Bangalore District Court
Mr.A.Boopathi vs ) M/S.Way 2 Wealth Brokers Private Ltd on 10 June, 2020
IN THE COURT OF THE VI ADDL. CITY CIVIL & SESSIONS JUDGE
AT BENGALURU CITY
(CCCH.11)
Dated this the 10th day of June, 2020
PRESENT: Sri.Rama Naik, B.Com., LL.B.,
VI Addl.City Civil & Sessions Judge,
Bengaluru City.
A.S.NO. 45/2014
PETITIONER/ MR.A.BOOPATHI
PLAINTIFF S/o.late Sri.T.M.Anjineyalu,
Aged about 60 years,
R/at No.17, Clarke Road,
Richards Town, Bengaluru -560 005.
[By Pleader Sri. Anandarama.K]
/Vs/
RESPONDENTS/ 1) M/s.Way 2 Wealth Brokers Private Ltd.,
DEFENDANTS Regd.Office : Frontline Grandeur
14, Walton Road, Bengaluru -560 001.
[By Pleader Sri.M.G.Nanjappa]
2) Mr.K.K.Balu,
Presiding Arbitrator
C/o.National Stock Exchange of India Limited
8th Floor, Arihant Nitco Park,
90, Dr.Radhakrishnan Salai, Mylapore,
Chennai - 600 004.
3) Mr.Anantharaman,
Arbitrator,
C/o.National Stock Exchange of India Limited
8th Floor, Arihant Nitco Park,
90, Dr.Radhakrishnan Salai, Mylapore,
Chennai - 600 004.
AS.45/2014
2
4) Mr.M.Navarathan,
Arbitrator
C/o.National Stock Exchange of India Limited
8th Floor, Arihant Nitco Park,
90, Dr.Radhakrishnan Salai, Mylapore,
Chennai - 600 004.
[Arbitrators]
JUDGMENT
This suit is filed by Plaintiff under Section 34 of the Arbitration and Conciliation Act, 1996, praying for setting aside the arbitral award dated 18.02.2014 passed by the Panel of Arbitrators in Arbitration matter (A.M) No:F&O/C-0008/2013 and for costs.
2) Plaintiff's case, in brief, is that, Defendant No.1 is a Company and is engaged in the business of stock/equity broking. Defendant No.1 is a member of the National Stock Exchange of India Limited and Bombay Stock Exchange Limited and is bound by the NSE Rules, by-laws and various regulations. Defendant No.1 is also registered with AS.45/2014 3 SEBI and is bound by the guidelines and directives issued by SEBI from time to time. Defendant No.1, being a Non Banking Financial Institution, is bound by the guidelines issued by Reserve Bank of India from time to time.
3) It is stated that, Defendant No.1 approached the Arbitration Department of National Stock Exchange of India Limited [for brevity 'NSE'] requesting for appointment of Arbitrator and a sole Arbitrator was appointed to arbitrate the dispute. Upon receipt of notice of arbitration, Plaintiff and his Advocate addressed various letters requesting certain information. Sole Arbitrator issued specific direction to Defendant No.1 to furnish information and documents to Plaintiff, however, Defendant No.1 failed to furnish the same. Instead, Defendant No.1 forwarded copies of the very same documents already filed before the Arbitrator and same was received by Plaintiff on 03.09.2013. Plaintiff filed his statement of case with liberty to file additional AS.45/2014 4 statement of case. Plaintiff also raised a counter claim of Rs.51,21,376=59. As the counter claim of Plaintiff exceeded Rs.25,00,000/-, the sole Arbitrator referred the matter to NSE, which in turn, appointed a panel of three Arbitrators and impugned award came to be passed on 18.02.2014 allowing the claim of Defendant No.1 in part. Counter claim of Plaintiff was partly allowed to an extent of Rs.13,69,726=24. Award dated 18.02.2014 was communicated to Plaintiff by NSE by its letter dated 25.02.2014, which was received by him on 04.03.2014.
4) Being aggrieved by the award, Plaintiff has challenged the same on the following grounds :
(1) Observation of the Arbitral Tribunal that Plaintiff made the counter claim on account of unauthorized sale of shares given for F&O margin towards outstanding in equity segment is wholly misconceived. Observation that shares were given towards outstanding in equity segment is a figment of AS.45/2014 5 imagination of the Arbitrators, without any basis and it is wholly erroneous.
(2) Arbitral Tribunal, by Order dated 05.08.2013, directed Defendant No.1 to furnish the details claimed in Sl.No.(a) &
(b) of Paragraph 1 and (a) to (d) of paragraph 2 of letter dated 24.07.2013 to Plaintiff, but, the said order was not complied by Defendant No.1. Defendant No.1 was also directed by Arbitral Tribunal on 01.11.2013 to provide to Plaintiff the documents set out in Memo dated 06.09.2013 filed by Plaintiff before Arbitral Tribunal. Said order was also never complied by 1st Defendant. Said documents were relevant to the case and under such circumstances, Arbitral Tribunal ought to have drawn adverse inference against Defendant No.1.
(3) As per Clause 1.3.5 of Annexure-1 to the Combined Risk Disclosure Document for Capital Market/Cash Segment and Futures & Options Segment any order for buy or sell of a security shall be in writing or in such form or manner as may be mutually AS.45/2014 6 agreed. Further, as per voluntary document dated 24.11.2007, Plaintiff had agreed that he is desirous of giving verbal orders/instructions for purchase or sale of securities, which 1st Defendant was requested to accept the verbal orders and also confirm the execution/non execution of orders/ instructions verbally. Arbitral Tribunal specifically held at page 14 of the award that there is no material to show that impugned purchase or sale transactions are either supported by any verbal or written instructions of Plaintiff or in any other form whatsoever. If that be so, any transaction undertaken by Defendant without there being any orders placed and without the concurrence and authority of Plaintiff is wholly unauthorized, illegal, contrary to terms of Risk Disclosure Agreement and voluntary document, which is binding on both parties. 1st Defendant has failed to prove that Plaintiff had placed any orders. There being no concluded contract to either buy or sell shares. All further unilateral actions of 1st AS.45/2014 7 Defendant will not validate its unauthorized and illegal act. Having held that there was no material to hold that Plaintiff had placed any orders, the Arbitral Tribunal committed a grave error in conducting a roving enquiry into the alleged conduct of the Plaintiff to hold that Plaintiff is liable.
