M/S FIRST GLOBAL STOCK BROKING PVT. LTD vs TARUN GUPTA
$~6
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision: 01.07.2024
+ FAO(COMM) 119/2024, CM NOS.35975/2024 & 35976/2024
M/S. FIRST GLOBAL STOCK BROKING
PVT. LTD. ….. Appellant
Through: Mr. Raghav Kacker & Mr. Aayush Shukla, Advocates.
Versus
TARUN GUPTA ….. Respondent
Through: None.
CORAM:
HON’BLE MR. JUSTICE VIBHU BAKHRU
HON’BLE MR. JUSTICE SACHIN DATTA
VIBHU BAKHRU, J.
INTRODUCTION
1. The appellant has filed the present appeal under Section 37(1)(c) of the Arbitration & Conciliation Act, 1996 (hereafter the A&C Act) impugning an order dated 22.05.2024 (hereafter the impugned order) passed by the learned Commercial Court in OMP(COMM) No.71/2021 captioned M/s First Global Stock Broking Pvt. Ltd. v. Tarun Gupta, whereby the appellants application under Section 34 of the A&C Act was dismissed. The said application [OMP(COMM) No.71/2021] impugned the arbitral award dated 06.10.2021 (hereafter the impugned appellate award) rendered by the Arbitral Tribunal comprising of three members (hereafter the Appellate Arbitral Tribunal), whereby the Appellate Arbitral Tribunal had upheld the Arbitral Award dated 06.04.2021 (hereafter the impugned award) passed by an Arbitral Tribunal (hereafter the Arbitral Tribunal). The Arbitral Tribunal, in terms of the impugned award, has awarded an aggregate amount of ?68,69,374/- against various claims made by the respondent (hereafter the claimant) along with future interest at the rate of 10% if the amount was not paid within a period of one month. The Arbitral Tribunal and the Appellate Arbitral Tribunal were constituted by the National Stock Exchange Ltd. (hereafter the NSE).
2. The learned Commercial Court concurred with the view of the Appellate Arbitral Tribunal and declined to interfere with the impugned award. And, the appellants petition under Section 34 of the A&C Act was dismissed by the impugned order.
3. The principal controversy between the parties, essentially, relates to the claimants allegation regarding wrong trades carried out in his account. According to the claimant, he had opened a trading account with the appellant a member of the NSE for carrying out discretionary trades. He claimed that he was informed that the trading would be conducted in his account by the appellant [in the nature of a Portfolio Management Services (hereafter PMS) account] and the trading strategy will mirror the strategy of the appellants Hedge Fund Strategies (HFS in short) product, whereby the capital would be preserved. The claimant claimed that his capital was wiped out during the months of September and October, 2008 on account of several wrong trades, which were not authorized and did not follow the trading strategy as represented.
4. The appellant disputed that the claimant had opened a discretionary trading account and claimed that the claimant had opened a simple trading account under which trades were executed as authorized and directed by the claimant. The appellant alleged that the claimant was seeking to resile from the responsibility of the trades executed as per his authority as he had incurred losses.
5. One of the central disputes that arise between the parties is whether the trades executed in the claimants account were duly authorized by him. The Arbitral Tribunal as well as the Appellate Arbitral Tribunal had found in favour of the claimant and had concluded that the appellant had failed to establish that the trades executed during the relevant period which were over 400 during the period of eight weeks and sometimes were squared off within the minutes of trades being executed were authorized. The Arbitral Tribunal found that the appellant was responsible for the same and had thus, inter alia, awarded the amount invested by the claimant along with interest as well as costs.
6. The appellant claims that the impugned award and the impugned appellate award are vitiated by patent illegality and the learned Commercial had also erred in failing to appreciate the same.
THE CONTEXT
7. The claimant, a young IT professional, had sometime in August, 2008, approached the appellant as he was looking for an investment opportunity to invest his savings. He claims that he was informed that the appellant was a premium brokerage house and was the best in HFS.
8. The appellant opened a trading account for the claimant. Admittedly, the parties entered into a Stock Broker and Client Agreement, Supplemental Trading Member and Client Agreement and a Combined Risk Disclosure Agreement, all dated 18.08.2008. The claimant deposited a corpus of ?28,82,030.80 and claims that he did so for the purposes of portfolio management. The claimant also claims that the appellant had assured him that trading in his account would mirror the appellants HFS where trades were hedged to protect the capital.
9. It was revealed that the account opened by the claimant with the appellant was not a discretionary trading account but a simple trading account. However, according to the claimant, it had opened an account believing the appellants assurances as aforesaid. The appellant also claims that the parties had entered into a Tripartite Agreement on 19.08.2008 (hereafter the Tripartite Agreement) with one Mr. Rajesh Chauhan who was to act as a sub-broker. This is strongly disputed by the claimant and he claims that his signatures on the Tripartite Agreement is forged. The claimant also produced report from Truth Labs in support of this assertion.
