Bangalore District Court
Hdfc Securities Limited vs T. Ramanathan on 14 July, 2021
IN THE COURT OF THE LXXXIII ADDITIONAL CITY CIVIL
AND SESSIONS JUDGE AT BENGALURU CITY [CCH84]
:Present:
Ravindra Hegde,
M.A., LL.M.,
LXXXIII Addl. City Civil & Sessions Judge,
Bengaluru
Dated on this the 14th day of July 2021
COM.A.S.No.134/2019
Petitioner HDFC Securities Limited,
A company incorporated under the
Companies Act, 1956 and a Trading
Member of NSE
Represented by its Authorized
Representative Shrikant Joshi,
having its registered office at
1 Think Techno Campus,
BuildingB, "Alpha", Office Floor 8,
Near Kanjurmarg Station,
Opp: Crompton Greaves,
Kanjurmarg (E), Mumbai400042.
(By Sri.M.C, Advocate)
// versus //
Respondent T. Ramanathan,
An Indian inhabitant,
R/at Flat No.162, Block I,
Embassy Meadows, 8th Cross,
S.T.Bed, Koramangala 4th Block,
Bengaluru560034, Karnataka.
(By Sri.S.R, Advocate)
2
CT 1390_Com.A.S.1342019_Judgment.doc
Date of Institution of the suit : 04/09/2019
Nature of the suit : Arbitration Suit
Date of commencement of :
recording of the evidence
Date on which the Judgment : 14/07/2021
was pronounced.
: Year/s Month/s Day/s
Total duration
01 10 10
JUDGMENT
This petition under Section 34 of the Arbitration and Conciliation Act 1996 is filed by the petitioner challenging the award dated 19/6/2019 passed by the learned Arbitral Appellate Bench of National Stock Exchange of India Limited (NSE) in Appeal (A.M) No. F&O/B0011/2018, partly confirming award dated 11/2/2019 passed by the learned Arbitral Tribunal.
2. The brief facts of the petitioner's case is as under; The petitioner is a company engaged in the business of share and stock broking and is represented by its authorized representative. The respondent executed a Member Client Agreement (MCA) on 31/1/2003 and appointed petitioner as his share broker and he had opened bank account and DEMAT Account with HDFC Bank Limited and executed Power of Attorney and authorized the petitioner to operate the said DEMAT Account. The respondent started placing orders 3 CT 1390_Com.A.S.1342019_Judgment.doc for sale and purchase of shares under the Cash Segment and all the transactions were executed by the petitioner on the respondent's instructions and the same were settled by actual payment of funds. On 14/6/2018 the respondent had submitted an application and requested the petitioner for activation of his account for the purpose of Equity Derivatives (F&O) Segment. The respondent started placing orders for F & O Segment trades and he confirmed the trades. From 29/6/2018 to 13/7/2018 all the transactions under F & O Segments were settled between the petitioner and respondent by actual payments from time to time and thereafter between 16/7/2018 to 25/7/2018, the transactions of the respondent has resulted into his ledger account showing a debit balance of Rs.45,31,946.06 and the respondent made payment of Rs.45,34,793.22 and completed all his obligations. Open position under F&O Segment for July 2018 expiry were rolled over to August 2018 expiry in phased manner and the RM of the petitioner called the respondent by telephone and confirmed all these transactions and in addition SMS confirmation, ECN were also sent. Even for the subsequent period after 7/8/2018, there were several transactions that were confirmed by the respondent. On 8/8/2018 for the first time the respondent disputed the validity of all F&O Segment transactions as it has resulted into losses. On 10/8/2018 the petitioner credited his ledger account of the respondent by Rs.8,35,107.56 by sale of HDFC bank shares as well as MTM, by exercising right under the F&O Segment regulation. The 4 CT 1390_Com.A.S.1342019_Judgment.doc SEBI and NSE have issued number of regulations and provided the procedures for execution of trades by a TM in the name of the constituents and its confirmation and the petitioner has followed each and every procedure prescribed including the SEBI Circular dated 22/3/2018. The respondent had not disputed voice recording and receipt of SMS, ECN, Daily Activity Report, Margin File etc. On 13/8/2018 respondent lodged a complaint to NSE and disputed validity of all F&O segment transactions and lodged a claim for Rs.75,74,961.02. Same is referred to IGRP (Investor Grievance Resolution Panel). Since the respondent disputed the validity of F&O segment transactions, the petitioner informed the respondent and closed out his open position, by which respondent's ledger account showing debit balance of Rs.75,36,163.32. IGRP, after hearing both sides, passed order in its proceedings dated 25/9/2018 and directed the petitioner to pay Rs.37,89,740.26 to the respondent and release 5000 shares of HDFC Bank Limited.
3. Aggrieved by this order, petitioner approached Arbitral Tribunal under Byelaws of NSE with claim for Rs.75,83,510.94 along with interest. Claim petition of the petitioner was rejected by the Arbitral Tribunal by award dated 11/2/2019 and petitioner was directed to pay Rs.75,83,510.94 to the respondent and to release 5000 shares of HDFC Bank Limited.
5CT 1390_Com.A.S.1342019_Judgment.doc
4. Being aggrieved by this Award, petitioner has preferred appeal before the learned Appellate Arbitration Tribunal, which partly allowed the appeal on 19/6/2019 and directed the petitioner to pay Rs.72,57,573.65 to the respondent and to release 5000 shares of HDFC.
