Delhi District Court
Shanti Goel vs M/S Motilal Oswal Securities Ltd on 3 December, 2024
IN THE COURT OF MS SAVITA RAO, DISTRICT JUDGE
COMMERCIAL COURT-01, SOUTH,
SAKET COURTS, DELHI
CNR No. DLST01-004229-2024
OMP (Comm) No. : 16/24
In the matter of :-
Ms. Shanti Goel
Proprietor M/s Prudence Investments
Having its office at -
M-53, III Floor, Main Market
Greater Kailash Part-1
New Delhi - 110048
............Petitioner
Vs.
M/s Motilal Oswal Securities Ltd.
A Company incorporated under the provisions of
The Companies Act, 1956, having its office at :
81, Bajaj Bhawan, Nariman Point
Mumbai - 400021
..............Respondent
Date of institution of the petition : 01.09.2014
Date of Assignment to this Court: 15.04.2024
Date of final arguments : 05.08.2024, 27.08.2024,
4.10.2024, 14.10.2024,
06.11.2024, 07.11.2024,
14.11.2024, & 22.11.2024
Date of Order : 03.12.2024
ORDER
1. This is petition u/s 34 of Arbitration and Conciliation Act, OMP (Comm) No. : 16/24 1/57 filed by the petitioner seeking setting aside of award dated 30.12.2013 passed by Ld. Arbitrator and Appellate Award dated 20.05.2014.
2. Facts giving rise to present petition are that respondent is a registered broker of the National Stock Exchange and Bombay Stock Exchange and offers services to investors across the country through self as well as through its sub-brokers/authorized persons for dealings in shares and securities at the platform of the said Stock Exchange. Petitioner is one of the sub broker/authorized person of respondent/Trading Member. Respondent/Trading Member had allotted code PRD1200 in respect of brokerage account of petitioner/sub-broker. Respondent trading member maintains the accounts of all the clients who carry business through the petitioner/sub-broker or directly through the respondent/trading member. All the contract notes, ledger confirmations, DEMAT statements, MTM Bills, Delivery Slips and other documents were issued by the respondent/trading member directly in the names of respective clients and various payments were made by clients directly in the name of respondent/trading member either through cheque/pay order/ Demand Draft/ RTGS etc. Similarly any payment to be made by the respondent/trading mamber to any of the clients was made directly in their names through any one of the aforesaid modes.
3. The role of sub-broker was only to provide ancillary services to the clients during the course of business which OMP (Comm) No. : 16/24 2/57 included filling and collection of Registration Forms/KYCs, executing trades for and on behalf of the clients, receiving payments in the name of respondent and depositing it in the account of respondent/trading member, downloading various data/ledgers from the server of the respondent and providing the same to the clients, if requested etc. Respondent/Trading member collected all the brokerage from the clients and thereafter disbursed the said brokerage in the ratio of 60:40 to the petitioner/sub-broker for the aforesaid services rendered by the petitioner/sub-broker from time to time.
4. Respondent/trading member had been maintaining an open, mutual and running account in respect of brokerage of the petitioner/sub-broker in both the segments of the NSE i.e. Cash/Capital and Futures and Options. Petitioner/Sub-Broker called upon the respondent to provide her the financial ledgers which were supplied by the respondent to the petitioner on 26th July 2012 and 10.08.2012 respectively. On receipt of the said financial ledgers, petitioner/sub-broker found that many entries were wrongly entered by the respondent in F&O Account as well as in Cash/Capital Account (as detailed in the petition), which were illegal and not justified. After deletion and/or reversal of all such entries, the respondent/trading member was required to pay a sum of Rs. 36,09,986.86 to the petitioner/sub-broker alongwith interest.
5. Petitioner filed statement of claim against the respondent before the National Stock Exchange of India, Delhi, to which, OMP (Comm) No. : 16/24 3/57 conter claim was filed by respondent. On behalf of respondent, it was submitted that after understanding about the terms and conditions for her appointment as sub- broker, on 01.10.2005, petitioner had executed an indemnity bond in favour of the Respondent. On 6-10-2005, petitioner also executed Broker-Sub- Broker Agreement with the Respondent for her empanelment as a sub- broker. During the period of October 2005 to February 2006, petitioner had introduced 32 clients prior to SEBI registration and was directly registered with the Respondent under Bi-partite agreement. Petitioner by an email dated 1-3- 2006 requested the Respondent to transfer said 32 clients to her sub-broker's client code. Accordingly said 32 clients were shifted to the sub-broker with new client codes starting PRD w.e.f 01.06.2006. Petitioner thereafter introduced other 211 clients through Tri-Partite Agreement in addition to 32 clients directly introduced. Same is not disputed by the parties.
6. During the period of January 2006 to May 2012, petitioner executed transactions for sale and purchase of shares on behalf of said clients (including clients registered under Bi-partite agreements) and shared sub-brokerage commission with the Respondent. Respondent as a main broker sent Electronic Contract Notes (ECN), quarterly ledger account and demat account statements to all the clients. During 05.01.2006 to 31.05.2012, respondent opened two ledger a/c's in the Petitioner's name and credited her ledger a/c for her share of sub-brokerages for cash and F&O segment, transfer of funds from her husband's OMP (Comm) No. : 16/24 4/57 account and debits towards aging debits in clients account, V- SAT/ CTCL charges, penalty, interest etc.
7. It was further submitted by Ld. counsel for respondent that on the basis of provisions under the sub-broker agreement, petitioner's sub-brokerage ledger A/c was debited for the aging debit lying in clients' account namely Rakshak Kapoor, Rajendra Singhal, Hemant Gupta and Geeta Singhal on 21.01.2009. The ledger A/c of the Petitioner was credited by a sum of Rs. 37,42,758.74 on 20.06.2009 by debiting the ledger A/c of the Petitioner's husband. The ledger A/c of the Petitioner was credited by a sum of Rs. 23,94,982.87 on 26.08.2009 by debiting the ledger A/c of the Petitioner 's husband. During the entire period of transactions, respondent sent quarterly ledger account, collateral accounts and other information to the Petitioner and same were accepted and acted upon by the Petitioner. In addition, petitioner had logged-in the web-site of the Respondent and viewed all her accounts throughout. On 19.09.2009, petitioner by an email confirmed her debit balance of Rs. 35 lakhs and value of securities at Rs. 88 lakhs (including RPL shares). The Petitioner advised the Respondent to send a registered letter to Mr. Rakshak Kapoor for balance confirmation on 13.04.2010 and 04.10.2010. On 07.05.2011 respondent made demand for outstanding amount and put her on notice for selling the shares lying in her collateral a/c. Respondent on 08.05.2011 informed the Petitioner that they will sell the stock on 11th May, 2011. Accordingly, 3160 shares of RIL were sold. On 08.08.2011, petitioner requested the OMP (Comm) No. : 16/24 5/57 Respondent for transfer of shares from her collateral account to PRD001 (her husband's A/c).
8. After completion of proceedings, award dated 30.12.2013 was passed by Ld. Arbitral Tribunal. Against the said award, petitioner preferred an appeal which was also dismissed by Ld. Appellate Arbitral Tribunal vide order dated 20.05.2014. It is against said award dated 30.12.2013 and Appellate award dated 20.05.2014 that the present petition u/s 34 of Arbitration and Conciliation Act, has been filed by the petitioner.
INTERPRETATION OF BAD DEBTS
9. Ld. Panel of Arbitrators interpreted the meaning assigned to the word " introduction" used in the broker/sub-broker agreement dated 6.10.2005 and the indemnity bond executed by the petitioner in favour of repondent to be able to determine the liability of the respondent towards bad debts/non payment of outstanding dues of the clients. Relevant clauses of the Broker/Sub-broker Agreement and Indemnity Bond were reproduced. It was noted by Ld. Panel of Arbitrators that the word "introduced" used in the sub broker agreement had to be given liberal meaning so as to include all clients, who were trading though the petitioner/sub broker in respect of which the petitioner was getting uniform monetary advantage of sharing the brokerage/commission agreed upon. Since the greater deal of emphasis was laid on the word "bad debt" used in the clauses of broker/sub broker agreement, it was noted that the 'bad debts' OMP (Comm) No. : 16/24 6/57 which had strict and narrow meaning for the purpose of assessment of income tax cannot be given the same meaning when it comes to interpretation of this word used in the broker/sub broker agreement, having been qualified by the word " negligence of the sub broker and non payment of dues by the client" . It was further noted that therefore, where the client had failed to discharge his financial obligtions under the agreement and had outstanding debit balance against him, same may be treated as bad debt if the parties from their practice and conduct had been treating it so, right from the year 2006 when the sub brokership business started.
10. Ld. counsel for petitioner made following submissions:
(a) That, both the arbitral tribunals had given wider/liberal interpretation to the expression ' bad debt' and the expression 'clients introduced by the petitioner' in order to reject the claims preferred by the petitioner. The said wider/liberal interpretation was contrary to law in as much as it is the settled principle of law that the clauses which burden a party with some financial obligation/liabilities have to be construed strictly and not liberally.
(b) That, by giving wider/liberal interpretation to expression 'bad debt', the arbitral tribunals had virtually rendered the expression 'bad' redundant. There is no definition of 'bad debt' under the Income Tax Act and the judgments quoted by the petitioner during the course of hearing only gave a common parlance meaning of expression ' bad debt' and that the courts OMP (Comm) No. : 16/24 7/57 were not considering any specific definition contained in any tax statute.
(c) That, petitioner is only a facilitator. All ledger confirmations, contract notes, demat statements, delivery slips and other documents issued directly by the Respondent / Stockbroker are in the name of the Client (not Petitioner).
Therefore, the Client legally and contractually can be proceeded against ONLY by the Respondent as no arbitration clause exists between Client and the Petitioner / Sub-broker and it is the Respondent who has to proceed against a client for non-payment of dues as he has the contract notes, enforceable ledgers account and the trade on papers are between the Client and the Respondent-Stockbroker.
(d) That, respondent did proceed for the biggest account of one Rakshak Kapoor directly. Section 34 challenge was made by Respondent before Hon'ble High Court against the setting aside of the award by the appellate tribunal, thereby the appellate award was set aside vide judgment dated 26.11.2009 in OMP (Comm.) 169/2016. Section 37 appeal was made by Rakshak Kapoor seeking stay of the judgment which was granted subject to deposit of award amount .
