Mr. A. Chandrasekaran vs M/s. Yoha Securities Limited and Mr. M.V. Badrinath

V. Ramasubramanian, J.—This is a petition filed u/s 34 of the Arbitration and Conciliation Act, 1996, seeking to set aside an arbitration

award passed by the second respondent - Arbitrator. The petitioner opened a trading account with the first respondent and started operations

from December 2003. It appears that by the end of 2003-2004, the petitioner was holding huge stocks traded through the first respondent. The

account number of the petitioner was SC-1.

It was the claim of the petitioner that he was introduced to the first respondent by a sub-broker by name T.K. Srinivasan, to whom, commission

used to be paid. But, after the relationship between T.K. Srinivasan and the first respondent got severed, the petitioner started making a claim for

bringing down the brokerage structure. At one time, the petitioner claimed that there was an excess brokerage of Rs. 7,80,000/- and the petitioner

protested on 8.2.2005. Thereafter, the petitioner filed a criminal complaint on the file of the VI Metropolitan Magistrate, Egmore. It appears that

the matter was referred u/s 156(3) of the Code of Criminal Procedure.

The petitioner stopped trading from 8.2.2005. Thereafter, the petitioner made a claim with the National Stock Exchange and invoked the

arbitration clause and the matter was referred to the second respondent for arbitration. Noting that the last trade was made on 8.2.2005, but the

claim was made to the concerned Authority in the National Stock Exchange only on 17.10.2006 and that the applicant actually filed an application

for arbitration only on 11.5.2007, the Arbitrator passed an award rejecting the claim, on the basis of the limitation prescribed by Bye law (3) of

Chapter XI of NSE Bye Laws, by his award dated 5.11.2007. Therefore, the petitioner is before this Court.

It must be mentioned here that after the petitioner filed an application on 11.5.2007 for arbitration, the respondent raised the question of

limitation. Therefore, the petitioner also filed an application before this Court u/s 43 of the Act, seeking extension of time. It was filed on

22.10.2007, but was not pursued.

In the above background of facts, the only question that arises for consideration is as to whether the Arbitrator was right in rejecting the claim on

the ground of limitation or not.

Before I go into the said question, it should be pointed out that according to Mr. K.G. Vasudevan, learned counsel appearing for the first

respondent, the arbitration award was not solely on the basis of limitation, but was actually on merits also. Drawing my attention to paragraphs 4.2,

4.3, 4.4 and 4-5, the learned counsel appearing for the first respondent submitted that the whole claim of the petitioner was found to be baseless

by the Arbitrator and that in addition, the Arbitrator also rejected the claim on the basis of limitation.

But I find that in the last portion of paragraph 4.1 of the award, the Arbitrator has stated ""at the outset, the present application for arbitration

was barred by limitation."" Therefore, I think the observations made from paragraphs 4.2 to 4.5 were only incidental and cannot be considered to

be a pronouncement on merits. Moreover, the actual findings of the Arbitrator are recorded only in Chapter V of the award from paragraphs 5.1

to 5.4. Therefore, I do not consider the award to be one on merits.

Coming to the question of limitation, it is seen that Bye law (3) of Chapter XI of NSE Bye-laws, as it stood at that time, reads as follows:

All claims, differences or disputes referred to, shall be submitted to arbitration within six months from the date on which the claim, difference or

dispute arose or shall be deemed to have arisen. The time taken in conciliation proceedings, if any, initiated and conducted as per the provisions of

the Act and time taken by the Relevant Authority to administratively resolve the claim, differences or disputes shall be excluded for the purpose of

determining the period of six months.

But subsequently, the Securities and Exchange Board of India issued a circular dated 11.8.2010 streamlining the procedure for arbitration

mechanism available at Stock Exchanges. In the said circular, SEBI indicated that the period of limitation for filing a reference should be governed

by the provisions of the Limitation Act, 1963. But unfortunately, the reference to arbitration and the passing of the award happened before the said

circular and hence, I have to test the question only with reference to the provision that existed then.

