2025 INSC 174 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. OF 2025

ARISING OUT OF SLP (C) No. 18393 OF 2021

AC CHOKSHI SHARE BROKER

PRIVATE LIMITED ...APPELLANT(S)

VERSUS

JATIN PRATAP DESAI & ANR. …RESPONDENT(S)

J U D G M E N T

PAMIDIGHANTAM SRI NARASIMHA, J.

1. Leave granted.

2. The issue arising in the present appeal is whether respondent

no. 1, who is the husband of respondent no. 2, could have been

made a party to the arbitration that was invoked by the appellant,

who is a registered stock broker, and held to be jointly and

severally liable for the debit balance that had accrued in the wife’s

(respondent no. 2’s) account with the appellant. The arbitral

tribunal found that both respondents were jointly and severally

2

liable for repaying the debit balance in respondent no. 2’s account,

and the respondents’ applications under Section 34 of the

Arbitration and Conciliation Act, 1996

1

to set aside the arbitral

award were dismissed by the learned single judge of the High

Court. However, the division bench of the High Court allowed the

Section 37 appeal preferred by respondent no. 1 by order dated

29.04.2021 and set aside the arbitral award only against him,

which is impugned before us in the present appeal. For the reasons

detailed below, we have allowed the appeal and set aside the

impugned order based on the following conclusions: First, by

interpreting Bye-law 248(a) of the Bombay Stock Exchange

2

Bye-

laws, 1957 that provides for arbitration between members and

non-members of the BSE, and considering the nature of

respondent no. 1’s involvement qua transactions conducted in

respondent no. 2’s account, we have held that an oral contract

undertaking joint and several liability falls within the scope of the

arbitration clause and the arbitral tribunal could exercise

jurisdiction over respondent no. 1. Second, considering the settled

jurisprudence on the scope of judicial intervention under Section

1

Hereinafter “the Act”.

2

Hereinafter “BSE”.

3

34 and Section 37 of the Act, we have held that the arbitral

tribunal arrived at a reasonable conclusion, based on evidence, as

to the joint and several nature of the respondents’ liability. The

arbitral award does not suffer from perversity and patent illegality

as has been held by the High Court in the Section 37 appeal, and

therefore, we have upheld the arbitral award in its entirety.

3. Facts: The relevant facts are as follows. The appellant is a

stock broker and a registered member of the BSE. In 1999, the

respondent nos. 1 and 2, who are husband and wife respectively,

approached the appellant for opening trading accounts and to this

end, they executed individual Client Registration Applications on

01.08.1999. As per the appellant, respondent no. 1 represented

that the accounts would be jointly operated by both of them and

they would be jointly and severally liable for any losses.

3.1 At the end of the settlement period on 31.01.2001, there was

an undisputed credit balance of Rs. 7,40,020/- in the account of

respondent no. 1, that was payable by the appellant. On

16.02.2001, respondent no. 1 further paid a sum of Rs. 2 lakhs to

the appellant, that increased his credit balance to Rs. 9,40,020/-.

On the other hand, there was a debit balance of Rs. 7,77,058/- in

4

respondent no. 2’s account on 20.01.2001, which further

increased to Rs. 11,40,413/- by 17.02.2001. The appellant’s case

is that on oral instruction of respondent no. 1, it transferred the

credit balance of Rs. 9,40,020/- from the husband’s account to the

wife’s account on 05.03.2001 to offset the losses.

3.2 However, due to a stock market crash in 2001, the debit

balance in respondent no. 2’s account bludgeoned to Rs.

1,18,48,069/- as on 12.04.2001, which is the recoverable amount

in arbitration.

3.3 The appellant initiated arbitration under BSE Bye-law 248(a)

and impleaded both the respondents, seeking an amount of Rs.

1,27,36,670/- with 18% interest from both of them to recover the

losses in respondent no. 2’s account. The respondents filed

separate written statements. In respondent no. 1’s written

statement-cum-counter-claim, he alleged that the appellant’s

arbitration claim is not maintainable for misjoinder of parties and

causes of action as each client is a separate legal entity. Further

alleging that the appellant transferred the credit balance from his

account to his wife’s account without express authority or written

consent as is required by SEBI guidelines, he claimed

5

Rs. 10,66,922/- with 18% interest from the appellant to recover

the amount so adjusted. Respondent no. 2, in her separate written

statement alleged that the appellant undertook unauthorised

transactions from her account and also took the position that

respondent no. 1 is not jointly and severally liable.

4. Findings of the arbitral tribunal: The arbitral tribunal allowed

the appellant’s claim and held both respondents to be jointly and

severally liable to pay Rs. 1,18,48,069/- along with interest @ 9%

p.a. from 01.05.2001 till the date of payment. It also dismissed the

counter-claim preferred by respondent no. 1. The reasons by the

arbitral tribunal, briefly stated, are:

4.1 The transactions undertaken by the appellant on behalf of

respondent no. 2 in her account were authorised and were as per

her instructions. This finding has not been contested before us.

4.2 Respondent no. 1 is jointly and severally liable for the debit

balance in respondent no. 2’s account. For this, the arbitral

tribunal held that share transactions in a family are “normally and

historically” undertaken by one person, albeit each individual has

a separate client code, contract notes, and bank accounts as these

are necessary documentation under tax laws.

