equivalent citations: 1999(1)BOMCR293, (1999)1BOMLR241, [2001]103COMPCAS1097(BOM), 1999(1)MHLJ352
Author: F.I. Rebello
Bench: F.I. Rebello
ORDER F.I. Rebello, J.
1. Parties in each of the petitions are different. The facts and cause of action is also different. All these petitions are however, being disposed off by a common judgment as one of the questions involved is a question common to all the three petitions and arguments had been advanced by various Counsel on that proposition of law. Arbitration Petition No. 82 of 1997 and 83 of 1997 are filed under the Arbitration Act, 1940. (Hereinafter referred to as the 1940 Act). Arbitration Petition No. 318 of 1998 is filed under the Arbitration and Conciliation Act, 1996 (Hereinafter referred to as the 1996 Act).
2. Before coming to the common issue, it will be necessary to broadly set out the facts and the grounds raised in each of the petitions.
Award 997 is dated 22-12-1995. The Award pertains to certain transactions, transacted on the Bombay Stock Exchange. The transactions are between a member and a non member. By an Award dated 22-12-1995 the Arbitrator held that the Law of limitation, namely, Indian Limitation Act, 1963 is attracted and consequently the claims were time barred and cannot be entertained. The grounds to challenge the Award are as under :-
(a) The Award discloses an error of law apparent on the face of the record in as much as the Arbitrator has held that the Indian Limitation Act, 1963 is applicable to contracts based on the bye-laws framed pursuant to the power conferred by section 9 of the Securities Contracts (Regulation) Act. 1956;
(b) That the Award was passed beyond the time specified for making the Award. The parties did not consent for extension of time and consequently, the Award is liable to be set aside;
In Arbitration Petition No. 83 of 1997 the petitioners have impugned the Award dated 22-12-1995. The claims were referred to the Arbitrator in respect of transactions between a member and a non-member done on the Bombay Stock Exchange. The learned Arbitrator held that the provisions of the Indian Limitation Act are applicable and consequently held that the claim of the petitioner could not be entertained and dismissed their case. The contentions raised and argued in the petition are also the same as raised in Arbitration Petition No. 82 of 1997.
Respondents contend that the provision for arbitration is pursuant to a contract and hence there is no error of law apparent on the face of the record. It is further contended that the parties acquiesced in the continuation of the arbitral proceeding and in such cases Court can extend time.
In Arbitration Petition No. 318 of 1998, the petitioners have approached this Court against the decision of the Arbitrator dated 14-9-1998 whereby preliminary objections raised by the petitioners that the provisions of Indian Limitation Act, 1963 are applicable has been rejected. The claim was referred to the Arbitrator under the provisions of the 1996 Act. The contentions raised on behalf of the petitioners are as under :-
(a) That the provisions for arbitration between a member and non-member is by virtue of a contract independent of the bye-laws framed under the Securities Contracts (Regulation) Act, 1956; though by virtue of incorporation, the procedure set out in the bye-laws has to be followed. It is therefore, contended that the provisions of the Indian Limitation Act, 1963 are attracted and consequently the decision on the preliminary issue is liable to be set aside;
(b) That the composition of the Arbitral Tribunal was contrary to section 10 of the Arbitration and Conciliation Act, 1996.
On behalf of the respondents in this petition, it is contended that the application itself is not maintainable as no remedy is provided under the Act of 1996 to challenge such a finding on a preliminary issue.
The common question therefore in all the three petitions is whether the provisions of the Indian Limitation Act, 1963 will apply in respect of transactions between a member and non member done on the Bombay Stock Exchange pursuant to the bye-laws framed by the Bombay Stock Exchange under section 9 of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the Securities Contract Act).