5. Present Arbitration suit is filed challenging this Order of the Appellate Arbitration Tribunal, on many grounds. It is stated that the F & O Segment loss was not paid by the respondent and the same is still due and payable by the respondent to the petitioner and the direction imposes liability on the petitioner making it to suffer double loss and impugned award is patently illegal. It is also stated that the impugned award is contrary to evidence produced by the petitioner as, the tribunal has not considered the Email dated 25/7/2018, 5 voice recording for telephonic conversation. It is also stated that the tribunal has erred in holding that the petitioner has not complied with the circular dated 22/3/2018 by ignoring the voice recording submitted before it. It is also stated that the Tribunal did not consider the post trade confirmation by the petitioner's RM and positive acceptance of the confirmation by the respondent. It is also stated that the tribunal has allowed the respondent to dispute the validity of sale shares of Yes Bank and Infosys Limited, when the respondent had received full consideration for sale of said shares. It is stated that the finding of the Tribunal that principles of estoppel is not applicable against the 6 CT 1390_Com.A.S.1342019_Judgment.doc respondent is principally incorrect. It is also stated that the tribunal has erred and allowed the respondent to dispute F&O Segment transactions by raising the objection of voice recording for preplacement of order, though there was post trade confirmation. It is stated that the Tribunal has misrepresented the SEBI circular and impugned award is contrary to the public policy of India and is liable to be set aside. It is stated that the Tribunal is constituted out of Bye laws of NSE and it do not provide for adjudication of regulatory matter of non compliance of SEBI circular. It is also stated that the Arbitral Tribunal cannot go beyond the scope of the contract and therefore the award of the tribunal is beyond its jurisdiction. It is stated that the tribunal had annulled trades and awarded compensation for transactions which the respondent has acted upon and further confirmed pay outs, therefore it would only be unjust enrichment of the respondent at the cost of the petitioner TM and the same is arbitrary and illegal and not within the scope of the powers of learned Tribunal. On all these grounds, petitioner has contended that the award is against the public policy of India and is liable to be set aside.
6. The respondent appeared and filed statement of objection and stated that the petition is not maintainable. It is stated that the petition is filed only to set aside the award dated 19/6/2019 passed by the Appellate Arbitration Tribunal of NSE and the award dated 11/2/2019 is not challenged and therefore even if the petitioner succeeds in 7 CT 1390_Com.A.S.1342019_Judgment.doc this petition it would restore the first award dated 11/2/2019. It is also stated that the petitioner has failed to comply with Rule 4(c) of the High Court of Karnataka Arbitration (Proceedings before the Courts) Rules 2001 as the Arbitrators are not made as respondents. It is also stated that the petitioner has not pleaded any ground as contemplated under Section 34 of the Arbitration & Conciliation Act for setting aside the award. It is also stated that the petitioner has merely made bald assertions and sought to reopen questions of fact and under Section 34 of the Act court cannot reappreciate the evidence or review the merits of the dispute. It is stated that the dispute revolves around a series of unauthorized and reckless trades made by the petitioner on behalf of the respondent. It is stated that in June 2018 the RM of petitioner made several unauthorized and fraudulent trades and incurred heavy losses on the respondent's account. It is stated that these losses were suppressed and wrongly presented by the RM to the respondent as profits and in order to suppress and offset the actual loss, the RM unlawfully sold shares belonging to the respondent. It is stated that in July the reckless trades triggered a huge margin call of Rs.6 lakhs and within a week time, another margin call of Rs.45 lakhs. It is stated that the respondent continued to raise queries through out June 2018 and July 2018 regarding the discrepancies and all these questions remained unanswered. It is also stated that the RM used state that failure to make the requisite payments 8 CT 1390_Com.A.S.1342019_Judgment.doc would result in the sale of long term investment holding of the respondent in HDFC Bank shares. It is stated that in August 2018, after multiple confrontations with the RM of the petitioner, RM has admitted to the fraud and respondent became fully aware of the lies, falsification of the records, manipulated price to suppress losses and took immediate action to revoke his POA and addressed the complaint to the HDFC Securities and also lodged complaint to NSE. It is stated that the issue was taken up by the IGRP in September 2018 and 3 members panel on 25/9/2018 passed order and thereafter, petitioner approached NSE to resolve the dispute through arbitration as contemplated in the client agreement and after detailed hearing on 11/2/2019 award is passed. It is stated that against this award the petitioner has invoked the jurisdiction of the Appellate Arbitration Tribunal under the NSE Byelaw and the tribunal heard both the sides extensively and passed award. It is stated that the present arbitration suit is wholly misconceived, untenable and suffers from gross disparity with the Arbitration & Conciliation Act. It is also stated that the SEBI issued master circular dated 22/3/2018 to prevent unauthorized trading by stock brokers and the petitioner is bound by the SEBI circular and in the present case, petitioner has violated the circular and failed to produce any recording to justify any of the disputed trades. It is also stated that the factual circumstances of this case have been reaffirmed on three occasions by a total 9 different adjudicators. It is also stated that in the petitioner's own 9 CT 1390_Com.A.S.1342019_Judgment.doc internal inspection/ Audit Report it is found that its Relationship Manager is responsible for carrying out unauthorised trading transactions and the petitioner has admitted that some transactions have been done without consent. It is stated that the SEBI Circular is extremely clear regarding pre trade authorizations and the relevance placed by the petitioner of post date confirmation is misplaced. It is stated that the interpretation now sought to be given by the petitioner with respect to the competence of the tribunal to hear regulatory disputes should have been raised at the first instance and as petitioner has failed to raise such dispute, he has waived the same. It is stated that the petitioner has subjected himself to the arbitration mechanism provided under the NSE and has never raised any objection and petitioner has always accepted that the SEBI Circular is sacrosanct in deciding this dispute and contended that they have complied the terms therein and now the respondent/ petitioner cannot take different stand. On all these grounds the petition is prayed to be dismissed with cost.
7. Heard both counsels. Counsel for petitioner has filed written submission also. Perused the records.
8. Now the points that arise for consideration of this court are:
1) Whether the petitioner has made out any grounds under Section 34 (2) and 34(2A) of the Arbitration & Conciliation Act to set aside the award of the learned Appellate Arbitration 10 CT 1390_Com.A.S.1342019_Judgment.doc Tribunal, Bengaluru dated 19/6/2019 in the dispute between the petitioner and the respondent, by which award of the learned Arbitral Tribunal dated 11/2/2019 is partly confirmed?
2) What order?
9. My answer to the above points are :
POINT No.1 : In the Negative.
