A) ABSTRACT / HEADNOTE

AC Chokshi Share Broker Private Limited v. Jatin Pratap Desai & Anr., [2025] 2 S.C.R. 1545 : 2025 INSC 174. This case examines whether a registered stock broker may invoke arbitration under Bye-law 248(a) of the Bombay Stock Exchange Bye-Laws, 1957 against a husband for a debit balance that accrued in his wife’s trading account, where liability was alleged to arise from an oral understanding that both spouses would be jointly and severally liable. The arbitral tribunal held both spouses liable; the Single Judge of the Bombay High Court refused to set aside the award under Section 34 of the Arbitration and Conciliation Act, 1996, while a Division Bench sitting under Section 37 set aside the award only as against the husband.

On appeal, the Supreme Court reversed the Division Bench and restored the arbitral award in full. The Court adopted a pragmatic, substance-over-form approach to the Bye-law’s scope, applied the non-signatory inclusion test from ONGC v. Discovery Enterprise (as affirmed in Cox & Kings), and held that where parties’ conduct and mutual intention demonstrate a composite transaction or oral undertaking, a non-signatory may be subject to institutional arbitration. The Court further reiterated the constrained role of courts under Sections 34 and 37, disapproved re-appreciation of evidence at the appellate stage, and found no patent illegality or perversity in the arbitral tribunal’s fact-based conclusion.

Keywords: Arbitration; Joint and several liability; BSE Bye-laws 248(a), 247A; Oral contract; Non-signatory; Section 16; Section 34; Section 37; Patent illegality; Perversity; Stock broker; Spousal transactions.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The dispute concerns recovery by a BSE-registered broker of a substantial debit balance that swelled following the 2001 market crash. Husband and wife opened separate client accounts in 1999; the husband’s account showed a credit balance which, on his alleged oral instruction, the broker adjusted to clear the wife’s losses. The debtor sum escalated to over one crore rupees. The broker invoked arbitration under Bye-law 248(a) against both spouses. The arbitral tribunal found both spouses jointly and severally liable and granted recovery.

The Single Judge refused to set aside the award; the Division Bench reversed only as regards the husband on two principal grounds:

(a) lack of jurisdiction because the husband’s alleged oral undertaking was a private contract outside Bye-law 248(a); and

(b) the finding of joint liability was perverse and patently illegal because the spouses had separate client agreements, client codes and bank accounts.

The Supreme Court was tasked with resolving whether institutional arbitration under the Bye-law could bind a non-signatory who, by conduct and oral agreement, had effectively participated in a composite transaction, and whether the Division Bench exceeded its limited appellate remit under Section 37. The Court framed the contest as a jurisdictional question under Bye-law 248(a) and a supervisory-law question about reappreciation of evidence and patent illegality under Sections 34 and 37 of the Act.

D) FACTS OF THE CASE

Respondent No.1 (husband) and Respondent No.2 (wife) executed separate client registration applications with the appellant stock broker on 01.08.1999. Initially the husband’s account had a credit balance of Rs. 7,40,020 (31.01.2001) which increased to Rs. 9,40,020 after an additional payment on 16.02.2001. The wife’s account carried a debit balance of Rs. 7,77,058 (20.01.2001) that ballooned to Rs. 1,18,48,069 by 12.04.2001 due to the market crash. The broker alleges that on the husband’s oral instruction it transferred the husband’s credit to the wife’s account on 05.03.2001 to offset losses.

The broker sought recovery by arbitration under Bye-law 248(a) for Rs. 1,27,36,670 (including interest). The arbitral tribunal accepted oral and documentary evidence (including affidavits and banking transaction patterns), concluded the spouses had an oral agreement to operate accounts jointly and that the husband’s credit was rightly adjusted; it therefore held both jointly liable and dismissed the husband’s counter-claim. The husband challenged the award before the High Court and succeeded in part; the Supreme Court restored the award in entirety.

E) LEGAL ISSUES RAISED

1. Whether arbitration under Bye-law 248(a) could be maintained against a husband (a non-signatory to the wife’s client agreement) on the basis of an oral undertaking of joint and several liability?

2. Whether a Division Bench under Section 37 may re-appreciate evidence and set aside an arbitral award on grounds of perversity or patent illegality where the Single Judge under Section 34 upheld the award?

3. Whether Bye-law 247A and SEBI guidelines precluded transfer/adjustment of one client’s credit to another without express written authorization, thereby vitiating the arbitral award as patently illegal?

F) PETITIONER / APPELLANT’S ARGUMENTS

The appellant contended that Section 7(4)(c) deems an arbitration agreement to exist where the existence is pleaded and not disputed; the husband did not dispute the arbitration clause, participated in proceedings and filed a counter-claim, thus submitting to jurisdiction. The appellant urged a practical interpretation of contracts and invoked the ONGC v. Discovery Enterprise non-signatory test (mutual intention, relationship, common subject-matter, composite transaction) to justify impleading the husband.

It relied on P.R. Shah v. B.H.H. Securities to show institutional Bye-laws permit composite references and that Bye-law 248(a) is broadly worded to cover disputes “arising out of, in relation to, incidental to or in pursuance of” exchange transactions. The appellant argued the husband’s conduct and pattern of finances evidenced joint operation and liability.

G) RESPONDENT’S ARGUMENTS

Counsel for respondents argued the husband and wife were distinct legal entities with separate client codes, contracts and accounts; the husband’s liability arose from an alleged private oral contract and thus fell outside Bye-law 248(a). It was contended that Bye-law 247A and SEBI guidelines mandated express authorization for inter-client adjustments; absent such written consent, adjustment was illegal and the award patently so. The respondents maintained that any jurisdictional challenge could be raised at any stage where there is an inherent lack of jurisdiction, and the Division Bench rightly corrected the Single Judge’s oversight.