10. As noted above, several trades were executed in the Future & Option Segment of the Stock Exchange in the claimants account during the material period. The said trades wiped out the claimants capital and resulted in a negative balance. The claimant claims that during the initial period he was informed that his account was giving positive returns, however, he noticed that there were certain fluctuations in the cash balance and had made enquiries regarding the same. He claimed that he was informed that the fluctuations were on account of trade settlements and margin requirements and he need not worry on this ground. He claimed that no specific authorization was taken from him before the trades were executed in his account. As noted above, more than 400 trades were executed over a period of eight weeks and several positions were opened and liquidated on the same day.
11. According to the claimant, he assumed that the appellant was carrying on the discretionary trading as per the mandate given by him and had no reason to suspect foul play.
12. The claimant was sent Contract Notes and was also supplied with copy of the ledger account in September, 2008. However, he claimed that as a lay person, he could not ascertain the course of trade from the several Contract Notes supplied to him.
13. The claimant claimed that on 10.10.2008, he noticed that his account showed a positive cash balance of ?3,00,000/- only, which was a significant drop. This raised suspicion about the irregularities and he called Mr. Rajesh Chauhan, who he claimed was a Business Development Manager (hereafter BDM) with the appellant, on 10.10.2008 to clarify the issue. He claimed that he was informed that the losses were on account of wrong trades done by a trader at appellants Mumbai office and that his money would be recovered. He also claimed that he had spoken to the Vice President of the appellant one Mr. Saurabh Gupta at the appellants Mumbai office and was also assured that his money would be recovered and he would personally handle the claimants account.
14. However, the claimant states that on checking his account, on 27.10.2008, it reflected a negative balance of ?3,00,000/-.
15. The claimant contacted the officers of the appellant on telephone and also sent messages (SMSs). The claimant claims that Mr. Saurabh Gupta had assured him that they would start active trading once the market stabilizes and he kept on trading sporadically in the claimants account till the year 2009, thus giving the impression that he was actively working on recovering the claimants money.
16. The claimant claims that he sought the e-mail IDs of senior officials of the appellant asking for emails of Mr Shankar Sharma and Ms Devina Mehra on 18.08.2009. In response, Mr. Gupta called the claimant and connected him with Mr. Neeraj Khanna, Group CFO of the appellant who informed the claimant that the trading was subject to market risk and his account was not a PMS account.
17. The claimant then sent various communications seeking to ascertain as to how the trading was done in his trading account. One of the relevant e-mails which is strongly relied upon by the claimant was sent on 26.08.2009 wherein he sought the following queries:
a. Who operated my account and authorized and executed trade during the above period i.e. 25th August, 2008 to 27th October, 2008.
b. Where were the trading calls coming from? Basically, from which Research Desk?
c. Did the trading mirror the strategy of First Globals HFS product?
d. Were all trades hedged? There was a verbal commitment from Mr. Rajesh Chauhan (BDS) that derivative trades will be used for hedging and above strategy will be followed.
e. It was my understanding that a PMS account will be opened and all discretionary trades will be done under that. Why was this not opened?
f. If there was no PMS account why did you insist on a minimum balance of Rs. 25 lacs in my trading account.
18. The appellant responded to the e-mail informing the claimant that his account was being investigated and a response would be sent to him by Monday. However, no response was received to the same. Consequently, on 03.09.2009, the claimant sent an e-mail thereby once again complaining that he has not received any response from the appellant to his e-mail.
19. Thereafter on 13.09.2009, the claimant sent an e-mail to the Vice Chairman of the appellant setting out his grievances and requesting him to look into the mishandling of his account and to ensure that his investment is recovered and he is compensated for the loss of opportunity.
20. The CFO of the appellant sent an e-mail dated 14.09.2009 informing the claimant that his account was a simple trading account which was handled by Mr. Rajesh Chauhan, BDM. It was also stated in the e-mail that Mr. Rajesh Chauhan had been regularly interacting with the claimant and the Contract Notes of several trades had been sent to the claimant.
21. Thereafter, several communications were exchanged between the parties. Whilst the claimant claimed that trades had been carried in his account not as per his instructions but on the assurance that it would follow the appellants HFS, the appellant denied the same and claimed that the trades in the claimants account were carried at the instructions of Mr. Rajesh Chauhan. Under cover of an e-mail dated 29.09.2009 of the claimant, Mr. Neeraj Khanna, CFO of the appellant, sent a copy of the Tripartite Agreement by an e-mail dated 23.10.2009 to the claimant asserting that the claimant had become the client of the appellant through a sub-broker by signing all the documents.