There is no dispute about the fact that if there was no arbitration agreement at all between the parties, the petitioner would have had a period

of limitation of three years to lodge a claim against the first respondent. There is also no dispute about the fact that the arbitration agreement

between the petitioner and the first respondent, is not an express contract, but an implied one. The first respondent is a member of the National

Stock Exchange and hence, the first respondent is a subscriber to the bye laws of the National Stock Exchange of India Limited. The said bye

laws contain a chapter under Chapter IX, which provides for arbitration. The relevant bye law stipulates that all claims, differences or disputes

between the trading members inter se and between trading members and constituents arising out of or in relation to dealings, contracts and

transactions, shall be submitted to arbitration. The bye law also provides that the provisions contained therein shall be deemed to form part of all

dealings, contracts and transactions. Therefore, the petitioner, by becoming a subscriber and by indulging in trading operations through the first

respondent, became a party to the said arbitration agreement provided under the bye laws. Thus, the arbitration agreement existing between the

petitioner and the first respondent is actually an implied or at least indirect one. This is why, Bye law (3) of Chapter XI of NSE Bye-laws,

stipulating only a period of 6 months to lodge a claim, is put against the petitioner. Therefore, the question to be considered is as to whether this

stipulation can be held against the petitioner or not.

Section 28 of the Indian Contract Act, as it originally stood, prescribed that every agreement, by which any party thereto is restricted

absolutely from enforcing his rights under the contract or which limits the time for enforcement of his rights, is void to that extent. The effect of this

unamended Section 28, was stated in the form of two propositions by the Law Commission of India in its 97th report as follows:

(a) The parties to an agreement are not allowed to substitute their own periods of limitation in place of the period laid in the general law of

limitation; and

(b) but the parties to an agreement are allowed to substitute their own periods of prescription, that is to say, they are free to provide that if a party

does not sue within a specified period, then the rights accruing under the contract shall be forfeited, or extinguished or that a party shall be

discharged from all liability under the contract. (The precise words used may differ from agreement to agreement, but in substance their object is

usually to forfeit or extinguish the rights). In other words, a clause limiting the time for enforcing a remedy is prohibited, but a clause limiting the

duration upto which the rights remain alive, and extinguishing those rights at the end of such period, is permissible.

The above provision led to lot of disputes. Several courts took the view that though the prescription of a lesser period of limitation for the

enforcement of a right was contrary to law, the prescription of a period for extinction of a right under the contract, was valid. This view was

approved by the Supreme Court in The Vulcan Insurance Co. Ltd. Vs. Maharaj Singh and Another, , where a clause in an insurance policy

prescribing the forfeiture of all benefits under the policy, unless a suit was brought within a specified period, was held to be valid. The Courts

pointed out that when the period of limitation for the enforcement of a contract is curtailed by agreement, it was void. But, when the contract

prescribed extinction of a right to sue or when the contract discharged one party from all liability after a particular point of time, Section 28 did not

have any application.

This provision of law provided a disturbing feature and hence the Law Commission made the following recommendations in its 97th report:

5.1. We now come to the changes that are needed in the present law. In our opinion, the present legal position as to prescriptive clauses in

contracts cannot be defended as a matter of justice, logic, commonsense or convenience. When accepting such clauses, consumers either do not

realise the possible adverse impact of such clauses, or are forced to agree because big corporations are not prepared to enter into contracts

except on these onerous terms. ""Take it or leave it all"", is their general attitude, and because of their superior bargaining power, they naturally have

the upper hand. We are not, at present, dealing with the much wider field of ""standard form contracts"" or ""standard"" terms. But confining ourselves

to the narrow issue under discussion, it would appear that the present legal position is open to serious objection from the common man''s point of

view. Further, such clauses introduce an element of uncertainty in transactions which are entered into daily by hundreds of persons.

5.2. It is hardly necessary to repeat all that we have said in the preceding Chapters about the demerits of the present law. Briefly, one can say that

the present law, which regards prescriptive clauses as valid while invalidating time limit clauses which merely bar the remedy, suffers from the

following principal defects:-

(a) It causes serious hardship to those who are economically disadvantaged and is violative of economic justice.

(b) In particular, it harms the interests of the consumer, dealing with big corporations.

(c) It is illogical, being based on a distinction which treats the more severe flaw as valid, while invalidating a lesser one.

(d) It rests on a distinction too subtle and refund to admit of easy application in practice. It thus, throws a cloud on the rights of parties, who do not

know with certainty where they stand, ultimately leading to avoidable litigation.

5.3. On a consideration of all aspects of the matter, we recommend that Section 28 of the Indian Contract Act, 1872, should be suitably amended

so as to render invalid contractual clauses which purport to extinguish, on the expiry of a specified term, rights accruing from the contract. Here is a

suggestion for re-drafting the main paragraph of Section 28.