H) JUDGMENT

The Supreme Court allowed the appeal and upheld the arbitral award in full. The Court emphasized a pragmatic approach: contractual scope is to be ascertained by reference to mutual intention and conduct, not formalistic labels.

Applying the non-signatory inclusion factors from ONGC v. Discovery Enterprise (and affirmed in Cox & Kings), the Court found:

(a) mutual intention: both spouses consistently dealt with the broker and behaved as co-participants;

(b) relationship: marital nexus and contemporaneous account openings supported unity;

(c) commonality: transactions related to the same trading activity; and

(d) composite nature: the husband effectively participated in performance.

Consequently, the husband fell within Bye-law 248(a)’s sweeping terms and could be bound to arbitration. The Court rejected the High Court’s “private transaction” categorization and held that the oral undertaking was not severable from the exchange transactions and thus not excluded from the Bye-law’s ambit. The Court further held that jurisdictional objections under Section 16 must be timely raised; the husband had waived such objections by participation and counter-claim.

Turning to appellate review under Section 37, the Court reiterated that Section 37’s role is limited to examining whether the Section 34 court exercised jurisdiction properly; it is not a forum for re-appreciation of evidence. The arbitral tribunal’s factual conclusion on joint liability rested on oral testimony and documentary pattern and hence was a possible view supported by evidence; it was not perverse.

As to patent illegality under Bye-law 247A, the Court observed that once joint liability is established, the Bye-law permits set-off and lien (Bye-laws 227(a) and 247A(E)), and there was no rule requiring written authorization that would vitiate the adjustment. The award therefore was sustainable on both jurisdictional and merits dimensions.

a. RATIO DECIDENDI

The decisive legal principle is twofold: first, institutional arbitration under a broadly-worded bye-law may extend to non-signatories where mutual intention, relationship, common subject matter and composite transaction show that the non-signatory effectively participated in or assumed liability for the exchange transactions; second, appellate review under Section 37 is circumscribed courts must not re-appreciate evidence or substitute their view where the arbitral tribunal reached a possible conclusion based on evidence; patent illegality requires an illegality that shocks conscience or goes to the root. Application of these tenets led to restoration of the arbitral award.

b. OBITER DICTA

The Court cautioned against hyper-technical contract interpretation and endorsed practical assessment of commercial realities in securities trading. It reiterated that procedural safeguards (timely invocation of Section 16 and not waiving objections) are essential to preserve tribunal jurisdictional rulings. The judgment also noted that Bye-law 247A and lien provisions should be read to effectuate fair set-offs where substantive liability exists rather than to create rigid formalities that frustrate equitable recovery.

c. GUIDELINES 

1. Institutional arbitration clauses expressed broadly should be construed in light of parties’ conduct and commercial context.

2. Non-signatories may be brought into arbitration when their conduct demonstrates mutual intention and participation in a composite transaction (apply ONGC/Cox & Kings factors).

3. Timely objection under Section 16 is mandatory unless inherent lack of jurisdiction is shown; participation and counter-claims ordinarily amount to waiver.

4. Courts under Sections 34 and 37 must confine review to statutory grounds; re-appreciation of evidence or substituting factual conclusions is impermissible.

5. SEBI/BSE rules on client accounts must be interpreted to allow legitimate set-offs and lien enforcement where substantive liability exists, absent explicit prohibition.

I) CONCLUSION & COMMENTS

The judgment is significant for arbitration and securities practice: it affirms that institutional arbitration can reach non-signatories when commercial reality and party conduct make them de facto parties to the transaction. The Court’s endorsement of the ONGC non-signatory test within an institutional-bye-law context harmonizes jurisprudence and discourages form over substance. Procedurally, the decision underscores the importance of raising jurisdictional objections promptly under Section 16 and of courts’ restraint under Sections 34 and 37.

Practically, brokers and clients must recognize that marital or familial coordination of trading may result in joint liability despite separate documentation; conversely, clients seeking to insulate separate accounts should ensure contemporaneous, clear, written instructions and records.

For arbitration counsel, the case reinforces strategy:

(i) contest jurisdiction early,

(ii) avoid active participation if preserving jurisdictional pleas, and

(iii) marshal documentary and transactional patterns to prove or rebut composite dealings.

The judgment balances enforcement of exchange-based dispute resolution with procedural safeguards, and it narrows opportunities for after-the-event jurisdictional quibbles that undermine commercial certainty.

J) REFERENCES

a. Important Cases Referred

1. AC Chokshi Share Broker Pvt. Ltd. v. Jatin Pratap Desai & Anr., [2025] 2 S.C.R. 1545 : 2025 INSC 174.

2. Bombay Stock Exchange v. Jaya I. Shah, (2004) 1 SCC 160. (referred in judgment).

3. P.R. Shah, Shares & Stock Brokers Pvt. Ltd. v. B.H.H. Securities Pvt. Ltd., (2012) 1 SCC 594.

4. ONGC Ltd v. Discovery Enterprises Pvt. Ltd., (2022) 8 SCC 42.

5. Cox & Kings v. SAP India Pvt. Ltd., (2024) 4 SCC 1.

6. Saw Pipes Ltd. v. ONGC, (2003) 5 SCC 705. (principles on public policy/patent illegality).

b. Important Statutes Referred

1. Arbitration and Conciliation Act, 1996 (ss.4, 7, 16, 34, 37).

2. Bombay Stock Exchange Bye-laws, 1957 (Bye-laws 227(a), 247A, 248(a), 282).

3. SEBI Guidelines on Regulation of Transactions Between Clients and Brokers (18.11.1993).