6

4.3 Further, there was an oral agreement between respondent

no. 1 and the appellant. It held that respondent no. 1 was mostly

visiting the appellant’s office, and respondent no. 2 had given

instructions sometimes when respondent no. 1 was out of town or

under his instructions. The arbitral tribunal further relied on the

affidavit of Ms. Deepika Chokshi, who is a director of the appellant

company, and the affidavit of Mr. Parag Jhaveri, who is a close

associate of respondent no. 1 and whose father introduced the

respondents to the appellant.

4.4 The arbitral tribunal also reasoned that despite having a

credit balance of Rs. 7 lakhs in his account, respondent no. 1 paid

the appellant a further sum of Rs. 2 lakhs but never demanded the

same except at the time of filing the counter-claim.

4.5 Looking to the financial dealings of the respondents with the

appellant, it held that both respondents have accounts in all the

banks from which cheques were issued, although each of them

may have a separate account. On 15.09.1999, respondent no. 1

issued a cheque of Rs. 1,20,000/- from Syndicate Bank towards

the debit balance in his account. On 06.10.1999, a cheque of the

next serial number was issued from the same bank account

7

number to be paid into the account of respondent no. 2. Similarly,

on 28.09.1999, a single cheque of Rs. 10,86,188/- was issued from

Syndicate Bank with an instruction to the appellant to credit Rs.

2,21,440/- to respondent no. 2’s account and the balance to

respondent no. 1’s account.

4.6 Relying on the above material, the arbitral tribunal held the

respondents to be jointly and severally liable and dismissed

respondent no. 1’s counter-claim as being a counter-blast and

being unsustainable as his credit balance was rightly adjusted to

the account of respondent no. 2. It also noted that while SEBI

Guidelines require written instructions to transfer money from one

constituent’s account to another’s, taking a practical view and

considering past experience and joint and several liability, as well

as the marital relationship of the respondents, it held that the

adjustment of balances between the accounts was in order.

5. Section 34 petition: Both respondent nos. 1 and 2 filed

separate applications under Section 34 to set aside the arbitral

award, which were dismissed by the High Court single judge’s

order dated 23.08.2005. The Court held that there is an implied

term in the written contract and an oral agreement to the effect

8

that both husband and wife will be jointly and severally liable for

the debit balance in the wife’s account. Although the arbitration

clause in the agreement between the appellant and respondent no.

2 was invoked, since such an arbitration clause also exists with

respondent no. 1, the Court held that there is no jurisdictional

error in the award. Further, that the finding of an oral

understanding among the parties was based on appreciation of the

evidence on record by the arbitral tribunal whose members are

appointed by a trade body. Hence, the learned single judge of the

High Court did not interfere with the award.

6. Impugned order allowing the Section 37 appeal: Respondent

no. 1 moved a Section 37 appeal against the single judge’s order,

which was allowed by the impugned order that set aside the

arbitral award only qua respondent no. 1’s liability. It is necessary

to appreciate the reasoning of the High Court exercising appellate

jurisdiction under Section 37 in setting aside the arbitral award

and reversing the findings of the single judge. After formulating

several issues, the High Court proceeded on two broad reasons:

6.1 First, that the arbitral tribunal lacked jurisdiction against

respondent no. 1 and he could not have been made a party to the

9

arbitration. The High Court held that there are separate causes of

action against husband and wife – the cause of action against

respondent no. 2 (wife) was regarding the debit balance in her

account in respect of transactions on the floor of the BSE.

However, the cause of action against respondent no. 1 (husband)

was based on the alleged oral understanding with the appellant

regarding his liability to pay the dues in case of default by

respondent no. 2, which the High Court held is a private and

separate transaction that is not subject to Bye-law 248(a) as it is

not conducted on the floor of the stock exchange. Further, since

there is no tripartite agreement between all three parties, nor did

the appellant invoke the arbitration agreement with respondent

no. 1, it could not have clubbed separate causes of action in a

common arbitration. Since respondent no. 1 does not fall under

Bye-law 248(a) in his capacity as a guarantor or third party, the

entire arbitration against him is without jurisdiction. Even if this

jurisdictional objection had not been raised before the arbitral

tribunal in accordance with Section 16 of the Act, the Court held

that the arbitral tribunal inherently lacked jurisdiction to

adjudicate on a private transaction between the appellant and

10

respondent no. 1. Further, since the arbitration clause is statutory

in nature, such jurisdiction cannot be conferred by consent of the

parties, and hence, not raising the objection under Section 16 does

not amount to a waiver under Section 4 of the Act.

6.2 Second, the findings of the arbitral tribunal are perverse and

patently illegal. With regard to joint and several liability of the

respondents, it held that the findings of the arbitral tribunal are

perverse as the respondents are two separate legal entities, having

separate and distinct accounts, separate client codes, separate

contracts notes and bills, and separate bank accounts. The

appellant only led oral evidence to prove joint and several liability,

however such oral evidence cannot be contrary to the documents

between the parties. The arbitral tribunal ignored BSE Bye-laws,

Rules and Regulations and SEBI guidelines by relying on past

experience and the respondents’ marital relationship to hold them

jointly and severally liable. Further, with regard to the transfer of

the credit balance from respondent no. 1’s account to offset the

debit balance in respondent no. 2’s account, it held that there was

no express or oral understanding that permitted the same. Despite

noting the need for express authorisation of the client for such

11

adjustment, the arbitral tribunal held it to be valid. This is in

violation of Bye-law 247A and the SEBI guidelines, making such

finding patently illegal and perverse.