Revised Section 28, main paragraph, Contract Act as recommended 28. Every agreement--

(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract by the usual legal proceedings in

the ordinary tribunals, or

(b) which limits the time within which he may thus enforce his rights, or

(c) which extinguishes the rights of any party thereto under or in respect of any contract on the expiry of a specified period or on failure to make a

claim or to institute a suit or other legal proceeding within a specified period, or

(d) which discharges any party thereto from any liability under or in respect of any contract in the circumstances specified in clause (c), is void to

that extent.

Thereafter, Section 28 of the Contract Act was amended in 1996, when the Arbitration and Conciliation Act, 1996 was enacted. The

amended provision of Section 28 reads as follows:

Agreements in restraint of legal proceedings, void -

Every agreement (a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual

legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or

(b) which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the

expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent.

In Smt. Biba Sethi and Mr. Nitin Sethi Vs. Dyna Securities Limited, , the Delhi High Court was concerned with a petition u/s 34, challenging

the awards passed by the Arbitral Tribunal, rejecting certain claims as barred by limitation in terms of bye-law 3 of Chapter XI. One of the

questions that the Delhi High Court framed for consideration was whether the said bye-law 3 of Chapter XI, is a local/special law, within the

meaning of Section 29(2) of the Limitation Act, 1963 or whether it was a contract to be governed by Section 28 of the Contract Act, 1872. After

noting that the bye-laws were framed in terms of Section 9 of the Securities Contracts (Regulation) Act, 1956, the Delhi High Court took note of

the power granted to the Court u/s 43(3) of the Arbitration and Conciliation Act, 1996, and came to the conclusion that the Arbitration Agreement

was thrust upon the constituents of stock brokers only by virtue of a contract and not by virtue of an enactment. The Delhi High Court also took

note of the fact that Section 9(2) of the Securities Contracts (Regulation) Act, 1956, by itself did not provide a lesser period of limitation.

Therefore, the Delhi High Court held that if bye-law 3 was only contractual then by virtue of Section 2(4) of the Arbitration Act, Section 28 of the

Contract Act would come into play. Consequently, the Court held that bye-law 3 was void. Ultimately, the Delhi High Court set aside the Arbitral

Award in that case, on the ground that the award was contrary to Section 28 of the Contract Act and was not in accordance with substantive law

of India.

In Pandit Construction Company Vs. Delhi Development Authority and Another, , the Delhi High Court was concerned with an award where

a claim was rejected on the ground that it was not preferred within the period of 90 days, as stipulated in clause 25 of the General Conditions of

Contract. After taking note of the judgment of the Supreme Court in National Insurance Co. Ltd. Vs. Sujir Ganesh Nayak and Co. and another,

and the amendment made to Section 28 of the Contract Act, the Delhi High Court held, following its earlier decision in Explore Computers Pvt.

Ltd. Vs. Cals Ltd. and Another, that a clause restricting the right of a person to file a suit or claim within one month of expiry of bank guarantee,

would be barred by the amended provisions of Section 28.

While the Delhi High Court appears to have consistently taken the view as above mentioned, this Court appears to have taken a contrary view

in HDFC Securities Ltd. Vs. S. Vivekanandan and Others, . In the said decision, Chitra Venkataraman, J., disagreed with the view taken by the

Delhi High Court in Biba Sethi and followed the decision of the Supreme Court in H.P. State Forest Company Ltd. Vs. United India Insurance

Co. Ltd., .

In the decision in HCG Stock and Share Brokers Limited Vs. Gaggar Suresh, , the Supreme Court was concerned with an award that was

upheld by a single Judge and a Division Bench of the Bombay High Court, on the ground of limitation. In other words, the rejection of the claim by

the Arbitral Tribunal on the basis of bye-law 3 of Chapter XI was upheld right upto the Supreme Court. But a careful perusal of the said decision

would show that the validity of bye-law No. 3 was never in question, with reference to Section 28 of the Contract Act, 1872 and Section 29(2) of

the Limitation Act, 1963.

Even the decision of this Court in HDFC Securities, cannot be taken to be laying down the law on the point, in view of the fact that the

question of validity of bye-law 3 was never raised in that case before the Arbitral Tribunal. Therefore, it was observed by this Court in HDFC

Securities (Para 25), that the question as to the validity of the bye-law was not raised before the Arbitral Tribunal and that therefore, the question

did not arise in the petition u/s 34. Once it is held that that question did not arise before this Court, even the observations made in paragraph 22 of

the Report, disagreeing with the views of the Delhi High Court, may at the most tantamount to arbiter. Therefore, there is no impediment for me to

consider the issue independently.