22. The claimant claims that immediately on receipts of the e-mail dated 23.10.2009, he sent an e-mail to Mr. Rajesh Chauhan. Mr. Rajesh Chauhan responded by an e-mail dated 24.10.2009 denying the allegations made by the CFO of the appellant in his e-mail.
23. The claimant thereafter also obtained a report from Truth Labs regarding verification of his signatures, which indicated that the signature on the Tripartite Agreement were not that of the claimant.
24. Thereafter, the claimant filed complaints with Security & Exchange Board of India on 13.10.2009 and 15.12.2009, and also with the NSE.
THE FIRST ROUND OF PROCEEDINGS
25. Thereafter, the claimant approached NSE for reference of the disputes to arbitration. The same were referred to the Arbitral Tribunal (the First Arbitral Tribunal). The claimant filed its claim before the First Arbitral Tribunal appointed by the NSE on 04.05.2010.
26. The First Arbitral Tribunal examined the disputes and rejected the appellants contention that a sub-broker was involved. The First Arbitral Tribunal considered the correspondences exchanged between the parties and noted that the same do not indicate that there was any broker as claimed by the appellant and the appellant had on number of occasions told the claimant that the appellant was executing the trade in his account. The First Arbitral Tribunal also referred to the SMSs dated 12.12.2008 sent by Mr. Saurabh Gupta, an official of the appellant, which reads as Dear Tarun, I am in a conference, we are already doing trades in your account, I will let you know the status in morning
.sorabh.
27. The First Arbitral Tribunal noted that in reply to the communications sent by the claimant, the appellant had given various responses including that they were investigating the whole issue but had not taken the plea that they were not dealing the claimants account but there was a sub-broker who was doing so. The First Arbitral Tribunal also noted that Mr. Rajesh Chauhan, who was claimed to be the sub-broker of the appellant was also described as the BDM, thus rejected the appellants explanation.
28. However, the First Arbitral Tribunal noted that the Contract Notes were issued regularly and the claimant had not taken any action or raised any protest. He had allowed the trades to continue. The First Arbitral Tribunal concluded that the claimants silence only supported the contentions that in fact, the trades were at his behest and it was thus too late for him to plead otherwise. The First Arbitral Tribunal also noted that in the pleadings, the claimant had asserted that as per his instructions the value of the shares held as per instructions on 10.09.2008 was ?13,82,030/-, which according to the First Arbitral Tribunal were sold as per the instructions of the claimant. Thus, although the appellants contentions were rejected, the First Arbitral Tribunal rejected the claimants claim by the arbitral award dated 31.01.2011 (the First Award). The claimant preferred an appeal before an arbitral tribunal constituted by the NSE (hereafter the First Appellate Tribunal). However, the said appeal was also rejected and the First Appellate Tribunal affirmed the First Award by an arbitral award dated 30.01.2012 (the First Appellate Award).
29. The claimant filed an application under Section 34 of the A&C Act before the learned Single Judge of this Court [being OMP No.686/2012 captioned Tarun Gupta v. M/s First Global Stock Broking Pvt. Ltd.] impugning the First Award and the First Appellate Award.
30. The learned Single Judge noted that the First Arbitral Tribunal had rejected the claimants contention that the account opened was a discretionary portfolio account based on HFS of the appellant and had accepted the appellants stand that it was a simple trading account. The learned Single Judge held that once the Arbitral Tribunal had accepted the appellants stand, it was necessary for the appellant to also establish whether the transactions had been conducted on the basis of instructions issued by the claimant. The learned Single Judge noted that the First Arbitral Tribunal and the First Appellate Tribunal had also disbelieved the appellants case of the transactions being conducted on the instructions of a sub-broker Mr. Rajesh Chauhan. The sole basis of the First Award and the First Appellate Award was issuance of Contract Notes by the appellant and lack of protest from the claimant, however, the First Arbitral Tribunal had also failed to consider that the claimant had raised a protest on receipt of the ledger account. The learned Single Judge thus held that the First Arbitral Tribunals decision on the basis of the claimants lack of protest to the Contract Note could not be accepted.
31. The learned Single Judge held that the First Arbitral Tribunal had not examined the correspondences exchanged between the parties and had taken a simplistic view. Accordingly, the First Award and the First Appellate Award were set aside and the claimant was granted liberty to initiate proceedings afresh.
32. The appellant assailed the order dated 10.12.2018 passed by the learned Single Judge in OMP No.686/2012 before the Division Bench of this Court by filing an appeal [being FAO(OS)(COMM) No.50/2019 captioned M/s First Global Stock Broking Pvt. Ltd. v. Tarun Gupta]. The appeal preferred by the appellant was also dismissed by the Division Bench of this Court by an order dated 14.01.2020.
33. The appellant preferred a Special Leave Petition (SLP) before the Supreme Court, which was dismissed by an order dated 23.02.2021 as the Supreme Court found no reason to interfere with the judgment dated 14.01.2020 rendered by the Division Bench of this Court.