3. Dr. Chandrachud for the respondent in Arbitration Petition No. 82 and 83 of 1997 and V.V. Tulzapurkar learned Counsel for the petitioner in Arbitration Petition No. 318 of 1998 arguing on behalf of the petitioners contend that the transactions between a member and non member is not a transaction under the Act. They contend that the Arbitration is pursuant to the contract signed between a member and a non member. It is contended that at the highest, the Agreement for Arbitration can be said to be by way of incorporation where by the procedure as laid down under the bye-laws of the Bombay Stock Exchange has been adopted. Adopting such procedure, it is contended does not mean that the Arbitration is pursuant to a provision in a statute. It is therefore, contended that such a transaction between a member and non member is not controlled by the bye-laws framed by the Act and as such the provisions of the Indian Limitation Act, 1963 will apply. In support, it is contended that such an issue arose though not exactly on the same point in the case of Collector of Aurangabad and another v. Central Bank of India and another, . In that case, tax dues were sought to be recovered as arrears of land revenue as the Act itself so provided. If the arrears were arrears of land revenue, it had first priority over other dues. The Apex Court had to consider the question as to whether the tax dues which could be recovered as arrears of land revenue could be said to be "land revenue". The Apex Court negating the contention held that merely because the procedure for recovering the tax was as if it was an arrears of land revenue, by itself would not convert "tax" into land revenue to get priority for payment.
Reliance was also placed on a Judgment of the Division Bench of this Court in the case of Savitra Khandu Berad v. The Nagar Agricultural Sale and Purchase Co-operative Society Limited, Ahmednagar, reported in 49 Bom.L.R. 425. Reference to Arbitration thereunder was made under section 54 of the Bombay Co-operative Societies Act, 1925. The question which arose was whether the Indian Limitation Act, 1908 applies to claim for adjudication as also the procedure prescribed in section 54 of the Bombay Co-operative Society Act, 1925. A Division Bench of this Court held that Arbitration under section 54 was a statutory arbitration and as such, section 37 of the Arbitration Act, 1940 is not applicable. The Division Bench observed that in a arbitration proceeding where the source of the authority of the Arbitrator is a statute, and not an Agreement between the contending parties, a condition that the Arbitrator must decide the dispute according to the law of limitation cannot in the absence of a statutory provision be implied. The Division Bench observed that the legislature has by section 46 of the Arbitration Act expressly excluded the application of section 37 to statutory arbitrations, and if notwithstanding that express exclusion the provisions of the Indian Limitation Act are applied, the Court would in effect be rendering the exclusion Clause ineffective. To similar facts, reliance has also been placed on another Division Bench judgment of this Court in the case of The Textile Labour Association, Ahmedabad v. The Labour Appellate Tribunal of India and others, . The Division Bench speaking through Chagla, C.J., observed that the provisions of the Arbitration Act which the Court was concerned are made applicable to a statutory arbitration and what section 46 provides is that the provisions of Arbitration Act shall apply except in so far as Arbitration Act is inconsistent with any other enactment or rules made thereunder which provide for a statutory arbitration. Thereafter the Division Bench observed that section 46 deals with those statutory arbitrations where the statute itself is looked upon as an Arbitration Agreement and in so far as the case which the Division Bench was considering was not a statutory arbitration in the sense in which section 46 intends to be. The Arbitration was under section 66 by a written submission to Arbitration of a private party. Therefore, a distinction was sought to be made between a statutory arbitration and a private arbitration. In Hemendra Shah petitioner v. Stock Exchange, Bombay and others, respondents, reported in 1995(2) Mh. L.J. 770, a learned Single Judge of this Court was considering the bye-laws framed under the Securities Contracts (Regulation) Act, 1956 and the provisions of the Arbitration Act. In para 14, the learned Single Judge observed that section 37 does not apply to an Arbitration under the Rules, Bye-laws and Regulations of the Bombay Stock Exchange. In para 19, the learned Single Judge observed that bye-laws 226(a) and 226(c) make it very clear that all such contracts or dealings irrespective of the fact that there may be no contract notes are deemed to be subject to these Rules, Bye-laws and Regulations. It is therefore, clear that these Rules, Bye-laws and Regulations will govern such contracts and dealings. This judgment is sought to be distinguished on the ground that it was not a judgment between a member and non member. On a perusal of the facts, it will be observed that it was a dispute between a member and a non-member. Hence, the ratio of that judgment would be applicable to the case in question. However, I proceed on the footing that the said judgment does not cover a dispute between a member and a non member.