6.3 While setting aside respondent no. 1’s liability under the

arbitral award, the High Court however held that his counterclaim

before the same arbitral tribunal was without jurisdiction as he

was not correctly impleaded. Rather, respondent no. 1 should have

invoked the arbitration clause against the appellant in a separate

proceeding to recover the amount.

7. Submissions: We have heard Mr. Dhruv Mehta, learned

senior counsel for the appellant, and Mr. Mayilsamy K, learned

counsel for the respondents. The submissions made by Mr. Mehta

are to the effect that:

7.1 As per Section 7(4)(c) of the Act, an arbitration agreement is

deemed to exist when an averment raised to this effect is not

disputed or denied. Here, respondent no. 1 did not dispute the

existence of an arbitration agreement in his written statement, and

even filed a counter-claim and participated in the arbitral

proceedings. Further, a plea of lack of jurisdiction was neither

raised before the arbitral tribunal nor in the Section 34 petition; it

12

was only raised at the stage of the Section 37 appeal. He submitted

that the same is impermissible and relied on several judgments of

this Court.

3

Such a jurisdictional plea is governed by Section 16(2)

of the Act and must be raised at the time of submission of

statement of defence.

4

7.2 Further, the respondents constitute a ‘single entity’ for the

purpose of trading, which is demonstrated from the transactions

executed by them. In any event, relying on ONGC v. Discovery

Enterprise Pvt Ltd

5

and P.R. Shah Share & Stock Brokers Pvt Ltd v.

B.H.H. Securities Pvt Ltd

6

, he submitted that a non-signatory can

be impleaded as party to the arbitration if there is a composite

transaction. The liability to clear the debit balance in respondent

no. 2’s account, being joint and several, would enable the appellant

to invoke a common arbitration against both spouses as this is a

composite transaction.

7.3 Bye-law 248(a) is widely worded and covers matters that are

incidental to transactions conducted on the floor of the stock

exchange, including any oral guarantee by respondent no. 1 to pay

3

State of West Bengal v. Sarkar and Sarkar, (2018) 12 SCC 736; MTNL v. Canara Bank, (2020) 12 SCC 767;

Union of India v. Pam Development (P) Ltd, (2014) 11 SCC 366.

4

Relied on GAIL v. Keti Construction Ltd, (2007) 5 SCC 38.

5

(2022) 8 SCC 42.

6

(2012) 1 SCC 594.

13

the dues owed by respondent no. 2 to the appellant. This oral

guarantee is incidental to the transactions executed on the floor of

the stock exchange on behalf of respondent no. 2, and gives rise to

a single cause of action against both respondents that is covered

by the arbitration clause.

7.4 The High Court erred in reappreciating evidence in the

Section 37 appeal to hold that there is no joint and several liability.

Further, it failed to appreciate that the scope in the Section 37

appeal is narrower than under Section 34, and the pleas taken at

the appellate stage cannot exceed the grounds in the Section 34

petition. Hence, the jurisdictional issue could not have been

agitated for the first time in the Section 37 appeal.

8. Mr. Mayilsamy K, learned counsel for the respondents, has

submitted that:

8.1 The jurisdictional issue was validly raised before the High

Court. In fact, such plea was also raised in the written statement

before the arbitral tribunal where respondent no. 1 claimed that

there was misjoinder of parties and that both respondents are

separate legal entities. In any case, since the arbitral tribunal

14

lacked ‘inherent jurisdiction’, the same can be raised at any stage

and the time-limit under Section 16(2) does not apply.

7

8.2 That both respondents are separate and individual entities,

as evidenced by their separate client agreements and independent

client codes. Further, Bye-law 247A of the BSE Bye-laws read with

SEBI Guidelines dated 18.11.1993 prohibits a stock broker from

making payments from one client’s account to the other. In this

light, a common arbitration could not have been invoked against

both respondents. In fact, the appellant only invoked and filed a

reference against respondent no. 2.

8.3 The Member-Client Agreement, as approved by SEBI, does

not provide for an indemnity/guarantee clause, and each client is

solely liable to the stock broker for their dues. Hence, the arbitral

tribunal could not have assumed the respondents to be a single

entity and could not have held them to be jointly and severally

liable based on their marital status.

8.4 Bye-law 248(a), that provides for arbitration, does not cover

the dispute against respondent no. 1 as it only covers matters

incidental to transactions conducted on the floor of the exchange.

7

Relied on Chief General Manager (IPC), M.P. Power Trading Co. Ltd. v. Narmada Equipments (P) Ltd, (2021)

14 SCC 548.

15

However, the cause of action against respondent no. 1 pertains to

satisfaction of a debt owed by respondent no. 2, which is a private

transaction that was not entered into on the floor of the exchange,

and hence stands excluded from the arbitration clause.