POINT No.2 : As per final order for the following:
REASONS
10. POINT No.1 : Present Arbitration Suit U/S.34 of the Arbitration & Conciliation Act is filed by the petitioner challenging the award dated 19/6/2019 passed by the learned Appellate Arbitration Bench of NSE, which partly confirmed award dated 11/2/2019 passed by the learned Arbitral Tribunal. The jurisdiction of the court to set aside an arbitral award is limited to the ground set out in Section 34 of the Arbitration & Conciliation Act 1996. Even if a contrary view based on the facts before the Arbitral Tribunal is possible, in the absence of any compelling reasons court cannot interfere with the view taken by the learned Arbitral Tribunal, as if, it is sitting in appeal over the award made by the Tribunal. Grounds on which the award of the Tribunal can be set aside by this court is clearly mentioned in Section 34(2) and 34(2A) of the Arbitration & Conciliation Act and these grounds are also elaborated by the Hon'ble Supreme Court in various decisions. It is also well established principle that the court sitting U/S.34 of the Act is not 11 CT 1390_Com.A.S.1342019_Judgment.doc supposed to go for reappreciation of evidence or impose its view as against the view of learned Arbitral Tribunal and the power of the court is only to set aside the award if it is coming under one of the grounds mentioned in the said section. In the presence of these basic principles, grounds urged by the claimant and the award of the learned Appellate Arbitral Tribunal are to be looked into.
11. The admitted facts of the case are that the petitioner is a trading member and the respondent is a constituent/client of the petitioner. Member client agreement has been entered into between the parties and necessary documents were executed. The respondent had opened DEMAT Account with the petitioner for purchase and sale of shares. In this purchase and sale of shares in F&O Segment, dispute arose between the parties. On 13/10/2018, the respondent gave complaint to the NSE complaining about fraudulent dealing and unauthorized trades by the petitioner in the account of the respondent. He has stated that there were lapses, manipulations in trading conduct ranging from unauthorized trading, not adhering to stop loss instructions, material suppression to client etc and stated that in June 2018 and July 2018 fraud was committed and the respondent never pre authorized any trade and he was only given post pact information and also stated about manipulation of the account. He has stated that Rs.6,00,000/ on 16/7/2018 and Rs.45,50,000/ on 25/7/2018 were taken by duress by 12 CT 1390_Com.A.S.1342019_Judgment.doc stating that if the amount is not paid the collateral given by the respondent will be sold. On this complaint of the respondent, the matter was referred to IGRP consisting of 3 members and parties have placed their case and on 25/9/2018 IGRP passed order. This order was challenged by the petitioner before the Arbitral Tribunal under rules and regulations and byelaws of the NSE wherein 3 learned Arbitrators on 11/2/2019 passed the award directing the petitioner to pay Rs.75,74,961.02 to the respondent with interest and dir4cted it to release 5000 shares of HDFC. Against this award as permitted by NSE byelaws, rules and regulations, appeal was preferred by the petitioner before the Appellate Arbitration Tribunal again consisting of 3 learned Arbitrators which has passed the award on 19/6/2019 and directed the petitioner trading member to pay Rs.72,57,573.65 to the respondent with interest @7% per annum and also directed to release 5000 shares of HDFC belong to the respondent. Therefore by this award of the Appellate Arbitration Tribunal, the award of the Arbitral Tribunal was modified. Against this award of Appellate Arbitration Tribunal present petition is filed under Section 34 of the Arbitration & Conciliation Act.
12. The respondent has raised preliminary objection to the application stating that the petitioner has challenged only the award of the Appellate Arbitration Tribunal and even if the award is set aside, the Award of the Arbitral Tribunal 13 CT 1390_Com.A.S.1342019_Judgment.doc dated 19/2/2019 would remain and the respondent would be entitle for higher amount with interest @12% per annum. However, without going to the technicalities, when entire petition and objection are seen, it could be gathered that the petitioner who was unsuccessful before IGRP and before the Arbitral Tribunal and also before the Appellate Arbitration Tribunal has preferred the present petition and is challenging the order of the IGRP as well as the award of the Arbitral Tribunal dated 11/2/2019 and that of Appellate Arbitration Tribunal dated 19/6/2019. Similarly another technical objection raised is that Learned Arbitrators are not made parties as required under Rule 4(c) of the High Court of Karnataka Arbitration (Proceedings before the Courts) Rules 2001. However, not making Arbitrators as parties in the petition is not fatal to the present case.
13. The learned counsel for the petitioner has vehemently argued that from July 2018 to August 2018 there were several transactions made in the DEMAT Account of the respondent, for which respondent was intimated by SMS, Email etc as required. It is argued that all the authorities who have decided the case of the parties i.e. IGRP, Arbitral Tribunal and Appellate Arbitration Tribunal have failed to consider that for all the transactions, intimation is given by SMS, Email and even payments are made by the respondent. It is also argued that there is even post trade confirmation, which acts as ratification and the respondent cannot dispute 14 CT 1390_Com.A.S.1342019_Judgment.doc the same later. It is argued that voice recording of the orders placed through telephone is as per the circular of the SEBI dated 22/3/2018 and only on the finding about non compliance with this circular, the learned Arbitrators have decided the dispute against the petitioner which is patently illegal and is against the fundamental policy of Indian Law and thereby opposed to public policy. The learned counsel has argued that arbitration is creation of contract and not the law and therefore unless there is a finding that there is a breach of contract, compensation cannot be awarded under Section 73 or 74 of the Contract Act. The learned counsel has also argued that though in his complaint, the respondent has stated about payments made under duress and there was no pretrade authorization, as per his own claim statement, he has made some payment voluntarily. The learned counsel has also argued that records clearly discloses that the respondent after making payment, in the guise of administrative circular of the SEBI is disputing the trade and seeking recovery of payment voluntary made. It is also argued that the respondent is seeking to enforce administrative circular to undo concluded contract which cannot be done in arbitration. The learned counsel has also argued that the tribunal has held that the case revolve around compliance of a binding circular issued by the regulator, but the Arbitral Tribunal which is creature of the contract cannot decide the matter on the basis of an administrative circular, when there is no breach of contract.
15CT 1390_Com.A.S.1342019_Judgment.doc It is also argued that it is beyond the jurisdiction of the tribunal to decide the matter once the contract is concluded and the payment is made, in the guise of compliance of circular of SEBI. It is argued that the Arbitral Tribunal has exceeded its jurisdiction and has stepped into the shoes of SEBI to enforce the administrative violations. The learned counsel has argued that award is contrary to public policy and is contrary to the terms of contract and is also patently illegal.
