Actual vs India Infoline Ltd.

D.Y. Chandrachud, J.—The Learned Single Judge dismissed a petition that was filed by the Appellant u/s 34 of the Arbitration and Conciliation Act, 1996 to challenge an award of the appellate tribunal constituted by the Bombay Stock Exchange. The Respondent is registered as a broker and member of the Bombay Stock Exchange. The Appellant was a person sharing brokerage with the Respondent, initially on a sharing basis and thereafter on a base brokerage model basis. The Appellant filed a claim before the arbitral tribunal constituted by the Bombay Stock Exchange for an amount of Rs. 59.19 lacs towards arrears of the share of brokerage, Rs. 14.37 lacs towards incentives earned on interest charged to non-banking financial companies and interest of Rs. 21.48 lacs on brokerage and incentive claimed to be due and payable. The Respondent raised a counter claim. During the course of the proceedings, the counter claim was restricted to an amount of Rs. 55.98 lacs. The arbitral tribunal rejected the claim of the Appellant and allowed the counter claim of the Respondent in part. The counter claim of the Respondent was allowed to the extent of Rs. 25.82 lacs, while the balance of the claim came to be rejected. Both the Appellant and the Respondent filed appeals before the appellate tribunal. The appellate tribunal confirmed the rejection of the claim filed by the Appellant. In the Appeal filed by the Respondent, the entire counter claim came to be allowed.

Four submissions have been urged during the course of the hearing on behalf of the Appellant :

(i) The award of the appellate tribunal is without reasons;

(ii) The award insofar as it relies upon the provisions of bye-law 218(f), is contrary to the provisions of Section 63 and Section 125(3) of the Contract Act;

(iii) The TDS certificates that were issued by the Respondent would constitute an acknowledgment of liability; and

(iv) No evidence was led by the Respondent in support of the counter claim.

For convenience of reference, we would address the issue of the counter claim of the Respondent first since that is the principal focus of the arguments of the learned counsel in appeal. The arbitral tribunal in its award dated 14 March 2011 recorded that the Respondent had restricted its counter claim to the extent of an amount of Rs. 55.98 lacs. This claim represented amounts due in respect of liabilities which were incurred by the Respondent towards payments which became due and payable on account of transactions executed on behalf of six parties. In respect of these six parties, it is common ground that the transaction was executed by the Appellant. Since there was a failure on the part of the six parties to pay the outstanding dues, the Respondent sought to assert an entitlement under bye-law 218 under which an indemnity is furnished by the person sharing brokerage (the Appellant) to the member of the Stock Exchange viz. the Respondent. Bye-law 218(d) provides as follows :

(d) In the absence of an agreement in writing to the contrary a remisier, authorised clerk, employee or other person sharing brokerage shall be deemed to have agreed to give a full and complete indemnity to the member with whom he shares brokerage for any loss which such member may sustain by the default of the constituent (provided such constituent is not a member of the Exchange) introduced by him in fulfilling his obligations.

Bye-law 218(d) envisages inter alia that a person sharing brokerage is deemed to have furnished a full and complete indemnity to the member with whom he shares brokerage for any loss which such member may sustain by the default of the constituent introduced by him in fulfilling his obligations.

Thereupon, bye-law 218(e) provides as follows :

(e) In the event of any default by a constituent the amount due shall be paid forthwith to the member by the remisier, authorised clerk, employee or other person introducing the defaulting constituent.

Hence, what bye-law 218(e) envisages is that if there is a default by a constituent, the person who introduces the defaulting constituent to the member would be liable to make good the default of the constituent to the member of the Stock Exchange.

Now in respect of four of the six parties in respect of whom the counter claim was made before the arbitral tribunal, the tribunal held that the claim was substantiated. In respect of the other two clients, the tribunal rejected the claim on the ground that the Respondent had settled the claims with these two parties and that bye-law 218(f) which entitled the Respondent to claim the balance from the Appellant was unconscionable. In appeal, the appellate tribunal held that the terms of bye-law 218(f) were clear in their mandate and so long as the bye-law governed the rights and liabilities of the parties, it could not be ignored. Bye-law 218(f) provides as follows :

(f) If the remisier, authorised clerk, employee or other person sharing brokerage fails to pay the amount due by the defaulting constituent introduced by him then at his risk and cost the member shall be entitled to take such proceedings against the defaulting constituent and/or make such settlement or compromise with him as he in his discretion deems advisable. The acceptance of a promissory note from the defaulting constituent for the whole or part of the amount due from him shall not release the remisier, authorised clerk, employee or other person sharing brokerage from his liability to pay to the member the original amount due from the defaulting constituent nor shall any settlement or compromise with the defaulting constituent diminish the liability of the remisier, authorised clerk, employee or other person sharing brokerage who shall pay to the member the unrealised balance of the original amount due from the defaulting constituent and the costs and expenses incurred in the course of realisation.