9. Issues: From the reasoning and findings of the arbitral

tribunal, as well as the manner in which the impugned order has

proceeded to set aside the arbitral award against respondent

no. 1, we find that there are two issues for us to consider in the

present appeal:

(i) 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?

(ii) The second issue pertains to 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?

16

10. Jurisdiction of the arbitral tribunal: The arbitration reference

by the appellant has been made under Bye-law 248(a) of the BSE

Bye-laws, 1957, which has been reproduced for ready reference:

“Arbitration other than between members

Reference to Arbitration

248. (a) All claims (whether admitted or not) difference and disputes

between a member and a non -member or non-members (the terms

‘non-member’ and ‘nonmembers’ shall include a remisier, authorised

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, authorised clerks, sub-brokers, constituents,

employees or any other persons 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.”

(emphasis supplied)

11. Based on the decisions of this Court in Bombay Stock

Exchange v. Jaya I. Shah

8

and P.R. Shah, Shares and Stock Brokers

(supra)

9

, an arbitration reference under Bye-law 248(a) is statutory

in nature, as opposed to being based on an arbitration agreement

between the parties in terms of Section 7 of the Act. The scope and

interpretation of Bye-law 248(a) falls for our consideration to

determine the first issue.

8

(2004) 1 SCC 160, para 36.

9

P.R. Shah, Shares and Stock Brokers Private Limited v. B.H.H. Securities Private Limited (supra), para 13.

17

12. Bye-law 248(a) specifically deals with disputes, claims, and

differences between “members”, i.e. stock brokers and “non -

member(s)”, i.e. client(s). It is undisputed that both respondents

are non-members or clients, but they entered into individual and

separate client registration agreements, leading to separate client

codes and accounts in each of their names. However, the appellant

has invoked arbitration against both of them for the debit balance

in respondent no. 2’s account based on an oral contract among the

parties that both husband and wife will be jointly and severally

liable for the transactions in each of their accounts.

13. While the existence of such an oral contract is a finding of

fact that must be based on evidence, at this stage, the simple

question is, presuming such an oral contract exists, whether the

arbitral tribunal can exercise jurisdiction over respondent no. 1 on

its basis. Through such an oral understanding, the respondents

consented to treat their independent client agreements with the

appellant as joint and composite. They have effectively entered into

the transactions undertaken in each of their trading accounts

together, i.e., the performance of the transactions in respondent

no. 2’s trading account is not only on her behalf but also on behalf

18

of respondent no. 1. Therefore, respondent no. 1 is effectively a

party to the client agreement between the appellant and

respondent no. 2.

14. In this light, the High Court’s reasoning in the impugned

order that arbitration was only invoked against respondent no. 2

as only her client code and client agreement were referenced by the

appellant is a hyper-technical approach as the claim had been filed

against both respondents. While interpreting contracts, courts

must acknowledge the practicalities of how parties execute and

participate in transactions and how they understand and perform

mutual obligations under the contract.

10

To facilitate ease of

contract and to prevent respondent no. 1 from mischievously

wriggling out of his liability for the transactions, it is necessary to

take into account the reality of the situation. The appellant

conducted the transactions in each their accounts based on an

oral agreement among all the parties that the respondents will

jointly operate and manage both accounts and undertake liability

for the same. Therefore, in these facts, even respondent no. 1 is a

10

See Cox and Kings v. SAP India Pvt Ltd, (2024) 4 SCC 1, paras 97, 132, 133 (Chandrachud, J).

19

“non-member” or client under Bye-law 248(a) with respect to the

account in respondent no. 2’s name.

15. In ONGC v. Discovery Enterprise, this Court comprehensively

laid down the factors to determine when a non-signatory can be

made party to an arbitration,

11

which has been subsequently

affirmed by a Constitution Bench in Cox and Kings (supra)

12

. They

are: (a) the mutual intention of the parties, as is evidenced by their

conduct and participation in the formation and performance of the

underlying contract; (b) the relationship between the signatory and

non-signatory; (c) commonality of subject -matter; and (d)

composite nature of transaction.

13

This test has been evolved in

the context of determining when a non-signatory can be made

party to an arbitration agreement. In the present matter, although

arbitration is not based on consent of the parties but is under the

statutory Bye-laws of BSE, application of this test only strengthens

our conclusion. The oral contract of joint and several liability

reflects the mutual intention of the parties that the respondents

will enter into and perform trading transactions together, even if

11

ONGC Ltd v. Discovery Enterprises Pvt Ltd (supra), para 40.

12

Cox and Kings v. SAP India Pvt Ltd (supra), paras 132-133, 170.8 (Chandrachud, J) and para 223.5, 229

(Narasimha, J).

13

ibid, paras 132, 229.

20

they are conducted only from one of their accounts, leading to a

composite transaction. The marital relationship of the respondents

and them approaching the appellant together as well as opening

accounts at the same time, through the same referee as is seen

from their client registration forms, further strengthens this

conclusion.

16. At this juncture, it would also be relevant to note this Court’s

decision in P.R. Shah v. B.H.H. Securities (supra), that arose in

somewhat similar facts. There, the first respondent referred a

dispute against the appellant and the second respondent for

arbitration under the BSE Bye-laws. The appellant, which was also

a stock broker, was a sister company of the second respondent.