(4) Contract notes were admittedly followed by SMS alerts, statement of accounts and other financial statements for the relevant period is wholly erroneous, contrary to record, perverse and liable to be set aside. Purchase and sale of shares by Defendant No.1 in Plaintiff's trading account on 07.09.2011 and 01.02.2012 in cash segment is wholly unauthorized and illegal. No margin was given by Plaintiff towards the said alleged illegal and unauthorized transaction. Said transaction was not with the concurrence and knowledge of Plaintiff. Plaintiff had given margin by way of cash margin and script margin to the tune of Rs.44,53,050=02 and shares worth Rs.31,68,323=57 ( as on the date AS.45/2014 8 on which it was unauthorizedly sold) respectively in F&O segment and had produced documents in this regard as Annexure - 3 and 4 to the list of documents dated 06.09.2013. Sale of said margins by Defendant No.1 is illegal, unauthorized, contrary to rules and regulations, unethical, unsustainable and Defendant No.1 is liable to refund the same to Plaintiff. (5) Findings of the Arbitral Tribunal that as Plaintiff did not object in any prescribed mode to the contract notes, sauda summary reports and profit and loss statements, the same is binding on him, such conduct of Plaintiff in not having refuted the purchase or sale of shares should be weighed and that Plaintiff never objected to the said transactions during the course of conversation on 17.09.2011 allegedly brought out in the CD is wholly erroneous and liable to be set aside. First, copy of the recording produced before Arbitrator is not pertaining to the conversation held on 17.09.2011, but on 15.09.2011. This shows non application AS.45/2014 9 of mind by the Arbitrators. Secondly, alleged disputed transaction was not the subject matter of conversation. Thirdly, original of recording is not produced. Recording pertaining to 07.09.2011 or subsequent dates is not produced for the reasons best known to Defendant. Recording ought to have been produced as Plaintiff specifically contended that he had objected to the alleged transaction, when he learnt about the same and had brought it to the notice of CEO on several occasions by telephone as well as in person. That apart, Plaintiff is clearly heard saying about 14 times that 'he does not want even one rupee exposure'. Under the circumstances, the finding that Plaintiff is stopped and therefore, he cannot deny the execution of trades as allegedly brought by the electronic contract notes is wholly misconceived, illegal, unsustainable, arbitrary and liable to be set aside. (6) Finding that letters addressed by Plaintiff is only an afterthought is without any basis. Said letters were AS.45/2014 10 addressed at an undisputed point of time as the oral complaints of Plaintiff to the CEO did not yield any result. Finding that there is inordinate delay and inaction on the part of the Plaintiff is equally erroneous and without any basis. It is unconceivable as to how without there being any orders placed, the contract notes and other documents came into existence. Fraud played by 1 st Defendant looms large on the face of record and Plaintiff cannot be held liable to the said fraudulent and unauthorized transactions conducted by 1st Defendant in Plaintiff's trading account without his concurrence and knowledge.
(7) Finding of Arbitral Tribunal that sale of the disputed shares along with scrip margin provided by Plaintiff in F&O segment on 01.12.2012 is in accordance with Clause 2(h) of Agreement dated 06.12.2007 is erroneous, illegal and liable to be set aside. In coming to the said conclusion, the Arbitral Tribunal relied upon said clause of the Agreement, is misconceived and erroneous. Said clause is applicable only AS.45/2014 11 when transaction is authorized and has been carried out with the concurrence and knowledge of the constituent/ Plaintiff. In the present case, transactions were unauthorized and illegal. As per Clause 2(f) of the Agreement, if a constituent fails to make payment of consideration to the trading member in respect of any one or more securities purchased by him before the pay-in date, the trading member shall be at liberty to sell the securities received in pay-out in proportion to the amount not received, after taking into account any amount lying to the credit of the Constituent, by selling equivalent securities at any time on the Exchange not later than the fifth trading day reckoned from the date of pay-in. It further provides that if the trading member has not sold the securities for any reason whatsoever, such securities shall be deemed to have been closed out at the close out price declared by the Exchange for the fifth trading day. In the present case, the unauthorized purchase of shares allegedly took place AS.45/2014 12 on 07.09.2011, the shares were sold on 01.02.2012 i.e. almost five months after the date of alleged purchase while the agreement provides a period of five days. Having failed to act as per Clause 2(f) which precedes clause 2(h), Defendant cannot be permitted to take shelter under Clause 2(h). Arbitral Tribunal conveniently avoided referring to Clause 2(f) and have thereby misconducted and the award is perverse. That apart, while a reference is made to Clause 2(h), the Arbitral Tribunal has failed to notice the provisions in Clause 2(j), according to which, 1st Defendant has the right to prevent any new orders from being placed and or executed by the Client. (8) Finding that the Satyam shares does not belong to the Plaintiff is wholly erroneous, baseless and wholly unsustainable. Plaintiff has purchased the shares through 1st Defendant and the same has been transferred to his DP account with ILFS on 08.07.2011. Same was brought to the notice of Arbitral Tribunal as 1st Defendant contended that AS.45/2014 13 the same is given to them as scrip margin in F&O which was wholly false. Arbitral Tribunal wholly misconstrued the issue and the finding is baseless and arbitrary. Had there been any debit in Plaintiff's account, the said shares would not have been transferred to the DP account of Plaintiff in ILFS. This proves the fact that Plaintiff did not have any debit in his trading account.
