O.M.P. 359/2003 Page 1 of 15 #F-39A * IN THE HIGH COURT OF DELHI AT NEW DELHI + O.M.P. 359/2003 SMT. VINITA ARORA ..... Petitioner Through Mr. Mukesh Anand with Mr. Sumit Batra, Advocates versus M/S. ESCORTS SECURITIES LTD. & ANR. ..... Respondents Through: Mr. Ajay Kumar Talesara, Advocates for R-1. % Date of Decision : April 21, 2010. CORAM: HON'BLE MR. JUSTICE MANMOHAN 1. Whether the Reporters of local papers may be allowed to see the judgment? No. 2. To be referred to the Reporter or not? No. 3. Whether the judgment should be reported in the Digest? No. J U D G M E N T MANMOHAN, J (ORAL) 1. Present petition has been filed under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act, 1996”) challenging the arbitral Award dated 31st May, 2003 passed by Mr. K.S. Jaggi, Sole Arbitrator. 2. Mr. Mukesh Anand, learned counsel for petitioner-objector submits that the Agreement dated 17th January, 2000 executed between petitioner-objector and respondent-claimant is void as being violative of Punjab Registration of Money-Lender‟s Act, 1938 (in short “Act, O.M.P. 359/2003 Page 2 of 15 1938”) as well as Rules 8(1)(f) and 8(3)(f) of Securities Contracts (Regulation) Rules, 1957 (in short “Rules, 1957”). He further states that if the substance and not the form of the Agreement executed between the parties is seen, the Court would find that it is in essence a money-lenders agreement rather than a credit facility Agreement. In this connection, Mr. Anand relies upon Hyco Product (P) Ltd. Vs. Shashi Hasija reported in 158(2009) DLT 351; Sobhag Narain Mathur Vs. Pragya Agrawal & Ors. reported in 141 (2007) DLT 356; Vayallakath Muhammodkutty Vs. Illikkal Moosakutty reported in AIR 1996 SC 3288 and Kapur Singh Vs. Firm Bhagwan Sass Sat Pal reported in Punjab Law Reporter Vol. LXXIII-1971 628. 3. Mr. Anand further states that all the defences/issues raised by petitioner-objector in its reply affidavit before the Arbitrator have not been dealt with in the impugned Award. In this connection, Mr. Anand drew my attention to petitioner-objector‟s reply affidavit filed before the Arbitrator wherein it has been stated that the Arbitrator had no jurisdiction to entertain the respondent-claimant‟s claim petition and that in accordance with regulations and bye-laws of National Stock Exchange, the arbitral tribunal should have comprised two arbitrators and not a single individual. 4. Mr. Anand further states that prior mandatory written consent of petitioner-objector under Rules 15(2)(c) of Rules, 1957 had not been obtained for transactions in the present case. He also states that O.M.P. 359/2003 Page 3 of 15 respondent-claimant in violation of Rules, 1957 had carried out the transactions without asking for any margin money from the petitioner- objector. He states that the total exposure of a broker cannot exceed 50% of the net worth of the client. He points out that admittedly net worth of petitioner-objector in the present case was Rs.2 lacs as mentioned in the Individual Client Application Form. He emphasises that all earlier transactions prior to 17th January, 2000 were for an amount less than Rs. 2 lacs. 5. On the other hand, Mr. Ajay Kumar Talesara, learned counsel for respondent-claimant submits that the Agreement dated 17th January, 2000 was a credit facility agreement. He points out that credit facility of Rs. 4 lacs was given by respondent-claimant to petitioner-objector because petitioner-objector had transacted/purchased shares worth Rs. 4,22,132.39 during the period 5th to 11th January, 2000. He states that in case petitioner-objector had been in default of the aforesaid amount by the settlement date, respondent-claimant would have been forced to sell those shares to square off the transaction. According to him, the Agreement dated 17th January, 2000 was executed only to facilitate the petitioner-objector to retain the said shares. 6. Mr. Talesara states that petitioner-objector and respondent- claimant had pre-existing relationship which even predated the credit facility Agreement dated 17th January, 2000. Mr. Talesara points out O.M.P. 359/2003 Page 4 of 15 that petitioner-objector has raised objections with regard to the transactions only after receipt of legal notice dated 19th July, 2000. 7. Mr. Talesara specifically denies the allegation that respondent- claimant had entered into transaction without any instruction of petitioner-objector. He states that petitioner-objector has failed to point out as to which entries/transactions have been carried out without petitioner-objector‟s consent. 8. Mr. Talesara submits that all arguments/defences raised by petitioner-objector in its written statement/reply affidavit had been specifically dealt with by the Arbitrator in both the impugned Award as well as the order dated 8th May, 2002 passed on an application filed by petitioner under Section 16 of Act, 1996. 