IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 19.10.2010 CORAM: THE HONOURABLE MR.JUSTICE P.JYOTHIMANI Tr.O.P.No.437 of 2007 Rajanarayan Capital Markets Services Ltd. Old No.45, New No.47, Tatabad 1st Street (Indian Bank Road), Coimbatore-641 012 rep. by its Director, C.Krishnakumar .. Petitioner Vs. 1. S.S.Chokkalingam 2. P.V.Krishnamurthy, Arbitrator The Regional Arbitration Center National Stock Exchange of India Limited 7th Floor, Harihant Nitco Park 90, Radha Krishna Salai Mylapore, Chennai  600 004. .. Respondents Prayer: Petition under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the award dated 12.10.2004 passed by the second respondent in Arbitration matter CH-016/2004. For Petitioner : Mr.S.R.Sundar For Respondents : Ms.Aruna Ganesh for 1st respondent ORDER The petitioner, who was the respondent before the Arbitrator, has filed the present petition under Section 34 of the Arbitration and Conciliation Act, 1996 (for brevity, "the Act") to set aside the award passed by the second respondent (Sole Arbitrator) dated 12.10.2004 directing it to pay an amount of ` 5,82,990.59 to the first respondent herein within one month, failing which to pay interest at the rate of 18% per annum till it is completely repaid. 2.1. According to the first respondent, who was the applicant before the Arbitrator, the petitioner is a trading member of the National Stock Exchange of India Limited. It has appointed one M/s.W-One Securities (P) Ltd. as their dealer and started trading activities. In the said trading activity by the first respondent with the said dealer of the petitioner, the petitioner was liable to pay an amount of ` 6,53,490.59 and since the amount was not paid, the dispute was raised. 2.2. On the other hand, it was the case of the respondent before the Arbitrator, who is the petitioner herein, that the matter is a dispute between the first respondent and M/s.W-One Securities (P) Ltd., and the petitioner has no direct contractual relationship with the first respondent and therefore, there is no question of arbitration. 2.3. It is seen that the first respondent has filed various documents to show that the said M/s.W-One Securities (P) Ltd. was acting as a sub-broker of the petitioner, namely (i) advertisement issued by M/s.W-One Securities (P) Ltd. in Dinamalar offering on line trading in association with the petitioner herein; (ii) hand bill issued by M/s.W-One Securities (P) Ltd. offering trading in capital market through their principal, viz., the petitioner herein; and (iii) a letter addressed by M/s.W-One Securities (P) Ltd. to the Commissioner of Police, Tirunelveli mentioning that the petitioner is a member broker of National Stock Exchange of India Limited, which happens to be the main broker. 2.4. The Arbitrator has found that while the first respondent has alleged that the representative of the petitioner has attended the investor meet arranged by M/s.W-One Securities (P) Ltd. to solicit investments, there was no proof to that effect. Certain documents, namely extracts of his bank account, were produced by the first respondent to show that he has made certain payments to the petitioner through demand drafts. During the hearing before the Arbitrator, even though it was conceded on behalf of the petitioner that the investors meet was convened, it was stated that the representatives of the petitioner have not attended. 2.5. The Arbitrator having taken note of the said documents to the effect that M/s.W-One Securities (P) Ltd. have acted as sub-brokers of the petitioner and having found that the petitioner has not informed the public that M/s.W-One Securities (P) Ltd. were not their sub-brokers or agents, held that the petitioner cannot escape the responsibility and in view of the same, the award came to be passed. 3. The said award is assailed by the petitioner on the ground that the award has been passed based on the prima facie observation of the first respondent; that the first respondent has failed to discharge the burden of proof and on the other hand, the records show that M/s.W-One Securities (P) Ltd. was only a client of the petitioner; that in the absence of any agreement between the first respondent and the petitioner, there is no question of making any reference of dispute for arbitration; and that M/s.W-One Securities (P) Ltd. itself has not been made as a party and therefore, the claim should have been rejected on that ground also. 4.1. Mr.S.R.Sundar, learned counsel appearing for the petitioner would submit that even as per the statement of claim made by the first respondent herein, who was the applicant before the Arbitrator, it has been clearly admitted that there has not been any constituent agreement between the petitioner and the first respondent. He would also refer to various communications from SEBI as well as the letters by the petitioner to the SEBI stating that the petitioner has no relationship with the said M/s.W-One Securities (P) Ltd. with effect from 30.4.2004. It is his submission that in such circumstances, the conduct of the Arbitrator in prima facie coming to a conclusion for the purpose of passing the award is untenable and in any event, in the absence of any arbitration agreement between the parties, there is no arbitrable issue to be decided by the Arbitrator. 