The first respondent executed certain trades in the account of the

second respondent, but claimed that even the appellant was jointly

and severally liable to pay the amounts due. It invoked arbitration

against both of them and the arbitral tribunal therein held both of

them to be liable. This Court held that while arbitration between a

broker and client is under Bye-law 248(a) and arbitration between

two brokers is governed by Bye-law 282 of the BSE

14

, a common

14

Bye-law 282 of the BSE Bye-laws, 1957 reads:

21

reference to arbitration is maintainable as it is in regard to the

same claim and there is an arbitration agreement between the first

respondent and the second respondent, as well as between the first

respondent and the appellant.

15

Here as well, the broker who was

the first respondent entered into transactions with the second

respondent on an understanding that the appellant will also be

liable.

16

17. While the primary issue in P.R. Shah (supra) was a composite

reference to arbitration despite the existence of different

arbitration mechanisms under Bye-laws 248(a) and 282, it is clear

that this Court also upheld the invocation of arbitration under BSE

Bye-laws against a person other than the client from whose

account the transactions were undertaken by relying on an

understanding of joint and several liability.

“282. All claims, complaints, differences and disputes between members arising out of or in relation

to any bargains, dealings, transactions or contracts made subject to the Rules, Bye-laws and

Regulations of the Exchange or with reference to anything incidental thereto (including claims,

complaints, differences and disputes relating to errors or alleged errors in inputting any data or

command in the Exchange's computerised trading system or in execution of any trades on or by

such trading system) or anything to be done in pursuance thereof and any question or dispute

whether such bargains, dealings, transactions or contracts have been entered into or not shall be

subject to arbitration and referred to the Arbitration Committee as provided in these Bye-laws and

Regulations.”

15

P.R. Shah, Shares and Stock Brokers (supra), para 19.

16

ibid, para 18.

22

18. The High Court in the impugned order differentiated the

decision in P.R. Shah (supra) on the ground that the first

respondent therein invoked arbitration against both parties, but

this was not the case here. However, as held hereinabove, this

conclusion is incorrect and the appellant in this case did in fact

invoke arbitration against both respondents.

19. The other reason offered by the High Court to differentiate

P.R. Shah (supra) and to also hold that the cause of action against

respondent no. 1 does not fall within the scope of Bye-law 248(a)

is that his oral contract with the appellant is a separate and

“private” transaction that was not conducted on the floor of the

stock exchange. We are of the opinion that this conclusion is

incorrect. In another decision of the Bombay High Court in Syntrex

Corporation v. Rajkumar Keshardev

17

, it was held that disputes in

respect of transactions that were not conducted on the floor of the

BSE, using its trading system, would not be covered by Bye-law

248(a). However, there is no contention by the respondents that

the transactions in respondent no. 2’s account were not conducted

on the floor of the stock exchange. In this light, and considering

17

2007 SCC OnLine Bom 620, paras 2 and 5.

23

the broad wording of the Bye-law 248(a) to refer disputes arising

out of, in relation to, incidental to or in pursuance of transactions,

contracts, and dealings to arbitration,

18

the oral contract between

the appellant and respondents cannot be termed as a “private”

transaction. The liability to pay the appellant directly arises out of

transactions conducted on the floor of the exchange and the oral

contract is squarely on who bears this liability. Therefore, it falls

within the ambit of Bye-law 248(a).

20. The High Court in the impugned order relied on this rationale

of a “private” transaction to hold that the arbitral tribunal lacked

inherent jurisdiction to decide the claim against respondent no. 1,

and such a jurisdictional plea could be raised at any stage even if

it was not raised before the arbitral tribunal. From the above

reasons, it is clear that there is no inherent lack of jurisdiction.

19

Consequently, any issue regarding the scope of Bye-law 248(a)

ought to have been raised in accordance with Section 16 of the

18

See Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, wherein para 151 held “…The third approach is to

avoid either broad or restrictive interpretation and instead the intention of the parties as to scope of the clause is

understood by considering the strict language and circumstance of the case in hand. Terms like ‘all’, ‘any’, ‘in

respect of’, ‘arising out of’ etc. can expand the scope and ambit of the arbitration clause. Connected and

incidental matters, unless the arbitration clause suggests to the contrary, would normally be covered.”

19

See Hindustan Zinc Limited v. Ajmer Vidyut Vitran Nigam Limited, (2019) 17 SCC 82, paras 17-19; M.P. Power

Trading Co. Ltd. v. Narmada Equipments Pvt. Ltd. (supra), para 14. In these decisions, this Court has held that a

plea of inherent lack of jurisdiction, i.e., when there is a lack of subject-matter jurisdiction, renders a decree nullity

and cannot be cured by the consent of the parties. Therefore, this plea can be raised at any stage even if it was not

raised before the arbitral tribunal.

24

Act

20

, i.e. during the arbitration, not later than the submission of

statement of defence.

21

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 as they are not jointly and

severally liable. A clear jurisdictional issue was only raised at the

Section 37 appeal stage, as has also been noted by the High Court

in the impugned order.