A careful look at Section 3(1) of the Limitation Act, 1963 shows that every suit instituted, appeal preferred and application made after the

prescribed period shall be dismissed, although limitation had not been set up as a defence, subject to the provisions of Sections 4 to 24. Section

29(2) of the Limitation Act, 1963, saves any special or local law which prescribes a period of limitation different from the period prescribed by the

schedule to the Limitation Act, 1963. Sub-section (2) of Section 29 also mandates that for the purpose of determining any period of limitation,

prescribed by any special or local law, the provisions of Sections 4 to 24 would apply only in so far as and to the extent to which they are not

expressly excluded by such special or local law.

The question as to the interpretation to be given to the expressions ""local law"" and ""special law"" appearing in Section 29(2), fell for

consideration in a few cases. Though the expression ""local law"" is defined in Section 42 of the Indian Penal Code, the same meaning cannot be

adopted for the purpose of understanding the expression appearing in Section 29(2). Wherever the CPC prescribed a period of limitation for

taking out an application, that provision was considered by the Supreme Court to be a special law { Mangu Ram Vs. Municipal Corporation of

Delhi, though the Code by itself is only a general law. Similarly, the French Civil Code was understood to be a local law of Pondicherry. The

Portuguese Civil Code was held to be a local law. The Letters Patent were held to be special or local law { The Union of India (UOI) Vs. Ram

Kanwar and Others, }.

But irrespective of what the expressions ""local law"" or ""special law"" would mean, there can be no dispute about the meaning to be assigned at

least to the expression ""law"". The Supreme Court has recognised, with reference to Kelson''s Hierarchy of Laws that law could fall under any of

the following categories:-

(i) Law made by Parliament or by Legislatures;

(ii) Rules issued by the appropriate Government, in exercise of the power conferred by an enactment of Parliament or State Legislature;

(iii) The Regulations issued by Statutory Authorities or creatures of Statutes in exercise of the power conferred by the Statute or the Rules;

(iv) Executive instructions issued in exercise of the power conferred by Statutes or Statutory Rules.

But the above Hierarchy of Laws do not take within its fold, a contract simpliciter entered into between two parties including a contract

entered into by a Statutory Authority or the State itself. On the contrary, there are indications in the Contract Act itself to the effect that there is a

distinction between what we perceive as law and what we perceive as a contract. The very definition of the expression ""contract"" as found in

section 2(h) of the Contract Act is that ""it is an agreement enforceable by law"". Section 21 of the Contract Act makes a contract not voidable

merely because it was caused by a mistake as to any law in force in India. The question as to whether the objects and considerations of an

agreement are lawful or not, in terms of Section 23, has also to be determined only with reference to what the law is. Therefore, a contract pure

and simple, entered into between two parties, cannot be taken to be a special or local law so as to fall within the scope of Section 29(2) of the

Limitation Act, 1963.

As pointed out by the Delhi High Court, the bye-laws of the National Stock Exchange, are framed in exercise of the powers conferred u/s 9(1)

of the Securities Contracts (Regulation) Act, 1956. The said Act defines a contract u/s 2(a) to mean a contract for or relating to the purchase or

sale of securities. The Act also defines the expression ""stock exchange"" u/s 2(j) to mean (i) any body of individuals constituted before

corporatisation and demutualisation under Sections 4A and 4B or (ii) a body of corporate incorporated under the Companies Act, 1956. The

Securities Contracts (Regulation) Act, 1956 contains some provisions that deal with making of rules, making of regulations and making of bye-

laws. Section 7A of the Act enables a recognised Stock Exchange to make rules to provide for certain matters. These rules are required to be

approved by the Central Government and also published in the Official Gazette. Section 8 empowers the Central Government itself to make rules.

Section 9(1) enables a recognised Stock Exchange to make bye-laws. But as seen from sub-section (1), the purpose of enabling a Stock

Exchange to make bye-laws is only for the regulation and control of contracts. These bye-laws require the prior approval of the Securities and

Exchange Bureau of India (SEBI). SEBI itself has the power u/s 10 to make or amend bye-laws of recognised Stock Exchanges.

The above provisions can be compared to some provisions of the Companies Act, 1956. Such comparison is permissible in view of Section

2A of the Securities Contracts (Regulation) Act, 1956, which states that words and expressions used in that Act, but not defined therein, would

have the same meaning assigned to them if defined in the Companies Act, 1956. Therefore, it is permissible to make a comparison.