14. On the other hand, the learned counsel for the respondent has argued that the petitioner has executed series of unauthorized trades in shares on behalf of the respondent without obtaining consent, as held in three rounds of adjudication by totally 9 adjudicators and this finding cannot be reopened and considered in the petition U/S.34 of the Arbitration & Conciliation Act. It is also argued that the petitioner was required to prove that respondent authorized the trade and for this purpose he has produced relevant records before the Arbitral Tribunal and the same are considered and held that no recording of authorization is present. It is also argued that the circular of the SEBI dated 22/3/2018 is passed under Section 11 of the SEBI Act and it is binding on both the parties and it becomes implied terms of the contract and the petitioner is bound to comply it. The learned counsel for the Respondent has also argued that the petitioner before all the three authorities had contended that it has complied with SEBI circular and now for the first time 16 CT 1390_Com.A.S.1342019_Judgment.doc in the present petition the petitioner is contending otherwise. It is also argued that the petitioner for the first time has raised issue about jurisdiction of the Tribunal to decide the dispute stating that the tribunal has no power to decide on compliance of SEBI circular. It is argued that as this point was not raised earlier, petitioner is now barred from raising the objection under Section 4 and even under Section 16 (2) of the Arbitration & Conciliation Act. It is also highlighted that against the order of the IGRP, petitioner itself invoked arbitration as per bye laws of NSE and hence it cannot dispute jurisdiction. The learned counsel has also argued that as recorded in the IGRP proceedings and the Arbitral Award, even the petitioner's internal inspection has found the RM responsible for carrying out such transactions in the account of the respondent in violation of SEBI guidelines.
15. Perusal of the records of the entire case show that on 13/8/2018 the respondent who is a constituent/client of the petitioner has given complaint to NSE and disputed validity of F&O Segment transactions. He has contended that these transactions are unauthorized and also contended that some payments are also taken from him under duress by stating that if amount is not arranged the shares given as collateral security will be sold. On this complaint, IGRP has heard both parties and persued records and has passed order on 19/6/2019. Against the IGRP proceedings, the petitioner who is the trading member has approached the Arbitral Tribunal as per NSE byelaw and against its award, as per 17 CT 1390_Com.A.S.1342019_Judgment.doc NSE byelaws Appellate Arbitration Tribunal was approached and against Aibunal's award present arbitration suit is filed. Therefore, as rightly contended by the respondent, with regard to this dispute, three sets of adjudication is already held, wherein, consistantly it is held that there was unauthorized trade made by the trading member-petitioner on behalf of the client-respondent and thereby caused loss to him. Even in the internal inspection report of petitioner, it appears that its Relationship Manager (RM) was found responsible for carrying out such transactions in the account of the respondent. Though in the IGRP proceedings, it was held that the respondent has also neglected in escalating the issue to the authorities and therefore a portion of the loss was ordered to be shared by the respondent, in subsequent award of Arbitral Tribunal and the Appellate Arbitration Tribunal, petitioner alone is held responsible. It is observed through out in 3 sets of adjudication by 9 adjudicating officers, that the petitioner without prior authorization has transacted in the shares in the F&O Segment in the account of the respondent and causeed loss to him. It is also observed that though there are some payment made by the petitioner, those payments are under duress.
16. The petitioner is contending that there is no evidence placed to show that under duress, the respondent has made some payments. According to Respondent, some payments are taken from him by stating that, if amount is not arranged, the shares given as collateral security, which were 18 CT 1390_Com.A.S.1342019_Judgment.doc long term investments, would be sold. Petitioner has stated in para 20 of the petition that on 10/8/2018, it exercised right under Regulation 3.10(b) of F&O Segment and without client's instruction, sold 398 shares of HDFC Bank of Respondent. This act of the petitioner itself would establish the duress and effect of nonpaymnet. More so, Petitioner also cannot keep quite, when payments are not received and there is huge debit balance in the account of the respondent. The respondent is bound to clear the debit balance in his account maintained with the petitioner for all the time, provided that transactions are made in the account on his instructions and permissions. If the transactions are not done with approval of the petitioner, as complained in this case, petitioner cannot be held responsible. Therefore, material point would be whether the transactions made in the account of the respondent by the RM of the petitioner during the particuler period were authorised, permitted or were later ratified. Some payments made by the respondent, with the fear of loosing his long term investments maintained in his account, may not help the petitioner to prove that there was ratification of the acts done by the petitioner. Since there is collateral security and if the amount outstanding is not arranged in time, even as per the client's agreement the petitioner is entitle to sell the collateral security, some payments made by the petitioner cannot, per say, be accepted as ratification of the transaction which was made earlier.
19CT 1390_Com.A.S.1342019_Judgment.doc After sale of some shares by petitioner without his instruction on 10/8/2018, respondent gave complaint on 13/8/2018.
17. In all the three proceedings held herein before, petitioner has consistently contended that all the trades made in the F&O Segment in the account of the respondent were properly authorized transactions and pre trade authorization were present. There is a circular of the SEBI dated 22.3.2018, as per which stock broker is required to keep evidence of pre trade authorization and is required to produce evidence when dispute arises. As could be seen from the records, it was also contended by the petitioner before IGRP and before the Tribunal that in compliance with the SEBI Circular dated 22/3/2018, petitioner has maintained voice recording of the orders given for the transaction. Before the Arbitral Tribunal, the petitioner appears to have even produced certain CDs alleged to be containing recordings. In the IGRP proceedings, it is observed that the petitioner was advised to give voice recording of those days, but petitioner informed that the same is not available. Before the Arbitral Tribunal, CDs were produced to show that they recorded voice recordings to indicate that the prior authorization were obtained from the respondent for the individual trade that were executed. It is observed by the Tribunal that on verifying CD it was found that no prior authorization were obtained by the petitioner for the individual trade and it has held that the petitioner has not followed the SEBI Circular dated 22/3/2018 which is mandatory and found that it 20 CT 1390_Com.A.S.1342019_Judgment.doc conducted the trade of the respondent without consent. This finding is upheld by the Appellate Arbitration Tribunal.