(9) Irrelevant aspects have been taken into consideration and relevant and important aspects have been eschewed to suit their convenience and the findings are wholly perverse. Approach of Arbitral Tribunal is unknown to any cannons of law and findings are arbitrary, biased and one sided.
Arbitrators were not eligible as per SEBI guidelines and norms and were biased and have violated the code of conduct prescribed by the SEBI as per its Circular No.CIR/MRD/DSA/24/2010 dated 11.08.2010 and have failed to act in fair, unbiased, independent and objective manner.
AS.45/2014 14 For all these reasons, Plaintiff prays for setting aside the award.
5) Defendant No.1 marked appearance through its counsel and filed its statement of objections, wherein, it is stated that, Plaintiff is not entitled to the part reliefs given under Issue No.6 of the award in his favour. Issue No.2, 3 and 4 of the award has been rightly affirmed by the Hon'ble Tribunal in its favour. Issue No.1 has been partly allowed in its favour and Plaintiff may be directed to deposit the award amount along with interest at 12% per annum from the date of award in its favour without further delay. It is stated that, Plaintiff has executed Client Application dated 06.12.2007 and signed - (a) Client Registration Form (b) membership client Agreement and (c) Risk Disclosure Document. With the execution of these documents, Plaintiff was aware of all the financial risks associated with the equity shares, derivative and other securities traded in NSE & BSE exchanges. Plaintiff has been AS.45/2014 15 actively trading in various securities for the last 40 years knowing all the process and procedures of the trading activities and is not a novice investor as wrongly stated in the objections and in this suit. Defendant No.1 had delivered the relevant Contract Notes, Transaction Statements, Margin Statements, Bills concerning the trades executed in cash and F&O segment in the said trading account to the Plaintiff at his registered address, which was supplemented by SMS alerts on the mobile of Plaintiff and hence, Plaintiff was well aware of all the trading activities undertaken by him supported by the documents executed thereof.
6) It is stated that, as per Clause 13.5 of Annexure-1 of Risk Disclosure document, the purchase and sale of shares on the trading account of the Plaintiff were conducted with his concurrence and authority which was followed by written orders and by verbal instructions in terms of the voluntary document dated 24.11.2007. As per his statement AS.45/2014 16 dated 06.09.2013, Plaintiff himself has admitted that he had received all the contract notes at his residence by post/SMS as per the postal address and cell number was available with Defendant, which proves that Plaintiff had knowledge of all the trades undertaken by him with this Defendant. As per Clause 13.10 of Annexure-1 of Risk Disclosure Document, Plaintiff was obligated to report the errors immediately on receipt of statement of accounts but not later than 30 days of receipt which actions were not reported by Plaintiff proving that the trading was valid and binding on Plaintiff.
7) It is stated that, even under Clause 16 of the Member Client Agreement dated 06.12.2007 at Exhibit-A.1, Plaintiff had failed to reconcile the accounts at the end of each quarter which proves that trading was conducted with the knowledge of the Plaintiff. The summary reports and P/L statements for the period of 01.04.2011 to 31.03.2012 holding all the transaction details AS.45/2014 17 including the transaction on 07.09.2011 and 01.02.2012 was never controverted by Plaintiff, which proves that the transactions were genuine and not riddled with fraud as falsely stated by him. Plaintiff was given ample opportunities to protest or set right the errors, or clarify the discrepancies knowing fully well when he received the Contract Notes and SMS alerts, Plaintiff chose to remain silent all the while, thereby ratifying all the trades and transactions with open eyes at each relevant point of time. Plaintiff is an experienced trader and it is an undisputed fact that he has not refuted any of the Contract Notes and SMS alerts which proves that all the trades and transactions were accepted by Plaintiff.
8) It is stated that, Defendant has exercised its right under Clause 2(h), (I) and (j) of the Agreement dated 06.12.2007 towards the defaulted obligations of Plaintiff and hence, the Defendant has not committed any illegalities as alleged by Plaintiff.
AS.45/2014 18 Defendant had issued a communication dated 25.01.2012 dispatched by Courier Service enclosing the debit balance of Rs.1,44,25,643.55 along with break up details which consisted of debit balance of Rs.1,44,25,643.44 along with collateral of Rs.1,22,01,550 requesting the Plaintiff to clear the debit balance to avoid squaring off actions from RMS which communication could not be delivered since Plaintiff refused to accept the said communication as seen in the returned envelop. Said communication was addressed to the correct address of Plaintiff and hence, Plaintiff disputing the facts that he did not receive the said communication is a false statement purely made to frustrate the case of Defendant. Plaintiff at the time of executing Client Registration Form had agreed that in the event of any outstanding amount, Defendant was entitled to make an inter se adjustment from the balances and collaterals held by Plaintiff and hence, as per Clause (f), 5, 3, Defendant had adjusted the collaterals of Plaintiff to AS.45/2014 19 meet his payment obligations, was not illegal as contended by Plaintiff. Defendant was legally entitled to recover the payment and balance obligations of Plaintiff without notice as per Letter and voluntary document. Roll over of Plaintiff derivative position for the expiry of August 2011 viz., open position as on 28.08.2011 was rolled over to September 2011 on 22.08.2011 by Plaintiff himself as per Contract Notes dated 22.08.2011 and same is not disputed by the Plaintiff and the Roll over is proved beyond doubt and therefore, the contention of Plaintiff that he directed the Defendant to close the position at least as on 22.08.2011 is a false submission made by Plaintiff. Roll over position and fluctuations, the margin obligations drastically changed which resulted in penalty of Rs.14,730/- on 02.09.2011; Rs.14,949.90 on 05.09.2011 and Rs.14,638/- on 06.09.2011 on Plaintiff as per new rules of exchange with effect from 01.09.2011 which was also enclosed in the financial statements given to Plaintiff by Defendant.