9. Mr. Talesara lastly submits that neither the exposure of broker exceeded 50% net worth of petitioner-objector nor the transaction had been carried out without margin money inasmuch as the shares which had been purchased against the credit facility Agreement were always pledged to the respondent-claimant and remained in their custody and possession. 10. In rejoinder, Mr. Anand states that respondent-claimant‟s version is contrary to record and is belied by its own statement of account. He states that respondent-claimant‟s statement of account itself shows that petitioner-objector had a credit balance of Rs. 3,560.70 on 12th January, 2000. He further states that from the statement of account furnished by O.M.P. 359/2003 Page 5 of 15 respondent-claimant itself, it would be apparent that respondent- claimant had on one single day, namely, 19th January, 2000 purchased shares worth Rs.4,50,045.64 on behalf of petitioner. 11. Mr. Anand further submits that in any event the Arbitrator could not have awarded a sum in excess of Rs. 4,00,000/- as credit facility Agreement was only for the said amount. He further states that the respondent-claimant had in its claim statement not pleaded the fact that it had purchased shares on behalf of petitioner-objector between 5th to 11th January, 2000. In this connection, he places reliance upon a judgment of this Court in Rama Tube Company Vs. Jay Rapid Roller Ltd. reported in 102 (2003) DLT 672 wherein it has been held that evidence as well as arguments can only be raised within the factual matrix mentioned in the pleadings. 12. Having heard the parties, I am of the view that the scope of interference by this Court with an arbitral award under Section 34(2) of Act, 1996 is extremely limited. Supreme Court in Delhi Development Authority Vs. R.S. Sharma and Company, New Delhi reported in (2008) 13 SCC 80, after referring to a catena of judgments including Oil & Natural Gas Corporation Ltd. (supra) has held that an arbitral award is open to interference by a court under Section 34(2) of the Act, 1996 if it is contrary to either the substantive provisions of law or the contractual provisions and/or is opposed to public policy. Even though Section 34 of Act, 1996 permits a Court to interfere on the ground of an O.M.P. 359/2003 Page 6 of 15 arbitral award being violative of public policy, various judgments of the Supreme Court place an extremely restricted and limited interpretation on the term „public policy‟ (Refer to State of Rajasthan & Ors. Vs. Basant Nahata reported in (2005) 12 SCC 77). 13. In fact, the Supreme Court in McDermott International Inc. Vs. Burn Standard Co. Ltd. & Ors. reported in (2006) 11 SCC 181 has succinctly summed up the scope of interference by this Court by stating “the 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc…...” 14. It is settled legal position, both under Arbitration Act, 1940 and to a even greater extent under Act, 1996, that arbitral tribunal‟s decision is generally regarded as final and courts cannot substitute its own evaluation on questions of law and facts to come to the conclusion that arbitral tribunal has acted contrary to the bargain between the parties. If the parties have selected their own forum, the deciding forum must be conceded the power of appraisement of evidence. The arbitrator is the sole judge of the quality as well as the quantity of evidence and it will not be for the Courts to take upon itself the task of being a judge on the evidence before the arbitrator (Refer to M/s. Sudarsan Trading Co. Vs. Government of Kerala and Anr. reported in (1989) 2 SCC 38). O.M.P. 359/2003 Page 7 of 15 15. Consequently, this Court is of the view that findings of fact given by the Arbitrator are not liable to be interfered with unless such findings are perverse and unconscionable. Moreover, as held in Lesotho Highlands Development Authority Vs. Impregilo SpA and others reported in 2005 UK HL 43, arbitrators do not exceed their powers simply by making a mistake. In Burchell Vs. Marsh reported in 58 U.S. 344 (1855), the United States Supreme Court held that if an award is within submission, and contains an honest decision of the arbitrators, then a Court would not set it aside for error, either in law or fact. According to the United States Supreme Court, a contrary course would be a substitution of the judgment of the judiciary in place of the chosen forum, namely, the arbitrators and would make the award the commencement, not the end of the litigation. 