At this stage, I may also refer to the reference made to the case of M/ s. Trilokchand Motichand and others v. V.H.B. Munshi, Commissioner of Sales Tax, Bombay and another, to contend that the law of limitation and/or latches is a matter of public policy. The need for a law of Limitation as stated in the Halsbury Laws of England (Third Edition volume 24) are for three different reasons:-
(1) that long dorment claims have more of cruelty than justice in them;
(2) that the defendants might have lost the evidence to disapprove a stale claim;
(3) that persons with good causes of action pursue them with reasonable diligence.
It is therefore, contended that stale claims should not be considered. It is further contended that the object of the statute of limitation was to give effect to the maxim "interest reipublicoe put sit finis litium" (interest of State requires that there should be a limit to litigation). It is therefore, contended that the healthy principle was that stale claims are not pursued. It is further pointed out that under the Regulation framed by the Securities Contracts (Regulation) Act, 1956, stock brokers are required to maintain books under Rule 15 for a period of five years. Considering any claim beyond this period it is contended would be to permit stale claims to be adjudicated when the books or record of the transactions not being made available.
4. Let me therefore consider whether it can be said that the provisions for Arbitration is under the Statute or is pursuant to the contract signed between the parties. In Arbitration Petition No. 130 of 1998 Vinay Burna v. Yogesh Mehta and others, , I had occasion to consider section 46 of the Act of 1940 and section 2(4) of the Act of 1996. The question that came up for consideration was whether the expression under the enactment would include the provisions for arbitration under the bye-laws of the Bombay Stock Exchange. Bye-laws of the Bombay Stock Exchange are framed pursuant to section 9 of the Securities Contracts (Regulation) Act. Section 9(1) provides that any recognized Stock Exchange may, subject to the previous approval of the Securities and Exchange Board of India, make bye-laws for regulation and control of contracts.
Sub-Section 2(k) reads as under:-
"the Regulations of the entering into, making, performance, rescission and termination of contracts, including contracts between members or between a member and his constituents or between a member and a person who is not a member and the consequence of default or insolvency on the part of seller or buyer or intermediary, the consequences of breach of omission buyer or intermediary the consequences of breach of omission by a seller or a buyer and the responsibility of the members who are not party to such contracts."
Section 2(n) reads as under:-
"the method and the procedure for settlement of claims or disputes including settlement by Arbitration."
While considering the language of the expression under the Act, I had occasion to consider the judgment of the Apex Court in Dr. Indrakumar Gupta v. U.R. Nath, . Before the Apex Court, what was under consideration was the expression by the Act, under the Act, or prescribed under the provisions of Forward Contracts (Regulation) Act, 1952. Relying on the said judgment, I have held that the expression under the enactment would include the provisions for arbitration made by the bye-laws framed under the Act. Therefore considering the above said judgment, the expression 'under the Act', in section 46 of the 1940 Act, and section 2(4) of the 1996 Act, I have held that the provisions of Arbitration under the provisions of the bye-laws of the Bombay Stock Exchange are under the Act.
A still finer distinction is sought to be made here, namely that though the provision for arbitration between a member and member is under the bye-laws, the arbitral clause between a member and a non member is not by virtue of the bye-laws but, by a separate contract. All that is done it is contended is that the Contract incorporates the provisions of the bye-laws in so much as the procedure is concerned, which includes Arbitration.