AS.45/2014 20 Said ledger entries have not been disputed. To avoid margin penalty being levied by exchange and to do way with the margin obligations for F&O segment, Plaintiff closed out the existing derivative position on 07.09.2011 by replacing the same quantity with a corresponding buy transaction in the cash segment worth Rs.95,03,361.37 on 07.09.2011 and closure of F & O position and purchase of shares on 07.09.2011 both synchronizes and in the recorded telephone conversation on 15.09.2011, it can be understood that Plaintiff had taken a stand to close the position in the cash position at an appropriate time which proves that Plaintiff was aware of the closure of F & O position, that Plaintiff did not instruct the closing of position in the cash segment prior to September 2011 and inclusion of collateral shares in the conversation regarding off setting of the collateral margin for F&O was being used for cash outstanding, hence, prays for dismissal of suit with costs.
AS.45/2014 21
9) Heard learned Counsels for the parties. Perused the record. Also perused the written arguments submitted on behalf of Plaintiff and Defendant No.1.
10) Points that arise for my consideration are :
(1) Whether Plaintiff has made out any of the grounds as enumerated under Section 34 of the Arbitration and Conciliation Act, 1996, to set aside the impugned award?
(2) What Order?
11) My answer to above points are :
Point No.1 - In the Affirmative;
Point No.2 - As per final order, for the following :
REASONS
12) Point No.1 : This suit came to be filed by Plaintiff [Respondent in the arbitral proceedings] for setting aside the award passed by the Arbitral Tribunal, whereby, the Arbitral Tribunal was pleased to allow the claim of 1st Defendant AS.45/2014 22 [Claimant in the arbitral proceedings] in part and to allow the counter claim of Plaintiff in part.
13) Plaintiff's contention is that, he had never placed any order nor given any instructions for purchase of shares on 07.09.2011 or sale of shares on 01.02.2012. Said purchase and sale of shares by 1st Defendant were wholly unauthorized, irrelevant and illegal. On the other hand, Defendant No.1 contends that, transactions were carried out as per the orders placed by Plaintiff. To assail the contentions of the parties, the Arbitral Tribunal, in all, framed six Issues, in which, Issues No.2, 3 and 4 dealt with the aforesaid contentions of the respective parties. Issues No.2, 3 and 4 read thus :
" 2. Whether the Applicant was instructed by the Respondent to close the F&O positions in his trading account? If so, was there any delay on the part of the Applicant in closure of the F&O position?
3. Whether the purchase of shares for Rs.95,03,361.37 by the Applicant on 07.09.2011 has been duly authorized by the Respondent?
AS.45/2014 23
4. Whether the sale of shares on 01.02.2012 for Rs.1,23,65,269.21 by the Applicant to realize the receivable from the Respondent has been authorized by the latter?"
14) Relevant portions of findings of the Arbitral Tribunal on Issue No.2 to 4 are as follows :
"It may be observed that any purchase or sale of securities in the trading account of the Respondent shall be with his concurrence or authority, which may be in writing or in any other mutually agreed form, as stipulated in clause 1.3.5 of Annexure-1 of Risk Disclosure Document or by way of verbal orders, in terms of the Voluntary Document dated 24th November, 2007, both forming part of Exhibit A-1. There is no material to show that the impugned purchase or sale transactions are either supported by any verbal or written instructions of the Respondent or in any other form whatsoever. Against this context, the plea that the disputed trades are unauthorized one needs to be examined with reference to the available documentary evidence. ................"
"................................ the conduct in the instance case is sending of contract notes and other financial statements and the reaction of the parties thereto. The conduct of the Respondent in not having had refuted the disputed purchase or sale of shares, as elaborated here above shall necessarily be weighed. ............................The Respondent never objected to the trades executed on 7 th September, 2011, purchasing the impugned shares, in the course of his conversation with the Applicant's CEO on 17th September, 2011, as brought out the CD (Exhibit A-10), notwithstanding the controversies meekly raised by the Respondent. The transcript of AS.45/2014 24 this telephonic conversation removes any doubt on the authenticity of the impugned purchase of shares in the trading account of the Respondent. The points of arguments filed by the Respondent on 20th December, 2103 are absolutely on the above aspect. The Applicant is hit by the doctrine of estoppel and, therefore, he is stopped from denying the execution of trades as brought by the electronic contract notes. In this connection, the plea raised by the Respondent on the extension of higher margin facility to him by the Applicant does not in any way change his position. The Respondent for the first time by his communication dated 16th February, 2011 addressed to the Applicant's CEO, after a lapse of 5 long months, raised serious objections on account of the discrepancies, malpractice, cheating, excess interest, fraudulent methods of trading, unauthorized sale of his own shares, unauthorized purchase and selling of shares in cash segment, reportedly resorted to by the Applicant in the trading account of the former. This contention of the Respondent being an after-thought is affected by serious latches. The aforesaid written-complaint followed by a series of his communications dated 5th march, 2012, 2nd April, 2012, apart from (i) representations dated 28th February, 18th March, 14th May, 20th May, 6th June, 12th June, 17th June, 30th June, 24th July & 8th August, 2013 made to National Stock Exchange; (ii) representation dated 4h March, 2013 preferred before Securities and Exchange Board of India; and (iii) representation dated 23rd September and 8th October, 2013 sent to Reserve Bank of India would be of little consequences on the impugned transactions, in the light of the inordinate delay and in-action on the part of the Respondent, in complying strictly with the understanding reached with the Applicant, elucidated elsewhere. In the context of circumstantial evidence narrated here above, which is the most common evidence used to establish or refute any liability, we are unequivocally of the view that the disputed trades executed in the AS.45/2014 25 Respondent's trading account on 7th st September, 2011 and 1 February, 2012 cannot be said to be unauthorized. ..........................."
