Cybertec Financial Services and Others vs M/S. J.R.G. Associates (P) Ltd.

C.K. Abdul Rehim, J.—This is an appeal filed u/s 37 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ''the Act'') against the order passed in O.P. (Arb.) No. 244/2003 by the IVth Additional District Court, Ernakulam. Appellants herein are the petitioners before the Court below and respondents before the Arbitration Tribunal. The respondent herein is the respondent before the court below and claimant before the Arbitration Tribunal. The 1st appellant is a partnership firm to which appellants 2 to 5 are partners. The firm had entered into an agreement with the respondent on 11-10-1999, through which it was agreed that the firm is appointed as Sub-Broker of the respondent. As per the ''account settlement statement'' No. 2001010 for the week ending on 13-03-2001 an amount of Rs. 20,54,655 became payable by the firm to the National Stock Exchange. Since the firm did not pay the said amount the respondent has to make the payment and as per the terms of the agreement the firm is liable to pay back the amount with interest, but they defaulted. Since the agreement dated 11-10-1999 (Ext. C2) contained a clause for arbitration, the respondent had approached this court invoking Section 11 of the Act. In Arbitration Request No. 19/2011 this Court appointed a sole Arbitrator through judgment dated 12-08-2008. The Arbitrator passed an award allowing the respondent to recover a sum of Rs. 16,56,781/- with interest @ 9% from the appellants.

The appellants filed application before the court below u/s 34 of the Act seeking to set aside the award, mainly contending that the arbitration agreement was not valid under law as on the relevant date of the transaction which was subject matter of the dispute, and hence the dispute cannot be settled through arbitration. It was also contended that the arbitral award is in conflict with public policy. The court below while dealing with the matter considered limitations with respect to grounds available for setting aside the award. Relying on decision of the hon''ble Supreme Court in Oil and Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd., it is observed that, interference can be possible only if the impugned award is contrary to fundamental policy of Indian law or interest of India or justice or morality or if it is patently illegal. Finding that the appellants were not successful in proving any of the said ingredients, the request for setting aside the award was negatived. With respect to the contention that the agreement was not in force as on the date of the transaction, after elaborate consideration of the materials and evidence, the court below found that Ext. C2 agreement has not come to an end and it was valid at the time of the relevant transaction. Holding that no ground for setting aside the award exists u/s 34 of the Act, the petition was dismissed.

In this appeal filed u/s 37, limited question which arises for consideration is as to whether the court below was right in refusing to set aside the arbitral award invoking powers u/s 34 of the Act. Main thrust of the argument is based on Ext. R7 agreement executed on 10-10-2000 between the respondent and M/s. Cybertec Stocks and Shares (P) Ltd., a company incorporated (hereinafter referred as ''the company''). On the basis of Ext. R7 agreement, Ext. C2 became terminated and thereby the Arbitrator has no jurisdiction to pass the impugned award, is the contention. Exhibit C2 agreement executed on 11-10-1999 stipulated period of its validity as one year. On 10-10-2000, exactly on the date of its expiry, Ext. R7 was executed between the respondent and the company. The Managing partner of the firm is the Managing Director of the Company, and the partners of the firm (other appellants) are Directors of the Company. According to the appellants, the Registrar of Companies had issued certificate in Form No. 2 and 3 transferring all the assets and liabilities of the firm to the Company, as on 10-10-2000. It is contended that by virtue of Ext. R7 agreement Ext. C2 became cancelled or invalid. It is further contended that after 10-10-2000 the company was acting as ''Sub-Broker'' of the respondent and was transacting business with the Stock Exchange. The arbitration clause contained in Ext. R7 agreement is to the effect of referring any dispute for arbitration in accordance with the Rules, Byelaws and Regulations of the Stock Exchange. It is pointed out that the arbitration clause (Clause 17) in Ext. R7 was incorporated in tune with the mandatory requirements under the SEBI Act and the SEBI (Stock-Brokers and Sub-Brokers) Regulation, 1992 and also in tune with clauses provided under the model ''Stock Broker and Sub-Broker agreement''. It is the case of the appellants that, Ext. R6 transaction statement pertains to business transactions on and from 10-10-2000 and it was conducted only by the company. Since all the assets and liabilities of the firm had already been taken over by the company, as approved by the Registrar of Companies, it was only the company which is transacting with the respondent. Even if any amount is found liable to be recovered the same can be recovered only from the company, is the contention. Since the arbitration clause applicable with respect to any such dispute is clause 17 of Ext. R7 and since the arbitration agreement contained under Ext. C2 became terminated, the arbitration tribunal was not having jurisdiction to deal with the dispute. The appellants also raised a contention that the Arbitrator had failed to mark in evidence the Certificates issued by the Registrar of Companies in form No. 2 and 3 of the Companies Act, 1956 inspite of production of certified copies of those documents and inspite of marking of those documents in the proof affidavit filed.