16. In my opinion, the credit facility Agreement dated 17th January, 2000 is not void as it is neither violative of Act, 1938 and/or Rules, 1957. I am of the view that the Agreement dated 17th January 2000 is in essence and substance not a money lenders agreement. In fact, lending and borrowing of funds by a trading member in connection with or incidental to or consequential upon the securities business neither attracts the Act, 1938 nor the Rules 8(1)(f) and 8(3)(f) of Rules, 1957. Security Exchange Board of India, Secondary Market Department has vide its circular dated 7th May, 1997 has also taken the same view. The said circular reads as under :- O.M.P. 359/2003 Page 8 of 15 SECURITIES AND EXCHANGE BOARD OF INDIA SECONDARY MARKET DEPARTMENT Mittal Court, A Wing, Gr. Floor, 224, Nariman Point, Mumbai 400 021 SMD/POLICY/CIR-6/97 May 07, 1997. To Executive Directors/Presidents/ Managing Directors of all Stock Exchanges. Dear Sir, Based on the suggestions/representations received from various Stock Exchanges, SEBI has examined the applicability of Rule 8(1)(f) and 8(3)(f) of the Securities Contract (Regulation) Rules, 1957, relating to Fund Based Activities of Brokers. It has been opined that borrowing and lending of funds, by a trading member, in connection with or incidental to or consequential upon the securities business, would not be disqualified under Rule 8(1)(f) and 8(3)(f). Yours sincerely, Sd/- M.D. PATEL EXECUTIVE DIRECTOR SECONDARY MARKET DEPARTMENT 17. The Arbitrator in the impugned Award has also observed as under :- “The Claimant also relied upon corporate communication dated January 4, 1999 of National Stock Exchange. The said corporate communication further clarified „Fund Based Activities‟. As per said communication, borrowing and lending of funds by stock broker in connection with or incidental to securities business would not be disqualified under Rule 8(1)(f) and 8(3)(f) of Securities Contract (Regulation) Rules, 1957. The Claimant further submit that said credit facility was extended to Respondent to finance/invest in shares and debentures and other securities at the National Stock Exchange and the said credit facility is legal and valid.” O.M.P. 359/2003 Page 9 of 15 18. In my opinion, the view expressed by the Arbitrator is a plausible and possible one and, consequently, it calls for no interference in Section 34 proceedings. 19. Moreover, upon perusal of the impugned Award and the order dated 8th May, 2002 passed by the Arbitrator, I am of the opinion that all the defences/issues raised by the petitioner-objector in its written statement/reply affidavit have been dealt with by the Arbitrator. 20. It is settled law that an arbitrator is not expected to write a judgment like a court of law. In the present case, I find that the Arbitrator has given cogent reasons for rejection of the defences/issues raised by petitioner-objector in her written statement/reply affidavit. Some of the observations of Arbitrator in the order dated 8th May, 2002 as well as impugned Award are reproduced hereinbelow :- A) Order dated 8th May, 2002 Whether the appointment of sole Arbitrator is in accordance with agreement between the parties? The main contention of the Applicant/Respondent with respect to issue No. 2 is that as per Rules and Regulations of National Stock Exchange/SEBI as regard to appointment of arbitrators is that the dispute required to be referred to arbitration of two arbitrators of the National Stock Exchange, one to be appointed by each party. Therefore, the appointment of present Sole Arbitrator is null and void and in violation of rules and regulations of National Stock Exchange/SEBI. The claimant in reply submits that Credit Facility Agreement and Member Client Agreement are two independent agreement. The claimant has invoked the Clause 18 of the Credit Facility Agreement to enforce the liability of Respondent under the Credit Facility Agreement dated O.M.P. 359/2003 Page 10 of 15 17.1.2000 which envisages appointment of Sole Arbitrator in case of dispute between the parties to the agreement. The perusal of letter dated September 12,2000 of claimant through counsel Sh. Satish Kumar, reveals that the claimant has invoked the Clause 18 of Credit Facility Agreement to enforce the financial liability incurred by Respondent for the purchase of and for investment in shares and/or debentures and/or such other securities. The clause 18 of the agreement envisages arbitration and clause 18.1 prescribed the procedure for appointment of sole Arbitrator. The clause 18.1 stipulates that in case of any dispute or differences arising between the parties thereto, then either party shall give to the other notice in writing of such dispute on difference and same shall be settled without recourse to the courts in accordance with the provisions of the Arbitration and Conciliation Act, 1996 at New Delhi by a Sole Arbitrator to the appointed by ESL. The procedure for appointment of arbitrator has already been agreed upon by the parties. Moreover, the Applicant/Respondent did not raise the issue of arbitration by the arbitral Tribunal consisting of two arbitrator appointed by each party in any of her correspondence in reply to notice of claimant to invoke arbitration clause. In view of above facts and circumstances the issue No. 2 is decided against the Applicant/Respondent ……… xxxx xxxx