Oral Judgment: (S.J. Vazifdar, J.)
1. This is an appeal against the order and judgment of the learned single Judge, dismissing the appellant's petition under section 34 of the Arbitration and Conciliation Act, 1996 to set aside an award passed by the arbitral tribunal dated 07.11.2003. The award directed the appellant to pay the respondent a sum of Rs.1,58,39,459-87 but refused to grant interest or costs.
2. The appellant entered into various transactions in respect of shares listed on the Bombay Stock Exchange (BSE). The respondent was one of the appellant's brokers. The parties had entered into a MemberâClient Agreement dated 31.08.2000. Clauses 1, 6 and 7 thereof read as under :-
â1. The provisions of this agreement shall always be subjected to government notifications, any rules, regulation and guidelines issued by SEBI and stock exchange rules, regulations and bye laws that may be in force from time to time.
6. All trades, transactions and contracts are subject to the Rules and Regulations of the Exchange including arbitration as per stock exchange rules and shall be deemed to be and shall take effect as wholly made, entered into and to be performed in the city of Mumbai and the parties to such trade shall be deemed to have submitted to the jurisdiction of the Courts in Mumbai for the purpose of giving effect to the provisions of the Rules and Regulations of the Exchange.
7. The client may give orders telephonically, as it suits the client and is convenient to the client, such telephone orders will be executed by the broker at the cost and risk of the client. For safety, the client is advised to send written orders. The client agrees to collect his contracts for the day from Member's office at the end of day before 6:30 p.m. The client also agrees to collect the bill for a settlement within two working days from the end of settlement and will point out objections if any within another two working days, or else the bill/contract will be seemed to be correct and accepted.â
3. The respondent invoked arbitration under the rules, byelaws and regulations of the BSE. The respondent filed a statement of claim seeking the amounts awarded together with interest at 18% and an amount of Rs.2.00 crores as damages. The claim was on the basis of the amount due at the foot of the account maintained by the respondent in respect of the appellant. The parties had entered into purchase, carry forward and sale transactions. On account of the appellant's alleged default, the respondent had also sought to square off certain transactions. The respondent's statement of case contains the following averments. The amounts claimed were in respect of settlement Nos.A-50, A-51 and A-52 towards the appellant's purchases and margin after giving him credit for the amounts deposited by him. The appellant's account was regularized upto statement No.A-49. The prices of the shares dealt in by the appellant crashed resulting in huge pay-in being required by the appellant. The appellant's default resulted in the respondent's default in pay in to the BSE. The appellant's cheques were dishonoured. Proceedings under section 138 of the Negotiable Instruments Act had been filed by the respondent. The respondent relied upon the copies of the appellant's contracts for the period 12.03.2001 to 23.03.2001.
4. In the written statement, the appellant apart from denying the claim, repeatedly contended that the respondent had failed and neglected to give him inspection of particulars and of the documents pertaining to the transactions carried out by the respondent on his behalf. The appellant also stated that he had along with the written statement filed an application under section 27 of the Arbitration and Conciliation Act, 1996 and Regulation 15.7 of the BSE and that he was filing the written statement under protest and craved leave to file a more detailed and specific reply on obtaining inspection of the relevant documents, for which he had made the said application. The appellant even sought the stay of the proceedings until such time as he was given inspection of the relevant documents. The claim primarily related to certain transactions in the scrip of Amara Raja Batteries Ltd. (ARB Ltd.)
The appellant also contended as follows. The respondent had carried out various transactions contrary to the circulars issued by the Securities and Exchange Board of India (SEBI), including the circulars dated 05.03.2001 and 07.03.2001. The circular dated 05.03.2001 imposed the additional margin on the sales of the shares with effect from 06.03.2001. The circular dated 07.03.2001 banned short sales. The respondent had not provided the appellant the bill for settlement No.50. Despite payment of Rs.50.00 lacs in the name of the respondent's sister concern, neither the respondent nor his sister concern purchased the shares on the appellant's behalf on 12.03.2001. The payment to the sister concern was at the respondent's request. The respondent had been held guilty of short selling 75,000 shares of ARB Ltd. The appellant apprehended that the respondent had resorted to large scale short selling various scrips, including of ARB Ltd. The appellant therefore, called upon the respondent and contended that the arbitrators also ought to direct the respondent to furnish him the copies of the trades executed by the respondent on behalf of the appellant as well as the other constituents under settlement Nos.50, 51, and 52 i.e. for the period 12.03.2001 onwards in respect of certain scrips, including the scrips of ARB Ltd. The appellant had already suffered a loss of Rs.45.00 crores on account of the illegal transactions by the respondent. The total loss on account thereof could be computed only upon inspection being given. The documents of which inspection was sought were listed in Exhibit 4 to the written statement.
The demand for inspection of the documents has been made at almost every stage of the written statement. The respondent's refusal to grant inspection is also averred in the written statement. The appellant, referring to his letter to the BSE, stated that he suspected that the respondent had short sold the shares belonging to him without any order for sale ; that the respondent had short sold the shares of ARB Ltd. against the appellant's long opposition contrary to the directives of the SEBI. None of the contracts annexed to the statement of case had been acknowledged by the appellant and therefore, the same were not binding on him. The appellant put the respondent to strict proof of the contracts and requested an opportunity to cross-examine the respondent. Paragraph 14 of the written statement which was heavily relied by the appellant reads as under :-
â14. With further reference to the paragraph under reply, the Respondent emphatically denies that any contract was issued by the Applicant Broker to him either on 12th March 2001 or thereafter and denies the purported liability as alleged by the Applicant Broker on the basis of such false contacts. With further reference to the paragraph under reply, the Respondent respectfully submits that the Applicant Broker had suo-moto taken the responsibility to square-off all the Respondents purchase positions without informing the Respondent or without giving him due notice which act of the Applicant is in stark contravention to the Bye-law No.174 and Regulation 13 of the Rules, Bye-laws and Regulations of the Exchange. It is further pertinent to note that the Applicant chose to write a letter dated 19th March 2001 to the Respondent after allegedly squaring off all the Applicant's purchase positions in scrips other than ARBL without giving any prior notice to the Respondent and a day prior to the squaring off, of the alleged position of the Respondent in the scrip of ARBL (though the Applicant very well knew the rate at which he would square off the said outstanding purchase position of the Respondent in the scrip of ARBL on the subsequent day) as more specifically stated hereinabove. It is thus, clearly apparent that a comparison of the said letter of the Applicant dated 19th March 2001 with the said alleged contract notes of the Applicant clearly shows that the two are contradictory and smacks of foul play having been played by the Applicant Broker. This limited aspect by itself clearly demonstrates that the aforesaid submission as made by the Respondent regarding inspection of the documents is of grave importance and ought to be considered and granted by this Hon'ble Forum.â
5. As we noted earlier, the appellant had also filed an application under section 27 of the Act. The application reiterated what was set out in the written statement. The application further stated as follows : âNo details of squaring off in respect of the appellant have been furnished prior to the filing of the arbitration proceedingsâ. As regards the net purchase position in settlement No.51, the appellant expressed an apprehension that the purchases were pursuant to the sales by other members of the exchange and/or their constituents in violation of the SEBI circulars. The sales matched against the purchases by the respondent on behalf of the appellant were alleged to be short sales conducted by the market participants, including the respondent without any preceding purchase position or deliveries. The appellant stated that he had been given to understand that a preliminary investigation by the SEBI and NSE found that the respondent's sister concern had resorted to short sales and fictitious dealings which had driven down the security market, including in the scrips of ARB Ltd. After setting out the mechanism by which the transactions are carried out on the BSE, the appellant contended that the validity of the transactions can be ascertained only if the records of the SEBI, the BSE and the NSE are produced and the information revealing the identity of the brokers is disclosed. The records are available with the SEBI and the exchanges. In paragraph (C)(I)(s) the appellant stated that if it is found that the purchase transactions entered into by the respondent are illegal and/or unlawful and are therefore, liable to be annulled, the same would result in a benefit to the respondent himself as the respondent would then be in a position to contend that the order passed by the BSE suspending the respondent from the exchange is also liable to be revoked/cancelled.
Accordingly the appellant applied to the arbitral tribunal to call for the details of the trades and sales and purchases for all the scripts from 07.03.2001 till 20.03.2001 from the SEBI, the BSE and the NSE to ascertain the validity of the transactions carried out by the respondent on behalf of the appellant. The documents in turn were specified in paragraph (C)(II).
One of the items was in respect of the relevant documents disclosing the names and the details of the constituents with the client code of the constituent, who had pressed the sales of the script in the said settlement Nos.50, 51 and 52. The appellant accordingly requested the arbitral tribunal to apply to this Court for assistance in taking evidence in relation to the documents.
6. In the rejoinder to the written statement, the respondent stated that he had attached certain documents to the statement of case, which he intended relying upon. The respondent contended that he was bound to give inspection only of such documents and of no other document.
7. Mr. Kunal J. Dwarkadas, the learned counsel appearing on behalf of the appellant raised the following submissions :-
I). The respondent's membership having been suspended by the Bombay Stock Exchange he was not entitled to invoke arbitration under the rules of the BSE notwithstanding the transactions in question having been entered into prior to the order of suspension.
II). The transactions were null and void as the respondent failed to provide the appellant with the contract notes of the carry over the transactions.
III) The award is in violation of the principles of natural justice as the appellant was denied an opportunity of cross-examining the respondent and the arbitral tribunal rejected the appellant's application under section 27.
IV). The respondent did not give the appellant prior notice before closing out the alleged outstanding position of the appellant thereby rendering the transactions void being in violation of the Regulations of the BSE.
V) The award was based on extraneous and irrelevant material.
8. We will refer to the award and to the impugned judgment after dealing with Mr. Dwarkadas' first submission challenging the jurisdiction of the arbitral tribunal.
Re :- I). The respondent's membership having been suspended by the Bombay Stock Exchange was not entitled to invoke arbitration under the rules of the BSE notwithstanding the transactions in question having been entered into prior to the order of suspension.
9. In respect of the submission, Mr.Dwarkadas relied upon Bye-laws 248(a) and 315(d) and Rules 5, 269 and 270 of the Bombay Stock Exchange, which read as under :-
BYE-LAWS
âARBITRATION OTHER THAN BETWEEN MEMBERS
Reference to Arbitration
Bye-law 248(a):
All claims (whether admitted or not) difference and disputes between a member and a non-member or non-members (the terms ânon-member and ânonmembers shall include a remisier, authorized clerk, a sub-broker who is registered with SEBI as affiliated with that member or employee or any other person with whom the member shares brokerage) arising out of or in relation to dealings, transactions and contracts made subject to the Rules, Bye-laws and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their construction, fulfillment or validity or in relation to the rights, obligations and liabilities of remisiers, authorized clerks, sub-brokers, constituents, employees or any other person with whom the member shares brokerage in relation to such dealings, transactions and contracts shall be referred to and decided by arbitration as provided in the Rules, Bye- laws and Regulations of the Exchange.
ARBITRATION BETWEEN MEMBERS
Member
Bye law 315(D):
For the purposes of this chapter the term âmemberâ shall include, and shall always be deemed to have included, a former member of the exchange who was a member of the Exchange at the time when the concerned bargain, dealing, transaction or contract was entered into.
RULES
Rule 5:-
Membership a Personal Privilege
The membership shall constitute a personal permission from the Exchange to exercise the rights and privileges attached thereto subject to the Rules, Bye-laws and Regulations of the Exchange.
Rule 269:-
Consequences of Suspension
The suspension of a member shall have the following consequences namely:-
Suspension of Membership Rights
(i) the suspended member shall during the term of his suspension be deprived of and excluded from all the rights and privileges of membership including the right to attend or vote at any meeting of the Exchange but he may be proceeded against by the Governing Board for any offence committed by him either before or after his suspension and the Governing Board shall not be debarred from taking cognizance of and adjudicating on or dealing with any claim made against him by other members:
Rights of Creditors Unimpaired
(ii) the suspension shall not affect the rights of the members who are creditors of the suspended member;
Fulfillment of Contracts
(iii) the suspended member shall be bound to fulfill contracts outstanding at the time of his suspension;
Further Business Prohibited
(iv) the suspended member shall not during the term of his suspension make any bargain on the floor of the Exchange or transact any business with or through a member provided that he may with the permission of the Governing Board close with or through a member the transactions outstanding at the time of his suspension;
Members Not to Deal
(v) no member shall transact business for or with or share brokerage with a suspended member during the term of his suspension except with the previous permission of the Governing Board.
Rule 270:-
Consequences of Expulsion
The expulsion of a member shall have the following consequences namely:-
(i)the expelled member shall forfeit to the Exchange his right of membership and all rights and privileges as a member of the Exchange including any right to the use of or any claim upon any interest in any property or funds of the Exchange (or of the Trade Guarantee Fund) but any liability of any such member to the Exchange (to the Clearing House, to the Trade Guarantee Fund) or to any member of the Exchange shall continue and remain unaffected by his expulsion;
Lapse of Right of Nomination
(ii) the right of nomination shall vest in the Exchange and shall not be exercised by the expelled member;
Office Vacated
(iii) the expulsion shall create a vacancy in any office or position held by the expelled member;
Rights of Creditors Unimpaired
(iv) the expulsion shall not affect the rights of the members who are creditors of the expelled member;
Fulfillment of Contracts
(v) the expelled member shall be bound to fulfill transaction outstanding at the time of his expulsion and he may with the permission of the Governing Board close such outstanding transaction with or through a member;
Members Not to Deal
(vi) no member shall transact business for or with or share brokerage with the expelled member except with the previous permission of the Governing Board.â
10. Mr.Dwarkadas submitted that under bye-law 248(a) disputes and differences, inter-alia, between a member and a nonmember can be referred to and decided by arbitration as provided in the rules, bye-laws and regulations of the BSE. If one of the parties is not a member, the disputes and differences cannot be referred to and decided by arbitration as provided in the rules, bye-laws and the regulations of the BSE. The option or facility accorded to a member to have the disputes and differences between his constituent and himself decided by the arbitration is a right and privilege attached to the membership. It is one of the rights referred to in rule 5. It is by virtue of rule 5 that a member is permitted to exercise the rights and privileges one of which is the right or privilege to refer the disputes between the member and his constituents to arbitration. When a member is suspended, he is deprived of the rights and privileges of membership. The words in rule 269(1) â........ all rights and privileges to membership including the right toâ¦.....â establish that the embargo in section 269 is wide. The suspended member is, therefore, deprived of the right and privilege of his membership to have disputes referred to and decided by arbitration as provided in the rules, bye-laws and regulations of the BSE.
11. The submission is not well founded. It is liable to be rejected on two grounds. Firstly, this contention was raised for the first time only in the appeal by seeking to introduce fresh evidence. Secondly, even on principle it is not well founded. We will deal with the second ground first.
12. Even assuming that an arbitration agreement creates a right in a party to have the disputes and differences referred to and decided by the arbitration as provided therein, it would make no difference. In a manner of speaking a party to an arbitration agreement does have a right to compel other parties to have the disputes and differences referred to arbitration. The right is recognized by the Arbitration and Conciliation Act, 1996 (hereinafter referred to as âthe Actâ) inter-alia by invoking the provisions of sections 8, 11 and 45 thereof. Bye-law 269 however, does not refer to such rights. In our opinion it refers to the rights of a suspended member qua the exchange and not to the rights between the parties to an arbitration agreement. A right to have a dispute decided by arbitration is not a right qua the exchange but qua the parties to the transaction such as between a member and his constituents.
13. A view to the contrary would lead to the most startling consequence whichever way the matter is considered.
14. The suggestion that the arbitration clauses ceases to operate altogether the moment a member is suspended is unsustainable. It would defeat the rights of the suspended or expelled member's constituent's/client's right to have the disputes between them referred to and decided by arbitration. The right of the nonmember (i.e. the suspended member's client) cannot be defeated for the default or wrong doing of the suspended or expelled member. The consequences of accepting Mr.Dwarkadas' submission would be to prevent the non-member such as the suspended member's client being denied the right of having the disputes between himself and the suspended or expelled member referred to and decided by arbitration for no fault of his and indeed only on account of the fault of such member. This would, in many cases, put a premium on the default of the suspended member.
Such a view would amount to penalizing an innocent client for no fault of his and on account of the mis-deeds or breaches or defaults of his broker. This could not have been the aim or intention of the framers of the rules, bye-laws and regulations of the BSE.
15. There is yet another aspect that militates against Mr.Dwarkadas' submission. As Mr.Dwarkadas himself admitted an order of suspension is and in any event can be only temporary. Mr.Dwarkadas' submission if accepted would cause enormous and in many cases insuperable difficulties on account of the issue of limitation. The period of suspension does not stop limitation from running. There is no provision that extends the period of limitation to the extent of the duration of the order of suspension. If a suspended member is prevented from invoking the arbitration clause, the suspended member as well as the innocent non-member would perforce be deprived of the right to have the disputes referred to and decided by arbitration for more than one reason.
16. Firstly, the period of suspension may run throughout the period of limitation. In that event, obviously the parties would be compelled to file a civil suit or adopt any other proceedings in accordance with law. If the period of suspension is not fixed at the outset, the parties would have to wait till the last date before filing a suit.
Even assuming that the period of suspension is for a short period within the period of limitation, it would make no difference. In many cases, it may be necessary for a party to not merely file the proceedings but also seek interim reliefs. If the party is compelled to file the proceedings during the subsistence of the suspension of the membership, it will per-force have to abandon the arbitration agreement and file any other proceedings such as a suit.
17. Although we cannot exclude the possibility in such a case of a party filing a suit due to the exigencies of the circumstances without prejudice to its rights to take recourse to arbitration subsequently, it only complicates the matters unnecessarily. The party would have to first file a suit without prejudice to the arbitration agreement. If the suspension is lifted or set aside finally he would then have to invoke arbitration. The suit would have to be withdrawn resulting in his losing court fees and incurring expenditure for filing the suit for no fault of his. This would be especially so when the suspension is set aside as being unjustified. We are certain that the framers of the rules, bye-laws and the regulations did not even remotely contemplate putting their members and the members of the public in such difficulties and in such a state of confusion. To accept Mr. Dwarkadas' contention would to ascribe to the BSE, an intention to confront its members and the public with a jigsaw puzzle with no purpose whatever.
18. What we have said here is also the first answer to Mr.Dwarkadas' alternate submission that the suspension of a member operates as a bar at least against the suspended member to invoke arbitration even if it does not operate as a bar against the non-member/client of the suspended member to invoke the arbitration agreement.
19. What we have just said regarding the difficulty in accepting such a view on account of limitation would equally apply to the suspended member as well as to his client â non-member. It is clear to us that the BSE never intended creating such complications and confusion especially in respect of a suspended member whose suspension may be only temporary and subject to further decision or orders.
20. Mr.Dwarkadas' alternate submission that the ban against invoking the arbitration clause would operate only against the suspended member is untenable for other reasons as well.
21. Firstly, we doubt whether there can be a valid arbitration agreement where only one party thereto is entitled to invoke arbitration.
22. Secondly and more important such a view would also result in startling consequences. There is nothing in the rules, byelaws and the regulations that prevents a suspended or expelled member from recovering or filing the proceedings for the recovery of his dues from his clients. This however, would be the consequence of accepting Mr.Dwarkadas' submission.
For instance if a suspended or expelled member files a suit against his client and his client's application under section 8 of the Arbitration and Conciliation Act, 1996 is allowed, the suspended or expelled member would be left without any remedy to recover his dues. On the one hand his suit would have come to an end without adjudication on merits by virtue of the order under section 8 and on the other he would not be entitled to have his claim decided by arbitration.
23. Far more unfair and complicated would be a case where the non-member does not agree to the suspended or expelled member referring his claim to arbitration thereby compelling him to pursue a civil suit but refers his claim to arbitration. The suspended or expelled member would not be entitled to raise a counter-claim either. Such a case would be riddled with unnecessary complexities too obvious to enumerable. There would for instance be a possibility of a conflict of decision between a public forum and a private forum.
24. Let us presume that it is possible and indeed it may theoretically be possible to overcome these difficulties. The answer to this difficulty we will presume is that the non-member/client would be entitled to elect before which forum the suspended or expelled member ought to prosecute his claim. The question of course then would be as to when he must make this election Should the suspended or expelled member call upon him to do so before he institutes his proceedings or would it be left to the non-member to elect after such member files his proceedings.
25. The point of vital importance in all this is not whether the difficulties can be solved but whether the BSE ever intended creating them to start with. We are not inclined to ascribe to the BSE an intention to present its members and the trading public with such a meaningless and convoluted process.
26. Mr.Dwarkadas submitted that rule 269(ii) provides that the suspension of a member shall not affect the rights of the members who are creditors of the suspended member. Though the rights of members who are the creditors of the suspended member have been preserved the rights of the non-members have not been preserved. According to him therefore, the rights of the non-members to have the disputes and differences referred to and decided by arbitration under bye-law 248 stand impliedly extinguished upon such non-member's broker being suspended or expelled. Mr.Dwarkadas submitted that the express mention of the right/privilege provided to other members to proceed against the suspended member implied that the suspended member's rights to proceed against the other members and non-members is excluded.
27. We are unable to agree. Rule 269(ii) does deal with the rights of the members who are the creditors of the suspended members qua the exchange. It was probably found necessary to clarify that the rights of the members who are the creditors of a suspended member are not affected for no fault of theirs and due to the default of the suspended member. That by itself however, would not indicate an intention to extinguish the right of a non-member. Further, the reference is to the rights qua the exchange and not the rights between the creditor member and the suspended or expelled member.
28. The submission based on Bye-law 269(ii) is, therefore, unfounded.
29. Mr.Dwarkadas relied upon the fact that bye-law 315(d) falls under the chapter âArbitration Between Membersâ as contended as follows : There is no such provision in the chapter relating to arbitration between members and non-members. Bye-law 315(D) saves the arbitration agreement between the members although one of the members might have ceased to be a member if his membership was valid when the concerned transaction was entered into. Thus when a former member was to be included in the definition of a member, the bye-laws expressly provided for the same. On the other hand, a similar provision is not there in the chapter relating to arbitration other than between the members. To read the term former member or suspended member into the definition of member for the purpose of the chapter relating to âarbitration other than between the membersâ would render the definition in bye-law 315(d) otiose. It must follow that absent any such specific stipulation, arbitration between a member and a non-member cannot be initiated by a suspended member notwithstanding that the relevant transactions or dealings had been entered into before he was suspended.
30. The submission is not well founded. Merely because specific provisions are made in the chapter relating to members, it does not follow that the provisions relating to others are impliedly to the contrary even if otherwise they are not found to be so. To draw such inferences would be inappropriate. The provision was necessary as the involvement of members in the arbitration proceedings between members is different. For instance, Rule 285 contemplates members as arbitrators. It is possible that the BSE intended even former members to be arbitrators. Moreover, a former member is not necessarily a suspended or expelled member. He can also be a member who has surrendered or transferred/assigned his membership.
31. In our view, therefore, the disputes and differences can be referred to and decided by arbitration as provided in the rules, byelaws and the regulations of the exchange even where a member has been suspended or expelled or where the persons membership has been terminated. The provisions in the rules, bye-laws and regulations of the BSE relating to arbitration remain unaffected upon a member being suspended or expelled or his membership being terminated.
32. The contention is liable to be rejected on another ground. It is not open to the appellant to raise this contention as it had not been raised either before the arbitral tribunal or before the learned single Judge. It was not open to the appellant to urge this contention even in the petition under section 34, as it has not been raised before the arbitral tribunal. A Division Bench of this Court in O.N.G.C.v. Comex Services SA, (2003) 5 Bom.C.R. 145 held that a party is not entitled to challenge an award on a ground that is not taken in the petition for setting aside the award. The Division Bench held as under:-
â5. At the outset we must mention that this contention was not raised nor argued before the learned Single Judge nor this contention was taken before the Umpire. The contention is not even raised in the memo of appeal. Since the appellant has not made necessary averments in the petition filed by them for setting aside the Award in our opinion the appellant should not be allowed to raise this point in this appeal for the first time especially as the question depends upon the facts which are conspicuous by their absence in the pleadings. It is well-settled that specific averments and grounds for setting aside the Award have to be set out in the pleadings to enable the Court to set aside the Award even though the Award may be a nullity as alleged in the instant case. An application for setting aside the Award under section 14 has to be made within thirty days of service of notice. Otherwise the Award cannot be set aside on any ground contemplated by section 30 of the Arbitration Act. The expression "otherwise invalid" appearing in Clause (c) of section 30 of the Act includes Awards that are nullities. In the instant case no fact has been stated in the petition to show that the Umpire has exceeded his jurisdiction in making the Award or in other words he travelled beyond the terms of the contract in awarding the compensation claimed by the respondent.
6. Mr. Zaiwalla, however, contended that the point regarding jurisdiction goes to the root of the matter and, therefore it is open for the appellant to raise this issue even in oral submission though he maintained that the point should be presumed to have been taken or raised in the petition in view of the averment that the Award is contrary to the terms of the contract. He sought to place reliance on the decisions of the Supreme Court in Kiran Singh and others vs. Chaman Paswan and others 1954 Indlaw SC 181 ) and Sushil Kumar Mehta vs. Gobind Ram Bohra (dead) through Heirs 1989 Indlaw SC 260). These decisions are not rendered under the Arbitration Act and we have serious doubt whether these decisions have any application to the petitions u/s. 14 of the Arbitration Act. In any event the issue of jurisdiction raised by the learned counsel is not a pure question of law and it is a mixed question of law and facts and it will totally unfair to allow the teamed counsel to raise this contention for the first time in oral submission when no such contention was raised either before the learned Single Judge or even in the memo of appeal. Mr. Advani, learned counsel for the respondent submitted and not without sufficient force that Cl. 27.0 of the contract prohibits consequential damages and not damages resulting directly and naturally from the breach of the contract. He submitted that the concept of consequential damages is different from general or ordinary damages.â
This is also a complete answer to this ground of challenge.
33. Mr.Dwarkadas however, relied upon the following observations from the judgment of the Supreme Court in Gas Authority of India Limited vs. Keti Construction (I) Limited (2007) 5 SCC 38 :-
â25. Where a party has received notice and he does not raise a plea of lack of jurisdiction before the Arbitral Tribunal, he must make out a strong case why he did not do so if he chooses to move a petition for setting aside the award under Section 34(2)(a)(v) of the Act on the ground that the composition of the Arbitral Tribunal was not in accordance with the agreement of the parties. If plea of jurisdiction is not taken before the arbitrator as provided in Section 16 of the Act, such a plea cannot be permitted to be raised in proceedings under Section 34 of the Act for setting aside the award, unless good reasons are shown.â
(emphasis supplied)
34. Mr.Dwarkadas contended that on 23.03.2001, the respondent's membership rights were suspended by the BSE and the respondent's BOLT was de-activated. Thereafter on 15.06.2001, the respondent invoked arbitration. These facts were suppressed by the respondent in the arbitration proceedings. The appellant had no way of knowing these facts and learnt about them for the first time from an affidavit dated 23.10.2002 filed by SEBI in another proceedings viz. Writ Petition No.2263 of 2002, filed by the respondent against SEBI and others. It is stated that the SEBI's affidavit formed a part of the compilation of documents tendered by him at the hearing of the arbitration petition and also when this appeal was admitted. He further submitted that a plea of lack of jurisdiction can be raised in a petition under section 34 even if it was not raised before the arbitral tribunal provided that good reasons are shown.
35. The submission is totally devoid of substance on facts as well as in law as applicable to the facts of this case. As we will demonstrate, the appellant knew and, in any event, should have known the alleged facts and we use the phrase âalleged factsâ consciously even during the course of the arbitral proceedings. In the facts and circumstances of this case, it cannot be said that there was good reason to permit the appellant to raise this contention although it was not raised before the arbitral tribunal.
36. Firstly, the contention does not involve a mere question of law. It involves a mixed question of law and of fact as is evident from what follows. Ms.Kumbhat on the other hand contended that the respondent's membership of the BSE had not been suspended. Her submissions establish that the issue involves a seriously disputed question of fact. Mr. Dwarkadas placed considerable reliance upon the said affidavit filed by SEBI. The respondent's BOLT was deactivated and SEBI suspended the registration. The SEBI's suspension of the respondent's registration is, however, not the same as the respondent's membership being suspended by the BSE. The SEBI's affidavit only states that the SEBI by an order dated 12.06.2002 suspended the certificate of registration granted by them to the respondent as a stock broker for a period of two years with effect from 27.06.2002. The affidavit therefore, expressly states that it is the SEBI that suspended the respondent's certificate of registration. It does not state that the respondent's membership was suspended by the BSE. Mr.Dwarkadas' reliance upon paragraph 5 of the said affidavit is therefore, unfounded. Further, the affidavit was filed by the SEBI. The question of the respondent admitting the contents thereof does not arise. These facts are sought to be introduced only in the appeal by filing an affidavit dated 11.10.2004.
37. The appellant stated that he had obtained a copy of the letter dated 20.07.2001 addressed by the BSE to the SEBI, which was referred to in the SEBI's said affidavit. The letter indeed states that the membership rights of the respondent were suspended by the BSE and that the exchange de-activated his bolt with effect from 23.03.2001.
Ms.Kumbhat, however, stated that whether through inadvertence or otherwise the statement in the letter is incorrect and that there is in fact no such order. As Ms.Kumbhat pointed the suspension of a membership by the BSE requires compliance of various rules, bye-laws and regulations of the BSE, including rules 258, 263 and 265. The provisions, according to her, were never invoked. She rightly pointed that the appellant has even today failed to obtain the alleged order of suspension of the respondent's membership by the BSE.
38. We are entirely in agreement with Ms.Kumbhat that these facts ought to have been alleged before the arbitral tribunal. Normally at least parties are not entitled to rely upon additional evidence even in a petition for setting aside an award. Such a course deprives the other party from meeting the case on facts. It would be wholly undesirable to introduce a system of permitting a Court in a petition for setting aside the award to determine disputed questions of fact. That would create chaos in the field of arbitration. It would not just hamper but frustrate arbitration proceedings by enabling the parties to raise disputed questions of fact in petitions for setting aside the award even if they relate to the jurisdiction of the arbitral tribunal. The judgment of the Supreme Court in Gas Authority of India v. Keti Construction (I) Ltd. (supra), far from supporting the appellant's case, militates directly against it. It is the arbitral tribunal and not the Court that is to determine such questions.
39. There was nothing that prevented the appellant from raising these allegations before the arbitral tribunal. As Ms.Kumbhat rightly pointed out the appellant had knowledge of the alleged suspension of the respondent's membership even when the proceedings were pending before the arbitral tribunal. The appellant in his rejoinder to his application under section 27 of the Act before the arbitral tribunal stated that the SEBI had suspended and revoked the respondent's registration for two years. Although the appellant did not state that the BSE had suspended his registration the suspension and revocation by the SEBI ought to have raised a doubt as to the respondent's membership of the BSE also having been affected. Further, and even more important is the fact that in his application under section 27 of the Act before the arbitral tribunal, the appellant alleged that there was an order passed by the BSE of suspending the respondent from the exchange. The averment is as follows :-
â(s) It is respectfully submitted that if the documents which the Applicant herein is seeking production of are produced before the Arbitral Tribunal and it is found that the purported purchase transactions of the Respondent herein were in fact illegal and/or unlawful and are therefore liable to be annulled and in any event not binding upon the Applicant herein, the same is bound to result in a benefit to the Respondent herein in as much as the Respondent broker would then be in a position to contend that the order passed by the BSE of suspending the Respondent herein from the Exchange is also liable to be revoked, declared illegal, cancelled and/or set aside.â
[emphasis supplied]
40. It is clear, therefore, that the appellant knew of the alleged suspension even during the course of the arbitral proceedings. It is, therefore, in the facts of this case, in any event, not permissible for him to raise this contention before us.
41. The contention that the arbitral tribunal had no jurisdiction to decide the disputes is rejected on both the grounds.
RE: VI THE AWARD IS BASED ON EXTRANEOUS AND IRRELEVANT MATERIAL AND THE ARBITRATORS FAILED TO APPLY THEIR MINDS INDEPENDENTLY.
42. This to our minds is the principal ground for challenging the award. We find that the award is liable to be set aside on this ground alone. The result of the other grounds virtually follow the result of our findings on this ground. The award deals with two aspects. It deals with the appellant's application under section 27 of the Act and with the main dispute.
43. Considering the nature of the proceedings before the arbitrators, the findings of the arbitral tribunal and the impugned order, it is necessary to set out the relevant part of the award on the merits of the matter in its entirety. It reads as under :-
âDuring the course of proceedings the Respondent filed a written statement, a counter claim and also an application u/s 27 of the Arbitration and Conciliation Act read with regulation 15.17 of the BSE regulations. The parties were heard in regard to the application and this Tribunal was not inclined to grant the reliefs prayed for in the said application. The main contention of the Respondent in his application u/s. 27 is that the purchases of Amaraja Batteries to the Applicant Broker corresponded to certain short sales allegedly in violation of the Circulars and Orders of SEBI and BSE and therefore the transactions on which the claim was based were a nullity. We find from the perusal of the records that the debit balance in the account of the Respondent is primarily on account of square off of Amaraja Batteries and certain other shares which the Respondent had purchased. It is clear, and nor has the Respondent seriously questioned this position that the purchases were made by the Respondent through the Applicant. His primary contention is that because there were short sales made by various other Brokers, these transactions would be annulled. We are not inclined to accept the contention of the Respondent. Firstly, we find from the record that SEBI and the BSE has examined these transactions and has not found the purchases made through the Applicant Broker to be invalid.
We find from a copy of the Enquiry Report which is on record that the Applicant Broker has been censured for not taking initial deposits and adequate margins. Thus already an independent enquiry has established the veracity of the transactions. Further in our considered opinion a contract is valid when both parties to the transaction are ad-idem. This clearly seems to be the position. The Respondent had instructed the Applicant Broker to purchase shares of Amaraja Batteries and certain other shares on his behalf which instruction was executed. The Applicant could not have been and it is not borne out from the record that he was aware of a corresponding short sale in the scrip by another broker. In any event, in the absence of any allegations of collusion between the Applicant Broker and the so-called short selling broker we can not see as to how an Application u/s 27 can be maintained. Undoubtedly, the Arbitral Tribunal is bound to afford adequate opportunity to the parties to make their case. However, it cannot permit the use of judicial machinery to go on a fishing expedition so that the possibility of some evidence which would help the Respondent would surface. In our opinion we have afforded enough opportunity to the Respondent to prove his case. This will be borne out by the following paragraphs.
As stated in the foregoing paragraphs this Tribunal was not inclined to accept the prayers in the Application u/s 27. As has been set out in the earlier paragraphs the only defence of the Respondent was that these transactions corresponded through alleged short sales. No other worthwhile defence was put forth. The Respondent wanted to know as to whether on the last dates of various settlements through broker had infact an outstanding position in respect of the shares for which the claim was made or that the Broker had already squared off the position and was deliberately foisting a liability on the Applicant. In order to meet the ends of justice, we asked the Applicant to file 1/2A and 1/2B statements in respect of 7 shares including the shares of Amaraja Batteries vide our directions dated 22nd April, 2003. The Applicant did so and these copies had been furnished to the Applicant by BSE pursuant to his Application on 14th May, 2003. However, the said record did not contain the client code. On 6th June, 2003 the Respondent addressed to us a letter stating that in the absence of the client code he was unable to make a submission. The Applicant argued before us that the record was given by the authorities over which he had no control. He had met our directions squarely and he argued that the refusal of the Respondent to make submissions was only a ploy to delay the matter.
We find from the record that this infact seems to be the case. We will illustrate this by an application made by the Respondent on 21st of January, 2003 seeking to cross examine the Applicant to prove his defence. The Application is a two paragraph application which does not set out a single reason as to why crossexamination is necessary. A reference to By-law 265 (b) will clear the matter. The bye-law explicitly states that no party shall be entitled without the permission of the Arbitrator to examine a Witness or receive oral evidence. The words used in Bye-law leave no doubt in our mind that oral evidence can be insisted upon only if considered necessary by the Arbitrators. Thus the examination of a Witness is a matter of right but left to the wisdom of the Arbitrators. The Application placed before us is a bland application setting out no reasons as to why a crossâexamination was necessary. In the circumstances, considering the facts on record this Tribunal declined to accept the request of the Respondent.
We have already put on record that the solitary defence is the veracity of the transactions appearing in the account of the Respondent in the books of the Applicant. We have only stated that the applicant has more than made the burden of proof. These transactions have not been annulled by any authority as on date and therefore a claim based thereon is entitled to succeed. We have therefore no hesitation in accepting the principle claim of the Applicant which is Rs. 1,58,39,459.87.
Coming to the counter-claim of the Respondent that has been made by ignoring the transactions which were debited to the account of the Respondent. The total claim is a sum of Rs.45 Crores. Apart from the claim of refund of margins of Rs.27,62,427,27 the Respondent in addition has claimed a sum of Rs.45 Crores on account of loss and damages which the Respondent has suffered on account of the alleged illegal acts of the Applicant Broker. Neither in the written statement nor in the Counterâclaim is there even a whisper as to how this figure of Rs.45 crores has been arrived at. We have therefore no option but to disregard the same. As regards the margins of Rs. 27, 62, 427.27 these were against the purchase transactions. We have already held that in our considered view these transactions were validly executed therefore no claim in regard thereto shall lie. The counter claim of the Respondent is rejected in toto.â
Thereafter the arbitral tribunal rejected the application for costs on the ground that the respondent did not function in a prudent manner as he failed to collect adequate margin. The costs were also declined on the same ground. The arbitral tribunal observed that the appellant had been given maximum latitude despite his attempt to prolong the proceedings by making unnecessary applications and that the appellant did not avail of an opportunity offered by failing to appear on 07.10.2003, which was the date fixed only for clarification of minor incidental questions. The last date was fixed only out of abundant caution and that nonappearance of the appellant did not affect the matter.
44. The learned Judge rejected the above petition. We held earlier that the learned Judge, in our opinion, rightly rejected the contention that the suspension of the respondent's membership card did not prevent the respondent from invoking the arbitration agreement.
On merits, the learned Judge held that the record showed that the petitioner had not really disputed the fact that he had instructed the respondent to purchase the shares and that the petitioner had not disputed that the shares of ARB Ltd. were purchased by the respondent at his instance.
As far as the merits are concerned, this is all that the learned Judge said :-
âPerusal of the record, however, shows that the Petitioner did not really dispute that he instructed Respondent to make the purchase. It is to be seen that the Respondent had addressed a letter dated 19.3.2001 to the Petitioner demanding the amount in respect of sale of shares made at his instance in settlement no.A-51. The letter was replied to by the Petitioner. The reply is dated 27th March, 2001. Perusal of that reply shows that the Petitioner was not disputing that at his instance shares of Amara Raja Batteries were purchased by the broker. However, the only contention raised, is that the Petitioner did not agree to the sale of the shares by the broker. The Arbitral Tribunal has also observed in its Award that there was no dispute between the parties on shares of Amara Raja Batteries and shares were purchased by the Respondent at the instance of the Petitioner. The only allegation of the Petitioner was that they were short-sold by the broker. So far as that aspect of the matter is concerned, the Arbitral Tribunal has relied upon the order made by the Chairman, Securities And Exchange Board of India dated 12th June, 2002. Perusal of that order shows that allegation against the broker was that they aided the Petitioner in manipulating the market. The Chairman of Securities and Exchange Board of India has also referred to the dues payable by the Petitioner to the Broker. In my opinion, therefore, as the position that the shares were purchased by the Petitioner, was not in dispute, it cannot be said that principle of natural justice has been violated, by denying the opportunity to the Petitioner to cross examine the witness. Same is the case in respect of the application under Section 27 of the Act filed by the Petitioner.
2. The primary contention of the Petitioner before the Arbitral Tribunal as noted by the Tribunal in the Award was that as the broker had short-sold the shares, the transaction would be annulled and therefore, he would not be liable to pay loss. That contention has been rejected by the Arbitral Tribunal.
3. Taking overall view of the matter and after having gone through the record. I find that considering the extremely limited jurisdiction of this Court under Section 34 of Arbitration and Conciliation Act, the Award passed by the Arbitral Tribunal cannot be interfered.â
45. It is necessary to first note that the appellant had challenged the transactions allegedly entered into by the respondent on his behalf at all stages for the relevant period i.e. 12th March onwards. We noted earlier that in paragraph 14 of the application the appellant expressly denied that any contract was issued by the respondent to him either on 12th March 2001 or thereafter. We agree with Ms.Kumbhat that under the terms agreed between the parties, it was respondents' responsibility to take delivery of the contract note and other relevant documents.
The application under section 27 did not require a consideration whether the appellant in fact took delivery of the contract notes or had failed to take delivery of the contract notes or must be deemed to have taken delivery of the contract notes. That is a matter on merits which is for the Arbitrators to decide. What is important is that the respondents' case is based inter-alia on the documents relevant to the transactions. In the application under section 27, the appellant expressly sought inspection of the copies of the documents referred to in Exhibit-4 thereto. The documents were the 1-2-A and 1-2-B, Statement/transaction sheets signifying the client code of the respondent's constituent for each date during the period 7th March 2001 and 20th March 2001 in respect of the scrips specified, including those of ARB Ltd. It is also pertinent to note that the Arbitral Tribunal directed the respondent to file 1-2-A and 1-2-B statements. The respondent filed the same. However, that was without the client codes.
The appellant also sought delivery statement for the said scrips for settlement Nos. 50, 51 and 52, de-mat details of the respondent and his constituent, statement of account etc. It is important to note that the appellant specifically sought inspection of the original contract notes and original bills annexed or referred to by the respondents in its statement of case.
This is not a case where the Arbitrators found that the transactions were established irrespective of whether the respondent had produced the documents or not. There may be cases where a party is unable to produce the document at the trial. The documents or the contents thereof may well be proved in any other manner to the satisfaction of the Arbitral Tribunal. In the present case, however, the application under section 27 was rejected without a satisfactory consideration thereof. The Arbitral Tribunal merely referred to the appellant's contention and observed that they were not inclined to accept the same. The Arbitral tribunal held that the respondent's main contention in the application under section 27 was that the purchase of shares of ARB Ltd. corresponded to certain short selling allegedly in violation of the orders of SEBI and BSE. The Tribunal noted that the applicant could not have been aware of the corresponding short sales in the scrip by another broker and that in any event in the absence of allegations of collusion between the respondent and the so called short selling broker, the Tribunal could not see as to how an application under section 27 was maintainable.
46. Firstly, the entire defence of the appellant was not based only on the aforesaid ground. The appellant also denied the other transactions namely the carry forward transactions and squaring off transactions. To have denied inspection on the basis of the findings on only one ground is not sustainable.
47. Moreover, one of the grounds on which the Tribunal did not accept the appellant's challenge to the validity of the purchase transaction was that SEBI and BSE had examined the transactions and had not found the purchases made through the respondents to be invalid. The Tribunal stated that they found from the copy of the enquiry report of SEBI that the respondents had been censured for not taking initial deposits and adequate margins. The Tribunal observed :- "thus already an independent enquiry has established the veracity of the transactions". This finding is unsustainable and indicates an error apparent on the face of the record. First, the enquiry report itself expressly states that the investigating team had carried out a "preliminary enquiry" and that a detailed investigation would be taken up subsequently.
48. After the enquiry report various steps are to be taken. The Arbitrators ought to have come to independent findings themselves regarding the veracity and validity of the transactions. It is true that the arbitrators have also observed that in their opinion, the contract is valid when both parties to the transactions are ad-idem. On this issue all that is said is that this appears to be the case. There is no reasoning or consideration of the material on record for coming to this finding. It appears clear to us that the primary reason for rejecting the application under section 27 was the enquiry report. In view thereof, we are in agreement with Mr.Dwarkadas that the rejection of the application under section 27 cannot be sustained.
The appellant and the respondent have both been censured. The award could never have been based upon this enquiry report. The enquiry was conducted under section 29 of the SEBI. Moreover, we do not find that the enquiry report in fact establishes the veracity of the transactions. The enquiry report is clearly extraneous material qua the arbitration proceedings. The award could not be made only or even primarily on the basis thereof. Indeed on this ground alone, the award would be liable to be set aside.
49. Even on merits, it is clear that the award is based essentially, if not solely, on the SEBI report and on the finding that the transactions had not been annulled by any authority. The following statement in the award is significant:- "these transactions have not been annulled by any authority as of date and, therefore, a claim based thereon is entitled to succeed".
50. This is not a valid approach. Merely because an authority has not set aside the transactions, it does not follow that the same are binding between the parties. The Arbitrators were bound to consider themselves whether the transactions were binding between the parties. They abdicated their duty to do so. There is no finding whatsoever on merits. The other findings are based essentially on the SEBI Report. Ms.Kumbhat was unable to show any part of the award which deals with the merits of the case.
51. In the result, we find that the rejection of the application under section 27 and the findings on merits are unsustainable in view of the fact that they are based essentially, if not, solely on the enquiry report of the SEBI and on the ground that no authority has set aside the transactions. In this view of the matter it is not necessary to go into the various detailed arguments on merits. The merits are for the Arbitral Tribunal to consider.
52. The learned Judge rejected the petition on a fundamentally different basis. He observed that the only contention raised by the appellant was that he did not agree to the sale of the shares by the broker. This is in contrast to the award which notes that the only worthwhile defence was in respect of purchase transactions. The learned Judge indeed did deal with the appellant's defence regarding short sales by the corresponding broker in respect of the purchase transactions. It is however, of vital importance to note that the learned Judge noted that the Tribunal had relied upon the order made by the Chairman, Securities and Exchange Board of India dated 12th June 2002. That admittedly, is not correct. The arbitrators made an award on the basis of the enquiry report, which is entirely different from the order of the Chairman, SEBI dated 12th June 2002. Further, we are informed that this order of the Chairman, SEBI was produced before the Arbitral Tribunal. Mr.Dwarkadas stated that the order of the Chairman was against the respondent suspending his licence. In those proceedings the appellant was not even a party. Mr.Dwarkadas further stated that thereafter the appellant appeared before the SEBI. An order dated 25th June 2002 was passed which contains certain observations against the appellant. However, the same was set aside by the order of the Securities Appellate Tribunal.
53. We do not intend dealing with all these orders of SEBI for three reasons. Firstly, they were not the basis of the impugned award. Secondly, the orders were not before the tribunal. Lastly, the Tribunal in any event was bound to arrive at its own findings regarding the merits of the disputes between the parties.
54. We, however, are in agreement with the learned Judge that even assuming that the respondent's membership of the BSE was suspended, it would make no difference to the jurisdiction of the arbitral tribunal and the arbitration agreement would remain unaffected.
55. We are however, unable to agree that mere refusal to permit the appellant to cross examine the respondent would not be a ground for setting aside the award. Nor does it establish that there has been a breach of the rules of natural justice. The respondent was not bound to examine himself. The appellant was not entitled as a matter of right to cross examine him. It was always open for the appellant to contend that his evidence, if any, on affidavit ought not to be taken into consideration or that an adverse inference ought to be drawn on account of respondent not having examined himself or made himself available for cross examination.
56. Mr.Dwarkadas on taking instructions from his client stated that the appellant is not only willing to but is desirous of having the disputes resolved by arbitration. The appellant therefore, agrees to have the disputes and differences referred to arbitration upon the respondent deciding to do so by 31.12.2014. It is further agreed that this offer is without prejudice to the respondent's right to challenge this order. The same shall be in respect of the same reference. There is no question, therefore, of the respondent's claim being affected by limitation.
57. In these circumstances, the appeal is allowed. The impugned order and judgment is set aside. The Award is set aside. It is however declared and clarified that the arbitration agreement remains unaffected even assuming that the respondents membership was suspended or cancelled and even if the respondent was expelled by the BSE.
There shall be no order as to costs.