Appellants further contended that the above grounds were raised before this court in the Arbitration Request No. 19/2001. But discarding such contentions this court appointed the Arbitrator, observing that the question as to whether the dispute can be decided by the Arbitration Tribunal need not be decided at that stage. It is further stated that, the appellants have raised the said contentions before the Arbitrator. But the Arbitrator had arrived at a conclusion that the arbitration clause in Ext. C2 agreement is valid and hence he had jurisdiction to resolve the dispute. The court below also upheld the said findings. In this appeal the appellants are challenging the findings of the Arbitration Tribunal and that of the court below on the said issue.

The above said contentions of the appellants were resisted by respondent submitting that, Ext. R7 agreement was entered only in the context of a desire to start business with a new company in the place of the firm, as Sub Broker, on getting registration from SEBI. But Ext. C26 will reveal that SEBI had granted registration to the company only on 23-03-2001. Admittedly the dispute relates to transactions from September 2000 onwards till the settlement made on the week ending on 13-03-2001. It is contended that, till the company got registration from SEBI, the firm was transacting business with the respondent and therefore Ext. R7 agreement or the arbitration clause contained therein has not become operative at that point of time. Referring to clause 12 in Ext. C2 it is pointed out that the agreement will remain in force for a period of one year from the date of installation of the software by the respondent at the firm''s office premises at Thodupuzha and if not terminated it will be automatically renewed for a further period on the same terms and conditions as already agreed to by the parties. Further, clause 20 of Ext. C2 says that the agreement will remain in force and will govern transactions between the parties for one year or till it is cancelled or terminated in the manner expressed therein. There was no cancellation or termination of the agreement and therefore, on the expiry the agreement will become automatically renewed for a further period of one year, on the very same terms and conditions. Hence it is contended that the arbitration agreement was valid and the Arbitral Tribunal had powers to resolve the dispute. It is further contended that respondent had produced all evidence in support of the claim, whereas the appellants refused to produce even materials available with them. The respondent had produced all the "Contract Notes" in respect of the transactions closing on 13-03-2001 and therefore the Arbitrator was justified in drawing an inference regarding genuineness of the claim, in view of Section 114 of the Indian Evidence Act.

While appreciating the rival contentions, basic question need be decided is as to whether the arbitration agreement was in force at the time when the transactions which is subject matter of the dispute had taken place. On this factual aspect the Arbitral Tribunal as well as the court below had arrived at categoric findings that, under the relevant clause in Ext. C2 agreement there is a provision for automatic renewal until it is terminated or cancelled. The said clause read with clause 20 of Ext. C2 gives rise to the presumption that, even after 10-10-2000 Ext. C2 agreement continued in force along with the arbitration clause contained therein, as valid. Regarding formation of the company and taking over of the assets and liabilities of the firm, contention of the appellant is that there was failure on the part of the Arbitral Tribunal to take note of the certificates issued by the Registrar of Companies. But in view of the fact that Ext. R7 agreement was executed subject to condition of the company obtaining registration from SEBI and in view of the fact that Ext. C26 registration was obtained only on 26-03-2001, it became evident that the agency agreement with the company was not operational till 23-03-2001. Factual contentions of the respondent regarding the transactions entered with the firm till 13-03-2001, has been accepted by the Arbitral Tribunal and further by the court below, on the basis of the evidence available. This court finds no illegality or infirmity in those findings. The provisions contained in Ext. C2 with respect to its validity and renewal will indicate that the findings of the Arbitral Tribunal and that of the court below, with respect to the existence of an arbitration agreement and jurisdiction of Arbitral Tribunal, also not suffers from any illegality, error or infirmity. Hence this court is inclined to uphold those findings.

Sri. K.L. Vargheese, learned counsel for the appellants, had raised a further contention based on Section 12 of the SEBI Act, 1992. It prohibits Stock-Brokers or Sub-Brokers in dealing with securities, except under and in accordance with the conditions of a certificate of registration obtained from the Board issued under the relevant regulations formulated under the Act. Pointing out to various provisions contained in the regulations it is contended that the firm in question was not having registration. Therefore Ext. C2 is an agreement executed in violation of Section 12 of the SEBI Act and any transactions under the said agreement is violative of fundamental policies of law and opposed to public policy, is the contention. Therefore the validity of the arbitration award is disputed.

