Supreme Court settles arbitration involving stockbroker, husband, and wife, clarifying jurisdiction and liability: AC Chokshi Share Broker vs. Jatin Pratap Desai (2025) INSC 174 (10 February 2025)

Date of the Judgment: 10 February 2025

Citation: 2025 INSC 174

Judges: Pamidighantam Sri Narasimha, J., Sandeep Mehta, J.

When a stockbroker initiates arbitration to recover losses from a client’s account, can the client’s spouse be held jointly liable for the debt? The Supreme Court of India addressed this question in a recent case involving a stockbroker seeking to recover losses from a wife’s account, where the husband was also implicated due to an alleged oral agreement. The court examined the scope of arbitration clauses in stock exchange bye-laws and the extent of judicial review in arbitration matters. The judgment was delivered by a bench comprising Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta.

Case Background:

The case revolves around AC Chokshi Share Broker Private Limited (the appellant), a registered stockbroker, and Jatin Pratap Desai and his wife (the respondents). In 1999, both respondents opened trading accounts with the appellant. According to the appellant, Mr. Desai represented that the accounts would be jointly operated, and both would be jointly and severally liable for any losses.

By January 31, 2001, Mr. Desai had a credit balance of Rs. 7,40,020 in his account. On February 16, 2001, he further paid Rs. 2 lakhs, increasing his credit balance to Rs. 9,40,020. Conversely, Mrs. Desai had a debit balance of Rs. 7,77,058 in her account on January 20, 2001, which increased to Rs. 11,40,413 by February 17, 2001. The appellant claimed that, based on Mr. Desai’s oral instructions, the credit balance of Rs. 9,40,020 from his account was transferred to his wife’s account on March 5, 2001, to offset the losses.

Due to a stock market crash in 2001, Mrs. Desai’s debit balance escalated to Rs. 1,18,48,069 by April 12, 2001, which the appellant sought to recover through arbitration.

Timeline:

Course of Proceedings:

The appellant initiated arbitration under Bye-law 248(a) of the Bombay Stock Exchange (BSE) and included both respondents, seeking Rs. 1,27,36,670 with 18% interest to recover the losses in Mrs. Desai’s account. Mr. Desai claimed the arbitration was not maintainable due to misjoinder of parties and causes of action, alleging the transfer of his credit balance to his wife’s account was without his express authority or written consent, counter-claiming Rs. 10,66,922 with 18% interest. Mrs. Desai alleged unauthorized transactions and denied Mr. Desai’s joint liability.

The arbitral tribunal allowed the appellant’s claim, holding both respondents jointly and severally liable for Rs. 1,18,48,069 with 9% interest from May 1, 2001, until payment, dismissing Mr. Desai’s counter-claim.

Both respondents filed separate applications under Section 34 of the Arbitration and Conciliation Act, 1996, to set aside the arbitral award, which were dismissed by the High Court single judge on August 23, 2005. The court found an implied term in the written contract and an oral agreement that both husband and wife would be jointly and severally liable for the debit balance in the wife’s account.

Mr. Desai’s Section 37 appeal was allowed by the High Court, setting aside the arbitral award only concerning his liability. The High Court reasoned that the arbitral tribunal lacked jurisdiction over Mr. Desai and that the findings of the arbitral tribunal were perverse and patently illegal.

Legal Framework:

The legal framework primarily involves the interpretation and application of Bye-law 248(a) of the Bombay Stock Exchange Bye-laws, 1957, and Sections 34 and 37 of the Arbitration and Conciliation Act, 1996.

Bye-law 248(a) of the BSE Bye-laws, 1957, states:

“All claims (whether admitted or not) difference and disputes between a member and a non-member or non-members… 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… shall be referred to and decided by arbitration…”

Section 34 of the Arbitration and Conciliation Act, 1996, provides the grounds for setting aside an arbitral award, including conflicts with the public policy of India.

Section 37 of the Arbitration and Conciliation Act, 1996, governs appeals against orders setting aside or refusing to set aside arbitral awards under Section 34.