18. Relavant part of SEBI circular dated 22.3.2018, is as under:
"III. To further strengthen regulatory provisions against unauthorized trades and also to harmonise the requirements across markets, it has now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, which could be, inter alia, in the form of:
a. Physical record written and signed by client. b. Telephone recording.
c. Email form authorized email ID d. Log for inter net transactions.
e. Record of messages through mobile phones. f. Any other legally verifiable record. When a dispute arises, the broker shall produce the above mentioned records for the disputed trades. However for exceptional cases such as technical failure etc where broker fails to produce order placing evidence, the broker shall justify with reasons for the same and depending upon merit of the same, other appropriate evidences like post trade confirmation by client, receipt/payment of funds/ securities by client in respect of disputed trade etc shall also be considered."
19. As per this circular, the petitioner as stock broker is not only required to keep evidence of the client, placing order as mentioned therein, but also have to produce it when dispute arise. Since the dispute has arisen, as in the present case on the complaint of the respondent, it was mandatory as 21 CT 1390_Com.A.S.1342019_Judgment.doc per the circular to produce such evidence of such telephone recording for placing order by the respondent. All the previous adjudicatory authorities have held that the petitioner has violated this circular of the SEBI on 22/3/2018 and has executed trade without keeping the records of placing the orders and have also held that the petitioner has executed trade without prior authorization and without the client placing the order.
20. The Arbitral Tribunal and the Appellate Arbitration Tribunal relying on circular of the SEBI is seriously disputed by the petitioner by contending that these circulars are administrative orders and they cannot be read in to the contract and the Arbitral Tribunal which is creation of the contract cannot go beyond the contract. The learned counsel for petitioner, to justify his contention has relied on the decision of the Hon'ble Supreme Court reported in (2017) 5 SCC 517 (National Securities Depository Limited v/s Securities and Exchange Board of India) in which in para 24 the Hon'ble Supreme Court has held that "Administrative orders such as circulars issued under the present case referable to Section 11(1) of the Act are obviously outside the appellate jurisdiction of the Tribunal". The learned counsel for the respondent has argued that this decision is not an authority to hold that the circular of the SEBI is not a law or is outside the contract and cannot be considered by the Tribunal. On going through the decision, this decision do 22 CT 1390_Com.A.S.1342019_Judgment.doc not help the petitioner to contend that the circular of the SEBI under Section 11 is only an administrative order and it cannot be considered by the Arbitral Tribunal while considering the breach of contract, as in the present case.
21. The learned counsel for the petitioner has, his serious dispute for the tribunal considering the SEBI Circular dated 22/3/2018. In the present petition the petitioner has mainly contended that as Arbitral Tribunal is the creature of the contract, it have to proceed in terms of the contract and it cannot consider the circular of SEBI. The learned counsel for the petitioner vehemently argued that the entire award of the Tribunal and even the Appellate Authority is based on violation of the circular of SEBI and not on breach of contract. For deciding such violation, according to the petitioner, Arbitral Tribunal has no authority and it cannot act as a regulatory authority of the SEBI guidelines. The learned counsel for the petitioner has also argued that when there is no breach of contract the compensation cannot be awarded. As stated above, before all the 3 previous adjudicatory authorities, petitioner had asserted compliance of SEBI Circular dated 22/3/2018. In the present petition, petitioner has taken the stand that the Arbitral Tribunal do not have jurisdiction to consider compliance of SEBI circular and that this circular which has come into force on 1/4/2018 cannot be read into contract between the parties. On looking to the client agreement entered into between the petitioner and the respondent at the time of beginning the transaction, 23 CT 1390_Com.A.S.1342019_Judgment.doc copy of which is produced by the petitioner, clause 5 deals with Order routing and execution. As per clause 5.1 client shall transmit his orders to the member only through the Internet over the Member's WebSite, over the telephone or in such other manner including over any Kiosks that the Member may install for this purpose. Therefore, this clause itself makes it clear that only on receiving the order from the client, the petitioner can execute order for purchase or sale whether in cash Segment or in F&O Segment. Therefore, even without the circular dated 22/3/2018, the petitioner was not permitted to transact in the shares on behalf of the respondent without the respondent placing orders.
22. In the same client agreement, clause 23 reads as under:
"23. APPLICABILITY OF EXCHANGE PROVISIONS:
This agreement and all contracts and transactions between the member and the client pursuant hereto shall be subject to the applicable exchange provisions. The Rules, ByeLaws, Regulations and other provisions of the concerned Exchange (including the Rules, Byelaws and Regulations of the various segments of the concerned Exchange), clearing house and clearing corporation, if any, the provisions of the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act of 1956 and the rules and regulations made thereunder and as amended from time to time. In addition to the specific rights set out in this agreement, the 24 CT 1390_Com.A.S.1342019_Judgment.doc Member and the Client shall be entitled to exercise any other rights which the Member or the Client may have under the Exchange Provisions or as may be prescribed by SEBI."
23. As per this clause 23, the ByeLaws, rules and regulations of the stock exchange and also an authority under the SEBI Act are applicable to all the contract and transactions between the petitioner and the respondent. As such, the petitioner cannot now contend that the circular of SEBI under Section 11 of the SEBI Act cannot be read into the contract. The learned counsel for the respondent has relied on the decision reported in (2013) 1 Supreme Court Cases 1 (Sahara India Real Estate Corporation Limited and others v/s Securities and Exchange Board of India and another), in which, the Hon'ble Supreme Court has held as under:
"303.1. Sub section (1) of Section 11 of the SEBI Act casts an obligation on SEBI to protect the interest of investors in securities, to promote the development of the securities market, and to regulate the securities market, "by such measures as it thinks fit". It is therefore apparent that the measures to be adopted by SEBI in carrying out its obligations are couched in open ended terms having no prearranged limits. In other words, the extent of the nature and the manner of measures which can be adopted by SEBI for giving effect to the functions assigned to SEBI have been left to the discretion and wisdom of SEBI. It is necessary to record here that the aforesaid power to adopt "such measures as it thinks fit" to promote 25 CT 1390_Com.A.S.1342019_Judgment.doc investors' interest, to promote the development of the securities market and to regulate the securities market, has not been curtailed or whittled down in any manner by any other provisions under the SEBI Act, as no provision has been given overriding effect over subsection (1) of Section 11 of the SEBI Act."