Sri. Jaju Babu, learned counsel for respondent raised a preliminary objection against the above said contention pointing out that such a ground is raised without support of any pleadings, for the first time in this appeal. But according to learned counsel for the appellants it is a question of law which can be raised at any stage. It is an issue which goes to the root of the matter, is the contention. He had placed reliance on various decisions hon''ble Supreme Court, Gurucharan Singh Vs. Kamla Singh and Others, , Santosh Hazari Vs. Purushottam Tiwai (Dead) by Lrs., , Hero Vinoth (minor) Vs. Seshammal, , Boodireddy Chandraiah and Others Vs. Arigela Laxmi and Another, , Kashmir Singh Vs. Harnam Singh and Another, and U.R. Virupakshappa V. Sarvamangala and another (2009) 2 SCC 177. The judicial precedents settle the proposition that a pure question of law going to the root of the case, based on undisputed or proven facts, could be raised even before the court of last resort. Contention of the appellants is that the transactions carried between respondent and the firm, prior to 23-03-2001 (date of which the company got registration) is struck by the mandatory provisions of Section 12 and other provisions of the SEBI Act and the relevant Regulations. Enforcement of Ext. C2 contract, being contrary to law, is a question involved which goes deep into root of the matter. It is a contract hit by Section 23 of the Indian Contract Act, 1972 and it is opposed to public policy, is the contention. Per contra, contention of the respondent is that the question whether Ext. C2 agreement satisfies the requirement u/s 12 of the SEBI Act, is a pure question of fact which is to be decided based on evidence. It is not an abstract question of law. Hence the plea based on an alleged violation of the provisions of the SEBI Act is not liable to be entertained for the first time in this Arbitration Appeal. Further, even assuming (without admitting) that there was violation of SEBI Act while acting in terms of Ext. C2, that will not invalidate the claim which is the subject matter of the arbitration. Admittedly the respondent is a registered broker of the National Stock Exchange. After entering into Ext. C2 agreement and enjoying benefits as a Sub Broker, the appellants cannot be permitted to take shelter on the pretext violation of Section 12 of the SEBI Act. A wrong doer cannot take defence against a third party on the basis that he has done a wrong thing. A party who committed a mistake cannot be permitted to turn around and put forth a defence against a third party, who bonafidely transacted with him. The amount in dispute was due to the National Stock Exchange, towards transactions done by the appellants. Ultimately the investors interest is to be protected and the amount due to the National Stock Exchange need to be paid. Therefore the defence put forth by the appellants will affect the interest of investors and also the interest of the National Stock Exchange, who are absolutely third parties in the transactions. Considering the public policy involved such a defence cannot be countenanced, is the contention.

Learned counsel for the respondent placed reliance on a decision of the hon''ble Supreme Court in Sita Ram Vs. Radhabai and Others, . The hon''ble Supreme Court considering the maxim, "In pari delicto, potior est conditio defendentis" held that there are exemptions to the principle that courts will refuse an illegal agreement at the instance of a person who is himself a party to the illegality or fraud, in cases in where a man will be relieved of the consequence of an illegal contract into which he has entered. In such cases the maxim does not apply, is the dictum. The appellants in their reply contended that, the respondent cannot use the above maxim to claim innocence and to escape from the liability for non-compliance of mandatory provisions of the SEBI Act, with respect to the transactions carried out on mutual basis before 23-03-2001. According to the appellants, a duty is cast on both the Stock Broker and sub broker to comply with the mandatory requirements.

Question to be decided is as to whether the award ought to have been set aside invoking Section 34 of the Act, on the basis that it was opposed to law and public policy. Whether Ext. C2 agreement was unenforceable under law, for the purpose of realising amounts paid by the respondent in discharge of its liability to NSE, on the basis that it was executed in violation of the provisions of SEBI Act and Regulations, is basically a question to be decided depending on facts and circumstances emerging from materials and evidences. Such a question cannot be adjudicated by this court in an appeal filed u/s 37 of the Act. Jurisdiction vested on the court is basically to decide sustainability of the findings arrived by the court below. Contentions against validity of the agreement of arbitration, raised for the first time in this appeal cannot be considered as an abstract question of law. To decide such an issue an adjudication based on facts and evidence is essential. Further, question as to whether the claim will survive despite the invalidity alleged, is also a matter requires consideration, which cannot be ventured in this appeal.

Under the above mentioned circumstances, we do not find any legally sustainable grounds to hold that the Court below had committed any error, illegality, irregularity or impropriety in arriving at a conclusion that the arbitration award is not liable to be set aside. In the result the appeal fails and the same is hereby dismissed.