xxxx xxxx The second contention of the Respondent that terms and conditions of agreement dated 17.1.2000 were not adhered and strictly as no margin money was maintained. The dispute upon reference is with respect to credit facility extended by claimant to Respondent. The Respondent in its reply dated 18.9.2000 admitted certain transaction undertaken by claimant on behalf of Respondent. The Respondent also admitted the letter dated 15.2.2000 issued by the NSE for maintained margin money. Therefore, in view of above facts I do not find any force in the contention of Respondent that no transaction were carried out after 17.1.2000. Therefore, in view of the above discussions the issue No. 3 is decided against the Respondent. Accordingly I hold that the arbitral Tribunal has jurisdiction to entertain the present claim of claimant.” O.M.P. 359/2003 Page 11 of 15 B) Award dated 31st May, 2003 14. That the second objection of the Respondent is that as per information disclosed by Respondent to Claimant in its application for grant of credit facility, the annual income of Respondent has been shown as Rs.60,000/- only which means that maximum lending credibility which can be granted to the Respondent should be to the tune of Rs. 2 Lacs only. The perusal of individual client registration application (EXHIBIT 3) reveals that the above mentioned application was given for the purpose of entering in to Member Client Agreement which was entered between the parties on 10/7/1998. Moreover, the value of portfolio held by Respondent cannot be relevant for the purpose of ascertaining the credit worthiness of prospective client since the value of portfolio keep on changing with the daily trend of the stock market. However, the present dispute relates to Credit Facility Agreement dated 17/1/2000 (EXHIBIT 5). The clause 1.1 of Credit Facility Agreement specifically held that the Claimant agreed to arrange a credit facility up to Rs. 4 Lacs for financing the purchase of and for investment in shares and/or debentures and/or such other securities. The Respondent specifically agreed to avail said credit facility up to Rs. 4 Lacs only. The perusal of Statement of Account (EXHIBIT 12) filed by Claimant reveals that several transactions were carried out on behalf of Respondent by the Claimant at the National Stock Exchange. The amount of transactions on realization was duly credited into the account of Respondent and outstanding amount was correspondingly reduced in proportion. The outstanding amount in the account of Respondent as on 19/1/2000 was Rs.4,46,484.94. The Respondent never objected to any particular entry of statement of account. The Claimant in the affidavit of Dr. Ashok Aggarwal, tendered in evidence, has specifically stated that the Respondent in the settlement period from 5/1/2000 to 11/1/2000, traded heavily on the National Stock Exchange and a sum of Rs. 4,50,045.64 was debited in her trading account resulting in a total debit balance of Rs.4,46,484.94. The Claimant further states that on the demand of Claimant made to Respondent to clear the outstanding amount, the Respondent expressed her inability to clear the outstanding amount immediately and requested the Claimant to arrange for her financial assistance or credit facility to finance the purchase of and for investment in shares and debentures or such other securities at the Stock Exchanges and assured the Claimant that she would clear the outstanding amount in her O.M.P. 359/2003 Page 12 of 15 trading/broking account within a fixed time frame. Accordingly, credit facility agreement dated 17/1/2000 was executed and credit facility to the tune of Rs. 4 Lacs was sanctioned in favour of Respondent by Claimant Company. The Respondent never objected to these entries or transactions till the issuance of legal notice dated 19/7/2000 by the counsel of Claimant. The perusal of statement of account (EXHIBIT 12) maintained by Claimant in the usual course of business and execution of credit facility agreement by Respondent, corroborate the explanation given by the Claimant to the objection/issue raised by Respondent. Therefore the second objection of Respondent is without any merit, hence dismissed. 