(e) That, the amount of Rs.80,16,699.38 had also been debited from the Petitioner's account on the basis that the Petitioner signed the Stock Broker and Sub-broker Agreement and also gave the Indemnity Bond. So as a matter of fact, Rakshak Kapoor's amount is taken twice by the Respondent, OMP (Comm) No. : 16/24 8/57 once from Rakshak Kapoor himself and second time from the Petitioner.
(f) That, the fact that Respondent has proceeded against Rakshak Kapoor shows that the Respondent is blowing hot and cold. Law is settled that the parties cannot approbate and reprobate.
Reliance was placed upon following:
(i) Rajasthan State Industrial Development and Investment Corporation and Another Vs. Diamond & Gem Development Corporation Limited & Another (2013) 5 SCC 470, wherein it was observed that :
" 15. A party cannot be permitted to "blow hot-blow cold", "fast and loose" or "approbate and reprobate". Where one knowingly accepts the benefits of a contract, or conveyance, or of an order, he is estopped from denying the validity of, or the binding effect of such contract, or conveyance, or order upon himself. This rule is applied to ensure equity, however, it must not be applied in such a manner, so as to violate the principles of, what is right and, of good conscience. (Vide: Nagubai Ammal & Ors. v. B. Shama Rao & Ors., AIR 1956 SC 593; C.I.T. Madras v. Mr. P. Firm Muar, AIR 1965 SC 1216; Ramesh Chandra Sankla etc. v. Vikram Cement etc., AIR 2009 SC 713; Pradeep Oil Corporation v. Municipal Corporation of Delhi & Anr., AIR 2011 SC 1869; Cauvery Coffee Traders, Mangalore v. Hornor Resources (International) Company Limited, (2011) 10 SCC 420; and V. Chandrasekaran & Anr. v. The Administrative Officer & Ors., JT 2012 (9) SC 260)" .
(ii) Nagubai Ammal & Others Vs. B. Shama Rao & Others, AIR 1956 SC 593, wherein it was observed that :
" 21..................The observations of Scrutton, L. J. on which the appellants rely are as follows:
"A plaintiff is not permitted to 'approbate and reprobate'. The phrase is apparently borrowed from OMP (Comm) No. : 16/24 9/57 the Scotch law, where it is used to express the principle embodied in our doctrine of election- namely, that no party can accept and reject the same instrument: Ker v. Wauchope(1): Douglas- Menzies v. Umphelby(2). The doctrine of election is not however confined to instruments. A person cannot say at one time that a transaction is valid and thereby obtain some advantage, to which he could only be entitled on the footing that it is valid, and then turn round and say it is void for the purpose of securing some other advantage. That is to approbate and reprobate the transaction".
It is clear from the above observations that the maxim that a person cannot 'approbate and reprobate' is only one application of the doctrine of election, and that its operation must be confined to reliefs claimed in respect of the same transaction and to the persons who are parties thereto. The law is thus stated in Halsbury's Laws of England, Volume XIII, page 454, para 512:
On the principle that a person may not approbate and reprobate, a species of estoppel has arisen which seems to be intermediate between estoppel by record and estoppel in pais, and may conveniently be referred to here. Thus a party cannot, after taking advantage under an order be heard to say that it is invalid and ask to set it aside, or to set up to the prejudice of persons who have relied upon it a case inconsistent with that upon which it was founded;
nor will he be allowed to go behind an order made in ignorance of the true facts to the prejudice of third parties who have acted on it".
(g) That, the finding of Ld. Arbitrator is opposed to India's public policy and the award has to be interfered with, as the Respondent proceeded against the Petitioner without taking reasonable steps and through untenable and wrong interpretation of 'bad debt'.OMP (Comm) No. : 16/24 10/57
(h) That, petitioner has neither a civil remedy nor arbitration clause against the Client. Further, as per award, primary liability to initiate legal proceedings is on the Respondent. Respondent has not challenged the award, therefore, the said observation has attained finality.
(i) That, by their own conduct the correct course for the Respondent is to first proceed against the Client directly and exhaust remedies and then against Respondent only if "bad debt incurred".
(j) That, 'bad debt' incurred doesn't mean that the debt is beyond the date when it has to be paid. The age of debt is not relevant. What has to be seen is whether the creditor has taken reasonable steps and after doing so has no reasonable expectations of recovery of the debt from the debtor. There should not be any ray of hope.
Reliance was placed upon following:
(i) Raja Bahadur Mukundlal Bansilal Vs. CIT (1952) 22 ITR 94 (Bombay):
" Now, a loan becomes irrecoverable or a debt becomes a bad debt when the creditor has no reasonable expectations of recovering it from the debtor; or, as it has been put in some cases, where there is no ray of hope at all on which the creditor can rely for recovering the amount from this debtor that it can be said that a debt has become bad or a loan ha become irrecoverable".
(ii) BCGA (Punjab) Limited Vs. CIT, Punjab (1937) 5 ITR 279 (Lahore):
" To my mind, this position in the circumstances of the case is most reasonable. So long as there is any ray of hope left to recover a debt, OMP (Comm) No. : 16/24 11/57 however dim it may be, and so long as a debt is in the process of realization, it cannot be said that it has become irrecoverable"
(iii) DIT Vs. Oman International Bank (2009) 313 ITR 128 (Bombay) :
" 17..............All this would indicate that when the assessee treats the debt as a bad debt in his books the decision which has to be a business or commercial decision and not whimsical or fanciful. The decision must be based on material that the debt is not recoverable. The decision must be bona fide".
(iv) Laxminarayan Vs. Returning Officer (1974) 3 SCC 425 :
" 85. It may be observed that the word " incurred" occurs both in section 96 and section 119. "Incurred" means " actually spent".
11. Per Contra, following was submitted by Ld. Counsel for respondent:
(a) That, HLB while dealing with the issue of 'clients introduced by the Petitioner and bad debts arising out of said clients', had considered the provisions of Clause D (1) of the Broker Sub-Broker Agreement entered between the Petitioner and the Respondent which provides that the share broker shall share brokerage at the rate on month to month after deducting statutory dues and after adjusting on account payments, outstanding dues from the clients / investors for the month concern.......' Indemnity Bond executed by the Petitioner in favour of the Respondent, emails dated 19th September 2009 and 8th August 2011 sent by the Petitioner, execution of trades by the Petitioner for the said 32 clients directly registered with the OMP (Comm) No. : 16/24 12/57 Respondent and sharing of sub- brokerage commission for the said 32 clients and recorded detailed reasoning. The HLB has also given detailed reasoning on why the judgments cited by the counsel for Petitioner cannot be applied in present case.
(b) That, with reference to Ground 3, HLB had considered the certificate issued by the auditor of the Respondent confirming sharing of sub-brokerage by the Respondent with the Petitioner, advising the Respondent to send balance confirmation to Rakshak Kapoor (one client who was registered under Bi-Partite Agreement) as evidence and recorded detailed reasoning.
(c) That, with reference to Ground 4, HLB had considered that from the day one, the Respondent debited the account of the Petitioner for the debit lying in the accounts of clients introduced by her and same was in accordance with Clause D (1) of the Broker Sub-broker Agreement and not disputed by the Petitioner prior to filing of arbitration. The HLB had also considered email of the Petitioner confirming ledger balance, thereby admitting said debits.
(d) That, in view of the contract between the parties, the main contention of the petitioner under the head " interpretation of bad debts incurred" and citation of a finding in the award has no meaning as the above referred clause gives the respondent the power to transfer the debit of client's account which is outstanding for more than a month. This practice was followed since inception without any objection by the petitioner.OMP (Comm) No. : 16/24 13/57
12. Contention of petitioner was noted by Ld. Panel of Arbitrators that the clients who were introduced by petitioner after she became sub-broker, had executed tripartite agreement i.e. client, sub-broker and broker agreement and those who were introduced prior thereto became direct clients of the respondent by executing clients-broker agreement. Accounts of all these clients were maintained by the respondent but their trades had been executed by the petitioner through the terminal provided by the respondent in her sub broker's office. Respondent had been issuing contract notes, quarterly ledger and other documents directly to the clients and her liability under the agreement and the bond was limited to the reimbursement of the bed debts of the clients who were introduced by her. Ld. Arbitrators observed that the word " introduced" used in the sub-broker agreement had to be given liberal meaning so as to include all clients who were trading through the petitioner sub broker in respect of which she was getting uniform monetary advantage of sharing the brokerage/commission agreed upon.
13. Ld. Counsel for petitioner further submitted that:
(a) by giving wide/liberal interpretation to expression ' introduced' , the Arbitral Tribunals made the petitioner responsible for all losses occasioned to the respondent in respect of all those clients who conducted trades at the terminal of the petitioner without considering the ' distinction for different categories of clients'.OMP (Comm) No. : 16/24 14/57
(b) arbitral tribunals had clubbed following categories of clients in one single hotchpotch in order to take the petitioner accountable for the losses of all i.e. (i) clients introduced by the petitioner ; (ii) clients not introduced by the petitioner but were carrying trades through the petitioner ; (iii) Clients who executed tripartite agreement but not introduced by the petitioner ; (iv) Clients who executed tripartite agreement but introduced by the petitioner ; (v) clients who had not executed tripartite agreement but were carrying on trades through the petitioner
(c) In this manner, all the aforesaid clients whether they were introduced or not by the petitioner and whether they had executed any tripartite agreement or not, were clubbed together by the Arbitral Tribunals in order to make the petitioner liable for their debts/debit balances. Such an interpretation, therefore rendered the expression 'clients introduced by the petitioner' as totally meaningless.
(d) arbitral tribunals failed to consider the fact that there was no evidence on record to suggest that the six clients whose debit balances were transferred by the respondent to the Master Brokerage account of the petitioner were in fact introduced by the petitioner in as much as no tripartite agreement evidencing such fact was produced by the respondent in relation thereto before the arbitral tribunals.
(e) arbitral tribunals had blown out of proportion the so called ' no objection' by the petitioner during the course of trading without realising the fact that the account maintained by OMP (Comm) No. : 16/24 15/57 the respondent was open, mutual and running account and was not settled and/or reconciled any time in the past and the efforts were going on to reconcile the same as borne out from various emails exchanged by and between the parties. As such, the petitioner could not be estopped from challenging the various entries in the said statement of account by pressing into service the so called ' no objection' by her.
14. It is a matter of fact that the account of such clients were deemed to have been transferred to the petitioner's sub broker account. These clients were considered to have been introduced by the petitioner for all practical purposes, primarily because the petitioner was sharing the brokerage, though no tripartite agreement had ever been executed between the parties pertaining to these clients. Liability of petitioner for payment of bad debts arose from the clauses outlined in the broker/sub broker agreement. Relevant clause under the section titled 'Mutual Obligations" is reproduced hereunder:
" The stock broker shall share brokerage at the rate as per the schedule on month to month basis after deducting statutory dues and after adjusting on account payments, outstanding dues from the clients /investors for the month in concerned or lossess suffered by the stock broker due to the negligence of the sub broker or after the receipt of audit report, whichever is later".
15. Under the title 'Indemnity and Liabilities', sub-broker agreed that:
" he/it shall be responsible for all bad debts incurred by the stock broker due to the negligence/non payment of dues by the clients/investors introduced by the sub-broker".OMP (Comm) No. : 16/24 16/57
16. Reference was also made to the Indemnity Bond executed by petitioner in favour of respondent on 01.10.2005, thereby, petitioner was to indemnify respondent against all claims, demand, actions, proceedings, loss, bad debts, damages, liabilities, charges and/or expenses occasioned or may be occasioned to most-directly or indirectly to any reason including bad delivery (as defined by the exchange rules/Regulations/Byelaws) of share securities and / or as a result of fake/forged/stolen shares/securities/transfer documents, introduced or may be introduced by or through the clients during the course of its dealings/operations on the stock exchange (s). Ld. Arbitrators also noted that petitioner did not give any reason for introduction of indemnity clause in the broker-sub broker agreement and the need for execution of separate indemnity agreement if her sub broker's office was simply a facilitator, with no responsibility for the clients introduced by her towards the respondent. It was though submitted by Ld. Counsel for petitioner that indemnity bond had been executed earlier but there was no purpose for continuation of separate indemnity bond after execution of broker/sub-broker agreement between the parties which came to an end upon such execution.
17. Based upon above, Ld. Arbitrator panel noted that:
" The bad debts which have been given strict and narrow meaning for the purposes of assessment of income tax cannot be given the same meaning when it comes to interpretation of this word used in the broker sub broker agreement. The word ' bad debt' has been further qualified by the word ' negligence of the sub broker and non payment of dues by the client' . Therefore, when the client has failed to discharge his financial obligations OMP (Comm) No. : 16/24 17/57 under the agreement and has outstanding debit balance against him, the same may be treated as a ' bad debt' if the parties from their conduct and practice had been treating it so right from the year 2006 when the sub- brokership business started. Here, it will also be pertinent to refer to clause 1 under the heading Mutual Obligation in the broker sub broker agreement which provides that the respondent-broker would share brokerage on month to month basis after deducting statutory dues and after adjusting on account payment, outstanding dues from client/investor for the month concerned' etc. Therefore, conjoined reading of these two clauses of the broker- sub broker agreement, in the light of the practice which the parties had adopted right from the beginniner of the sub brokership leaves no doubt that non payment of outstanding dues, notwithstanding they had not become bad debts in narrow sense was covered by the indemnity clauses of the agreement. Furthermore, the Indemnity bond dated 1.10.2005, which has been reproduced above, also does not limit the indemnity to only ' bad debts' but it covers ' all claims, demand, loss and liabilities' which in wider sense would cover outstanding dues which have not been paid by the client within stipulated period or on demand etc."
18. In terms of broker-sub-broker agreement, under the heading 'Matters Regarding Clients', Clause 5 stipulates that :
"the sub broker agrees and undertakes that he will not accept any fund /securities from clients for cash/derivatives segment and he will act only as a facilitator between stock broker and the client".
It was submitted by Ld. counsel for petitioner that limits of buying and selling of securities by every client is decided and managed by respondent based on its Risk Management Strategy (RMS) and action against any client incurring loss to the respondent is taken as per RMS. Further, as submitted on behalf of petitioner, the petitioner only being facilitator, her liability under the agreement and the bond was limited to the reimbursement of the bad debts of the clients.
19. 'Bad debt' by definition is the uncollectible account expense i.e. a monetary amount owed to a creditor that is OMP (Comm) No. : 16/24 18/57 unlikely to be paid or is not collectible for any reason. By this definition, the word used as 'bad debt' in the broker-sub-broker agreement refers to liability of the petitioner to indemnify respondent only in case of unrecoverable payment by the clients. Nevertheless, Ld. Arbitrators panel also relied upon the other clause in the broker sub-broker agreement with regard to sharing of brokerage on month to month basis by stock broker after adjusting 'on account' payments, outstanding dues from clients or losses suffered by the stock broker due to negligence of the sub broker. Based upon the above and also the alleged practice being followed for adjustment of outstanding dues of clients in account of petitioner, Ld. Arbitrator panel noted that :
" The indemnity provisions of the broker sub-broker agreement and the indemnity bond will cover the default in discharge of financial obligation by the clients within the prescribed time or for non payment of dues when demanded and that the parties had agreed that it will be done from month to month basis. This practice of transferring the outstanding dues of the clients, to the debit of the account of the applicant, keeping it in suspense account, and reversing the entry as and when payment is received/recovered from the clients has been followed by the respondent from the beginning of the sub brokership business against which no objection had been raised by the applicant. The conduct of the applicant establishes that the applicant also understood that she was liable for the liability/outstanding dues and non payment of the dues by the clients who were executing trades through her".
20. Ld. counsel for petitioner submitted that what the respondent resorts to is wholly illegal, perverse and opposed to public policy as it, without taking any action against Clients, merely debited the account of petitioner , as per its whims and fancies. Debiting petitioner first and then the Respondent received the amount from the Client and gives it a credit. This OMP (Comm) No. : 16/24 19/57 practice is opposed to public policy and contrary to the clause of indemnity as there are no bad debts incurred.
21. The observed practice, involved transferring outstanding dues of clients to the debit of account of petitioner, maintained in suspense account, with subsequent reversal of entries upon receipt or recovery of payments from the clients. In terms of Clause 1, titled 'Mutual Obligations', stock broker/respondent was required to share brokerage on month to month basis, consequently brokerage payments were to be made only after adjusting for outstanding amount/losses. Furthermore, a separate clause imposed an obligation on the petitioner to indemnify the stock broker for all the bad debts resulting from client defaults or negligence. Combined reading of these terms suggests that while brokerage payments were conditional upon adjustments for outstanding dues, such dues could not have been debited from petitioner's account prematurely without any efforts for recovery. The debits were to occur only when the dues escalated to the status of bad debts, triggering the petitioner's indemnity obligations.
22. Bad debt refers to the portion of receivables that is deemed uncollectible due to the debtor's inability or unwillingness to pay. Bad debt is recognized when it becomes clear that recovery efforts are unlikely to succeed or did not succeed. The indemnifier is contractually obligated to cover all bad debts upon identification which first of all involves recognition of bad debt OMP (Comm) No. : 16/24 20/57 i.e. the overdue receivables reclassified from accounts receivable to bad debt after all reasonable recovery efforts fail. If an indemnity agreement is in place, the indemnifier's account is debited to recognize the indemnity claim. This represents the amount the indemnifier is liable to reimburse the creditor for the bad debt. When outstanding dues escalate to bad debt status, the indemnifier's liability might be triggered as per the agreed terms. This escalation acknowledges that the debt is no longer recoverable from the debtor and shifts the financial burden to the indemnifier. The practice of debiting the petitioner's account with all clients dues, not for the brokerage adjustments but as a recovery mechanism, shifting the financial burden upon indemnifier without escalation acknowledgment that debt is no longer recoverable from client and rather reversing the entries upon receipt of payments which itself does not indicates being 'bad debt' , appear inconsistent with the terms of agreement and does not align with the contractual obligations.
23. Ld. Counsel for petitioner demonstrated before the court, that even the practice as interpreted by Ld. Arbitrators often not adhered to in many instances. It was submitted that as per said observation of Ld. Arbitrator, brokerage was to be paid after the adjustment of outstanding dues of the clients on month to month basis. However, many a times brokerage was paid even when there was negative balance in the sub broker account and it was not the case that after brokerage payments were made first off setting the outstanding dues, resulting in payments to account OMP (Comm) No. : 16/24 21/57 with negative balance. Ld. Counsel for petitioner highlighted that the account was being maintained by respondent, ledger details of which are available on record. As on 21.01.2009, in terms of ledger details Annexure-P16, reflected losses in four client accounts with outstanding payments against them, yet without receipt of any amount in the intervening period from the clients, there was reversal of entries on 28.1.2009. Similar pattern was pointed out in numerous entries in the ledger details, maintained by respondent, available in the Arbitral Record. No purpose could be descerned with such reversals often occurring at the end of the month or beginning of the next month. Ld. Counsel for petitioner submitted that it was only to show the books of the respondent neat and clean.
24. Ld. Counsel for respondent was not able to refute this argument, nor could provide the valid explanation for the repeated reversal of debit entires pertaining to outstanding dues despite no payment having been received in between. Ld. Arbitrator panel appears to have overlooked this pattern or their attention was not adequately drawn to the same. Consequently, no estoppel could arise against the petitioner for allegedly failing to object, especially since the practice itself contradicts the terms of the agreement and does not affirm the respondent's narrative. The rationale behind debiting the petitioner's account and subsequent reversal of entries without actual credit from the clients many a times, appears, as argued by Ld. Counsel for petitioner, to align more with maintaining clean accounts rather OMP (Comm) No. : 16/24 22/57 than any contractual or practical necessity. Further,regarding the outstanding payments from clients, regardless of whether they had reached to the stage of being classified as ' bad debts', petitioner had no right to recover the same from the clients, despite having been fastened upon the liability to indemnify. Ld. Arbitrator Tribunal though also noted that petitioner had no power to initiate arbitration proceedings or for that matter, any civil proceedings for recovery of the outstanding dues in the trading account of the client maintained by the respondent.
25. Following was observed :
" The primary liability to initiate legal and other proceedings was on the Trading Member. By virtue of Indemnity given by the sub broker- applicant, respondent has recovered non payment of the dues by the client by transferring the debit to the account of the applicant. These two remedies available to the respondent are not inconsistent remedies that after taking recourse to one available remedy reverting to take alternative remedy became barred by estoppel by election. The trading member cannot shut its responsibility to take appropriate legal action against the defaulting client for recovery of dues or the sub broker with authority of the trading member should take legal action against such client and recover dues which the trading member has debited in her account. The respondent cannot be excluded from filing the arbitration application, which it can alone file against the client and also transfer the debit outstanding to the account of the applicant so long as it is not recovered from the client."
26. In the instant matter, for recovery of the outstanding amount of the clients which had been debited in the account of petitioner, except for one client, no proceedings had been initiated by the respondent which was entirely banking upon the indemnity clause, thereby debiting the account of the petitioner. It was the responsibility of the trading member, even in terms of observation of arbitral tribunal, to take appropriate legal action OMP (Comm) No. : 16/24 23/57 against the defaulting clients for recovery of dues or to authorize sub broker to take legal action against such clients.
27. Ld. counsel for petitioner further submitted that petitioner thereby was emasculated as it cannot even proceed against the Client or the Respondent. As a matter of fact, the Petitioner tried to proceed against the defaulting clients but the Respondent never joined and such attempt have been an exercise in futility. Clause 7 of the Stock Broker and Sub-broker Agreement shows that no action can be taken by the sub-broker against the client. That clause is only restricted to disputes between stock broker and sub-broker. Similarly, under tripartite agreement clause 13, only a client and stock broker can resolve their disputes through arbitration.
28. Ld. Counsel for respondent submitted that petitioner vide an email dated 13th Arpril 2010 requested the respondent to send a letter through registered post to their client PRD006 (Rakshak Kapoor) stating about the debit amount outstanding with MOSL. This clearly indicates that whenever the petitioner wanted to have legal recourse against the client's default, they had an obligation to request the respondent for arbitration. As further submitted, it is also an admitted fact that on the request of the petitioner, respondent initiated arbitration proceedings against Mr. Rakshak Kapoor as advised by email. Yet, petitioner dishonestly disputed her obligations and lodged a claim.
29. In terms of record, legal/arbitral proceedings were initiated by respondent against said Sh. Rakshak Kapoor wherein award OMP (Comm) No. : 16/24 24/57 was passed in favour of respondent. In continuation of the proceedings i.e. filing of the appeal, challenge u/s 34 of Arbitration and Conciliation Act and appeal filed u/s 37 Arbitration and Conciliation Act, said Rakshak Kapoor has been directed to deposit the award amount which is lying deposited before Hon'ble High Court. Said amount has already been debited from the petitioner's account. Consequently, it is the respondent which shall have unjust enrichment at the expense of petitioner, particularly when the petitioner is now deprived of both civil remedy and the opportunity to invoke arbitration against the client for their default or outstanding dues. Contention of Ld. Counsel for respondent that only upon the request of the petitioner, legal recourse was required to be adopted by the respondent is itself against the tenets of legal principles. Besides that, it is borne out from the record that all the documents, data, call records, trade records were being shared directly with the clients and petitioner had no access to the record maintained by respondent. Petitioner, as submitted, had also requested the respondent to initiate legal proceedings or to provide the necessary documents and authorization to enable the petitioner to recover the outstanding amount.
30. Ld. Counsel for petitioner was enquired whether the abovenoted was brought to the notice of Ld. Arbitrator Panel, to which it was answered that no such document could be filed on record as all the emails had been deleted from the email account i.e. [email protected] which was domain of respondent.
OMP (Comm) No. : 16/24 25/57It was further brought on record that abovenoted email account had been provided by respondent to the petitioner and all the communications, including those pertaining to disputes and issues were conducted through the said email ID. Respondent deleted that email ID from the server. During arbitration proceedings, it was mentioned in written statement that email server could not be retrieved. Non production of such vital evidence warranted drawing of adverse inference against the respondent.
31. Reliance is placed upon Food Corporation Of India vs Regional Provident Fund,W.P.(C) 8237/2014, CM APPL. 19151/2014 & CM APPL.33769/2022 wherein observation of Hon'ble Apex Court in Union of India v. Ibrahim Uddin were noted, as follows:
"114. This Court is of the view that an adverse inference may be drawn only when the non-production of the best evidence is intentional and unjustified. Similar view has also been taken by the Hon'ble Supreme Court in Union of India v. Ibrahim Uddin, relevant paragraphs of which are as under:
"...24. Thus, in view of the above, the law on the issue can be summarised to the effect that the issue of drawing adverse inference is required to be decided by the court taking into consideration the pleadings of the parties and by deciding whether any document/evidence, withheld, has any relevance at all or omission of its production would directly establish the case of the other side. The court cannot lose sight of the fact that burden of proof is on the party which makes a factual averment. The court has to consider further as to whether the other side could file interrogatories or apply for inspection and production of the documents, etc. as is required under Order 11 CPC. Conduct and diligence of the other party is also of paramount importance. Presumption of adverse inference for non-production of evidence is always optional and a relevant factor to be considered in the OMP (Comm) No. : 16/24 26/57 background of facts involved in the case. Existence of some other circumstances may justify non-production of such documents on some reasonable grounds. In case one party has asked the court to direct the other side to produce the document and the other side failed to comply with the court's order, the court may be justified in drawing the adverse inference. All the pros and cons must be examined before the adverse inference is drawn. Such presumption is permissible, if other larger evidence is shown to the contrary..."
32. As also brought on record by Ld. Counsel for petitioner that on similar facts in another reference, the award was passed against the stock broker and in favour of the sub-broker in NSE Arbitration Award A.M. No: F&O/D-023/2011 M/s Asit C Mehta Investment Intermediates Ltd vs M/s TKL Investments (Prop. Poonam Balani). Ld. Counsel for respondent submitted that the award was passed by another co-ordinate bench, therefore the findings are neither relevant nor binding with regard to award in question. Ld. Arbitrator in the said matter had adopted the different approach on same issue. Observation of Ld. Arbitrator on the point in discussion are worth reproduction :
"3. The applicant has not been able to show any reason why it has not taken action for recovery of this amount from the concerned clients. Even if the applicant's contention that the sub-broker is responsible for payment of the defaulted amount was to be accepted, such responsibility will arise only after all efforts for recovery of this amount from the defaulting clients have been exhausted. Instead of doing so the applicant has adopted a short and convenient option of claiming this amount from the sub- broker instead of the concerned clients who are primarily responsible for payment of this amount. While the applicant has claimed that the responsibility for clearing this amount lies with the sub-broker, it has not been able to show any provision in the agreement prescribed as per SEBI Regulations and signed between it and the respondent. On the contrary clause 7 of this agreement stipulates that any dispute between the broker and sub-broker shall be settled with the help of officials of NSE as far as possible. If no such settlement is possible only then the matter will be referred for arbitration. The present proceedings have been started without OMP (Comm) No. : 16/24 27/57 any attempt to settle the matter in accordance with this clause and are therefore premature. Further no clause of this agreement supports the applicant's claim that the respondent is liable to pay to the applicant dues of defaulting clients."
33. In the instant matter also, no efforts were reflected on record, made by respondent for recovery of the outstanding amount from the defaulting clients. Contrary to the terms of agreement, the outstanding amount of clients was debited in the account of petitioner. In the instant matter as well, respondent adopted short and convenient option of claiming the outstanding amount from the sub broker instead of the concerned clients who were responsible for payment of the amounts. While also noting that trading member cannot shun its responsibility to take appropriate action against defaulting clients and also that respondent alone can file against the client for the outstanding dues, yet Ld. Arbitral Panel proceeded ahead to construe the expression 'bad debts' in a liberal sense. Petitioner thereby neither can be compelled to be left remedyless nor the respondent can be permitted unjust enrichment at the cost of petitioner, by flouting all the norms, regulations and misinterpreting the terms of contract to its own benefit. Findings of Ld. Arbitrator panel on this aspect, therefore, are not only contrary to the terms of agreement but are patently illegal which go to the root of the matter.
OMP (Comm) No. : 16/24 28/57TRANSFER OF ENTRIES AND CONSIDERATION AS FAMILY ACCOUNT:
34. Ld. Arbitrator panel noted the submission of respondent with regard to transfer of credit entries from the account of Sh. Surender Kumar Goel to the account of his wife Smt. Shanti Goel and observed as follows:
" it was within the knowledge of the petitioner and her husband but the applicant did not raise any objection, rather took advantage of those credit entries. Therefore, by virtue of the doctrine of estoppel and acquiescence, the applicant now cannot, after lapse of so much time, challenge those transfer entries. Assuming for the sake of arguments, though not holding, that the transferred entries of the credit from the account of Shri Surinder Kumar Goel, husband of the applicant, to the account of the applicant Smt. Shanti Goel, is not provided for in the broker - sub broker agreement yet the applicant Smt. Shanti Goel had taken advantage of these credit entries in her account. She has neither raised objection nor has got the amount immediately transferred back to her husband's account, if she so desired. Having taken advantage of these credit entries in her account she is not now estopped by her conduct in questioning their legality and validity. The applicant, as such, by doctrine of estoppel and acquiescence is estopped from disputing those entries in the present proceedings".
35. Ld. counsel for petitioner made following submissions:
(a) That, the Arbitral Tribunals misinterpreted clauses 32 and 33 contained in Tripartite Agreement and failed to consider that the account in which the aforesaid credit was transferred by the respondent was the Master account of Sub-Broker i.e. Prudence Investments (Code No. PRD1200) and the said accout was not a family account or group account in respect of dealings in cash segment or derivative segment of the Exchange.
(b) That, petitioner and her husband had separate trading accounts with the respondent/trading member under the client code PRD101 and PRD 001 for the purpose of conducting share OMP (Comm) No. : 16/24 29/57 trading in their individual capacities. Merely because the said concern was the proprietorship concern of Smt. Shanti Goel, the said fact does not change the nature and character of the said account. In the said account, only brokerage was received by the petitioner and it had nothing to do with any trading either in cash segment or the derivative segment of the Exchange.
(c) That, credit of Rs.1,56,937.55 of dividend in the Petitioner's Brokerage A/c is arising from shares held by her client and husband Shri Surender Kumar Goel. The credit of dividend should have ideally been in the account of the Petitioner's client and husband Shri Surender Kumar Goel. The arbitral award is misdirected in law for allowing the credit of dividend in the Petitioner's Brokerage A/c by treating the same as family account with Shri Surender Kumar Goel. Merely on email and verbal conversations, money and securities cannot be transferred by any one from one account to another. The transaction has to be within the four corners of SEBI law and regulations of CDSL, NSDL & NSE.
(d) That, the Respondent is relying on some emails written by son of the Petitioner. Even if that has to interpreted as mentioned by the Respondent, that doesn't permit the Respondent to disobey the law. For example, email written by son of bank account holder to bank to transfer X amount to another account, bank needs to follow the law laid down by RBI that bank account holder needs to provide cheque or voucher for this transfer to be executed.OMP (Comm) No. : 16/24 30/57
(e) That, the entire case of the Respondent is based on the fact that the Petitioner's son in some emails is confirming some transfer entries etc. These emails need to be seen in chronological order and within the ambit of law and also various emails which respondent had sent through [email protected] which account now stands deleted by the Respondent. In the absence of entirety of email correspondence, the correct inference cannot be drawn which renders the impugned award as perverse and in violation of public policy of India.
36. Ld. Arbitrator noted that :
" ......an amount of Rs. 1,56,937.65 has been credited in her account towards dividend of certain shoes not boelonging to her. In reply, the respondent has alleged that some shares belonging to the applicant were held as collateral as against her account on which the respondent had received dividend from the respective companies. Accordingly, dividend credit was given to the applicant. The contention of the applicant is that those shares belong to her husband Shri Surender Kumar Goel and not to her and the respondent is wrongfully and illegally treating them as collateral to the account of the applicant. The respondent conversely contended that Shri Surender Kumar Goel, husband of the applicant, had opened a trading account in his name and the applicant and her husband had agreed to keep their accounts as a family / group account and allowed transfer of credit from one family/ group account to other family/ group account and further Shri Surender Kumar Goel had also transferred these shares as collateral to the account of the aplicant-wife who was sub broker. It is submitted that all through the period, no objection was ever raised either by the applicant or by Shri Surender Kumar Goel for holding those shares as collateral by the respondent to the account of applicant sub broker. He has drawn attention to the Email of the applicant dated 8.8.2011 whereby a request was made for transfer of shares from the collateral account to the account of her husband. It is at page 15 of the additional reply. Attention has also been drawn to another Email of Shri Anish OMP (Comm) No. : 16/24 31/57 Goel son of the applicant sent to the respondent on 19.9.2009 wherein he had valued the stock in the account of the applicant at Rs. 88 lakhs and wanted some shares to be transferred to the account of the applicant's husband and keeping the remaining shares collateral to her account. Shri Anish Goel son of the applicant was admittedly looking after the business of the applicant and he was handling account of all the clients and their dealings with the respondent including the account his own father Shri Surender Kumar Goel as well as the account of sub-brokership maintained by the respondent. It is, therefore, submitted that the applicant as well as her husband Shri Surender Kumar Goel had knowledge that the shares, which were in the name of Shri Surender Kumar Goel have been held as collateral to the account of the sub brokership of the applicant and this could be only with the consent and agreement of both of them. The request for transfer of some of the shares, which belonged to Shri Surender Kumar Goel back to his account by itself is sufficient to prove that the shares were held as collateral in the account of the applicant with the consent of both Shri Surender Kumar Goel and the applicant. In the facts and circumstances of the case and from the evidence we agree with the contention of the respondent and do not find force in the objection to the entry of the dividend in the account of the applicant. The applicant has filed Annexure P-18 to the statement of case which contains the entry of the dividend having been made in the account between 20.7.2009 and 13.7.2012. Shri Anish Goel, who was dealing with the account of the sub brokership as well as the account of his father Shri Surender Kumar Goel could not have been ignorant of these entries. No objection was ever raised against any of the entries of the dividend. We, therefore, reject this claim".
37. Ld. Arbitrator further noted that:
" The respondent has further alleged that the applicant and her husband Shri Surender Kumar Goel had agreed to treat their account as family/ group account and transfer of credit from one family / group account to other family/group account and pursuance to that authority, a sum of Rs. 37,42,758.74 and Rs. 23,94,982.87 was transferred from the ledger account of Shri Surender Kumar Goel, husband of the applicant, to the account of the applicant, so the same was not illegal. According to the OMP (Comm) No. : 16/24 32/57 applicant, these transfer entries were made in October, 2009, May, 2011 and August, 2011. We have already observed that the account of the applicant, account of Shri Surender Kumar Goel and the account of all other clients were being dealt with by Shri Anish Goel son of the applicant. He was carrying on business of sub brokership and was also dealing with the respondent on behalf of the applicant, his own father Shri Surender Kumar Goel as well as other clients. We cannot believe that Shri Anish Goel was not aware of the transfer of credit from the account of his father to the account of the applicant. We can also not believe that Shri Surender Kumar Goel had also no knowledge about such a transfer. No objection about it was taken by the applicant or by Shri Surender Kumar Goel or their representative Shri Anish Goel against these transfer entries on time. Rather Shri Anish Goel had confirmed that there were Rs. 35 lakhs outstanding in the account of the applicant in his Email dated 19.9.2009. The applicant, her husband and their son/representative Shri Anish Goel had allowed the applicant to take advantage of these credit transfer, they now after lapse of time cannot turn back and dispute these transfer entries. Therefore, the objection of the applicant to the transfer of this amount to the credit of her account cannot be held to be unauthorized or illegal, so we reject this claim also".
38. Husband of Ms. Shanti Goel had also filed separate claim, in which similar/joint/identical objection was taken, leading to similar findings which are being mentioned here.
39. Clause 32 and 33 of Tripartite Agreement refer to entitlement of stock broker to adjust and set off the amounts and securities payable to the client/family/group in respect of transactions done by the client/family/group on the cash segment of the exchange against the amounts receivable from the client /family/group, with further authorization by the client in favour of stock broker to appropriate credits lying in his group/family accounts on the cash segment of the exchange against debits in his group/family accounts on the derivative segment of the exchange through issue of cheque or by passing appropriate OMP (Comm) No. : 16/24 33/57 journal entries. Petitioner herein is holding the trading account as well as sub broker account, whereas her husband is holding the trading account.
40. Ld. Counsel for petitioner referred Regulation 6.1.6.1(b) and 6.1.6.2(v)(a) of the National Stock Exchange (Futures & Options Segment) Trading Regulations and Regulation 6.1.5(b) of the National Stock Exchange (Capital Market) Trading Regulations which mandates a broker to keep the money and security belonging to a client in a separate account. The relevant extract is reproduced hereunder:
Regulation 6.1.6.1(b) of National Stock Exchange (Futures & Options Segment) Trading Regulations: "It shall be compulsory for all Trading Members to keep the money of the constituents in a separate account and their own money in a separate account. Bank account(s) holding constituent funds shall be named as "Name of Stock Broker - Client Account". No payment for transaction in which the Trading Member is taking a position as a principal shall be allowed to be made from the constituent's account."
Regulation 6.1.6.2(v)(a) of National Stock Exchange (Futures & Options Segment) Trading Regulations: The Trading Members shall keep the dematerialised securities of Constituents in a separate beneficiary account distinct from the beneficiary account maintained for holding their own dematerialised securities. No delivery towards the own transactions of the Trading Members shall be allowed to be made from the account meant for Constituents. For this purpose, every Trading Member is required to open a beneficiary account in the name of the Trading Member exclusively for the securities of the Constituents (hereinafter, to be referred to as "Constituents beneficiary account"). A Trading Member may keep one consolidated Constituents' beneficiary account for all its Constituents or different accounts for each of its Constituents as it may deem fit."
Regulation 6.1.5(b) of National Stock Exchange (Capital Market) Trading Regulations: "It shall be compulsory for all Trading Members to keep the money of the clients in a separate account and their own money in a separate account. Bank account(s) holding clients funds shall be named as "Name of Stock Broker - Client Account". No payment for transaction in OMP (Comm) No. : 16/24 34/57 which the Trading Member is taking a position as a principal will be allowed to be made from the client's account."
41. Reference was also made to Clause 8 of Tripartite Agreement signed between husband of Petitioner, Respondent and Prudence Investment that:
"The stock broker agrees that the money/securities deposited by the client shall be kept in a separate account, distinct from his /its own account or account of any other client and shall not be used by the stock broker for himself /itself or for any other client or for any purpose other than the purpose mentioned in SEBI Rules & regulation circulars/ Guidelines/Exchange Rules / Regulations/Bye Law and Circulars".
42. It was also submitted that therefore, the journal entries made by debiting the Petitioner's husband trading account and crediting Prudence Investments/Petitioner's Brokerage Account are in violation of Regulations of National Stock Exchange and also the Tripartite Agreement binding on the Respondent.
43. Following the abovenoted mandate, stock broker/sub broker was required to maintain separate account with regard to money/securities deposited by the client, distinct from its own account or account of any other client. Therefore, the trading account of petitioner herein as well as her husband, could not have been clubbed with the sub broker account of Prudence Investment i.e. the proprietorship concern of petitioner. SEBI and NSE Guidelines mandate stringent norms to ensure transparency and prevent conflict of interest, particularly for intermediaries like sub broker. A sub broker account is a business account which operates under professional capacity and facilitates trading for others under the purview of the broker . These accounts are not OMP (Comm) No. : 16/24 35/57 personal trading accounts and as such are not automatically considered family accounts under the definition used for proprietary or personal trading. Trading accounts of family members though can be considered family accounts depending upon the parameters that the accounts are operated from personal investments/trading, that there is financial dependency or pooling of resources between family members and that a declaration or disclosure has been made to treat these accounts as family accounts for margin and exposure purposes. If the family or group has provided prior written consent authorizing the broker to pool their accounts for settlements, the broker may adjust amounts or securities across accounts but without such consent , such adjustments would violate the regulations and norms.