" It is the case of the Applicant that in order to avoid margin penalty being levied by the exchange and to do away with the margin obligations for F&O Segment, the Respondent closed out the existing derivative position on 7.9.2011 by replacing the same quantity with a corresponding buy transaction in the cash segment worth Rs.95,03,361.37 on 7.9.2011. It is thus seen that the closure of F&O position and purchase of shares on 7.9.2011 synchronizes. The voice record and its transcript of the telephonic conversation between the CEO of the Application and the Respondent on 15.9.2011, would suggest that the Respondent had taken a stand to close its position in cash segment at an appropriate time. We have, therefore, little difficulty in concluding that (i) the Respondent was aware of the closure of F&O Position; (ii) the Respondent did not instruct the closing of cash position prior to September, 2011; and
(iii) the inclusion of collateral shares in the conversation regarding offsetting of the collateral margin for F&O was being used for Cash outstanding. Therefore, the issue Nos.
2, 3 & 4 are answered in favour of the applicant."
(underlined by me)
15) From the findings of the Arbitral Tribunal, it is clear that, Arbitral Tribunal has held that "there is no material to show that the impugned purchase or sale transaction are either supported by any verbal or written instructions of Plaintiff or any other form of whatsoever". It is further held that, "it is little AS.45/2014 26 difficulty in concluding that Plaintiff was aware of the closure of F&O position, he did not instruct the closing of cash position prior to September, 2011 and the inclusion of collateral shares in the conversation regarding offsetting of the collateral margin for F&O was being used for cash outstanding". In spite of such specific findings, the Arbitral Tribunal has passed the impugned award in favour of Defendant No.1. What makes the Arbitral Tribunal to pass the impugned award in favour of Defendant No.1 is that, contract notes sent by 1 st Defendant to Plaintiff and voice record and telephonic conversation between CEO of 1 st Defendant and Plaintiff on 15.09.2011. It is to be noted that, the alleged placement of order by Plaintiff is on 07.09.2011. Admittedly, 1 st Defendant recorded the conversation which fact has been established by transcript of the conversation dated 15.09.2011. However, 1st Defendant had not produced transcript of the conversation dated 07.09.2011 and prior to that before the Arbitral AS.45/2014 27 Tribunal. 1st Defendant's unequivocal contention is that, based on the placement of order by Plaintiff, selling and buying of shares were carried out on 07.09.2011. Whether there had been any placement of order by Plaintiff was a core issue before the Arbitral Tribunal and particularly when Plaintiff emphatically denied that he never placed any order on 07.09.2011 for selling and buying of shares. Under such circumstances, it was the bounden duty of 1st Defendant to prove that Plaintiff had placed such order on 07.09.2011 by placing transcript of the conversation dated 07.09.2011 and prior to that. However, it has failed to do so. Instead, he has produced transcript of the conversation dated 15.09.2011, in which, Plaintiff repeatedly said that 'he does not want even one rupee exposure and that even in cash segment he does not want to buy anything'. Except that, nothing can be found as to placement of order by Plaintiff. If 1st Defendant had placed transcript of conversations recorded on 07.09.2011 and prior to AS.45/2014 28 that, certainly, it would be known that whether Plaintiff had placed any such order or not. Such important piece of evidence has been withheld by 1st Defendant. Under such circumstances, presumption can be drawn under Section 114 of the Indian Evidence Act, 1872. Illustration (g) to Section 114 specifically states that, "the Court may presume that evidence which could be and is not produced would, if produced, be unfavourable to the person who withholds it". Arbitral Tribunal has failed to consider this factual aspect of the matter in a perspective manner.
16) Plaintiff contends that, the Arbitral Tribunal has passed the impugned award disregarding the terms of contract, bye-laws of the National Stock Exchange Regulations of India Ltd., and the Trading Regulations [Capital Market Segment]. Relevant clauses read thus :
AS.45/2014 29
(a) Annexure-I to the Model Agreement dated 06.12.2007 :
"1.3.5 Give any order for buy or sell of a security in writing or in such form or manner, as may be mutually agreed. Giving instructions in writing ensures that you have proof of your intent, in case of disputes with the member."
(b) Model Agreement dated
06.12.2007:
" 2(f) If a Constituent fails to make payment of consideration to the trading member in respect of any one or more securities purchased by him before the pay-in date notified by the Exchange from time to time, the Trading Member shall be at liberty to sell the securities received in pay-out, in proportion to the amount not received, after taking into account any amount lying to the credit of the Constituent, by selling equivalent securities at any time on the Exchange not later than the fifth trading day reckoned from the date of pay-in. If the trading member has not sold the securities for any reason whatsoever, such securities shall be deemed to have been closed out at the close out price declared by the Exchange for the fifth trading day. The loss, if any, on account of the close out shall be to the account of the Constituent."
(c) Voluntary Document, dated
24.11.2007 :
"I/we are desirous in giving verbal orders/instructions for purchase or sale of securities through you. You are requested to accept verbal orders/instructions on my/our behalf. You are also requested to confirm the execution/non-exectuion of orders/instructions to me/us verbally. These shall be deemed to have been given in writing and shall be subject to all such terms AS.45/2014 30 and conditions as applicable to written contracts".
17) Bye-laws of NSE - Chapter-VII -
" (17) Closing out :
Subject to the regulations prescribed by the relevant authority from time to time, any dealing in securities made on the Exchange may be closed out by buying in or selling out on the Exchange against a trading member and/or Participant as follows :-
(a) in case of the selling trading member/Participant, on failure to complete delivery on the due date; and
(b) in case of the buying trading member/Participant, on failure to pay the amount due on the due date, and any loss, damage or shortfall sustained or suffered as a result of such closing out shall be payable by the trading member or participant who failed to give due delivery or to pay amount due."
(e) Chapter-X -
"(4) Closing-out of Constituent's Account :
(b) When closing-out the account of a constituent a trading member may assume or take over such transactional 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 manner specified by the relevant authority 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."