Section 13 of the Companies Act, 1956 prescribes the requirements of a Memorandum of Association of an incorporated company. Sections

14 mandates that the Memorandum of Association should be in one of the forms stipulated in Tables B, C, D and E of Schedule-I. Any alteration

to the Memorandum of Association requires the approval of the Central Government or the Company Law Board as the case may be. Similarly,

Section 28 mandates that the Articles of Association of a company limited by shares may be an adaptation of all or any of the regulations contained

in Table A of Schedule-I. The alteration of the Articles of Association also requires approval of the Central Government.

But the Memorandum and Articles of Association of a company, do not constitute either a local or special law. Despite the Memorandum and

Articles of Association of a company taking the form prescribed by statute and despite the fact that any alteration thereto requires the approval of

the Central Government, they are only in the realm of a contract. By the same analogy, the bye-laws framed by a stock exchange, despite being

approved by SEBI, continue to be only in the realm of a contract. If so, Section 29(2) of the Limitation Act, 1963 will have no application.

Consequently, Section 28 of the Contract Act would be a bar.

It must be pointed out that in the decision in H.P. State Forest Company Ltd., the Supreme Court was concerned with a provision only in the

realm of a contract. But the contract in that case had been entered into before the amendment to Section 28 of the Contract Act in the year 1996.

This aspect was noted by the Supreme Court in H.P. State Forest Company Ltd., in paragraph 11 of the report. Paragraph 11 of the report in

H.P. State Forest Company Ltd., reads as follows:-

We see from the order of the Commission that it has relied upon National Insurance Co. Ltd. Vs. Sujir Ganesh Nayak and Co. and another,

to hold that the complaint could not be entertained as being time-barred. The counsel for the appellant had, however, argued before the

Commission as also before us, that as Section 28 of the Contract Act had undergone significant amendments, the aforesaid judgment required a

reappraisal. This submission had been rejected by the Commission by observing that it was bound by the judgment in Sujir Ganesh Nayak case

and that the appellant could agitate the question as to its correctness before the Supreme Court. The matter was, accordingly, adjourned by us to

enable the parties to find out if the amendment had, indeed, been made and, if so, to what effect. During the resumed hearing, the learned counsel

for the appellant candidly admitted that the amendment had been made but had thereafter been repealed and the matter would, thus, have to be

examined u/s 28 of the Contract Act, as originally placed. We have, accordingly, chosen to deal with this matter under that provision.

Therefore, it is clear that the decision of the Supreme Court in H.P. State Forest Co., arose out of an insurance policy issued in 1987/1988,

much before Section 28 of the Contract Act was amended. This distinction was not noted by the learned Judge of this Court in HDFC Securities

Ltd. In any case, what was observed in HDFC Securities Ltd., is only an obiter in view of the fact that the validity of bye-law 3 was not

questioned before the Arbitrator in HDFC Securities Ltd. Therefore, the learned Judge of this Court refused to test the validity of bye-law 3. But

in this case, the petitioner has raised the issue of validity before the Arbitrator. Hence, the decision in HDFC Securities Ltd., would not go to the

rescue of the first respondent.

In view of the above, I hold that the arbitral award dated 5.11.2007, holding the claim of the petitioner to be barred by bye-law 3, cannot be

sustained. If it cannot be sustained and if the Arbitrator is obliged to consider the claim of the petitioner on merits, the only option available to me is

to take recourse to Section 34(4) of the Act. Section 34 merely enables this Court to set aside an arbitral award. The question as to whether the

power to set aside would include a power to remand the matter back or to modify the award, has become a debatable one. Therefore, the only

way of resolving the present stalemate is to take recourse to Section 34(4).

Section 34(4) of the Act provides that the Court can adjourn the proceedings to give the Arbitral Tribunal an opportunity to resume the arbitral

proceedings or to take such other action as in the opinion of the Arbitral Tribunal, will eliminate the grounds for setting aside the award. Therefore,

I am of the view that the proceedings in this petition can be adjourned with a direction to the Arbitral Tribunal to eliminate the ground on which the

award is liable to be set aside. In view of the above, the following order is passed for the present:-

(i) The proceedings in the main petition are adjourned by 6 months.

(ii) Since the second respondent who acted as the Arbitrator, is stated to be not available anymore, the National Stock Exchange of India is

directed to nominate an Arbitrator, to resume the hearing and hear the parties on merits and pass an award afresh. This shall be done within 6

months.

(iii) Call after 6 months.