The Court said that an arbitral tribunal can exercise jurisdiction over the husband in such cases under Bye-law 248(a) of the Bombay Stock Exchange2 Byelaws, 1957.
On Monday, the Supreme Court ruled that a husband can be held jointly and severally liable for the debit balance in his wife’s stock trading account based on an oral agreement and the nature of their financial transactions [AC Choksi Share Broker Vs Jatin Pratap Desai].
A Bench comprising Justices PS Narasimha and Sandeep Mehta stated that an arbitral tribunal has the authority to exercise jurisdiction over the husband in such cases under Bye-law 248(a) of the Bombay Stock Exchange Byelaws, 1957.
“Under Bye-law 248(a) (BSE), the arbitral tribunal could have exercised jurisdiction over respondent no. 1 (husband) on the basis of an oral contract that he would be jointly and severally liable for the transactions undertaken in respondent no. 2’s (wife) account. Such oral contract would not amount to a “private” transaction that falls outside the scope of arbitration,” the Court ruled.
The central question in this appeal is whether a woman’s husband can be included as a party in an arbitration initiated by the appellant, a registered stockbroker.
The dispute stemmed from a debit balance in the wife’s trading account, with the arbitral tribunal holding both respondents jointly and severally liable.
The respondents had individually opened trading accounts with the appellant-stockbroker in 1999. However, the appellant asserted that they had agreed to operate the accounts jointly and share responsibility for any losses.
By early 2001, the wife’s trading account had accrued a substantial debit balance (loss), while the husband’s account showed a credit balance. Following the husband’s oral instructions, the appellant transferred funds from his account to hers to cover the losses.
However, a stock market crash caused the debit balance to rise sharply, prompting the appellant to initiate arbitration to recover the amount from both respondents.
The husband challenged the claim, asserting that he was wrongly included in the arbitration and that the fund transfer violated SEBI guidelines.
The arbitral tribunal ruled in favor of the broker, holding both respondents jointly and severally liable for the losses.
It based its decision on evidence indicating the husband’s active involvement in the transactions and his agreement to cover the shortfall. The tribunal also rejected the husband’s counterclaim, reasoning that their financial dealings suggested shared liability. While it acknowledged SEBI guidelines requiring written authorization for fund transfers, it justified its ruling based on the couple’s financial history and past transactions.
When the respondents challenged the tribunal’s decision under Section 34 of the Arbitration and Conciliation Act, a single judge of the Bombay High Court dismissed their applications.
However, on appeal under Section 37, a Division Bench of the High Court overturned the tribunal’s ruling against the husband, concluding that he should not have been included in the arbitration.
The High Court held that his alleged liability arose from a private understanding, separate from transactions governed by the Bombay Stock Exchange (BSE) rules. It further emphasized that oral agreements could not override official trading records or SEBI guidelines. Consequently, it ruled that the tribunal lacked jurisdiction and had made legal errors in its decision.
The stockbroker subsequently appealed to the Supreme Court.
The Supreme Court ruled that the arbitral tribunal had jurisdiction over the husband under BSE Bye-law 248(a), which governs disputes between brokers and clients. It held that the oral agreement establishing joint and several liability was incidental to the transactions carried out on the stock exchange.
The Court highlighted the husband’s active role in managing both accounts and the financial dealings between the parties, reinforcing the tribunal’s jurisdiction over the matter.
“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……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,” the Court said.
The Court determined that the arbitral tribunal’s conclusion on joint and several liability was supported by evidence, including affidavits and the parties’ conduct. It held that the tribunal’s finding—that the husband had orally agreed to be jointly liable—was reasonable and not perverse.
Additionally, the Supreme Court criticized the High Court for re-evaluating evidence, noting that such review exceeded the scope of a Section 37 appeal.
As a result, the Court ruled in favor of the broker and upheld the arbitral tribunal’s decision.
“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,” the Court ruled.