21. This Court has held, in several judgments, that when the

jurisdictional issue has not been raised in accordance with Section

16, it is deemed that the objecting party has waived his right, in

20

Section 16 of the Act reads:

“16. Competence of arbitral tribunal to rule on its jurisdiction.—(1) The arbitral tribunal may

rule on its own jurisdiction, including ruling on any objections with respect to the existence or

validity of the arbitration agreement, and for that purpose,—

(a) an arbitration clause which forms part of a contract shall be treated as an agreement

independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the

invalidity of the arbitration clause.

(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the

submission of the statement of defence; however, a party shall not be precluded from raising such

a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon

as the matter alleged to be beyond the scope of its authority is raised during the arbitral

proceedings.

(4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3),

admit a later plea if it considers the delay justified.

(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and,

where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral

proceedings and make an arbitral award.

(6) A party aggrieved by such an arbitral award may make an application for setting aside such an

arbitral award in accordance with section 34.”

21

McDermott International Inc v. Burn Standard Co. Ltd, (2006) 11 SCC 181, para 51; Gas Authority of India Ltd

v. Keti Construction (I) Ltd (supra), paras 24 and 25; M/s Vidyawati Construction Company v. Union of India,

2025 INSC 101, paras 13-15.

25

terms of Section 4 of the Act

22

to raise the same at a later stage.

23

Such objection cannot be raised for the first time when the party

is challenging the award under Section 34.

24

Here, respondent

no. 1 not only filed his statement of defence and participated in the

arbitral proceedings but also filed a counter -claim, thereby

submitting to the arbitral tribunal’s jurisdiction.

25

Hence, any

jurisdictional objection must be rejected on this ground as well.

22. Whether the arbitral award ought to have been set aside: 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.

26

The appellate jurisdiction under Section 37 is also limited, as it is

constrained by the grounds specified in Section 34 and the court

cannot undertake an independent assessment of the merits of the

22

Section 4 of the Act reads:

“4. Waiver of right to object.—A party who knows that—

(a) any provision of this Part from which the parties may derogate, or

(b) any requirement under the arbitration agreement, has not been complied with and yet proceeds

with the arbitration without stating his objection to such non-compliance without undue delay or, if

a time limit is provided for stating that objection, within that period of time, shall be deemed to have

waived his right to so object.”

23

Union of India v. Pam Development (P) Ltd (supra), para 17.

24

ibid, para 18; Gas Authority of India Ltd (supra), para 25; MSP Infrastructure Limited v. Madhya Pradesh Road

Development Corporation Limited, (2015) 13 SCC 713, paras 13-16; MP Rural Road Development Authority v.

L.G. Chaudhary Engineers and Contractors, (2018) 10 SCC 826, para 19, as clarified in Sweta Construction v.

Chhattisgarh State Power Generation Company Ltd., (2024) 4 SCC 722, paras 13-17.

25

See Govind Rubber Ltd v. Louis Dreyfus Commodities Asia Pvt Ltd, (2015) 13 SCC 477, para 21; State of West

Bengal v. Sarkar and Sarkar (supra), para 11.

26

McDermott International Inc (supra), para 52.

26

award by reappreciating evidence or interfering with a reasonable

interpretation of contractual terms by the arbitral tribunal.

27

The

court under Section 37 must only determine whether the Section

34 court has exercised its jurisdiction properly and rightly, without

exceeding its scope.

28

23. Since the Section 34 petition in this case was filed prior to

the 2015 Amendment to the Act, the pre -amendment statutory

position must be considered,

29

the relevant portion of which reads

as follows:

“34. Application for setting aside arbitral award.—(1) Recourse

to a court against an arbitral award may be made only by an

application for setting aside such award in accordance with sub-

section (2) and sub-section (3).

(2) An arbitral award may be set aside by the court only if—

***

(b) the court finds that—

(i) the subject-matter of the dispute is not capable of settlement by

arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

27

MMTC Ltd v. Vedanta Ltd, (2019) 4 SCC 163, para 14; Konkan Railway Corporation Ltd v. Chenab Bridge

Project Undertaking, (2023) 9 SCC 85, para 25.

28

MMTC Ltd (supra), 14; Bombay Slum Redevelopment Corporation Pvt Ltd v. Samir Narain Bhojwani, (2024) 7

SCC 218, para 26.

29

Batliboi Environmental Engineers Ltd v. Hindustan Petroleum Corporation Ltd, (2024) 2 SCC 375, para 31.

27

Explanation.—Without prejudice to the generality of sub-clause (ii), it

is hereby declared, for the avoidance of any doubt, that an award is

in conflict with the public policy of India if the making of the award

was induced or affected by fraud or corruption or was in violation of

Section 75 or Section 81.”

(emphasis supplied)

24. The term “public policy” in Section 34(2)(b)(ii) has been

interpreted by this Court as meaning (a) the fundamental policy of

Indian law, or (b) the interest of India, or (c) justice or morality.

30

In ONGC v. Saw Pipes,

31

this Court further held that an arbitral

award can be set aside as being contrary to public policy if it is

patently illegal. The illegality must go to the root of the matter and

must be so unfair and unreasonable that it shocks the court’s

conscience; it cannot be of a trivial nature.

32

Such patent illegality

includes a situation where the award is in contravention with

substantive law.

33

24.1 Further, an award can be set aside as being opposed to the

“fundamental policy of India” if it is perverse,

34

i.e., the finding is

not based on evidence, or the arbitral tribunal takes something

30

Renusagar Power Co Ltd v. General Electric Co, 1994 Supp (1) SCC 644, para 66.

