A Bench of Justices PS Narasimha and Sandeep Mehta stated that an arbitral tribunal can exercise jurisdiction over the husband under Bye-law 248(a) of the Bombay Stock Exchange (BSE) Bye-laws, 1957.
NEW DELHI: The Supreme Court of India on 11th Feb, ruled that a husband can be held responsible for the losses in his wife’s stock trading account if there was an oral agreement and shared financial dealings.
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A Bench of Justices PS Narasimha and Sandeep Mehta stated that an arbitral tribunal can exercise jurisdiction over the husband under Bye-law 248(a) of the Bombay Stock Exchange (BSE) Bye-laws, 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.
Background
The main question in this appeal was whether a husband could be made a party to an arbitration initiated by a stockbroker regarding a debit balance in his wife’s account.
Both the husband and wife had opened separate trading accounts with a stockbroker in 1999. The broker claimed that they had agreed to manage their accounts jointly and share liability for losses.
By early 2001, the wife’s account had a significant debit balance (loss), whereas the husband’s account had a credit balance. On the husband’s oral instructions, the broker transferred money from his account to his wife’s account to cover the losses.
However, after a stock market crash, the losses increased, and the broker sought recovery from both the husband and wife through arbitration.
The husband opposed the claim, arguing that he was wrongly included in the arbitration and that the fund transfer was unauthorized under SEBI guidelines.
The arbitral tribunal ruled in favor of the broker and held both the husband and wife jointly and severally liable for the losses. The tribunal’s decision was based on the following findings:
- The husband actively participated in financial transactions.
- He had agreed to cover the shortfall in his wife’s account.
- The couple had a shared financial understanding.
The tribunal also dismissed the husband’s counterclaim, stating that SEBI guidelines requiring written authorization for fund transfers did not override the couple’s past dealings.
When the husband and wife challenged the 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. It ruled that:
- The husband’s liability was based on a private understanding, not official stock exchange transactions.
- Oral agreements could not override official trading records and SEBI regulations.
- The arbitral tribunal lacked jurisdiction to include the husband.
The broker then appealed to the Supreme Court, which ruled in its favor. The Supreme Court held that the arbitral tribunal had jurisdiction over the husband under BSE Bye-law 248(a), which covers disputes between brokers and clients.
The Court found that the husband’s involvement in financial dealings justified his liability.
“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 ruled.
The Supreme Court stated that the arbitral tribunal’s conclusions were based on valid evidence, including affidavits and the conduct of the parties. It criticized the High Court for re-evaluating the evidence, which was beyond the scope of a Section 37 appeal.
Thus, the Supreme Court 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.
Case Title: AC Choksi Share Broker Vs Jatin Pratap Desai