44. Vide Clause 32 and 33 of Tripartite Agreement, nevertheless, husband of petitioner had consented for adjustment and set off, of the amounts by respondent and for appropriation of credits and securities in respect of transactions on the Cash Segment of the exchange as well as on the Derivative Segment of the exchange in his group/family accounts. Thereby, petitioner, her husband and other family member's trading accounts were to be treated as family accounts for the purpose of appropriation of credits lying in their family accounts against debits on Cash and Derivative Segment of the Exchange. Prudence Investment, nevertheless, was not holding the trading account but was holding sub broker account. Therefore, there was no such term or clause in the tripartite agreement to consider sub broker account OMP (Comm) No. : 16/24 36/57 and trading account as Family or Group Account which is distinct, separate and business account. If the adjustment involves the sub broker's account whose obligations are distinct from client or family account, thereby debiting a family member's trading account to settle a sub broker's alleged obligations, is violation of the Regulations and Norms which could also lead to conflict of interest and mis-use of funds. Furthermore, in terms of Clause 32 and 33, the amount could be appropriated or adjusted or set off on the Cash and Derivative Segment of exchange, whereas the sub-broker account which was merely a facilitator and brokerage account, was not involved with trading transactions on Cash or Derivative exchange.
45. Despite the obligations of Sub broker account as separate and distinct from trading accounts, if it was still to be treated as family account alongwith trading accounts of family members, explicit written consent, at least, was required for such adjustments, which is not the case here. There was no prior written consent from client/family for adjustments including any arrangement to settle obligations collectively with the sub broker account. Besides that, the clear documentation of clients' consent and adjustment was required to be maintained by the respondent while ensuring that client's funds and securities remain separate unless such pooling is explicity authorized. A broker cannot automatically adjust funds or securities between the client/family or group accounts including to or from a sub broker's account unless there is explicit written authorization from all parties OMP (Comm) No. : 16/24 37/57 involved and full compliance with Regulations. The consent, in terms of clause 32 and 33, to the sub broker account, despite the specific stipulation with regard to consent for appropriation of funds only on Cash and Derivative Segment, is stretching too far, contrary to the terms of the agreement between the parties.
46. Ld. Arbitrator drew inference from involvement of son of petitioner in business affairs and noted that:
" The account of the applicant, account of Sh. Surender Kumar Goel and the account of all other clients were being dealt with by Sh. Anish Goel son of applicant. He was carrying on business of sub brokership and was also dealing with the respondent on behalf of the applicant, his own father Shri Surender Kumar Goel as well as other clients. We cannot believe that Sh. Anish Goel was not aware of the transfer of credit from the account of his father to the account of the applicant. We can also not believe that Shri Surender Kumar Goel had also no knowledge about such a transfer. No objection about it was taken by the applicant or by Sh. Surender Kumar Goeal or their representative Sh. Anish Goel against these transfer of entries on time. Rather Sh. Anish Goel had confirmed that there were Rs. 35 lakhs outstanding in the account of the applicant in his email dated 19.09.2009. The applicant, her husband and their son/representative Shri Anish Goel had allowed the applicant to take advantage of these credit transfer. They now after lapse of time cannot turn back and dispute these entries".
47. Merely because son of the petitioner was managing the business in all the accounts, it did not entitle the respondent to make the adjustments or transfer of entries, credits in/to the account of sub-broker without the explicit consent of the husband of petitioner or at least his authorized representative which ipso facto, could not have been considered family account. Contention of Ld. Counsel for petitioner carries weight that adjusting the negative balance in the account of sub broker after debiting the OMP (Comm) No. : 16/24 38/57 account of husband of petitioner cannot be said to be, to the advantage of petitioner herein.
48. Similarly, for 3160 shares of Reliance Industries Limited which were kept as collateral with respondent were sold and sale proceeds of the shares was credited into sub broker account . It was submitted by Ld. Counsel for petitioner that respondent sold 3160 shares of Reliance Industries Ltd. of husband of petitioner , kept as collateral with Respondent and credited sale proceeds of Rs.29,80,605.05 into Prudence Investments' Brokerage A/c (Cash Segment) on 13.05.2011. These shares were given as collateral by the husband of Petitioner to the Respondent for the purpose of trading in his account as per Demat Instruction Slips & Demat Transaction Ledger. These shares were suo moto sold illegally by the Respondent and its proceeds were credited in the Prudence Investments' Brokerage Account. The fundamental premise on the basis of which the alleged collateral of husband of Petitioner i.e. 3160 shares of Reliance Industries Ltd. have been sold and adjusted against dues of Prudence Investments is that Prudence Investment and the husband of Petitioner are family/group. This is erroneous and stems from complete misreading of the contract. The grouping of family as explained hereinabove can only be in one genre i.e. trading accounts or sub-broker accounts and not interchangeable. In the present case, the dues are of sub-broker whereas shares are of a trader which cannot be offset under Clause 32 of the Tripartite Agreement.
OMP (Comm) No. : 16/24 39/5749. It was further submitted that clause 27 of the Bipartite Agreement, ex facie, has no applicability. The said clause contemplates adjustment as regards the dues of trader vis-à-vis his broker. In the present case, the dues as alleged are of sub- broker to stock broker. This is in violation of Regulation 6.1.6.1(b) and 6.1.6.2(v)(a) of the National Stock Exchange (Futures & Options Segment) Trading Regulations and Regulation 6.1.5(b) of the National Stock Exchange (Capital Market) Trading Regulations . It was also submitted that in email exchange dated 13.07.2011, between the Respondent & Petitioner's son Mr. Anish Goel, an objection was raised on behalf of the husband of Petitioner against the transfer of proceeds of shares in Prudence Investments' Brokerage Account which establishes that the transfer of sale proceeds was unauthorised.
50. Ld. Counsel for petitioner submitted that while rejecting the claim in respect of the sale proceeds of Rs. 29,80,605.05 of 3160 shares of Reliance Industries Ltd, the arbitral tribunals have totally misinterpreted the emails dated 19.09.2009 and 8.08.2011 sent by Sh. Anish Goel, the son of petitioner. None of the said emails suggest that either the husband of petitioner or Sh. Anish Goel had ever authorized the respondent to take the said shares as collateral security in the account of the sub-broker namely Prudence Investments. The said emails were request from Sh. Anish Goel to transfer the said shares to the account of the OMP (Comm) No. : 16/24 40/57 husband of petitioner to which they rightfully belonged. There was no evidence before the Arbitral Tribunal to suggest that the said shares were given towards collateral for the sub-broker by the husband of petitioner.
51. It was submitted by Ld. Counsel for petitioner that vide email exchange between the parties, petitioner was told to maintain balance at Rs. 35 lacs, therefore, vide email dated 19.09.2009 respondent was requested to transfer RPL shares into PRD001 account while remaining shares were to act as collateral against the debit in PRD1200.
52. Vide email dated 21.07.2009, following was informed :
" Sir, based on our various discussions, I am giving below the numbers and decisions for your implementation:
1. Current debit in PRD1200 (main sub broker account) is Rs. 12251888/-.
2. Current value of shres in collateral is Rs. 13898538.
3. Based on your instructions, we have divided the debit in two parties viz. :-
Debit from 3 clients Rs. 52 lakhs Less: Reversals of Brokerage, interest and penalties agreed by us:
Rs. 12 lakhs Less: Reversal of option trade Rs. 8 lakhs Net debit for these 3 clients Rs. 32 lakhs We request you to clear this debit through monthly installments of Rs. 1.50 lakhs. Please send the PDCs favouring Motilal Oswal Securities Limited alongwith a covering letter. We will keep shares worth Rs. 48 lakhs as cover (current value) towards these debits. We will release proportionate shares every three months from this account based on clearing of installments provided the remaining debit of 70.51 lakhs is cleared first.
4. Remaining debit of Rs. 7051888. This will be cleared by you within a time frame. You had informed me that this debit could get cleared in a month's time. Pls note that the collateral shares against this debit is Rs.
9098538 (current value). As a special gesture, we will not charge interest on this debit from July 1st till 15th August post which interest will be charged. In case the stock collateral value falls below Rs. 75 lakhs, we will be forced to OMP (Comm) No. : 16/24 41/57 sell the proportionate shares to recover this debit and remaining shares shall be added to the collateral against debit of point 3 above.
5. There is no brokerage credit pending from our side. As regards to interest charged earlier, I will not be able to reverse anything over and above Rs. 12 lakhs reversed in point 3 above. I had made it clear to Anish time and again that this large debit and the position is being allowed only against interest payments which was agreed upon.
6. Also, we had done some hedging options trade where we had paid Rs. 6.50 lakhs and had not debited your account for that amount. All in all, we have take a hit of Rs. 6.50 lakhs + 12 lakhs in this account. Anything more shall not be possible.
Pls confirm the above arrangement on email to me so that I can put it in action at our end. Meanwhile, we are willing to pay Rs. 50 K payout every month towards meeting office expenses provided the brokerage shares of PRD1200 is more than that.
Regards Vijay Kumar Goel, Associate Director Broking & Distribution, Motilal Oswal Securities Ltd."
53. Vide email dated 19.9.2009, son of petitioner conveyed to respondent that :
" I would like to request you to make necessary changes in PRD1200 and as discussed, the balance should be 35 lacs minus one lac adjustment on account of aug month brokerage.
The stock value of PRD 1200 is 88 lacs plus 3 lac cash security kindly release all RPL shares (i.e. equal to 50 lacs) into PRD001, Demat account as it remaining shares will act as a collateral against the debit in the PRD1200. Kindly transfer the remaining shares on quarterly bases to PRD001 demat account".
54. Vide email dated 07.05.2011, son of petitioner further informed that:
" on 05th may it was not a discussion. It was more of you telling me that you are selling my collateral stock for the debit in my account. I have started working on the same and will be able to give the complete reply by Tuesday with all the details as per my meeting with Mr. Ajay and Mr. Vijay when I last visited Mumbai".OMP (Comm) No. : 16/24 42/57
55. Vide email dated 08.08.2011, husband of petitioner asked respondent to transfer the shares in PRD001 account from PRD1200 as he was in need of funds to pay his loan installments with mention that he had been following up on this for past two weeks.