AS.45/2014 31
18) Part A - Trading Regulations -
" 1.3.7 CONSTITUENT -
A constituent means a person, on whose instructions and, on whose account, the Trading Member enters into any contract for the purchase or sale of any security or does any act in relation thereto.
Explanation : For the purpose of these regulations, the term Constituent includes a participant as defined under the Byelaws of the Exchange unless expressly stated otherwise."
"1.3.10 MEMBER-CONSTITUTENT AGREEMENT -
Member-Constituent agreement is an agreement which is executed between a Trading Member and its constituent as per the Exchange requirements."
" 3.2 TRADE OPERATIONS 3.2.1 Trading Members shall ensure that appropriate confirmed under instructions are obtained from the constituents before placement of an order on the system and shall keep relevant records or documents of the same and of the completion or otherwise of these orders thereof.
3.2.2 The Trading Member shall make available to his constituent the NEAT order number and copies of the order confirmation slip/modification slip be despatched to the constituent.
3.2.3 However where the Trading Member has accumulated the orders of several constituents to meet the requirement of the Regular lot quantity he may give his own order number referred to as the Reference AS.45/2014 32 Number, together with a reference to the NEAT Order Number, to the constituent.
3.2.4 The procedures and conditions for amendment or cancellation of orders would be subject to such conditions and as specified by the Exchange from time to time."
" 3.11 CONSTITUENT IN DEFAULT -
If a Constituent fails to make payment of consideration to the trading member in respect of any one or more securities purchased by him before the pay-in date notified by the Exchange from time to time, the Trading Member shall be at liberty to sell the securities received in pay-out, in proportion to the amount not received, after taking into account any amount lying to the credit of the Constituent, by selling equivalent securities at any time on the Exchange not later than the firth trading day reckoned from the date of pay-in. If the trading member has not sold the securities for any reason whatsoever, such securities shall be deemed to have been closed out at the close out price declared by the Exchange for the fifth trading day. The loss, if any, on account of the close out shall be to the account of the Constituent.
If a Constituent fails to deliver any one or more securities to the pool account of the trading member in respect of the securities sold by him before the pay-in date notified by the Exchange from time to time, such undischarged obligation in relation to delivering any one or more securities shall be deemed to have been closed out at the auction price or close-out price, as may be debited to the Trading Member in respect of the security for the respective settlement, to the extent traceable to the Constituent who has failed to deliver; otherwise the close out price on the date of pay-out in respect of the relevant securities, declared by the Exchange. The loss, if any, on account of the AS.45/2014 33 close out shall be to the account of the Constituent.
Subject to what is stated above, no further claims shall lie between the Constituent and Trading Member."
" 4.4.6 Where the constituent requires an order to be placed or any of his order to be modified after the order has entered the system but has not been traded, the Trading Member may, if it so desires, obtain order placement/modification details in writing from the constituent. The Trading Member shall accordingly provide the constituent with the relevant order confirmation/modification slip or copy thereof, forthwith, if so required by the constituent".
19) Voluntary document permits verbal instructions or orders for purchase or sale of securities. Clause-1.3.5 of Annexure-I to Model Agreement states that, order for purchase or sale of securities may be given in writing or in such form or manner as may be mutually agreed. Clause-4.4.6 of Trading Regulations specifically states that, where the constituent places an order, the trading members may obtain order placement in writing from the constituent. A conjoint reading of Clause- 1.3.5 of Annexure-I to Model Agreement and Clause-4.4.6 of Trading Regulation make it clear AS.45/2014 34 that, placement of order may be either by verbal instructions or in writing.
20) Under Clause - 4.4.6 of Trading Regulations, the trading member, if so desires, may obtain order placement in writing. Any how, voluntary document clearly goes to show that, Plaintiff has agreed to give verbal orders/instructions for purchase and sale of securities. Contract notes follow the placement of order by Plaintiff. In the absence of placement of order from Plaintiff, generating the contract notes would become illegal. Plaintiff's contention is that, he had not placed any order as contended by 1st Defendant. 1st Defendant traded without any instructions and contract notes were generated illegally. When a specific allegation has been leveled against 1st Defendant, 1st Defendant ought to have produced documents such as transcript of conversation dated 07.09.2011 in order to show the placement of order by the Plaintiff. Instead, it has placed transcript of AS.45/2014 35 conversation dated 15.09.2011, in which, Plaintiff has denied to buy in cash segment. Having considered the said aspect of the matter, the Arbitral Tribunal has rightly held that, "there is no material to show that the impugned purchase or sale of shares were supported either by written or verbal orders or any other form of placement". In spite of its specific conclusion, it has passed the award in favour of 1st Defendant against the agreed terms of contract by relying on contract notes and transcript of voice record dated 15.09.2009. Arbitral Tribunal ought to have taken into consideration the fact that the trading member cannot sell or buy the securities and cannot generate contract notes without any instructions or order from the constituent. Assuming that Plaintiff had placed order to purchase shares on 07.09.2011 and under such circumstances, if Plaintiff had failed to make payment of consideration to 1st Defendant, it should have followed Clause-2(f) of Model Agreement and Clause-3.11 of Trading Regulation. Clause-2(f) of AS.45/2014 36 Model Agreement is replica of Clause-3.11 of Trading Regulation. Clause-3.11 of Trading Regulation has been engrafted in Clause-2(f) of Model Agreement. It specifically states that, if a constituent fails to make payment of consideration to the trading member in respect of securities purchased by the trading member before 'pay-in date' [Shares that the client wants to sell are picked up from their demat account and transferred to the broker's account. All these shares are then delivered to the clearing corporation], the trading member shall be at liberty to sell the securities received in 'pay-out' [Shares that the client wants to buy are received from the clearing corporation and then transferred to the broker's account. This in turn is made to reflect in the client's demat account] at any time on the Exchange not later than the 5th trading day reckoned from the date of 'pay-in'. It further states that, if the trading member has not sold the securities for any reason whatsoever, such securities shall be deemed to AS.45/2014 37 have been closed out for the 5 th trading day. It also states that, loss, if any, on account of close out, shall be to the account of the constituent.