31

ONGC v. Saw Pipes Ltd, (2003) 5 SCC 705.

32

ibid, para 31; McDermott International Inc (supra), para 59.

33

ONGC v. Saw Pipes (supra), para 54; Associate Builders v. DDA, (2015) 3 SCC 49, para 42.1.

34

ONGC v. Western Geco Internation Ltd, (2014) 9 SCC 263, para 39.

28

irrelevant into account, or ignores vital evidence.

35

However, an

award is not perverse if the finding of fact is a possible view that is

based on some reliable evidence.

36

25. The High Court, while exercising jurisdiction under Section

37, has set aside the arbitral award against respondent no. 1 on

the grounds of patent illegality and perversity in the following

manner: first, that the arbitral award is contrary to Bye-law 247A

of the BSE Bye-laws, 1957 and the SEBI Guidelines that mandate

express authorisation of the client for adjustment of accounts, and

second, that the finding of joint and several liability is based on the

respondents’ marital relationship and past experience, contrary to

their distinct legal entities and separate accounts, thereby making

it perverse.

26. We will first deal with the issue of perversity of the finding of

joint and several liability. We have already stated the material

relied on by the arbitral tribunal and its reasons to arrive at such

finding. Broadly, the arbitral tribunal considered the oral evidence

of Ms. Deepika Chokshi and Mr. Parag Vinod Jhaveri, both of

35

Associate Builders (supra), para 31.

36

Kuldeep Singh v. Commr of Police, (1999) 2 SCC 10, para 10, as cited in Associate Builders (supra), paras 32,

33.

29

whom have stated in their affidavits that the respondents agreed

to be jointly and severally liable and that their account balances

would be netted off. These witnesses were also cross-examined but

the respondents could not bring out anything to the contrary. The

arbitral tribunal also considered the fact that respondent no. 1

would visit the appellant’s office and manage both accounts, as

well as the manner of financial dealings vis-à-vis both accounts.

Based on this material on the conduct of the parties as well as the

oral representations made by the respondents to the appellant, the

arbitral tribunal arrived at the finding that there was an oral

contract of joint and several liability. This is a pure finding of fact,

arrived at by the arbitral tribunal, on the basis of oral and

documentary evidence adduced by the parties.

27. Applying the test for perversity under Section 34 as explained

above, it is clear that the High Court, while exercising jurisdiction

under Section 37, adopted an incorrect approach. The arbitral

tribunal’s findings are definitely based on evidence, as has been

rightly held by the Section 34 court. The High Court, at the stage

of the Section 37 appeal, took an alternative view on this finding

of fact by reappreciating evidence. The arbitral tribunal’s

30

conclusion was based on oral and documentary evidence regarding

the conduct of the parties, which leads to a reasonable and

possible view that there is joint and several liability. Hence, the

High Court, while exercising jurisdiction under Section 37, has

incorrectly held the award to be perverse.

37

28. Coming to the issue of patent illegality, the High Court held

that despite noting the need for a client’s express authorisation for

adjustment of accounts, the arbitral tribunal approved an illegal

transfer of the credit balance from respondent no. 1’s account to

that of respondent no. 2. On going through the arbitral award, the

finding of the arbitral tribunal is based on “past experience” –

meaning the conduct of respondent no. 1 all along acting on behalf

of respondent no. 2, joint and several liability, and the

respondents’ marital relationship.

29. Bye-law 247A was inserted by way of an amendment to

incorporate the SEBI Guidelines on Regulation of Transactions

Between Clients and Brokers dated 18.11.1993. It reads:

37

See P.R. Shah, Shares & Stock Brokers (supra), para 21; Dyna Technologies Pvt Ltd v. Crompton Greaves Ltd,

(2019) 20 SCC 1, paras 24-25; Anglo American Metallurgical Coal Pty Limited v. MMTC Limited, (2021) 3 SCC

308, para 48; UHL Power Company Ltd. v. State of Himachal Pradesh, (2022) 4 SCC 116, para 22.

31

“247A. Notwithstanding anything to the contrary contained in these

Bye-laws, the following shall regulate the transactions between

Clients and Brokers:

“(1) 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. No payment for transactions in which the Member broker is

taking a position as a principal will be allowed to be made from the

client’s account. The above principles and the circumstances under

which transfer from client’s account to Member broker’s account

would be allowed are enumerated below.

A) Member

Broker to

keep

Accounts

Every member broker shall

keep such books of accounts,

as will be necessary, to show

and distinguish in connection

with his business as a

member-

(i) Moneys received from or on

account of and moneys paid

to or on account of each of his

clients and,

(ii) the moneys received and the

moneys paid on Member’s

own account.

B) Obligation

to pay

money

into-“client

account”

Every member broker who

holds or receives money on

account of a client shall

forthwith pay such money to

current or deposit account at

bank to be kept in the name of

32

the member in the title of

which the word “clients” shall

appear (hereinafter referred to

as “clients account”. Member

broker may keep one

consolidated clients accounts

for all the clients or accounts

in the name of each client, as

he thinks fit:

Provided that when a Member

broker receives a cheque or

draft representing in part

money belonging to the client

and in part money due to the

Member, he shall pay the

whole of such cheque or draft

into the clients account and

effect subsequent transfer as

laid down in para D(ii).