THE SECOND ROUND OF PROCEEDINGS
34. Thereafter, the claimant re-initiated the arbitral proceedings and filed Statement of Claims before the Arbitral Tribunal constituted by the NSE.
35. The Arbitral Tribunal examined the rival contentions and delivered the impugned award. The Arbitral Tribunal found that on the basis of the material evidence on record including the messages sent by the officials of the appellant, the appellant had traded in the claimants accounts. The Arbitral Tribunal rejected the contention that there was any deemed authorization by the claimant. The claimants account was a basic account and the same was within the knowledge of Mr. Saurabh Gupta of the appellant. The Arbitral Tribunal did not accept that there was any authorization in favour of Mr. Rajesh Chauhan whether as a BDM or a sub-broker. The Arbitral Tribunal noted that the defence that Mr. Rajesh Chauhan had effected the trades was introduced for the first time in the communication dated 14.09.2009 of Mr. Neeraj Khanna whereas the dispute has arisen in October, 2008. The Arbitral Tribunal noted that the claimant had claimed an amount of ?28,82,030/-, which comprised of ?15,00,000/- plus ?13,82,030.80 being the proceeds of sale of shares. The said figures were not disputed by the appellant. Accordingly, the Arbitral Tribunal awarded the said amount. In addition, the Arbitral Tribunal also awarded interest at the rate of 10% per annum on the aforementioned amount for a period of eleven years and six months which was quantified to ?33,14,334/-. The claimants claim for opportunity lost was rejected, however, the claimant was granted ?10,000/- as compensation for mental agony suffered by him. In addition, he was also awarded costs amounting to ?6,63,010/-. Thus, the Arbitral Tribunal awarded an aggregate amount of ?68,69,374/- in favour of the claimant along with interest at the rate of 10% per annum.
36. The appellant preferred an appeal before the Appellate Arbitral Tribunal. The Appellate Arbitral Tribunal rendered the impugned appellate award dismissing the appeal in terms of the impugned appellate award.
37. The petition preferred by the appellant before the Commercial Court assailing the impugned award and the impugned appellate award was also rejected. The learned Commercial Court did not accept the appellants contentions that the receipt of the Contract Notes evidenced pre-trade authorization by the claimant. The learned Commercial Court noted that the appellant had changed its stand to set up a case that the claimants account was a simple trading account to avoid its liability as the Regulations for handing PMS account were stringent, however, the appellant had also failed to obtain any confirmation and instructions before placing of orders. The learned Commercial Court held that the appellant had failed to establish any patent illegality, perversity or the award being contrary to public policy, which warranted interference under Section 34 of the A&C Act and thus rejected the appellants petition to set aside the impugned award and the impugned appellate award.
SUBMISSIONS
38. Mr Kacker, learned counsel appearing for the appellant had contended that the Arbitral Tribunal, the Appellate Arbitral Tribunal as well as the learned Commercial Court had erred in proceeding on the basis that there was a mandatory requirement to keep a telephonic recording of the orders placed by the claimant. He submitted that the requirement to keep a record of the telephonic recordings became mandatory by virtue of Circular dated 22.03.2018 issued by SEBI. Prior to the said Circular, there was no requirement to preserve recording of the telephonic instructions received by clients. He contended that the reference to the amended Regulation 3.4.1 of the National Stock Exchange (F&O Segment) was misplaced and the said regulation was amended after the Circular dated 22.03.2018 and thus, was not applicable at the material time.
39. Next, he submitted that the impugned award and the impugned appellate award were vitiated by patent illegality and the learned Commercial Court had failed to consider the same. He also submitted that since there was no dispute that the Contract Notes had been supplied to the claimant and he had admittedly raised no protest against the same, the conclusion that the trading activity was carried out without instructions of the claimant, could not be accepted. The contrary conclusion of the Arbitral Tribunal and the Appellate Arbitral Tribunal, vitiated the impugned arbitral awards and resulted in patent illegality.
REASONS AND CONCLUSION
40. We have heard Mr Kacker at some length.
41. As noted above, the claimants case rested on the assertion that the trades carried out in his account were wrongful. The appellant was responsible for the same and, therefore, is liable to make good the amount invested by the claimant. According to the appellant, the trades were duly authorised by the claimant. Thus, the principal dispute that fell for consideration of the Arbitral Tribunal was whether the trades executed in the claimants account were duly authorised by him.
42. The question whether the claimant had authorised such trade is a question of fact. The Arbitral Tribunals decision mainly rested on the findings of the Arbitral Tribunal on this purely factual issue. It is settled law that the Arbitral Tribunal is the final adjudicator of questions of fact. Thus, unless the Arbitral Tribunals findings are perverse and wholly implausible, no interference with the same would be warranted. The scope of examination under Section 34 of the A&C Act of the Arbitral Tribunals finding of fact is narrow and does not entail reappreciation and re-evaluation of evidence.