21) 1st Defendant contends that, to avoid margin penalty being levied by the Exchange and to do away with the margin obligations for F&O Segment, Plaintiff closed out the existing derivative position on 07.09.2011 by placing the same quantity with a corresponding buy transaction in the cash segment worth Rs.95,03,361.37 on 07.09.2011 and closure of F&O position and purchase of shares on 07.09.2011 both synchronizes and recorded telephonic conversation of 15.09.2011 proves that Plaintiff was aware of the closure of F&O position. He did not instruct the closing of position in cash segment prior to September, 2011 and inclusion of collateral shares in the conversation regarding offsetting of the collateral margin for F&O was being used for cash outstanding.
AS.45/2014 38
22) Arbitral Tribunal has not come to the definite conclusion regarding the aforesaid contention of 1st Defendant. In other words, it has not accepted the contention of 1st Defendant. It has held that " it is therefore, little difficulty in concluding that Plaintiff was aware of the closure of F&O position and he did not instruct the closing of cash position prior to September, 2011 and inclusion of collateral shares in the conversation regarding offsetting of the collateral margin for F&O was being used for Cash outstanding." Even if it is held so, it has answered Issue No.2 to 4 in favour of 1 st Defendant. It is to be noted that, 1st Defendant purchased shares worth Rs.95,03,361.37 on 07.09.2011 along with margin money and Plaintiff's own shares offered in F&O segment were sold by 1st Defendant and a sum of Rs.1,23,65,269.21 was realized. If 1 st Defendant had purchased the shares worth of Rs.95,03,361.37 on 07.09.2011 as per order placed by Plaintiff, certainly, said amount should have been paid before the 'pay-in' date. As per 1st Defendant, AS.45/2014 39 Plaintiff did not pay the said amount. Under such circumstances, the only option would be available for 1st Defendant was that, it should have sold the shares received in 'pay-out' within 5 days from the date of 'pay-in'. However, in the instant case, 1 st Defendant kept on postponing selling of shares purchased on 07.09.2011 till 01.02.2012 and thereby caused the Plaintiff to bear the loss of Rs.1,44,25,643.55 as on 01.02.2012 and finally, 1 st Defendant sold the shares purchased on 07.09.2011 along with margin money and Plaintiff's own shares offered as collateral security for F&O segment for an amount of Rs.1,23,65,267/- and after realizing Rs.1,23,65,267, 1st Defendant claimed debit balance of Rs.20,60,374.34. Clause- 3.11 of Trading Regulation specifically states that, if the trading member has not sold the securities for any reasons, such securities shall be deemed to have closed at the 'close-out' price declared by the Exchange for the 5th trading day and the loss, if any, on account of 'close-out' shall be to the account of AS.45/2014 40 the constituent. Since 1st Defendant failed to sell the shares within 5th trading day from the date of 'pay- in', said shares shall be deemed to have been closed out at the close-out price declared by the Exchange for the 5th trading day. On account of close-out, if any loss occurs, Plaintiff is liable to pay such loss only and is not liable for any further claim. Chapter-X of bye-law No.1 specifically states that, all contracts subject to bye-laws, Rules and Regulations. Clause-3.11 of Trading Regulations has been engrafted in Model Agreement entered into between Plaintiff and 1st Defendant. 1st Defendant without following the said mandatory terms of agreement, kept on postponing selling of shares purchased on 07.09.2011 till 01.02.2012 against Clause-3.11 of the Trading Regulations and finally sold the said shares along with shares offered as collateral security in F&O segment. Arbitral Tribunal, without taking into consideration of the terms of the contract and Clause-3.11 of Trading Regulations merely placing reliance upon contract AS.45/2014 41 notes, has passed the award against the terms of contract. If the disputes were relating to the transaction during the trading period, that too, within 5th day of trading period from the date of pay-in, then only, the contract notes would be relevant to consider.
23) In Associate Builders Vs. Delhi Development Authority [(2015) 3 Supreme Court Cases 49], Hon'ble Supreme Court was pleased to hold that, award passed in contravention of the terms of contract would amount to illegality. It has held that, "in all cases, the Arbitral Tribunal shall decide in accordance with terms of the contract and shall take into account the usages of the trade applicable to the transaction. Thus , the third sub-head of patent illegality is really a contravention of Section 28(3) of the Arbitration Act". It is further held that :
" The juristic principle of Wednesbury reasonableness is that a decision which is perverse or so irrational that no reasonable person would have arrived at AS.45/2014 42 the same is important and requires some degree of explanation.
It is settled law that where:
(i) a finding is based on no evidence, or
(ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse."
24) Having regard to all these aspects of the matter, it can be fairly said that, Arbitral Tribunal has overreached by relying on contract notes, without taking into consideration of the terms of the contract. Its consideration of voice conversations dated 15.09.2011 as a circumstantial evidence is irrelevant to the decision which it arrived at. For all these reasons award vitiates from its inception.