56. Nevertheless, previous email dated 13.07.2011 seems to have missed the attention of Ld. Arbitrator panel or was not brought to the notice of Ld. Arbitrator panel whereby son of petitioner had informed the following:
" Kindly find the attached file containing detail of all activities of PRD1200 since the time Bad debts were transferred in our account i.e. 21.01.2009. I seriously want to settle this matter once and for all and move ahead in life.
I have strictly abided by points on which we all have agreed upon as per our meeting in Mumbai.
Please reply to this at the earliest and transfer shares and money to my father's account as he is too possessive about his shares. I have lost crucial three years of my life and dont want to waste any more time".
57. Ld. Counsel for petitioner submitted that Rs. 35 lacs in the account of sub broker i.e. Prudence Investment was not the outstanding but was required to be maintained as balance as per discussion between the parties. From perusal of all the emails, it cannot be concluded that son of petitioner had acquiesced to the transfer of funds or shares to be treated as collateral for PRD1200. While, it may be considered that the son of petitioner had agreed for retention of shares as collateral to maintain the value at Rs. 35 lacs, at the same time, he had requested for transfer of the remaining shares to the demat account of his father. The reason that he requested for transfer of some shares OMP (Comm) No. : 16/24 43/57 from sub broker's account to the account of his father, therefore cannot be misconstrued that all the RIL Shares alongwith some other shares were lying in the pool/margin account as collateral to the account of sub broker and not as collateral to the account of husband of petitioner. Taking embrage from the misconstruction of Clause 32 and 33 of the Tripartite Agreement, respondent had treated the shares as collateral to the pool/margin account including the account of sub-broker, for which there was no explicit consent obtained . The implied consent of the son of petitioner on behalf of his father can be construed, for keeping the 'remaining shares' as collateral to the account of sub broker, but in view of the specific request for transfer of the remaining shares to the account of his father, while also stating that his father was too possessive about his shares, cannot again be misconstrued as acquiesance or treating the shares lying in the pool/margin account as collateral to the sub broker account which was not part of the family account.
58. The series of email exchanges between the parties makes no mention of acquiesance by the husband of petitioner or any agreement to transfer funds or dividends from the trading account of her husband to her sub broker account. Observation of Ld. Arbitral Tribunal that petitioner took advantage of the transfer of dividend in her account and raised no objection seems misplaced. This conclusion appear flawed, as the said amount had been adjusted against the negative balance in the petitioner's sub broker account whereby there could not have been enjoyment or OMP (Comm) No. : 16/24 44/57 benefit to the petitioner, especially when this adjustment resulted in corresponding loss in her husband's trading account.
59. Claim of petitioner pertaining to the transaction charges, stationery cost, interest charges, CTCL, VSAT Charges and other Miscellaneous charges, was declined by Ld. Arbitrator panel on the ground of petitioner having knowledge of levying of the charges during the course of business between the parties. Main thrust of observation of Ld. Arbitral Panel was on the aspect that if these charges were unauthorized or illegal, petitioner would not have allowed it to be debited from her account for long. With regard to the interest charges, it was submitted by Ld. Counsel for petitioner that Ld. Arbitral Tribunals failed to take into consideration the fact that the debit existed in the Master Brokerage account of the petitioner, was only on account of debit balance of clients to the tune of Rs. 70,90,958.57 which was illegally transferred by the respondent by misinterpreting various clauses of the Broker-Sub Broker Agreement and the Indemnity Bond and on account of aforesaid false debit, so called transaction charges to the tune of Rs. 3,45,883.65 were levied by the respondent as and by way of interest. Since there was no justification for transferring the said debit balance of clients to the Master Brokerage Account of the petitioner, charging of interest to the tune of Rs. 3,45,883.65 in relation thereto also became bad in law.
60. Record reflects that whenever there was outstanding due from the client, respondent would debit the said amount directly OMP (Comm) No. : 16/24 45/57 in the petitioner's sub broker account. Additionally, interest was charged to the petitioner's account for delayed payments by clients. This practice itself is inherently unreasonable as the outstanding amount had already been debited in the account of the petitioner, yet interest was separately charged from petitioner for delayed payments by clients. Petitioner thereby was subjected to double jeopardy .
61. Ld. Counsel for petitioner submitted that Arbitral Tribunals illegally and arbitrarily, disallowed the claim of Rs 44,000/- pertaining to alleged ' Trade Charge Penalty' and also disallowed claims in respect of various charges levied by the respondent in cash/capital account of the petitioner. As further submitted, there was no evidence brought before the Arbitral Tribunal in relation to the aforesaid and mere entry in a statement of account alone is not sufficient to make someone liable for the same. Further, no quantum of levying of such charges had been decided by and between the parties either under the Broker and Sub-Broker Agreement or otherwise and as such there was no justification on the part of the respondent to levy any such charges.
62. Ld. Counsel for petitioner pointed out that it is incorrect that petitioner did not dispute the charges. Vide email dated 22.3.2011, VSAT charges, Money Ware charges and CTCL charges were disputed by the Petitioner. It was also submitted that there is no truth in levy of charges as per Clause B(16) of the Agreement since the quantum of charges is neither prescribed therein nor agreed upon otherwise. This makes the charges OMP (Comm) No. : 16/24 46/57 unilateral and arbitrary. With regard to Claim B of F&O Segment for Rs.3,45,883.65, it was submitted by Ld. Counsel for petitioner that the Arbitral Tribunal interprets a clause F(1)(d) which is not legible in the Stock Broker and Sub-broker Agreement and is incompletely reproduced in the arbitral award. Even otherwise clause F(1)(d) only speaks about adjustment of deposit and appropriation of deposit. Therefore, clause (d) has to be read in line with clauses (a), (b) or (c) of Clause F(1). What has been imposed is a transaction processing charge which finds no mention in the said clause. This applies to Claim J of Cash Segment also which is for Rs.10,669.88.
63. Reliance was placed upon Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd., (2020) 7 SCC 167, wherein it was observed that :
" 22. The present case arises out of a domestic award between two Indian entities. The ground of patent illegality is a ground available under the statute for setting aside a domestic award, if the decision of the arbitrator is found to be perverse, or, so irrational that no reasonable person would have arrived at the same; or, the construction of the contract is such that no fair or reasonable person would take; or, that the view of the arbitrator is not even a possible view".
64. As submitted, petitioner is not liable for any penalty on trade change but only for the losses arising due to punching errors and miscommunication (Clause B(15) of the Stock Broker and Sub-broker Agreement. Thus, trade charge penalty in Claim E (F&O Segment) and Claim N (Cash Segment) is beyond the OMP (Comm) No. : 16/24 47/57 terms of the Agreement, therefore, the impugned award is liable to be set aside.
65. With regard to Claims C, E, F, G, H, L and M of Cash Segment, Ld. Counsel for petitioner submitted that none of these charges have any basis as no backup/details have been provided for the alleged default/use and these have been whimsically debited from the account of the Petitioner. These charges are therefore, beyond the terms of the contract.
66. Ld. Counsel for respondent though submitted that HLB had considered Clause F (d) of Broker Sub-Broker Agreement which gives power to the respondent to levy interest @ 18% p.a. for delay in payment and therefore correctly rejected the claim. Further, HLB had considered the period (12th May 2006 to 31st March 2010) when such penalties for change of client code was imposed and no objection to the said penalty was raised by the petitioner. It was also submitted that HLB had considered Clause D-16 of the Broker-Sub-Broker Agreement which provides for levying V-SAT Charges, CTCL Charges etc. and the period of debits (31st March 2006 to 14th June 2012) while rejecting the claim of the petitioner in respect of miscellaneous charges.
67. Pertaining to all these significant debits /charges, as noted above, Ld. Arbitrator Tribunal failed to address their justification, validity or legality in the findings. At the cost of repetition, it may be noted that perusal of record does not reveal any discussion or observation by Ld. Arbitrator Panel on whether the charges levied were in consonance with the terms of OMP (Comm) No. : 16/24 48/57 agreement between the parties. The contention that petitioner did not raise any objection to these charges is contradicted by the record.
68. Email dated 22.3.2011, raising objections pertaining to VSAT Charges, Money ware Charges, CTCL Charges etc. demonstrated that petitioner indeed disputed these levies. Ld. Arbitral Tribunal, therefore, was obligated to consider the objections raised by the petitioner and examine the validity, legality and justification for these charges. Merely recording that there was no objection on part of petitioner, while disregarding the documented objection, cannot be construed as estoppel and renders the findings of Ld. Arbitral Tribunal as perverse and legallaly untenable.
69. Another contention of respondent was noted by Ld. Arbitrator with regard to cerdit in sum of Rs. 27 lacs in account of petitioner for the default of client to accommodate petitioner from the losses. It was submitted that as a gesture of goodwill and keeping in mind the business assessment, respondent had given this amount as credit and not as a matter of right. Reference to letter dated 26.7.2012 was noted which was to help and enable the petitioner to explain for her income tax assessment. It was noted by Ld. Arbitrator Tribunal that:
" The respondent has further alleged that amount of Rs. 27 lakhs, which was given to the applicant as reversal of debit amount of certain clients against amount of Rs. 50,30,307.49 which was the total amount of funds transferred from cash segment of F&O segment of the account. The question of debt of Rs. 50,30,307.49 did not arise since it was a transfer in intersegment account and the applicant is trying to confuse the tribunal by OMP (Comm) No. : 16/24 49/57 showing adjustment of credit of Rs. 27 lakhs against the debit of said amount where there is no such debit standing in her account. We completely agree with the explanation given by the respondent, so that claim pleaded in para 5 (k) of statement of case filed by applicant is rejected.".
70. Ld. Counsel for petitioner submitted that respondent reversed the loss to the tune of Rs.27 Lacs vide letter dated 26.07.2012 pertaining to three clients and told not to pursue legal case.
Vide Letter dated 26.7.2012, petitioner was informed with regard to adjustment of client debit. Following was conveyed:
" This is to confirm that your account PRD1200 had been debited on 21st January , 2009 with the losses suffered by your client as per the Stock Broker-Sub Broker Agreement entered by you. The details of the said debit are given hereunder:
Date Client Code Debit Amount
21/01/2009 PRD076 1220029.68
21/01/2009 PRD095 544470.73
21/01/2009 PRD121 3389554.45
This is to further confirm that against the said total debit of Rs, 51,54,054.86, MOSL has given a reversal of Rs. 27,00,000/- (Rs. Twenty Seven Lacs only) to your account PRD1200 on August 31,2009."