43. In the present case, it was the claimants case that it had invested the money with the appellant and the appellant would execute trade based on its strategies. The claimant himself had neither selected the securities in the Future and Options segment to be sold or purchased, nor specifically authorised any such trade. According to the claimant, it had permitted the appellant to carry on the trading activities in accordance with its strategies.
44. The claimant has asserted that he always understood that his account was in the nature of Portfolio Management Service (PMS) account, which was a discretionary account.
45. The appellants defence was that the claimants account was a simple trading account and the trades had been executed by a sub-broker Mr Rajesh Chauhan. The appellant claimed that Mr Rajesh Chauhan had interacted with the claimant. It was also asserted at one stage that Mr Rajesh Chauhan had introduced the claimant as a client.
46. Thus, one of the key questions that fell for consideration is as to who had executed the sales. If the appellants case was to be accepted that Mr Rajesh Chauhan was a sub-broker responsible for execution of the trades. The appellant had also relied on the Tripartite Agreement produced by the appellant.
47. The claimant had disputed the execution of the Tripartite Agreement. He had denied its signatures on the same and had also produced a report from the Truth Labs in support of his claim that the Tripartite Agreement was not signed by him. The Arbitral Tribunal had, after evaluation of the material and communications, rejected the defence of the Tripartite Agreement set up by the appellant. The Tripartite Agreement had been produced at a much belated stage and did not find reference in the earlier communications. Further, the record indicated that the trades were, in fact, executed by the appellant and not by the sub-broker (Mr Chauhan). The Arbitral Tribunal also doubted the defence of a claimant that there was a sub-broker as Mr Chauhan was described as a Business Development Manager (BDM). However, notwithstanding the controversy regarding his description, the Arbitral Tribunal held that the evidence clearly indicated that the trades were executed by the appellant. The Arbitral Tribunal held that the claimant had established that it had not authorised the trades and the communications issued by him clearly indicated the same. Thus, the burden to prove that the trades were authorised by the claimant shifted to the appellant. However, the appellants stand in this regard was not consistent.
48. The appellant failed to establish that the claimants account had been handled by Mr Chauhan as a Business Development Manager or as a sub-broker. There was no evidence that the copy of the Tripartite Agreement had been supplied to the claimant. Further, in some of the communications, the appellant had specifically admitted that it was carrying on the trading activities in the claimants account.
49. In the aforesaid circumstances, the Arbitral Tribunal concluded that the claimant had not placed any order to buy or sell securities with the appellant in the cash segment or the future and option segment. The relevant extract of the impugned award setting out the said reasoning is reproduced below:
32. It has been averred by the Respondent that Mr. Chauhan has signed as an Introducer as well as a witness in the Constituent’s Account opening form. Then, how it is possible that there may be a Tripartite Agreement in between the Constituent / Trading Member and Mr. Chauhan. What was the necessity of this Tripartite Agreement? Had there been such Tripartite Agreement, then the Respondent must have disclosed this fact in the first instance i.e. when the first SMS was sent from Mr. Saurabh Gupta, Vice President on 03.12.2008 & 12.12.2008 to the Claimant. Instead of any reference of the Tripartite Agreement, the reply of Mr. Saurabh Gupta as per SMS dated 03.12.2008 is “Yes, we have started it from today” and as per SMS dated 12.12.2008 is “Dear Tarun, I am in a Conference, we are already doing trade in your account, I will let you know the status in the morning”. As per the Respondent’s SMS version, the Respondent has started trading in the Account of the Claimant. Is it ethical for the Trading Member to trade in the Basic Account of the Claimant. When Mr. Saurabh Gupta or any of its employees are trading in the Basic Account of the Claimant, there cannot be any deemed authorization on behalf of the Claimant. It is wrong to say that the Claimant has expressly permitted Mr. Saurabh Gupta to trade in his Account. It was Mr. Saurabh Gupta who has done the trading in the Account of the Claimant of his own accord at the risk of Trading Member, there is no such written authorization given by the Claimant to Mr. Saurabh Gupta. There is a clear admission of Mr. Saurabh Gupta that he has started the trading in the account of the Claimant, which was a basic account and it was well within the knowledge of Mr. Saurabh Gupta.