4.2. He would also refer to the bye-laws of the National Stock Exchange of India Limited which contemplates reference of only a dispute between the trading members inter se and between trading member and constituent arising out of the relationship or contracts and he would submit that only a party to an agreement can file an application under Section 34 of the Act. 5. On the other hand, it is the contention of Ms.Aruna Ganesh, learned counsel appearing for the first respondent that the relationship between the petitioner and M/s.W-One Securities (P) Ltd. has to be presumed based on some of the letters. She would also refer to a letter of SEBI dated 8.6.2004 addressed the petitioner as well as the first respondent, in which the petitioner has been directed by SEBI to deal with SEBI registered sub-brokers only. 6. I have heard the learned counsel for the petitioner and first respondent and referred to various documents, including the files produced by the Arbitrator. 7. A reference to the statement of claim made by the first respondent herein before the Arbitrator dated 16.6.2004 shows that the first respondent has been doing share trading and investing from September, 2002 as a member of the Hindu Undivided Family, through M/s.W-One Securities (P) Ltd. It has been his complaint that the petitioner has never given him any membership constituent agreement, contract notes or bills. It is with that specific averment he has raised the dispute and that was referred to the Arbitrator. 8. The three documents, which are relied upon by the Arbitrator to decide against the petitioner herein, as referred to above, were all the documents of M/s.W-One Securities (P) Ltd., who themselves have proclaimed as the agents of the petitioner, offering on behalf of the petitioner capital market services and no one of the documents can be attributable to the petitioner at all, nor the petitioner has ever either accepted that M/s.W-One Securities (P) Ltd. were their agents acting on their behalf or there has been any contract between the petitioner and the first respondent. That has been the categoric stand of the petitioner all throughout, viz., before the Arbitrator as well as in their communication to the National Stock Exchange of India Limited, as it is seen in the letter dated 13.7.2004, wherein it has been stated that the petitioner has no contract with the first respondent at all and there was no arbitration agreement entered with the first respondent. 9. In the communication dated 31.7.2004 by the petitioner to the SEBI, the petitioner has clearly stated that M/s.W-One Securities (P) Ltd. was previously called as Wise Investments and they were trading as clients of the petitioner from 3.6.2002 and subsequently, the name was changed as M/s.W-One Securities (P) Ltd. and the business was carried on by the said M/s.W-One Securities (P) Ltd. as the clients of the petitioner with the same code number, namely W007. It is also stated in the said letter that M/s.W-One Securities (P) Ltd. were registered as petitioner's client on 18.11.2002. 10. Even in a communication of M/s.W-One Securities (P) Ltd. dated 11.3.2004 addressed to the Commissioner of Police, it has been the categoric stand of the said M/s.W-One Securities (P) Ltd. that the first respondent is one of its shareholders, holding 411 shares and that his wife, Mrs.C.Maragatham Ammal, was holding 500 shares and that Mrs.Maragatham Ammal was made as Executive Director of M/s.W-One Securities (P) Ltd. and it was on her behalf the first respondent has been holding and acting as Executive Director. Therefore, at the most it is clear that the first respondent acting as one of the Directors of M/s.W-One Securities (P) Ltd., which is stated to be a client of the petitioner, would have transacted with the petitioner on behalf of M/s.W-One Securities (P) Ltd. 11. In fact, the petitioner, in the letter dated 31.3.2004 addressed to National Stock Exchange of India Limited, has stated that the petitioner has stopped dealing with M/s.W-One Securities (P) Ltd. during January, 2004 itself. Therefore, it is crystal clear that it has been the consistent stand of the petitioner throughout that M/s.W-One Securities (P) Ltd., which was having earlier a different name, viz., Wise Investments Private Limited, was only its client and not agent or broker and the petitioner has been dealing with the said M/s.W-One Securities (P) Ltd., in which the first respondent was acting as a Director, only as a client and there is absolutely no contractual relationship between the petitioner and the first respondent at all and that has been the case of the first respondent also in his claim statement, wherein he has in no uncertain terms admitted that there was no membership constituent agreement, contract notes or bills between him and the petitioner. 12. In such circumstances, it is unfortunate that the Arbitrator has relied upon the three documents, which are self-speaking documents, by which no inference can be drawn by any stretch of imagination that any contractual relationship between the petitioner and the first respondent has been in existence or there has been any arbitration agreement between the parties. There is no difficulty to come to a conclusion that the arbitration award is on the face of it perverse and has been passed not on materials, but on certain prima facie grounds which can only be termed as surmises and conjectures. 