Bye-law 218(f) is clear in its stipulation that in the event that a person sharing brokerage fails to pay the amount due by the defaulting constituent introduced by him, in such an event the member would be entitled to adopt proceedings against the defaulting constituent or at its discretion to settle or compromise with him. The bye-law stipulates that such a settlement or compromise with the defaulting constituent shall not diminish the liability of the person sharing brokerage and the latter shall be liable to pay the member the unrealized balance of the original amount. The appellate tribunal was justified in taking the view that having regard to the clear mandate of bye-law 218(f), it was not open to the arbitral tribunal to ignore the bye-law which would bind the dealings between the parties.

But it has been urged on behalf of the Appellant that bye-law 218(f) would be contrary to the provisions of Section 125(3) of the Contract Act 1872. Section 125(3) provides as follows :

Rights of indemnity-holder when sued - The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor -

(1) .....

(2) ......

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.

At the outset it must be noted that no such plea was raised before the arbitral tribunal or before the appellate tribunal. The plea was raised for the first time in the petition u/s 34 of the Arbitration and Conciliation Act 1996. For the purposes of Section 125, the Appellant was the promisor in the contract of indemnity, while the Respondent is the promisee. Section 125 entitles the promisee to recover from the promisor sums which he may have paid under the terms of any compromise of any such suit. This is subject to the condition that the compromise was not contrary to the orders of the promisor and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity or if the promisor authorises him to compromise the suit. This is not a case where the promisee has paid certain amounts and which he seeks to recover from the promisor under the contract of indemnity. The situation is exactly the reverse where the promisee has realized a part of the claim and is suing the promisor for the balance relying upon the contract of indemnity. Whether the settlement was one which it would have been prudent for the promisee to make in the absence of a contract of indemnity is certainly not a pure question of law and is a matter on which evidence ought to have been adduced on behalf of the Appellant if he sought to question the terms of settlement. The Appellant did nothing of its kind. In the circumstances, it is not possible to entertain the submission in a proceeding u/s 34 in the absence of any factual foundation before the arbitral tribunal. The appellate tribunal was, in the circumstances, justified in holding that since bye-law 218(f) continues to apply to the parties, it would not be open to the Tribunal to ignore its mandate.

The only other defence as regards the counter claim was that it was barred by limitation. The arbitral tribunal held that the counter claim fell within the scope of bye-law 252(3) under which the claim was governed by the Limitation Act. This aspect has not been questioned in these proceedings in appeal. That leads us to the claim that was preferred by the Appellant before the arbitral tribunal. The contention of the Appellant was that the deduction of tax at source and the TDS certificates that were issued by the Respondent constituted a written acknowledgment of the debt, since a TDS certificate is issued when there is an ascertained quantum of money due and payable. The learned Single Judge has held that the issuance of a TDS certificate does not amount to the acknowledgment of liability by the Respondent in favour of the Appellant. We are inclined to reject the submission of the Appellant for the simple reason that it is common ground that the TDS certificates that were issued by the Respondent were common in respect of the transactions between the Appellant and the Respondent both on the Bombay Stock Exchange and the National Stock Exchange. Admittedly, the Appellant did not make any bifurcation between those transactions which were conducted on the Bombay Stock Exchange and those on the National Stock Exchange. This has been noted in the concluding part of paragraph 28 of the judgment of the learned Single Judge and this finding is not challenged in appeal. In the circumstances, it was the obligation of the Appellant, which had presented a claim before the arbitral forum constituted by the Bombay Stock Exchange to bifurcate and confine its claim in respect of those transactions which were effected on the Bombay Stock Exchange. Since this was not done, the rejection of the claim cannot be faulted.

We find no merit in the contention that the award of the appellate tribunal is without reasons or that there was no evidence in support of the counter claim. The award, ex facie, indicates that the appellate tribunal has considered and dealt with the submissions which were urged. The issue as regards the counter claim has already been considered earlier in this judgment. For these reasons, we do not find any merit in the Appeal. The Appeal is accordingly dismissed.