Contention raised by respondent cannot be read contrary to the contents of communication between the parties. Particularly when Ld. Arbitral Panel itself rejected the counter claim of the respondent seeking reversal of entry of Rs. 27 lacs which as noted was allowed by respondent to accommodate the petitioner against defaults made by clients introduced by her.
71. Ld. Counsel for respondent submitted that the provisions of section 34 (2) of the Act limit the grounds on the basis of OMP (Comm) No. : 16/24 50/57 which an award can be set aside. The award dated 30.12.2013 and the appellate award dated 29.9.2014 are reasoned award based on documentary evidence and the law applicable at the relevant time, therefore, no interference is required.
72. Reliance was placed upon 2021 SCC Online SC 508 PSA Sical Terminus (P) Ltd. Vs. Board of Trustees of Chidambaram Port Trust, Tuticorin, wherein it was observed that :
" 42. It will thus appear to be a more than settled legal position, that in an application under Section 34, the court is not expected to act as an appellate court and reappreciate the evidence. The scope of interference would be limited to grounds provided under Section 34 of the Arbitration Act. The interference would be so warranted when the award is in violation of "public policy of India", which has been held to mean "the fundamental policy of Indian law". A judicial intervention on account of interfering on the merits of the award would not be permissible. However, the principles of natural justice as contained in Section 18 and 34(2)(a)(iii) of the Arbitration Act would continue to be the grounds of challenge of an award. The ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the "most basic notions of morality or justice". It is only such arbitral awards that shock the conscience of the court, that can be set aside on the said ground. An award would be set aside on the ground of patent illegality appearing on the face of the award and as such, which goes to the roots of the matter. However, an illegality with regard to a mere erroneous application of law would not be a ground for interference. Equally, reappreciation of evidence would not be permissible on the ground of patent illegality appearing on the face of the award".
73. Ld. Counsel for petitioner submitted that petitioner has invoked the jurisdiction of this Hon'ble Court under Section 34 of the Arbitration & Conciliation Act, 1996 ("the Act") as the appellate award dt. 28.09.2014 is in conflict with the public policy of India and is ex facie perverse. Patent illegality has crept in the appellate award as the claims have been rejected on an apparent and clear misreading of the applicable contractual OMP (Comm) No. : 16/24 51/57 clauses which is not just a mistake apparent but clear perversity that goes to the root.
74. As further submitted, present petition was filed before Hon'ble High Court challenging the award dated 30.12.2013 and appellate award dt. 20.05.2014, all of which is prior to the amendment of Section 34 of the Act that came into effect from 23.10.2015. Accordingly, as per the judgment of the Hon'ble Supreme Court in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, (2019) 15 SCC 131, the applicable law shall be the law prior to 23.10.2015.
75. Ld. Counsel for petitioner further submitted that the Petitioner falls within the contours of the scope of challenge under Section 34 of the Act in view of the following judgments:
(a) Ssangyog Engineering & Construction Co. Ltd. Vs. National Highways Authority of India (2019) 15 SCC 131:
" 19. There is no doubt that in the present case, fundamental changes have been made in the law. The expansion of "public policy of India" in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 ["Saw Pipes"] and ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 ["Western Geco"] has been done away with, and a new ground of "patent illegality", with inbuilt exceptions, has been introduced. Given this, we declare that Section 34, as amended, will apply only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that date".
(b) ONGC Ltd. Vs. Western Geco International Ltd (2014) 9 SCC 263:
" 35. What then would constitute the 'Fundamental policy of Indian Law' is the question. The decision in Saw Pipes Ltd. (supra) does not elaborate that aspect. Even so, the expression must, in our opinion, include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. Without meaning to exhaustively enumerate the purport of the expression "Fundamental Policy of Indian Law", we may refer to three distinct and fundamental juristic principles that OMP (Comm) No. : 16/24 52/57 must necessarily be understood as a part and parcel of the Fundamental Policy of Indian law. The first and foremost is the principle that in every determination whether by a Court or other authority that affects the rights of a citizen or leads to any civil consequences, the Court or authority concerned is bound to adopt what is in legal parlance called a 'judicial approach' in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the Court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be remembered is that the importance of Judicial approach in judicial and quasi judicial determination lies in the fact so long as the Court, Tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. Judicial approach ensures that the authority acts bonafide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a Court, Tribunal or Authority vulnerable to challenge".
............................
" 38. Equally important and indeed fundamental to the policy of Indian law is the principle that a Court and so also a quasi-judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice. Besides the celebrated 'audi alteram partem' rule one of the facets of the principles of natural justice is that the Court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non-application of mind is a defect that is fatal to any adjudication. Application of mind is best demonstrated by disclosure of the mind and disclosure of mind is best done by recording reasons in support of the decision which the Court or authority is taking. The requirement that an adjudicatory authority must apply its mind is, in that view, so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian Law".
.........................
" 40. It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an arbitral tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest".OMP (Comm) No. : 16/24 53/57
(c) Associate Builders Vs. Delhi Development Authority (2015) 3 SCC 49:
" When a court is applying the ' Public Policy' test to an arbitration award, it does not act as a court of appeal and consequently errors of facts cannot be corrected. A possible view by the arbitrator on the facts has necessary to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus, an award based on little evidence or on evidence which does not measure up in quality to a trainedTimes New Roman legal mind would not be held to be invalid on this scope. Once it is found that the arbitrator's approache is not arbitrary or capricious, then he is the last word on facts" .
" An arbitral tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a terms of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person could do".
" The expression ' justice' when it comes to setting aside an award under the public policy ground can only mean that an award shocks the conscience of the court" .
(d) ONGC Ltd Vs. Saw Pipes Ltd (2003) 5 SCC 705:
" 31. Therefore, in our view, the phrase 'Public Policy of India' used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term 'public policy' in Renusagar's case (supra), it is required to be held that the award could be set aside if it is patently illegal. Result would be - award could be set aside if it is contrary to: -
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or OMP (Comm) No. : 16/24 54/57
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void".
(e) Hindustan Zinc Vs. Friends Coal Carbonisation (2006) 4 SCC 445:
" 14. The High Court did not have the benefit of the principles laid down in Saw Pipes (supra), and had proceeded on the assumption that award cannot be interfered, even if it was contrary to the terms of the contract. It went to the extent of holding that contract terms cannot even be looked into for examining the correctness of the award. This Court in Saw Pipes (supra), has made it clear that it is open to the court to consider whether the award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India".
(f) Delhi Development Authority Vs. R.S. Sharma & Co. (2008) 13 SCC 80:
" 21. From the above decisions, the following principles emerge:
(a) An Award, which is:
(i) contrary to substantive provisions of law ; or
(ii) the provisions of the Arbitration and Conciliation , 1996 or
(ii) against the terms of the respective contract; or
(iv) Patently illegal; or
(v) prejudicial to the rights of the parties ;
is open to interference by the Court under Section 34(2) of the Act.
(b) Award could be set aside if it is contrary to :
(a) fundamental policy of Indian Law; or
(b) the interest of India; or
(c) justice or morality;
(c) The Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court.OMP (Comm) No. : 16/24 55/57
(d) It is open to the Court to consider whether the Award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India With these principles and statutory provisions, particularly, Section 34(2) of the Act, let us consider whether the Arbitrator as well as the Division Bench of the High Court were justified in granting the Award in respect of Claim Nos.1 to 3 and additional Claim Nos. 1to 3 of the claimant or the appellant-DDA has made out a case for setting aside the Award in respect of those claims with reference to the terms of the Agreement duly executed by both parties".
76. Though, it is correct that scope of jurisdiction under section 34 of the Arbitration Act is limited and is not open for appellate analysis. The court cannot sit in appeal while adjudicating a challenge to an Award. In terms of well settled law, the arbitral awards should not be interfered with, in a casual and cavalier manner, unless the court comes to a conclusion that the perversity of the award goes to the root of the matter. Nevertheless, in the instant matter, award has been passed against the specific terms of contract and is patently illegal in view of the discussion made herein. In Ssangyong Engineering & Construction Co. Ltd. Vs. National Highways Authority of India, it was also noted that :
" it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law and secondly, that such award is against the basic notions of justice or morality. Explanation 2 to Section 34 (2) (b) (ii) and Explanation 2 to section 48 (2) (b)
(ii) was added by the Amendment Act only so that Western Geco (Supra), as understood in Associate Builders (supra), and paragrpahs 28 and 29 in particular, is now done away with. In so far as domestic awards made in India are concerned, an additional ground is now available under sub-section (2A), added by the Amendment Act, 2015, to section 34. Here, there must be patent illegality appearing on the fact of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere OMP (Comm) No. : 16/24 56/57 erroneous application of the law. In short, what is not subsumed within " the fundamental policy of India Law" ,namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.
Secondly, it is also made clear that re-appreciation of evidence, which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award.
To elucidate, para 42.1 of Associate Builders (supra), namely a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. Paragraph 42.2 of Associate Builders (supra), however, would remain that if an arbitrator gives no reasons for an award and contravenes section 31 (3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award.
The change made in section 28 (3) by the Amendment Act really follows what is stated in paragraphs 42.3 in Associate Builders (supra), namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitratror construes the contract in a manner that no fair minded or reasonable person would; in short take or the arbitrator's view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted him, he commits an error of jurisidiction . This ground of challenge will now fall within the new ground added under section 34 (2A)" .
77. As findings of Ld. Arbitrator panel, confirmed by Appellate Tribunal have been found perverse, beyond the terms of the contract between the parties, ignoring the vital evidence and being patently illegal, award passed by Ld. Arbitrator Panel and the Appellate Award are hereby set aside. Objection petition u/s 34 of Arbitration and Conciliation Act stands allowed. Parties are at liberty to take legal recourse pertaining to redressal of their respective claims, as available in law. File be consigned to record room.
savita Digitally signed
by savita rao
Date: 2024.12.03
rao 16:47:41 +0530
Announced in the open (SAVITA RAO)
court on this Day DISTRICT JUDGE
of 3rd December 2024 (COMMERCIAL COURT)-01
SOUTH, SAKET COURTS, DELHI
OMP (Comm) No. : 16/24 57/57