5. Let us therefore, examine the relevant bye-laws for the purpose of finding out whether the argument advanced on behalf of the petitioners has substance. Bye-law No. 20 provides that dealings in securities shall be permitted on the Exchange as provided in the Bye-Laws and Regulations. No other dealings are allowed. Bye-Law No. 44 sets out that the terms "Bargain" "transactions" "dealings" and "contract" shall have one and the same meaning unless the context indicates otherwise.
Bye-law No. 191 provides that the Exchange does not recognized as parties to any bargain in the market any parties other than its own members and every member is directly and primarily liable to every other member with whom he affects a bargain for its due fulfillment in accordance with the Rules. Bye-laws and Regulations of the Exchange whether such bargain be on account of the member affecting it or on account of a principal.
Bye-law No. 192 provides all bargains in securities in which dealings are permitted shall in all cases be deemed made subject to the Rules, Bye-laws and Regulations of the Exchange which shall be a part of the terms and conditions of all such bargains and they shall be subject to the exercise by the Governing Board and the President of the powers with respect thereto Vested in it or him by the Rules, Bye-laws and regulations of the Exchange.
Bye-law No. 219 provides that the contract notes rendered by members to non-members shall state that the contract is subject to the Rules, Bye-laws, Regulations and usages of the Exchange and subject to arbitration as provided in the Rules, Bye-laws and Regulations of the Exchange and subject to the jurisdiction of the courts in Bombay. The contract notes shall not contain any provision inconsistent with the Rules, Bye-laws and regulations of the Exchange. The names of the partners or the sole proprietor of a firm shall be printed on the contract notes. The contract notes shall also be in such form as will provide that the words "Member(s) of the Stock Exchange, Bombay shall immediately follow the signature.
Bye-law No. 220 provides that the contract notes rendered by members to non-members in respect of bargains made for and on behalf of such non-members" account may be in the form prescribed in the relative Regulation or in such other form or forms as the Governing Board may from time to time prescribe in addition thereto or in modification or substitution thereof. Such contract notes shall state that brokerage at rates not exceeding the official scale of brokerage has been charged and allowed for in the price.
Bye-law No. 226 provides that all contracts made by a member for or with a non-member for the purchase or sale of securities in which dealings are permitted on the Exchange shall in all cases be deemed made subject to the Rules, Bye-laws, Regulations and usage of the Exchange which shall be a part of the terms and conditions of all such contracts and they shall be subject to the exercise by the Governing Board and the President of the powers with respect thereto vested in it or him by the Rules, Bye-laws and Regulations of the Exchange.
Bye-law No. 282 is a bye-law which provides for arbitration in respect of claims, complaints, differences and disputes between members arising out of or in relation to any bargains, dealings, transactions of contracts made subject to the Rules, Bye-laws and Regulations of the Exchange or with reference to anything incidental thereto or anything to be done in pursuance thereof any question or dispute whether such bargains, dealings, transactions or contracts have been entered into or not shall be subject to arbitration and referred to the Arbitration Committee as provided in these Bye-laws and Regulations.
Bye-law No. 307 provides that a Arbitration committee shall not take cognizance of any claim, complaint, difference or dispute which shall not be referred to it within three months of the date when it arose.
Bye-law No. 354(a) provides as under :--
A member shall not enter into the following contracts and any such contracts if entered into in contravention of the provisions in that behalf contained in these bye-laws and Regulations shall be void:
(i) contracts for the clearing in other than Cleared Securities;
(ii) contracts for a period beyond the current and ensuing clearings in Cleared Securities;
(iii) contracts for hand delivery for a period beyond fourteen days save as provided in these Bye-laws and Regulations;
(iv) contracts for special delivery without the permission of the Governing Board or the President as provided in these bye-laws and Regulations;
(v) contracts (other than specific bargains) for purchase and sale of securities dealings in which are not permitted on the Exchange.
(vi) contracts for the purchase and sale of prospective dividends;
(vii) carry-over contracts between members and their constituents either as agent to principal or as principal to principal in respect of which contract notes are not rendered to constituents at the special making up price as provided in these bye-laws and Regulations.