15. The third objection of Respondent is that as per rule 15(2) (c) of Securities Contract (Regulation) Rules, 1957 all transactions is to be carried out on the written instructions of the client. In the present case, all the transactions were not carried out on the written instructions of the Respondent, therefore, Respondent is not liable to the outstanding amount arisen out of these instructions. The Respondent placed reliance on the acts, rules, regulations of Securities and Exchange Board of India and rule 15(2)(c) of said rules. The rule 15 relates to Books of Account and other documents to be maintained and preserved by every member of recognized Stock Exchange. The rule 15(2)(c) relates to written consent of clients in respect of contracts entered into as principals. The learned counsel for Claimant submits that the Claimant being member of National Stock Exchange act as agent but not as principal for the transactions carried out at National Stock Exchange. The Claimant act as agent of Respondent for carrying out the transaction on behalf of Respondent. Moreover, the custom/practice of trade is followed by the members of Stock Exchanges. The written consent as mentioned in rule 15(2)(c) is with respect to transactions carried out by member as principal or without disclosing its status as agent of its client. The counsel for Claimant further states that the Contract Notes were duly sent to the clients after any transaction is carried out for and on their behalf. In the present case the Contract notes and Combine Bills were duly dispatched to the Respondent. The courier receipt are Exhibited as EXHIBITS 105-111. Therefore, I do not find any merit in the said objection of Respondent, hence dismissed. 16. That the next contention of the Respondent is that as per circular no. 1/4/SC/83, dated 28/1/1983, rule 5, the Claimant has to dispatch/communicate to the client on the same day, the Contract Notes regarding the transactions carried out in a day and same should be acknowledged by the O.M.P. 359/2003 Page 13 of 15 client. The counsel for Respondent submits that Contract Notes were never sent/dispatched to the Respondent by the Claimant, therefore the Respondent is not liable to outstanding amount due towards these transactions. The counsel for the Claimant submits that the Contract Notes were duly dispatched/communicated to the Respondent. The proof of dispatch of Contract Notes and Combine Bills are Exhibited as EXHIBIT 105-111. The perusal of Contract Notes and receipt filed by Claimant in proof of dispatch of Contract Notes and Combine Bills reveals that the Contract Notes/Combine Bills were duly dispatched by the Claimant to the Respondent. Moreover, the Respondent never objected to any transaction specifically and claimed to settle the account on 22/2/2000 with the Claimant. Therefore I do not find any merit in said objection of Respondent, hence dismissed.” 21. Consequently, the view taken by the Arbitrator with regard to margin money and prior written consent of petitioner-objector is a plausible and possible view. 22. I also find that it is not the petitioner-objector‟s case that for some transactions written consent was given, while for some others the said procedure was not followed. Upon perusal of the arbitral record, I find that for the undisputed period, that means, prior to 17th January, 2000 petitioner-objector had indulged in „heavy transactions‟ on the stock exchange. Also, if the respondent-claimant has waived practice directions with regard to margin money, then it has only waived a security in its favour and petitioner-objector cannot make a virtue out of that. In any event, as found by the Arbitrator, the respondent-claimant was always secure as it had the pledged shares in its possession. 23. Though it is correct that there is no pleading in the claim petition that credit facility agreement had been entered into to avoid petitioner- O.M.P. 359/2003 Page 14 of 15 objector‟s being declared a defaulter or its excess shares being sold off, I find that there is a reason with regard to the same. Though the transaction of purchase of shares has been carried out between 5th to 11th January, 2000, the amount became due and payable only when the respondent-claimant raised its combined bill, that is on 19th January, 2000. Consequently, the credit facility agreement was executed prior in time when the said purchase amount became due and payable. Moreover, in arbitration proceedings, the strict rules of pleadings as envisaged by the Code of Civil Procedure and Indian Evidence Act do not apply. I find that in the present case, there has been substantial compliance of the principles of natural justice which is mandated by the Act, 1996. (Refer to Sections 18 and 19 of Act, 1996) 24. In any event, one cannot lose sight of the fact that petitioner- objector has not disputed the execution of the credit facility agreement dated 17th January, 2000. Though it is the petitioner-objector‟s case in the present proceedings that credit facility agreement was not acted upon, I am of the view that petitioner-objector has failed to discharge that burden, especially keeping in view the contract notes and combined bills which were placed on record before the Arbitrator. But keeping in view the fact that the credit facility Agreement dated 17th January, 2000 was only for an amount Rs. 4,00,000/-, the Award against Claim No. 1 is reduced from Rs. 6,90,130.40 to Rs. 4,00,000/-. O.M.P. 359/2003 Page 15 of 15 25. Consequently, with the aforesaid modification present petition is dismissed but with no order as to costs. MANMOHAN,J APRIL 21, 2010 rn