33. When the Claimant wrote mail on 26.08.2009 & 27.08.2009 to Mr. Trishem Rao raising serious queries i.e. Who operated my account and authorized and executed trade. Where were the trading calls coming from? Basically, from which Research Desk? Then there was a reply from Trishem Rao via email on 27.08.2009 to the Claimant, the contents of the reply are “The regard of your mail are investigating the whole issue and will reply to you by Monday. ”
34. Had there been authorization for B.D.M, Mr. Chauhan or Sub-Broker Mr. Chauhan for conducting trading in the Account of the Claimant by the Claimant, then there must be specific reply in the year 2008 by the Respondent that there is a Tripartite Agreement and the Claimant himself has authorized Mr. Chauhan to transact as per Tripartite Agreement in the account of the Claimant. But there was no such reply. Even the matter has been kept for investigation in the whole issue. When the Claimant did not get the reply by Monday as per the mail dated 27.08.2009, the Claimant again raised serious issue and wrote the mail to Mr. Neeraj Khanna on 28.08.2009 & 03.09.2009 and raised serious issues, and wrote mail on 13.09.2009 to Mr. Shankar Sharma, Vice Chairman of the Company, then there was a reply from Neeraj Khanna via mail on 14.09.2009. Copy of same was sent to Mr. Saurabh Gupta and Mr. Trisham Rao, wherein the whole stand was changed and it was averred that the Account of the Claimant was being handed by the B.D.M. Mr. Chauhan who was regularly interacting with the Claimant.
35. Defense of the B.D.M. Mr. Chauhan was introduced first time by Mr. Neeraj Khanna on 14.09.2009, whereas dispute has arisen in October, 2008 and before that as per the telephonic conversation and incoming and outgoing SMS. Mr. Neeraj Khanna stated in his email dated 14.09.2009 i.e. You started trading in the account in August, 2008 and if you were not satisfied with the services being provided to you by Rajesh Chauhan, you should have pointed out at that stage to us. Now after a period of almost 1 year, you are airing your grievances. We have analyzed this fact written by Mr. Neeraj Khanna, this fact is against the record. The Claimant has been airing his grievances since October, 2008 as per SMS dated 29.10.2008, wherein he wrote my confidence in your firm is very low now and the subsequent mails as referred above.
36. Now we find that the Claimant has discharged his burden and the burden now has shifted on the Respondent that the Claimant Account was being handled by B.D.M. Mr. Chauhan or Sub-Broker Mr. Chauhan as per authorization of the Claimant.
37. We feel that the Respondent has utterly failed to produce any such evidence, which may prove the above version of the Respondent i.e. the Account was being handled by B.D.M. Mr. Chauhan or Sub-Broker Mr. Chauhan. Had there been any such Tripartite Agreement, a copy of such Tripartite Agreement must have been supplied by the Respondent to the Claimant at the time of opening of the account, but there is no such evidence that the copy of the same has been given or sent to the Claimant.
38. Even the Respondent Company has specifically admitted as per SMS from Mr. Saurabh Gupta dated 03.12.2008 and 12.12.2008 stating therein that we are already trading in your Account. This is a clear admission of the Respondent. At every stage, there is new defense or story set up by the Respondent, if Mr. Chauhan was authorized to handle the Account as per Respondent, then, how Mr. Saurabh Gupta started trading in the Account of the Claimant. As such, the whole version of the Respondent is unbelievable. It is self-contradictory. Theory set up by the Respondent in regard to Tripartite Agreement appears to be unnatural, afterthought, even though, the Respondent may have procured the report of the handwriting expert. No weightage can be given to such report procured by the Respondent in the given facts and circumstances, whereas the Claimant has also filed a hand writing expert report, wherein it is stated that the signature on Tripartite Agreement does not match with the Claimants signature.
39. As such, if we go through the whole records, evidence, telephonic conversation and correspondences via email in between the parties, we find that the Claimant has not placed any order of buy or sell to the Trading Member in cash segment or Future & Option segment.
50. As is apparent from the above, the Arbitral Tribunals decision that the claimant had not placed any order for trades carried out in his account is based on appreciation and evaluation of evidence and is informed by reason. We find no grounds to fault this view. The Arbitral Tribunals conclusion is clearly a plausible one and thus, the impugned award founded on the said conclusion cannot be said to be vitiated on the ground of patent illegality, or otherwise.
51. The appellants claim that the claimant had not objected to the Contract Notes and the ledger copy and thus, the same evidenced pre-trade authorisation, was rejected by the Arbitral Tribunal. The Arbitral Tribunal noted that the claimant had in fact objected to the ledger account, and had raised several queries, but no satisfactory response was given by the appellant at the material time. It was also admitted by the appellant that it had not maintained relevant records or a document of the authorisation. The Arbitral Tribunal had also considered the said admission to reject the appellants contention. The Arbitral Tribunals reasoning to reject the said contention is articulated in paragraph 40 of the impugned award. The same reads as under:
40. The Respondent has placed much emphasize that as the Contract Notes and Ledger Copy sent by the Trading Member and received by the Claimant, so it should be deemed that trade have been done as per instructions of the Claimant. This theory is totally unbelievable, when the Claimant has not placed any orders to trade, when he did not authorize anyone to trade in his account, then, he cannot be stopped to raise his grievances. We hold that Contract Notes had come into existence only after the Trades has been undertaken on the Stock Exchange by the Trading Member itself. These Contract Notes record the concluding transactions and in no way convey exercise of discretion and judgment by the trading account holder of the particular trades before the trades are undertaken. Since, the Claim of the Claimant was that it was represented to him that a discretionary trading account would be operated by the Respondent, it was not expected from the Claimant to protest the undertakings of the hundreds of the trades in his account in a single day since it was his belief and exemption that the Respondent was undertaking such Hedge Trades following the trades strategies of his own products. We find that the Claimant did raise objections since beginning and till end through telephonic conversation, through SMS and via emails several times to all Senior Officers of the Company, when he became aware of the account position and the Respondent has also assured the Claimant that it was looking into his grievances. There would have been no reason for the Respondent to give any such comfort or assurance to the Claimant, had it been a simple trading account operated by the Respondent as per his own decision. There is also no force in the contention of the Respondent that the Claimant did not raise any issue after receipt of Contract Notes and Ledger Statement. We have to say that there is cogent evidence that when the Claimant received the Ledger Statement and checked it, he went on raising the issues seriously. He cried and wrote several mails to all Senior Officers of the Company. But no satisfactory reply was given at any time and it was stated that the matter is being investigated.
The Claimant has drawn our attention towards the admission made by the Counsel of the Respondent during the proceedings undergoing before the Hon’ble High Court of Delhi in FAO (OS) (Comm.) No. 50/2019, wherein the Hon’ble High Court has observed as follows He fairly admits that the appellant who is the trading member, does not have any confirmed order instructions on the NEAT System, and that the appellant also has not kept relevant record or document of the same, or of the completion, or otherwise, of the orders placed on it. Therefore, it is established that the trades undertaken by the Respondent in the account of the Claimant were not done on the prior instructions from the Claimant.
52. As is apparent from the above, the decision of the Arbitral Tribunal to reject the appellants contention that the supply of the Contract Notes and the ledger account to the claimant evidenced the pre-authorised trades, is a well-reasoned decision. According to the claimant, the appellant was to carry out the trades at its discretion according to its HFS. Thus, there was no ground for the claimant to object to each Contract Note on the ground of lack of authorisation. According to the claimant, he believed that the trades were being carried out according to the assurance held by the appellant.
53. It is also clear from the above that the Arbitral Tribunals conclusion that the trades executed by the appellant in the claimants account were not authorised is based on the evaluation of evidence and material produced by the parties. It is not based on non-compliance of maintenance of telephone recording as required by Regulation 3.4.1 of the National Stock Exchange of India Ltd. (F&O Segment) Regulations. In terms of the Regulation as applicable at the material time, it was incumbent on the appellant to maintain record of authorisations; the requirement to use telephonic recording systems to record the instructions and maintain telephonic recordings as a part of its records was introduced subsequently.
54. The contention that the impugned award is liable to be set aside as the Arbitral Tribunal had proceeded on an erroneous assumption that the said Regulation was applicable, is unmerited.
55. The appellant had reagitated its case before the Appellate Arbitral Tribunal. Based on the pleadings, submissions and rival contentions, the Appellate Arbitral Tribunal had framed the following points for determination:
(i) Whether Shri Rajesh Chauhan is a necessary party in the present Arbitration proceedings and if so its effect?
(ii) Whether the Respondents account was a simple trading account or was a discretionary account?
(iii) Whether the Impugned Award suffers from any illegality or material irregularity and liable to be set-aside?
(iv) Whether the interest awarded by the Tribunal below is unjust, unfair and liable to be set-aside/modified?
56. The Appellate Arbitral Tribunal rejected the appellants contention that Mr Rajesh Chauhan was a necessary party. The Appellate Arbitral Tribunal held that since the appellant claimed that it had executed the Tripartite Agreement with Mr Rajesh Chauhan and the claimant, the onus to prove the said fact rested on the appellant but it had not called Mr Chauhan as a witness and had failed to discharge its onus to prove the existence of the Tripartite Agreement in any manner.
57. The second and the third points of determination were decided together to avoid repetition.
58. Before the Appellate Arbitral Tribunal, the appellant reiterated its contention that the admission of the claimant that he had received Contract Notes was sufficient to establish that he had authorised the same because in terms of the undertaking cum authority letter forming Annexure 3 of the agreement between the parties, the claimant was required to communicate any discrepancy with the contract notes within a period of 24 hours failing which the same would be binding. The appellant contended that the same was in conformity with Regulation 3.4.1 of the National Stock Exchange of India Ltd. (F&O Segment) Regulations as the same was required to be read in conjunction with the agreement between the parties. The appellant submitted that in terms of the said Regulation 3.4.1, all members were required to ensure appropriate confirmed order instructions are obtained from the constituents before placement of order on the NEAT system. The appellant contended that the telephonic instructions were mutually agreed upon as appropriate confirmed order instructions. The appellant claimed that telephonic instructions were given by the claimant to the appellant and at the material time, there was no requirement to record such telephonic instructions.