24. As held by the Hon'ble Supreme Court, the SEBI has an obligation to protect the interest of the investor and for discharge of such obligations, it has issued circular from time to time. All those circular's would be part of the contract between stock Broker and the client, applicable for the transactions entered after the circular came into force. In another decision of the Hon'ble High Court reported in 2014 GLH (2) 582 (Nikhil T. Parikh v/s Union of India and others), in para 139 the Hon'ble High Court has said that the circular of SEBI could be termed as a statutory circular having a force of law and binding to all the stock exchanges in the country. Therefore, the petitioner who is the subbroker of the stock exchange and the respondent who is the client of the petitioner would be bound by the circular. In view of the specific clause in the client's agreement, all the rules, byelaws and regulations, even circular of the SEBI which has the force of law would be part of the contract between the parties and the petitioner cannot contend that it can safely violate the circular and pay penalty when the action is taken by the SEBI or other authority, but it would not be liable to compensate for the loss that is suffered by its 26 CT 1390_Com.A.S.1342019_Judgment.doc client due to non following of the circular. Therefore, it cannot be said that by considering the SEBI Circular, Arbitral Tribunal and Appellate Arbitration Tribunal have travelled beyond its jurisdiction.
25. As stated above, against the order passed by the IGRP, it is the petitioner who has invoked the arbitration as provided under NSE ByeLaws. In those proceedings, petitioner has not taken the contention that circular of the SEBI dated 22/3/2018 cannot be gone into and applied to the contract between the parties and that Tribunal has no jurisdiction to pass award based on non compliance of Circular. As per section 4 of the Arbitration & Conciliation Act, a party who knows that any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non compliance without undue delay he shall be deemed to have waived his right to so object. Even as per Section 16(3) of the Arbitration & Conciliation Act, a plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. In this connection, the learned counsel for the respondent has relied on the decision of the Hon'be Bombay High Court reported in 2003(2) Mh.L.J page 643 (Union of India v/s MAA Agency and another) in which in para 9 it is held as under:
27CT 1390_Com.A.S.1342019_Judgment.doc " In the present case, it was open to the petitioner to challenge either the jurisdiction of the Arbitral Tribunal to adjudicate upon the third claim or to raise the plea that the Tribunal was exceeding the scope of its authority. No such objection was raised before the Arbitral Tribunal. On the contrary, the petitioner proceeded with a defence to the claim on merits. The Arbitral award was passed thereupon. That being the position, the petitioner clearly waived under section 4 its right to object on the ground that any requirement of the arbitration agreement had not been complied with. The defence that the third claim could not have been arbitrated upon without a formal reference by the competent authority to the Arbitrator was within the knowledge of the petitioner. The defence not having been raised, before the Arbitrator, the principle of waiver embodied in Section 4 of the Act must necessarily apply."
26. In another decision reported in MANU/SC/1144/2014 (MSP Infrastructure Limited v/s M.P.Road Development Corporation Limited) Hon'ble Supreme Court has held on section 16 that :
"On a plain reading, this provision mandates that a plea that the Tribunal does not have jurisdiction shall not be raised later than the submission of the statement of defence. There is no doubt about either the meaning of the words used in the Section nor the intention. Simply put, there is a prohibition of the party from raising a plea that the Tribunal does not have jurisdiction after the party has submitted its statement of defence. The intention is very clear. So is the mischief that it seeks to prevent. This provision disables a party from petitioning an Tribunal to challenge its jurisdiction belatedly, 28 CT 1390_Com.A.S.1342019_Judgment.doc having submitted to the jurisdiction of the Tribunal, filed the statement of defence, led evidence, made arguments and ultimately challenged the award under Section 34 of the Arbitration Act, 1996. This is exactly what has been done by the respondent corporation. They did not raise the question of jurisdiction at any stage. They did not raise it in their statement of defence; they did not raise it at any time before the Tribunal; they suffered the award; they preferred a petition under Section 34 and after two yers raised the question of jurisdiction of the Tribunal. In our view, the mandate of Section 34 clearly prohibits such a cause. A party is bound, by virtue of Subsection (2) of Section 16, to raise any objection it may have to the jurisdiction of the Tribunal before or at the time of submission of its statement of defence, and at any time thereafter it is expressly prohibited. Suddenly, it cannot raise the question after it has submitted to the jurisdiction of the Tribunal and invited an unfavorable award. It would be quite undesirable to allow arbitrations to proceed in the same manner as civil suits with all the wellknown drawbacks of delay and endless objections even after the passing of a decree."
27. On the basis of these decisions, it is argued for the Respondent that even there is waiver by the petitioner and petitioner having not raised this issue of jurisdiction of Arbitral Tribunal to decide on compliance of SEBI circular, earlier, cannot raise the said issue before this court. Even otherwise, as discussed above, in view of clause 23 of the client agreement, the SEBI Circular which is given in the interest of the investor would be part of the contract between the parties and would be binding and applicable to the 29 CT 1390_Com.A.S.1342019_Judgment.doc transaction between the parties. Looking from any angle, the contention of the petitioner that application of SEBI circular dated 22/3/2018 to the contract between the parties by the the Arbitral Tribunal and the Appellate Arbitration Tribunal is wrong, cannot be accepted. Therefore on this ground the award under challenge cannot be said to be against the Public Policy of India or is patently illegal.