25) 1st Defendant contends that Plaintiff ought to have filed this suit in Civil Court at Mumbai as per bye-law of NSE and therefore, this court has no jurisdiction to entertain this suit. In support of its AS.45/2014 43 contention, 1st Defendant has placed reliance on the Judgment in the case of Emkay Global Financial Services Ltd. V. Girdhar Sondhi [ (2018) 9 SCC 49]. In para-8 it is held as follows :
"8. The effect of an exclusive jurisdiction clause was dealt with by this Court in several judgments, the most recent of which is the judgment contained in Indus Mobile Distribution (P) Ltd. In this case, the arbitration was to be conducted at Mumbai and was subject to the exclusive jurisdiction of courts of Mumbai only. After referring to the definition of "Court" contained in Section 2(1)(e) of the Act, and Sections 20 and 31(4) of the Act, this Court referred to the judgment of five learned Judges in BALCO v. Kaiser Aluminium Technical Services Inc., in which, the concept of juridical seat which has been evolved by the courts in England, has now taken root in our jurisdiction. After referring to several judgments and a Law Commission Report, this Court held :
(Indus Mobile Distribution Case, SCC pp.692093, paras 19 & 20) " 19. A conspectus of all the aforesaid provisions shows that the moment the seat is designated, it is akin to an exclusive jurisdiction clause. On the facts of the present case, it is clear that the seat of arbitration is Mumbai and Clause 19 further makes it clear that jurisdiction exclusively vests in the Mumbai courts. Under the Law of Arbitration, unlike the Code of Civil Procedure which applies to suits filed in courts, a reference to "seat" is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue may not in the classical sense have jurisdiction - that is, no part of the cause of action may have arisen at the neutral venue and neither would AS.45/2014 44 any of the provisions of Sections 16 to 21 CPC be attracted. In arbitration law however, as has been held above, the moment "seat" is determined, the fact that the seat is at Mumbai would vest Mumbai courts with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.
20. It is well settled that where more than one court has jurisdiction, it is open for the parties to exclude all other courts. For an exhaustive analysis of the case law, see Swastik Gases (P) Ltd. v. Indian Oil Corpn. Ltd. This was followed in a recent judgment in B.E.Simoese Von Staraburg Niedenthal V. Chhattisgarh Investment Ltd.
Having regard to the above, it is clear that Mumbai courts alone have jurisdiction to the exclusion of all other courts in the country, as the juridical seal of arbitration is at Mumbai. This being the case, the impugned judgment [Datawind Innovations (P) Ltd. V. Indus Mobile Distribution (P) Ltd.] is set aside. The injunction confirmed by the impugned judgment will continue for a period of four weeks from the date of pronouncement of this judgment, so that the respondents may take necessary steps under Section 9 in the Mumbai Court. The appeals are disposed of accordingly."
26) In the backdrop of the ratio laid down in the judgment supra, it is necessary to read Chapter-VII Clause-1(a) of bye-law of NSE. Chapter-VII deals AS.45/2014 45 with 'Dealings by Trading Members'. Clause-(1) deals with 'jurisdiction'. It reads thus :
"(1)(a) Any deal entered into through automated trading system of the Exchange or any proposal for buying or selling or any acceptance of any such proposal for buying and selling shall be deemed to have been entered at the computerised processing unit of the Exchange at Mumbai and the place of contracting as between the trading members shall be at Mumbai. The trading members of the Exchange shall expressly record on their contract note that they have excluded the jurisdiction of all other Courts save and except, Civil Courts at Mumbai have exclusive jurisdiction in claims arising out of such dispute. The provisions of this Byelaw shall not object the jurisdiction of any court deciding any dispute as between trading members and their constituents to which the Exchange is not a party."
27) Moreover, Clause-18 of the Model Agreement dated 06.12.2007 entered into between Plaintiff and 1st Defendant specifically states that, the parties shall have submitted to jurisdiction of the courts as may be specified by the bye-laws and regulations of the Exchange. A cursory reading of Clause-1(a) goes to show that, only Civil Courts at Mumbai has exclusive jurisdiction in claims arising out of disputes. However, further Clause-1(a) specifically states that, provisions of this bye-law shall not AS.45/2014 46 object the jurisdiction of any court deciding any dispute as between trading members and their constituent, to which, the Exchange is not a party. Hence, it has been abundantly clear that, if the Exchange is made as party to the lis, certainly, no other courts except civil courts at Mumbai shall have jurisdiction to entertain the lis. In the instant case, it is the dispute between trading member and constituent and Exchange is not a party to lis. Under such circumstances, first part of Clause-1(a) is not applicable to the parties to the lis. Plaintiff has rightly approached this court.
28) 1st Defendant further contends that, Plaintiff ought to have challenged the arbitral award before the Appellate Arbitral Authority as per the bye-law of NSE. Plaintiff without challenging the arbitral award before the Appellate Arbitral Authority has filed this Section 34 petition challenging the arbitral award before this Court. This argument of 1st Defendant has no merit to decide. Clause-19(a) of AS.45/2014 47 the bye-law states that, a party aggrieved by an award may appeal to the Appellate Arbitrator against Arbitral Award within one month from the date of receipt of Arbitral Award and in such manner as prescribed by the Relevant Authority from time to time. It is to be noted that, it is not at all mandatory to prefer appeal against the Arbitral Award before the Appellate Arbitral Authority under Clause-19(a). Moreover, Section 34 of the Act deals with setting aside arbitral award. It does not specifically deal with setting aside Appellate Arbitral Award. Considering all these aspects of the matter, it can be fairly said that, there is no reason to contend that this court has no jurisdiction to entertain the suit. For all these reasons, this Court opines that, award vitiates by patent illegality as the same has been passed in contraventions of the terms of the contract; accordingly, I answer the above point in the affirmative.
AS.45/2014 48
29) Point No.2: For the foregoing discussion and answer to Point No.1, I proceed to pass the following :
ORDER (1) Suit filed under Section 34 of the Arbitration and Conciliation Act, 1996, by the Plaintiff; is hereby allowed.
(2) Award dated 18.02.2014 passed by Panel of Arbitrators in Arbitration Matter (A.M.)No:F&O/C-0008/2013; is hereby set aside.
(3) No order as to costs.
(Dictated to the Judgment Writer, transcribed and computerized by her, transcript thereof corrected and then pronounced by me in open court, on this the 10th day of June, 2020.) (RAMA NAIK) VI Addl.City Civil & Sessions Judge, Bengaluru City.