59. The Appellate Arbitral Tribunal rejected the aforesaid contention and found that the appellant had failed to comply with Regulation 3.4.1 of the National Stock Exchange of India Ltd. (F&O Segment). It found that there was ample material on record which indicated that the appellant had failed to obtain confirmation instructions from the claimant before placement of any order. Further, the appellant did not preserve the record as regard placement of the orders. The Appellate Arbitral Tribunal also upheld the conclusion of the Arbitral Tribunal in this regard.
60. We find no infirmity with the said view. Admittedly, in terms of Regulation 3.4.1 of the National Stock Exchange (F&O Segment) Regulations, the appellant was bound as the trading member of NSE to ensure that appropriate confirmed order instructions are obtained from the constituents. Concededly, the appellant was required to obtain instructions from the claimant. However, the appellant had produced no evidence on record to establish that it had in fact received instructions from the claimant prior to execution of the transactions. The appellant relied solely on the admission of receipt of the contract notes by the claimant, which according to the appellant, established that the trades were as per the instructions of the claimant as he had not objected to it. However, the material produced on record clearly indicated that the claimant had not issued specific instructions for executing the trades prior to the same were executed. As noted above, the conclusions of the Arbitral Tribunal and the Appellate Arbitral Tribunal in this regard are based on appreciation of evidence. The same are well reasoned and thus, not amenable to challenge on the grounds as set out under Section 34(2) and Section 34(2A) of the A&C Act.
61. The Appellate Arbitral Tribunal also found no force in the appellants contention that the Arbitral Tribunal had erred in awarding interest for a period of 11 years and 6 months as the first award has been set aside by the Court under Section 34 of the A&C Act. The Appellate Arbitral Tribunal held that there was no infirmity with the decision of the Arbitral Tribunal to award interest from the date of cause of action. Clearly, there is no ground to fault this decision.
62. In the circumstances, we find that there is no ground to set aside the impugned award or the impugned appellate award on the ground of patent illegality or as being in conflict with public policy. The appellants challenge to the impugned award is, thus, unmerited.
63. Before concluding, it is also relevant to observe that although Regulation 3.4.1 of the National Stock Exchange of India Ltd. (F&O Segment), Trading Regulation, 2000 may not have, at the relevant time required telephonic recording of the instructions to be preserved, the said Regulation expressly provided that the required trading members to ensure that appropriate confirmed order instructions are obtained from the constituents before placement of order on the NEAT Systems. The trading members were also required to keep relevant record or documents of the same and/or completion or otherwise of these orders thereof. The relevant extract of Regulation 3.4.1 of the said Regulations, which were applicable at the material time reads as under:
3.4.1 Trading Members shall ensure that appropriate confirmed order instructions are obtained from the constituents before placement of an order on the NEAT system and shall keep relevant records or documents of the same and of the completion or otherwise of these orders thereof.
64. It is apparent from the above that even though there was no requirement to keep recording of telephonic conversations, the appellant was bound to keep relevant records and documents to evidence that appropriate confirmed order instructions were obtained. Concededly, there are no records whatsoever available with the appellant evidencing receipt of appropriate confirmed order instructions. The contention that the receipt of instructions must be inferred on the basis that the appellant did not raise objections on receipt of contract notes, was rightly rejected by the Appellate Arbitral Tribunal, in view of the overall factual conspectus, as noticed hereinabove.
65. The learned Commercial Court had also considered the said contention and had observed as under:
12. The objection raised by Ld. counsel for petitioner seemingly is misplaced. Neither the Arbitral Tribunal nor the Appellate Tribunal referred to requirement of recording of telephonic conversations issued vide SEBI Circular dated 22.03.2018. It was rather noted that the petitioner changed its stand and tried to make out a case that it was a simple trading account to evade its liability as the Regulations for handling the PMS Account were much more stringent. Furthermore, at best, if the case of petitioner was taken that it was a simple trading account, then also, they were in clear violation of Regulation 3.4.1 of NSEIL (F&O Segment) Trading Regulations, 2000. It was noted that petitioner failed to obtain any confirmation instructions before the placement of order on the NEAT System. They did not preserve the record with regard to placement of the order. Retention of the record was mandatorily required to be maintained by virtue of Regulation 2000. Contract Notes and Ledger Statement were sent post the transaction that was conducted, therefore, did not constitute pre-trade authorization.
66. We find no infirmity with the said view.
67. Consequently, the present appeal, being unmerited, is accordingly, dismissed.
VIBHU BAKHRU, J
SACHIN DATTA, J
JULY 01, 2024
gsr/RK
FAO (COMM) 119/2024 Page 8 of 9