28. The learned counsel for the petitioner has referred to an award of a sole Arbitrator in the similar matter of arbitration under byelaws, rules and regulations of NSE in the case of Nirmal Bang Securities Private Limited v/s Shashikant Sadanand Sakpal, In this award, the learned Arbitrator in a matter in which pre trade confirmation through voice recording was not present has held that though the applicant did not carry out transaction with pre trade instruction, the respondent has accepted all the trades carried out by the applicant post trades, which means that the respondent had a knowledge of all trades carried out in his account by the applicant, which cannot be overlooked. In this award, the disputed trade were from 25/1/2018 to 9/1/2019 and complaint was lodged on 3/10/2019 and there were evidence showing that the client had accepted the trade carried out and therefore there was ratification. This award of a sole arbitrator is not only do not have any binding force to this case, but also different from the facts of the present case. In that case client had accepted trade subsequently and he 30 CT 1390_Com.A.S.1342019_Judgment.doc was aware of the transaction and there was an inordinate delay of about 9 months. In the present case last transaction as mentioned in the petition is on 7/8/2018 and on 8/8/2018 respondent disputed the validity of the F&O Segment transaction and then on 13/8/2018 he has given complaint to the NSE without any delay.
29. The learned counsel for the petitioner has also relied on a decision of the Hon'ble high Court of Bombay in Uttam Chand Garg v/s Anand Rathi Shares Brokers Limited and others dated 12/1/2012 in Arbitration Petition No.950/2011. In this decision under Section 34 of the Arbitration & Conciliation Act the Hon'ble High Court has upheld the finding of the learned Arbitrator that in any event, non compliance with the requirement of collecting margin by a trading member from the clients does not invalidate the trades immediately executed at the instance of the client. This decision also cannot be applied to the present facts as in the said case, trades were executed at the instance of the client, the margin was not collected and the present case is not so. In this case, though initially before the IGRP and before the Arbitral Tribunal and the Appellate Arbitration Tribunal the petitioner contended that there is pre trade instruction for executing the orders, but by late, in the present petition it is contending that the circular requiring recording of pre trade instructions cannot be applied to the case and is also contending that after the trade, 31 CT 1390_Com.A.S.1342019_Judgment.doc the SMS, Email etc were sent and the trades were informed to the client and therefore there is ratification.
30. The finding in the award in all the three proceedings clearly show that there was no pre trade instruction to execute the orders and even there are no voice recording made as per the circular and without such pre trade instructions, the trades have been executed in the account of the respondent by trading member that is the petitioner. It is observed in those proceedings that even the internal inspection report pertaining to this incident disclose that relationship manager is found responsible for the transaction which were in violation of SEBI guidelines and some transactions were done without consent. In a decision in FAO65/2014 dated 5/3/2014 (Angel Brokering v/s Arti Jain and another) the Hon'ble High Court of Delhi, in para 4 has held that there is a concept known as vicarious liability and appellant cannot wriggle out of the illegal actions of its Branch Manager merely by making a self serving plea of collusion with the Branch Manager and the respondent/ claimant. As held in the decision, when petitioner's relationship manager was found responsible for the unauthorized trade, petitioner would be vicariously liable to compensate for the loss suffered by the respondent.
31. The learned counsel for the respondent has relied on the decision of the Hon'ble High Court of Bombay reported in (2018) SCC Online Bombay 19845 (Motilal Oswal 32 CT 1390_Com.A.S.1342019_Judgment.doc Securities v/s Sadhana Bhatt and another) in which the facts were similar to the present case, wherein no pre confirmation were produced by the petitioner and the petitioner had not kept proper record of telephonic call and other mode by which the respondent was placing order with the petitioner for F&O for the relevant periods and the award is passed by holding that the petitioner is liable and allowed the compensation for loss of amount by unauthorized trade in F&O Segment and the same was confirmed by the Hon'ble High Court. In another judgment of Delhi High Court in FAO 479/2013 (Aurum Infocomm Limited v/s Sh.Desh Raj Mangal) relied by the respondent, the Hon'ble High Court has held that a court hearing objections under Section 34 has limited jurisdiction. It is held that when the Arbitrator has found as a matter of fact that no evidence has been lead by the appellant that any instructions were given by the respondent for conducting the alleged trades and the appellant did not file any telephonic record or relied upon any telephonic record with respect to issuing of any instructions for the trades by the respondent to the appellant, the award of the learned Arbitrator cannot be said to be perverse and cannot be entertained under Section 34 of the Arbitration & Conciliation Act. In both these decisions, in a similar situation in which there were no telephonic record showing 33 CT 1390_Com.A.S.1342019_Judgment.doc pre trade authorization have refused to interfere with the award of the Appellate Arbitration Tribunal.
32. The learned counsel for the petitioner has also argued that the Arbitral Tribunal have to decide the matter by applying the contract between the parties and contended that only in case of breach of contract the tribunal can pass award for payment of compensation under Section 73 or 74 of the Contract Act. In this connection the learned counsel has relied on a decision in 2005 SCC Online Raj 15 (State of Rajasthan and others v/s Nathulal). In this decision in para 18 the Hon'ble High Court has held that, the right and entitlement to receive such sum as a reasonable compensation could arise only in case of breach having been established. He has also relied on a decision reported in (2003) 5 SCC 705 (ONGC v/s Saw Pipes Limited) in which in para 15 the Hon'ble Supreme Court has held as under:
"15. The result is if the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal, which could be interfered under Section 34. However, such failure of procedure should be patent affecting the rights of the parties."
In this decision the Hon'ble Supreme Court has held that if the award is contrary to the substantive provisions of law or against the terms of contract, it would be patently illegal and 34 CT 1390_Com.A.S.1342019_Judgment.doc could be interfered under Section 34 of the Arbitration & Conciliation Act.
33. The learned counsel has also referred to Section 28(3) of the Act as per which while deciding and making an award, the Arbitral Tribunal shall, take into account the terms of the contract and trade usages applicable to the transaction. It is argued that as the terms of the contract do not include the SEBI Circular, the awarding compensation is beyond the scope of the contract and therefore award is patently illegal. However, as discussed above, the SEBI Circular under Section 11, would be part of the contract entered into between the petitioner and respondent by virtue of clause 23 of the client agreement and when this circular itself becomes part of the contract, the violation of the circular would result in awarding of appropriate compensation and the arbitration Tribunal would be justified in compensating the respondent for the loss suffered by him by way of compensation under Section 73 of the Contract Act.
34. The learned counsel for the petitioner has vehemently argued that subsequent to the transaction there were Email, some SMS sent and the respondent is intimated and therefore, there is post trade confirmation and respondent cannot dispute the same and there is ratification of the contract. In this connection the learned counsel has relied on a decision of the Gujarat High Court reported in 35 CT 1390_Com.A.S.1342019_Judgment.doc (2002) 3 GLR 673 (Ashok Kumar J. pandya v/s Suyog Co operative Housing), wherein, it is held in para16.2 that:
"Ratification is an approval of a previous act or contract, which, after it is ratified, becomes the act or contract of the person approving it. It is not a contract to assume such liability. In the case of contracts, ratification is the affirmance of contract already made and as on the date on which it was made. It is neither the making of a new contract to be bound by the old one, or the making of a new contract in the terms of the old one, but the adoption of the old contract itself, as it existed, as if it were made with a previous authority. As soon as an act or contract is ratified it stands on the same tooting as an act or contract previously authorized, and not merely as an act or contract whose effect the principle may be stopped to deny. Another feature is that ratification is retrospective, while estoppel operates after the act and in reliance upon it, ratification makes the whole act good from the beginning."
35. However, though the petitioner contended about sending of SMS, Email and otherwise respondent getting information about the trade executed by the end of the date, no evidence was placed to show that after coming to know about such trade, the respondent has ratified the said acts of executing the trade in F&O Segment. Only because the respondent was informed by Email or SMS subsequent to the transaction as contended, it cannot be said that the respondent has ratified the said act of selling the share. Only if respondent ratify the previous act, then it becomes valid 36 CT 1390_Com.A.S.1342019_Judgment.doc transaction under section 196 of Indian Contract Act. Therefore this decision do not help the petitioner in contending that after the transaction the act of the petitioner was ratified expressly or impliedly by the respondent. On the other hand, after the last transaction on 7/8/2018, the respondent has disowned these trades by raising dispute and gave complaint on 13/8/2018. Therefore, after the execution of trade, there was no such ratification as now conended in this petition.
36. The learned counsel for the petitioner has also relied on the decision reported in (2009) 12 SCC 1 (State of Rajasthan and another v/s M/s. Ferro Concrete Construction Limited) in which the Hon'ble Supreme Court has held that in case of breach of contract, for awarding damages evidence is to be lead and facts to be proved. He has also relied on the decision of Hon'ble Supreme Court reported in (2013) 3 SCC 747 (P.Radhakrishna Murthy v/s National Building Construction Corporation Limited) in which it is held that for claim of damages, it is to be established that the same is against breach committed by other party. For the discussion made above a breach of Circular of the SEBI is also breach of contract and such breach of contract has caused loss to the respondent and the loss caused to the respondent is evident from the records produced. Hence, awarding of compensation by the Arbitral Tribunal is just and proper.
37CT 1390_Com.A.S.1342019_Judgment.doc
37. The learned counsel for the petitioner has also argued that the respondent is attempting to make unjust enrichment at the cost of the petitioner and this award which allows the respondent to make unjust enrichment would be against the fundamental policy of Indian law. In this connection he has relied on a decision reported in LAWS (SC) 2020519 (Patel Engineering Limited v/s North Eastern Electric Power Corporation Limited) in which in para 53 the Hon'ble Supreme Court has held that :
"... Unjust enrichment being contrary to the Fundamental Policy of Indian Law is a ground for interference with an Arbitral Award under Section 34(2) of the Act. The Bombay High Court in Angerlehner Structural and Civil Engineering Company v. Municipal Corporation of Greater Mumbai has recognized unjust enrichment of a party at the cost of public exchequer as being against the fundamental policy of Indian law...."
In the present case, this decision cannot be applied as the clear acts of unauthorized trade by the relationship manager of the petitioner has caused loss to the respondent. The said loss is sought to be compensated by awarding compensation. Except the loss and interest thereon no other amount is given in the award passed against the petitioner. Therefore there is no unjust enrichment as contended.
38. In a nutshell, first contention of the petitioner which was taken even before the Tribunal that there were pre trade instructions given by the respondent for the transaction in 38 CT 1390_Com.A.S.1342019_Judgment.doc the F&O Segment is not established throughout by the petitioner. The contention of the petitioner that SEBI Circular dated 22/3/2018 cannot be read into contract between the parties which came into existence even earlier cannot be accepted, as client's agreement itself states that the byelaws, regulations of SEBI etc would be applicable to the transaction. Even in general law, without any instruction the petitioner is not supposed to trade in the account of the respondent and cause loss to him. The contention of the petitioner that there is no breach of contract is also not established. The contention of the petitioner that the compensation under Section 73 or 74 of the Contract Act cannot be awarded also falls to the ground. The contention of the petitioner that the Arbitral Tribunal and the Appellate Arbitration Tribunal have exceeded their jurisdiction and were not supposed to decide the compliance of SEBI Circular is also not accepted as the SEBI Circular become part of the contract and the petitioner cannot violate the same and cause loss to the respondent. The contention of the petitioner that there was post trade confirmation and thereby there is a ratification of the trade by the respondent is also not established, as, though post trade information might have reached the respondent, there is absolutely no material placed to show that the respondent has accepted and ratified those trades. For all these reasons, petitioner has utterly failed to prove that, the award passed by the learned Arbitrators of the Appellate Arbitration Tribunal or by the 39 CT 1390_Com.A.S.1342019_Judgment.doc Arbitral Tribunal are opposed to the public policy of India or is patently illegal and is required to be set aside under Section 34(2)(b)(ii) or Section 34(2A) of the Arbitration & Conciliation Act. Therefore, this petition deserves to be dismissed with cost. Accordingly point No.1 is answered in the negative.
39. POINT No.2 : For the discussion made on above point, following order is passed:
ORDER This petition under Section 34 of the Arbitration and Conciliation Act 1996 filed by the petitioner challenging the award dated 19/6/2019 passed by the learned Appellate Arbitration Tribunal in Appeal (A.M) No. F&O/B0011/2018, partly confirming award dated 11/2/2019 passed by the learned Arbitral Tribunal is dismissed with costs.
[Dictated to the Judgment Writer; transcript thereof corrected, signed and then pronounced by me, in the Open Court on this the 14th day of July 2021] [Ravindra Hegde] LXXXIII Additional City Civil Judge.
BENGALURU.
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