13. As per the bye-laws of the National Stock Exchange of India Limited, the reference to arbitration can be only in respect of the disputes between the trading members inter se or between the trading member and the constituent arising out of a trading relationship, contracts etc. It is relevant to refer to few of the bye-laws, viz Bye Laws 1, (1B) and 2, which are as follows: "(1) All claims, difference or disputes between the Trading Members inter se and between Trading Members and Constituents arising out of or in relation to dealings, contracts and transactions made subject to the Bye-Laws, Rules and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their validity, construction, interpretation, fulfillment or the rights, obligations and liabilities of the parties thereto and including any question of whether such dealings, transactions and contracts have been entered into or not shall be submitted to arbitration in accordance with the provisions of these Byelaws and Regulations. (1B) All claims, differences or disputes between the Trading Members inter se, Trading Members and Constituents, whether or not registered as Participants, Constituents inter se, whether or not registered as Participants, arising out of or in relation to dealings, contracts and transactions executed or reported on the Wholesale Debt Market Trading Segment of the Exchange and made subject to the Byelaws, Rules and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their validity, construction, interpretation, fulfillment or the rights, obligations and liabilities of the parties thereto and including any question of whether such dealings, transactions and contracts have been entered into or not shall be submitted to arbitration in accordance with the provisions of these Byelaws and Regulations. (2) In all dealings, contracts and transactions, which are made or deemed to be made subject to the Byelaws, Rules and Regulations of the Exchange, the provisions relating to arbitration as provided in these Byelaws and Regulations shall form and shall be deemed to form part of the dealings, contracts and transactions and the parties shall be deemed to have entered into an arbitration agreement in writing by which all claims, differences or disputes of the nature referred to in Bye laws (1), (1A) and (1B) above shall be submitted to arbitration as per the provisions of these Byelaws and Regulations." 14. A combined reading of all those clauses make it clear that there must be a contractual relationship between the trading member and the constituent or sub-brokers and the trading members and it is only if such contractual relationship is in existence, the provisions of regulations can be deemed to be forming part of such contract. 15. In Chennai Container Terminal Private Limited v. Union of India, 2007 (4) CTC 284, the First Bench of this Court, to which I am a party, while referring to the provisions of the Act, especially with reference to Section 34 of the Act and referring to the terms "party" under Section 2(1)(h) of the Act and "arbitration agreement" under Section 2(1)(b) of the Act and reading along with Sections 7(1), 8 and 34 of the Act, has held that it is only the party to the arbitration agreement who can file an application under Section 34(2) of the Act. After referring to various judgments on the issue and the above said provisions, the Division Bench has observed as follows: "A conjoint reading of the aforesaid provisions would imply that the word "party" wherever it occurs in the Act unless the context otherwise requires would only mean such person who is a party to an arbitration agreement. Section 2(1)(b) of the Act defines "arbitration agreement" as an agreement referred to in Section 7. Section 7 defines "arbitration agreement" as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. Section 2(1)(h) defines "party" as a party to an arbitration agreement. Section 8 relates to the power to refer parties to arbitration where there is no arbitration agreement. Section 34 refers to application for setting aside the arbitration award at the instance of a party. A plain reading of Section 34 shows that only party to the arbitration agreement and party to the arbitration award can file an application to set aside the arbitration award and that too only on the grounds provided under Section 34(2) of the Act." 16. Applying the dictum laid down, as state above, and in accordance with the provisions of the Act, on the face of it, I am satisfied that the Arbitrator has exceeded the authority, especially when there is no contract for referring the dispute for arbitration. Consequently, I have no hesitation to hold that the award passed by the Arbitrator can never be termed as valid in the eye of law and the same is liable to be set aside. In the result, the original petition is allowed and the arbitration award passed by the Arbitrator is set aside. No costs. sasi