Oral contracts are binding in arbitration: SC judgment on joint and several liability, Read Judgment

"The limited supervisory role of courts while reviewing an arbitral award is stipulated in Section 34 of the Act, beyond whose grounds courts cannot intervene and cannot correct errors in the arbitral award." With this principle in focus, the Supreme Court examined a dispute arising from stock market transactions, where a stockbroker sought to enforce joint and several liability against a married couple. While the arbitral tribunal ruled in favor of the broker, the High Court intervened, setting aside the award against the husband. The appeal raised critical questions on arbitration jurisdiction, contractual obligations, and the extent of judicial review under Section 37.

The appellant, a registered stock broker and member of the Bombay Stock Exchange (BSE), initiated arbitration proceedings against the respondents, who are husband and wife. Respondent No. 2 (wife) maintained a trading account with the appellant, while Respondent No. 1 (husband) also had a separate account. The appellant claimed that Respondent No. 1 had orally agreed to be jointly and severally liable for the debit balance in Respondent No. 2’s account. Due to stock market losses, a substantial debit balance accumulated in Respondent No. 2’s account. The appellant sought to recover this amount through arbitration under BSE Bye-law 248(a). The arbitral tribunal ruled in favor of the appellant, holding both respondents jointly and severally liable. However, while the single judge of the High Court upheld the award, the division bench set aside the arbitral award against Respondent No. 1, leading to the present appeal.

The appellant argued that Respondent No. 1 had consented to joint and several liability for the debit balance in his wife’s account. It was contended that both respondents functioned as a single trading entity, as evidenced by financial transactions, oral agreements, and past dealings. The appellant asserted that the arbitration clause covered the dispute, as per Bye-law 248(a), since the claim against Respondent No. 1 arose from transactions incidental to stock exchange trading. The appellant also submitted that Respondent No. 1 had participated in arbitration, filed a counter-claim, and did not challenge jurisdiction before the arbitral tribunal or in the Section 34 petition, making the objection impermissible at the Section 37 appellate stage. It was further argued that the High Court exceeded its limited jurisdiction in a Section 37 appeal by reappreciating evidence and setting aside the arbitral tribunal’s findings without proper justification.

Contentions of the Respondent:

Respondent No. 1 contended that he was an independent legal entity separate from his wife, with distinct client agreements and trading accounts. He argued that there was no written agreement making him jointly and severally liable for his wife’s trading losses, and the arbitral tribunal had erroneously relied on oral representations. The respondent emphasized that SEBI Guidelines and BSE Bye-laws prohibit adjusting funds between different client accounts without express authorization, and no such authorization was given. He also asserted that the arbitration clause under Bye-law 248(a) did not apply to his alleged oral guarantee, as it was not a transaction conducted on the stock exchange. Lastly, he maintained that the arbitral tribunal lacked jurisdiction over him, and since this was an issue of inherent jurisdiction, it could be raised at any stage, including the Section 37 appeal.

The Court identified two key issues. "The first is a jurisdictional issue that pertains to the maintainability of arbitration against respondent no. 1 under Bye-law 248(a) for payment of the debit balance in respondent no. 2’s account on the basis of his joint and several liability." The second issue is "whether the High Court correctly exercised jurisdiction under Section 37 while setting aside the arbitral award against respondent no. 1 on the grounds of perversity and patent illegality by finding that there is no joint and several liability."

Arbitration was initiated under Bye-law 248(a), which states, "All claims (whether admitted or not) difference and disputes between a member and a non-member or non-members...shall be referred to and decided by arbitration as provided in the Rules, Bye-laws and Regulations of the Exchange." The Court emphasized, "The scope and interpretation of Bye-law 248(a) falls for our consideration to determine the first issue."

The respondents, though non-members, had separate client registration agreements but consented through an oral understanding to treat them as joint. Rejecting the High Court’s reasoning, the Court held, "The High Court’s reasoning that arbitration was only invoked against respondent no. 2 as only her client code and client agreement were referenced is a hyper-technical approach."

Applying ONGC v. Discovery Enterprise, the Court noted that factors such as "mutual intention of the parties, the relationship between the signatory and non-signatory, commonality of subject-matter, and composite nature of transaction" are relevant in determining arbitration applicability. Referring to P.R. Shah v. B.H.H. Securities, the Court reiterated, "A common reference to arbitration is maintainable as it is in regard to the same claim and there is an arbitration agreement between the parties."

The Court dismissed the High Court’s differentiation of P.R. Shah, stating, "This conclusion is incorrect and the appellant in this case did in fact invoke arbitration against both respondents." The Court further clarified that the liability arose from transactions conducted on the exchange floor and was not a "private" transaction.

On jurisdictional objections, the Court noted, "Neither respondent has, in their statements of defence or Section 34 petitions, raised an objection to the arbitral tribunal’s jurisdiction in clear terms beyond stating that there is a misjoinder of parties." It emphasized, "A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence," and failure to do so constitutes waiver under Section 4.

The Court reaffirmed that courts have a limited role in reviewing arbitral awards. "The limited supervisory role of courts while reviewing an arbitral award is stipulated in Section 34 of the Act, beyond whose grounds courts cannot intervene and cannot correct errors in the arbitral award."

The High Court incorrectly exercised jurisdiction under Section 37 by reappreciating evidence and taking an alternative view on a factual finding. The arbitral tribunal’s conclusion was based on oral and documentary evidence, leading to a "reasonable and possible view that there is joint and several liability." Hence, the High Court "incorrectly held the award to be perverse."

On patent illegality, the High Court found the tribunal approved an illegal transfer of the credit balance. However, the tribunal’s finding was based on "past experience"—considering respondent no. 1’s conduct in acting on behalf of respondent no. 2, their joint liability, and their marital relationship.

Bye-law 247A, incorporating SEBI guidelines, mandates that "it shall be compulsory for all Member brokers to keep the money of the clients in a separate account and their own money in a separate account." It allows withdrawals only in limited situations, including "money properly required for payment to or on behalf of clients" or debts owed to the broker. Since the tribunal found joint liability, "Bye-law 247A in fact permits the withdrawal of the credit balance from respondent no. 1’s account."

The tribunal required written authorization, but the Court found "nothing in Bye-law 247A or in the SEBI Guidelines that mandates the same." Bye-law 227(a) also supported the adjustment of accounts, stating that "whenever and so often as a constituent is indebted to a member, all securities and other assets from time to time lodged with the members by such constituent...shall be subject to the lien of such member."

The appellant had lien over respondent no. 1’s cash balance due to his joint liability. Therefore, "the adjustment of accounts was in accordance with the BSE Bye-laws" and not contrary to legal provisions. The arbitral award did not suffer from patent illegality warranting interference.

The Court concluded:

1. Under Bye-law 248(a), the tribunal had jurisdiction over respondent no. 1 based on an oral contract establishing joint and several liability, which does not amount to a "private" transaction.
2. The High Court incorrectly exercised jurisdiction under Section 37 by reappreciating evidence and examining the merits of the award. The tribunal’s findings do not indicate "perversity or patent illegality," and the award is not liable to be set aside.

The impugned order of the High Court in Appeal No. 126/2006 in Arbitration Petition 309/2004 dated 29.04.2021 was set aside, and the present appeal was allowed. Consequently, the arbitral award dated 26.02.2004 was upheld in its entirety. Respondent no. 1 was held jointly and severally liable, along with respondent no. 2, to pay the appellant Rs. 1,18,48,069/- with 9% interest per annum from 01.05.2001 until repayment, as directed by the arbitral tribunal.

All pending applications were disposed of. No order was made as to costs.

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