Therefore, considering section 9 of the Securities Contracts (Regulations) Act, 1956 read with sub-section 2(b) and 2(k) and 2(h) I have no doubt whatsoever that the provision for arbitration is a provision under the bye-laws. Bye-law No. 226 makes it absolutely clear that transactions between a member and non-member is deemed made subject to the Rules, Bye-Laws Regulations, usage of the Exchange, Bye-law No. 219 makes it mandatory that the contract notes provide that the contract is subject to the Rules, Bye-laws, Regulations and usages of the Exchange I have therefore, no hesitation in holding that contracts between a member and non-member is pursuant to the bye-laws framed under section 9 of the Securities Contracts (Regulation) Act, 1956 and that the provisions for Arbitration contained in the contract is therefore under the Act and as such, falling within section 46 of the 1940 Act and section 2(4) of the Act of 1996. It is an Arbitration Agreement under the Act.
Therefore, once I hold that this is an Arbitration under the Act, the first contention of the petitioners must be rejected. By virtue of section 46 of the 1940 Act, section 37 excludes the provisions of the Indian Limitation Act in the Act of 1940 and by virtue of section 2(4) the application of Indian Limitation Act as contained in section 43 is excluded. Therefore, the provisions of the Indian Limitation Act will not apply to Arbitration between a member and non-member in respect of transactions done under the Bombay Stock Exchange Act.
It is true that the interpretation will make stale claims arbitrable. In so far as the dispute between a member and a member is concerned, bye-laws have been framed whereby limitation to refer to a dispute is 3 months. It is however, no answer to contend that the principle of laches should be read into the Act. Once the parties sign an Agreement to refer a dispute to arbitration and make no provision for raising disputes within a specified period the question of reading limitation will not arise. It is for the Exchanges to consider amending the bye-laws in alike manner like disputes between members and members and providing for a suitable period of limitation.
6. Having disposed off the main point I will now address myself to the other contentions raised on behalf of the respondents in Arbitration Petition No. 82 of 1997 and 83 of 1997.
It is firstly contended that even if the Court comes to the conclusion that the provisions of Indian Arbitration Act are applicable, it will not amount to an error of law and it will not be open to this Court to interfere with the Award of Arbitrators.
In Union of India v. A.L. Rallia Ram, the Apex Court held that the Award is bad on the ground of error of law on the face of it, when in the Award itself or in the document actually incorporated, there is found some legal proposition which is the basis of the Award and which is erroneous. An error in law on the face of the award means that it must be found in the Award or in the document actually incorporated thereto, a note appended by arbitrator, stating reasons for his judgment, some legal proposition which is the basis of the Award and which you can they say is erroneous. However this rule will not apply where the questions of law was referred to the Arbitrator for his decision. The Award of the Arbitrator on this question is binding upon the parties. By referring the specific question, the parties desire to have a decision from the Arbitrator on those questions rather than from the Court and the Court will not unless it is satisfied that the Arbitrator had proceeded illegally interfere with the decision. This has been reiterated in the M/s. Tarapore and Company v. Cochin Shipyard Ltd. Cochin and another, as also subsequently in the case of U.P. Hotels etc. v. U.P. State Electricity Board, . The Apex Court has further noted that to set aside the Award, there must be a wrong proposition of law laid down in the Award as the basis of the Award.
On behalf of the respondents, it is contended that in the instant case what was referred to the Arbitrators was not a question of law but, claims made by the respondents. It is therefore, contended that if the incidental questions are considered, that would not be a question of law referred for decision of the arbitrators. Reliance for that purpose has been placed on judgments of the High Court of Madras Easun Engineering Co. Ltd. v. The Fertilisers and Chemicals Travancore Ltd. and another, and of the Karnataka High Court in State of Karnataka and another v. R.H. Shetty and Co. Engineers and Contractors, .
Considering the law and the facts in the present case, it is clear that the dispute as to whether the provisions of Indian Limitation Act apply or not was not referred to the decision of the Arbitrator. That was considered incidentally as a preliminary issue and it is in these circumstances, that the issue was decided. It is true that the Apex Court has gone to the extent of holding that even if the Arbitrator has decided the question contrary to the judgment of the courts, that by itself would not amount to an error of law if the question was referred for decision of the Arbitrator unless the Arbitrator had proceeded illegally. In the instant case, it was not so referred. The proposition of law that Indian Limitation Act, 1963 applies therefore, amounts to an error of law and the Award therefore is liable to be set aside on that count alone.
7. In so far as the second contention was concerned, that time was not extended it is true as can be seen from the record that the Award was passed beyond the time prescribed. However the Apex Court in the case of State of Punjab v. Hardyal, and in the case of Hindusthan Steel Works Construction Ltd. v. C. Rajasekhar Rao, has held that the Court can extend the time on the facts of the case. In the instant case, no objection was taken before the Arbitrator that the time was not extended and that he was rendered functus officio. On the contrary, the parties continued with the proceedings without any demur or protest. In these circumstances, it would be appropriate on the facts of this case to extend the time under section 28 of the Act of 1940. I am therefore, rejecting the second contention on behalf of the petitioners that the Award is liable to be set aside on that count.
8. That brings us to the questions in so far as Arbitration Petition No. 318 of 1998. For the law as discussed already on the point of limitation, the finding on preliminary issue must be upheld.
The second contention however, is that the Arbitral Tribunal is not property constituted and therefore, arbitral Tribunal as presently composed cannot proceed to dispose off the claim. In Arbitration Petition No. 130 of 1998 Vinay Bubna v. Yogesh Mehta & others 1998(5) L.J. (S), 613 decided on 7-9-1998, I have taken a view that where the Arbitral Tribunal consists of an even number of Arbitrators, the same would be contrary to section 10 of the Act of 1996. In the instant case, the composition of the Tribunal is of two members and consequently it will be contrary to section 10 of the Act, as parties cannot derogate from the said provision.
10. However, it is contended that no petition would lie before this Court as it is not an Award covered by section 34 or for that matter an order passed under sub-section (2) or (3) of section 16 which is appealable under section 37 of the Arbitration and Conciliation Act, 1996. I have to reject the said contention. Under section 14 of the Act of 1996, the mandate of the Arbitrator shall terminate if he becomes defacto or de jure unable to perform his functions. The Arbitrator or Arbitrators must therefore be able to proceed with the Arbitration proceedings. If the Tribunal is constituted contrary to section 10 of the Act of 1996, the Arbitrators de jure will not be able to perform those functions. In that event the parties can move the Court for decision to decide whether the mandate has terminated. One of the grounds raised is regarding the termination of the proceedings. The matter is still pending before the Arbitral Tribunal and proceedings have not yet been terminated. In view of that, this Court will have jurisdiction under section 14(2) to decide that question. I am aware that a similar question had come up before me earlier. I had upheld the contention under section 10 of the Act of 1996 but refused to interfere with the proceedings considering the language of section 16 and 37(2) of the Act of 1996. Under section 37(2) of the Act of 1996, appeal lies only when the Arbitral Tribunal upholds the plea that it has no jurisdiction. Section 14(2) had not been considered. The present petition can therefore be treated as an application under section 14(2). Once it is so treated it will be held that the arbitrators dejure cannot proceed with the Arbitration.
11. In the above context, the following order : --
Arbitration Petition No. 82 of 1997 and 83 of 1997 are allowed. The impugned Awards are set aside. The matter is remitted back to the Arbitrators for deciding the reference afresh within four months from receipt of communication of the order of the Court. Each party to bear their own costs.
Arbitration Petition No. 318 of 1998 is allowed. Proceedings stand terminated.
Each party to bear their own costs.
Counsel for the respondent seeks stay of the order. I find no reason to stay the order and consequently application for stay rejected.
12. Petition allowed.