C) What

moneys

to be

paid into

“clients

account”

No money shall be paid into

clients account other than-

i) money held or received on

account of clients;

ii) such money belonging to the

member as may be necessary

for the purpose of opening or

maintaining the account;

iii) money for replacement of any

sum which may by mistake or

accident have been drawn

33

from the account in

contravention of para D given

below:

iv) a cheque or draft received by

the Member representing in

part money belonging to the

client and in part money due

to the member.

D) What

moneys to

be

withdrawn

from

“clients

account”

No money shall be drawn

from clients account other

than-

i) money properly required for

payment to or on behalf of

clients or for or towards

payment of a debt due to the

member from clients or money

drawn on client’s authority, or

money in respect of which

there is a liability of clients to

the Member, provided that

money so drawn shall not in

any case exceed the total of

the money so held for the time

being for such each client;

ii) such money belonging to the

Member as may have been

paid into the client account

under para 1C(ii) or 1(C)(iv)

given

34

iii) money which may by mistake

or accident have been paid

into such account in

contravention of para C

above.

E) Right to

lien, set-

off etc.,

not

affected.

Nothing in this para 1 shall

deprive a Member broker of

any recourse of right, whether

by way of lien, set -off,

counter-claim charge or

otherwise against moneys

standing to the credit of

clients account.

It shall also be compulsory for all Member brokers/Sub-brokers to

receive or to make all payments from or to the clients strictly by way

of account payee crossed cheques or demand drafts or direct credit

into the bank account through EFT or any other modes as so permitted

by the Reserve Bank of India. Member brokers shall accept cheques

drawn only by clients and issue cheques only in favour of the clients.

However, in exceptional circumstances Member broker may receive

payment in cash, to the extent that there is no violation of the Income

Tax requirement for the time being in force.”

30. Bye-law 247A provides that a broker shall not withdraw

money from a client’s account other than money required for

payment on behalf of the client, for payment of debt due to the

broker from the client, or money in respect of which there is a

35

liability of the client to the broker. Once the arbitral tribunal

arrived at a finding that respondent no. 1 is jointly and severally

liable for the debit balance in respondent no. 2’s account, which

we have upheld above, Bye -law 247A in fact permits the

withdrawal of the credit balance from respondent no. 1’s account.

Therefore, the adjustment of accounts on 05.03.2001 is legal and

valid. Although the arbitral tribunal has held that written

authorisation for such adjustment is required, we find nothing in

Bye-law 247A or in the SEBI Guidelines, on which this Bye-law is

based, that mandates the same.

31. Bye-law 227(a) also supports the adjustment of accounts,

although it has not been considered in detail at the earlier stages.

It provides for the broker’s lien, which remains unaffected as per

clause (E) of Bye-law 247A, and reads:

“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 or held by the member for and on behalf of such

constituent and any cash lying to the credit of such constituent with

the member shall be subject to the lien of such member for any

general balance of account or margin or other monies that may be due

at any time by such constituent singly or jointly with another or others

to such member in respect of any business done subject to the Rules,

Bye-laws and Regulations of the Exchange and shall be deemed a

general security for payment to such member of all such monies

(including interest, commission, brokerage and other expenses) as

may be due by such constituent in such manner.”

(emphasis supplied)

36

As per Bye-law 227(a), the appellant had lien over the cash balance

lying in the account of respondent no. 1 on account of his joint

liability with respondent no. 2. Therefore, from this perspective as

well, the adjustment of accounts was in accordance with the BSE

Bye-laws and was not against the legal provisions governing the

issue. Therefore, the arbitral award does not suffer from patent

illegality that warrants interference with its findings.

32. In view of the above reasons, we answer the two issues that

we set out in the beginning in the following manner:

i. Under Bye-law 248(a), the arbitral tribunal could have

exercised jurisdiction over respondent no. 1 on the basis

of an oral contract that he would be jointly and severally

liable for the transactions undertaken in respondent no.

2’s account. Such oral contract would not amount to a

“private” transaction that falls outside the scope of

arbitration.

ii. The High Court did not correctly exercise jurisdiction

under Section 37 as it reappreciated evidence and

examined the merits of the award. Upon examination of

the findings of the arbitral tribunal, it is clear that the

37

award is not liable to be set aside on the grounds of

perversity or patent illegality.

33. We therefore set aside the impugned order of the High Court

in Appeal No. 126/2006 in Arbitration Petition 309/2004 dated

29.04.2021 and allow the present appeal. As a consequence, the

arbitral award dated 26.02.2004 is upheld in its entirety and

respondent no. 1 is jointly and severally liable, along with

respondent no. 2, to pay the appellant the arbitral sum of

Rs. 1,18,48,069/- along with 9% interest p.a. from 01.05.2001 till

date of repayment as has been directed by the arbitral tribunal.

34. Pending applications, if any, stand disposed of.

35. No order as to costs.

………………………………....J.

[PAMIDIGHANTAM SRI NARASIMHA]

………………………………....J.

[SANDEEP MEHTA ]

NEW DELHI;

FEBRUARY 10, 2025