Arguments:

Appellant’s Arguments (AC Chokshi Share Broker):

• ✓ As per Section 7(4)(c) of the Arbitration and Conciliation Act, 1996, an arbitration agreement is deemed to exist if not disputed. Mr. Desai did not dispute the agreement and filed a counter-claim.
• ✓ The respondents constitute a ‘single entity’ for trading purposes. Citing ONGC v. Discovery Enterprise Pvt Ltd [(2022) 8 SCC 42] and P.R. Shah Share & Stock Brokers Pvt Ltd v. B.H.H. Securities Pvt Ltd [(2012) 1 SCC 594], a non-signatory can be impleaded in arbitration if there is a composite transaction.
• ✓ Bye-law 248(a) covers matters incidental to transactions on the stock exchange, including oral guarantees by Mr. Desai to pay Mrs. Desai’s dues.
• ✓ The High Court erred in reappreciating evidence in the Section 37 appeal and the jurisdictional issue should have been raised earlier.

Respondents’ Arguments (Jatin Pratap Desai & Anr.):

• ✓ The jurisdictional issue was validly raised, as Mr. Desai claimed misjoinder of parties in his written statement. The time limit under Section 16(2) does not apply due to the arbitral tribunal lacking inherent jurisdiction, citing Chief General Manager (IPC), M.P. Power Trading Co. Ltd. v. Narmada Equipments (P) Ltd [(2021) 14 SCC 548].
• ✓ Both respondents are separate entities with individual client agreements and codes. Bye-law 247A and SEBI Guidelines prohibit payments from one client’s account to another.
• ✓ The Member-Client Agreement does not provide for an indemnity/guarantee clause, and the arbitral tribunal erred in assuming the respondents to be a single entity.
• ✓ Bye-law 248(a) does not cover the dispute against Mr. Desai, as it pertains to satisfaction of a debt owed by Mrs. Desai, which is a private transaction.

Submissions Table:

Issues Framed by the Supreme Court:

1. Whether arbitration against Mr. Desai is maintainable under Bye-law 248(a) for the debit balance in Mrs. Desai’s account based on his joint and several liability?
2. Whether the High Court correctly exercised jurisdiction under Section 37 in setting aside the arbitral award against Mr. Desai on the grounds of perversity and patent illegality by finding that there is no joint and several liability?

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities:

The court relied on several cases and legal provisions to reach its decision:

• Bombay Stock Exchange v. Jaya I. Shah [(2004) 1 SCC 160]: Bye-law 248(a) is statutory in nature.
• P.R. Shah, Shares and Stock Brokers Private Limited v. B.H.H. Securities Private Limited [(2012) 1 SCC 594]: A non-signatory can be made party to an arbitration if there is a composite transaction.
• ONGC Ltd v. Discovery Enterprises Pvt Ltd [(2022) 8 SCC 42]: Factors to determine when a non-signatory can be made party to an arbitration.
• Cox and Kings v. SAP India Pvt Ltd [(2024) 4 SCC 1]: Affirmed the principles in Discovery Enterprise regarding non-signatories.
• Syntrex Corporation v. Rajkumar Keshardev [2007 SCC OnLine Bom 620]: Disputes in respect of transactions not conducted on the floor of the BSE are not covered by Bye-law 248(a).
• Vidya Drolia v. Durga Trading Corpn. [(2021) 2 SCC 1]: Interpretation of terms like ‘all’, ‘any’, ‘in respect of’, ‘arising out of’ in arbitration clauses.
• Hindustan Zinc Limited v. Ajmer Vidyut Vitran Nigam Limited [(2019) 17 SCC 82]: Plea of inherent lack of jurisdiction can be raised at any stage.
• McDermott International Inc v. Burn Standard Co. Ltd [(2006) 11 SCC 181]: Limited supervisory role of courts in reviewing arbitral awards.
• MMTC Ltd v. Vedanta Ltd [(2019) 4 SCC 163]: Appellate jurisdiction under Section 37 is limited.
• Batliboi Environmental Engineers Ltd v. Hindustan Petroleum Corporation Ltd [(2024) 2 SCC 375]: Consideration of pre-amendment statutory position for Section 34 petitions filed before the 2015 Amendment.
• Renusagar Power Co Ltd v. General Electric Co [1994 Supp (1) SCC 644]: Interpretation of “public policy” in Section 34(2)(b)(ii).
• ONGC v. Saw Pipes Ltd [(2003) 5 SCC 705]: An arbitral award can be set aside as being contrary to public policy if it is patently illegal.
• Associate Builders v. DDA [(2015) 3 SCC 49]: Patent illegality includes contravention with substantive law; an award can be set aside as being opposed to the “fundamental policy of India” if it is perverse.
• ONGC v. Western Geco Internation Ltd [(2014) 9 SCC 263]: An award is perverse if the finding is not based on evidence, or the arbitral tribunal takes something irrelevant into account, or ignores vital evidence.
• Kuldeep Singh v. Commr of Police [(1999) 2 SCC 10]: An award is not perverse if the finding of fact is a possible view that is based on some reliable evidence.
• Dyna Technologies Pvt Ltd v. Crompton Greaves Ltd [(2019) 20 SCC 1]: The High Court, at the stage of the Section 37 appeal, took an alternative view on this finding of fact by reappreciating evidence.
• Anglo American Metallurgical Coal Pty Limited v. MMTC Limited [(2021) 3 SCC 308]: The High Court, at the stage of the Section 37 appeal, took an alternative view on this finding of fact by reappreciating evidence.
• UHL Power Company Ltd. v. State of Himachal Pradesh [(2022) 4 SCC 116]: The High Court, at the stage of the Section 37 appeal, took an alternative view on this finding of fact by reappreciating evidence.

Authority Consideration Table:

Judgment:

The Supreme Court allowed the appeal, setting aside the High Court’s order and upholding the arbitral award in its entirety. The Court held that Mr. Desai is jointly and severally liable, along with Mrs. Desai, to pay the appellant the arbitral sum of Rs. 1,18,48,069 with 9% interest p.a. from May 1, 2001, until the date of repayment.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Bombay Stock Exchange v. Jaya I. Shah [(2004) 1 SCC 160]: The Court cited this case to emphasize that Bye-law 248(a) is statutory in nature, meaning it has the force of law.
• P.R. Shah, Shares and Stock Brokers Private Limited v. B.H.H. Securities Private Limited [(2012) 1 SCC 594]: The Court relied on this case to support the principle that a non-signatory can be made a party to arbitration if there is a composite transaction, indicating a close relationship and mutual intention between the parties.
• ONGC Ltd v. Discovery Enterprises Pvt Ltd [(2022) 8 SCC 42]: The Court used this case to outline the factors for determining when a non-signatory can be made a party to an arbitration, focusing on mutual intention, the relationship between the parties, commonality of subject matter, and the composite nature of the transaction.
• Cox and Kings v. SAP India Pvt Ltd [(2024) 4 SCC 1]: The Court referenced this case to affirm the principles established in Discovery Enterprise regarding the conditions under which non-signatories can be bound by arbitration agreements.
• Syntrex Corporation v. Rajkumar Keshardev [2007 SCC OnLine Bom 620]: The Court distinguished this case, clarifying that transactions not conducted on the floor of the BSE are not covered by Bye-law 248(a), thereby reinforcing that the current case does indeed fall under Bye-law 248(a) as the transactions were conducted on the exchange.
• Vidya Drolia v. Durga Trading Corpn. [(2021) 2 SCC 1]: This case was cited to support a broad interpretation of arbitration clauses, emphasizing that terms like ‘all’, ‘any’, and ‘arising out of’ can expand the scope of such clauses to include connected and incidental matters.
• Hindustan Zinc Limited v. Ajmer Vidyut Vitran Nigam Limited [(2019) 17 SCC 82]: The Court cited this case to reinforce the principle that a plea of inherent lack of jurisdiction can be raised at any stage, but clarified that this principle does not apply here because there was no inherent lack of jurisdiction.
• McDermott International Inc v. Burn Standard Co. Ltd [(2006) 11 SCC 181]: This case was referenced to highlight the limited supervisory role of courts when reviewing arbitral awards, emphasizing that courts should not reassess the merits of the case.
• MMTC Ltd v. Vedanta Ltd [(2019) 4 SCC 163]: The Court cited this case to underscore that appellate jurisdiction under Section 37 is limited and should not involve an independent assessment of the merits of the award.
• Batliboi Environmental Engineers Ltd v. Hindustan Petroleum Corporation Ltd [(2024) 2 SCC 375]: This case was mentioned to justify the consideration of the pre-amendment statutory position for Section 34 petitions filed before the 2015 Amendment to the Arbitration Act.
• Renusagar Power Co Ltd v. General Electric Co [1994 Supp (1) SCC 644]: The Court cited this case for the interpretation of “public policy” in Section 34(2)(b)(ii), clarifying that an award could be set aside if it conflicts with the fundamental policy of Indian law, the interests of India, or justice and morality.
• ONGC v. Saw Pipes Ltd [(2003) 5 SCC 705]: This case was referenced to support the principle that an arbitral award can be set aside if it is patently illegal, meaning the illegality goes to the root of the matter and shocks the conscience of the court.
• Associate Builders v. DDA [(2015) 3 SCC 49]: The Court cited this case for defining patent illegality and perversity in arbitral awards, noting that an award could be set aside if it is based on no evidence or ignores vital evidence.
• ONGC v. Western Geco Internation Ltd [(2014) 9 SCC 263]: This case was used to further define perversity in arbitral awards, stating that an award is perverse if it is not based on evidence or if the tribunal takes irrelevant factors into account.
• Kuldeep Singh v. Commr of Police [(1999) 2 SCC 10]: The Court cited this case to clarify that an award is not perverse if the finding of fact is a possible view based on some reliable evidence, indicating a reasonable basis for the tribunal’s decision.
• Dyna Technologies Pvt Ltd v. Crompton Greaves Ltd [(2019) 20 SCC 1]: The Court referred to this case to highlight that the High Court, at the stage of the Section 37 appeal, improperly took an alternative view on a finding of fact by reappreciating evidence.
• Anglo American Metallurgical Coal PtyLtd v. MMTC Limited [(2021) 3 SCC 308]: The Court cited this case to reinforce that the High Court should not reassess the evidence and substitute its own findings for those of the arbitral tribunal.
• UHL Power Company Ltd. v. State of Himachal Pradesh [(2022) 4 SCC 116]: This case was used to reiterate that the High Court’s role in a Section 37 appeal is limited and does not extend to a full-blown re-evaluation of the evidence.

Ratio Decidendi:

The ratio decidendi of the case is that an oral agreement for joint and several liability between a husband and wife for trading accounts maintained with a stockbroker falls within the scope of Bye-law 248(a) of the Bombay Stock Exchange Bye-laws, 1957, and is arbitrable. Furthermore, the High Court, in exercising its jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996, should not re-appreciate evidence or examine the merits of the arbitral award, as its supervisory role is limited.

Concluding Remarks:

The Supreme Court’s judgment in AC Chokshi Share Broker vs. Jatin Pratap Desai clarifies the scope and applicability of arbitration clauses in stock exchange bye-laws and reinforces the limited scope of judicial review in arbitration matters. The decision underscores that oral agreements related to transactions on the stock exchange can be subject to arbitration, and non-signatories can be bound by arbitration agreements if there is a clear intention and composite transaction. The judgment also serves as a reminder to appellate courts to refrain from re-evaluating evidence and substituting their own findings for those of the arbitral tribunal, thereby upholding the autonomy and finality of arbitral awards.

Flowchart of the Case: