'Oral Undertaking Falls Within Scope Of Arbitration Clause' : Supreme Court Upholds Award Against Husband For Operation In Wife's Demat Account

The Supreme Court today (February 10) held that an oral contract undertaking joint and several liability falls within the scope of an arbitration clause.

Holding so , the Court affirmed an arbitral award against a husband, finding him jointly liable for the award due to a debit balance in a joint demat account registered in his wife's name.

The Court rejected the contention that the husband's liability constituted a "private transaction" beyond the scope of arbitration. Instead, it held that the arbitration clause, applicable to non-signatories, in conjunction with the husband's active participation in transactions within his wife's account, gave rise to an implied oral agreement establishing joint and several liabilities for both parties.

“It is undisputed that both respondents are non-members or clients, but they entered into individual and separate client registration agreements, leading to separate client codes and accounts in each of their names. However, the appellant has invoked arbitration against both of them for the debit balance in respondent no. 2's (wife) account based on an oral contract among the parties that both husband and wife will be jointly and severally liable for the transactions in each of their accounts.”, the court observed.

A bench of Justice PS Narasimha and Justice Sandeep Mehta was hearing the case where the dispute arose between AC Chokshi Share Broker Pvt. Ltd. (Appellant), a registered stockbroker, and (Respondent No. 1) & his wife (Respondent No. 2) over a debit balance in the wife's trading account.

The appellant initiated arbitration against both respondents under Bye-law 248(a) of the Bombay Stock Exchange (BSE) Bye-laws, 1957.

The arbitral tribunal held both respondents jointly and severally liable for the outstanding amount of Rs. 1,18,48,069/- along with 9% interest per annum.

The High Court's division bench (under Section 37 of the Arbitration and Conciliation Act, 1996) set aside the arbitral award only against the husband (Respondent No. 1), leading to the present appeal before the Supreme Court.

The Supreme Court, in a judgment delivered by Justice Narasimha, set aside the decision of the High Court. Noting the limited jurisdiction to intervene in arbitral awards save for violations of public policy, the Court held that the High Court had erred in setting aside the award on the technicality of the husband's "separate" liability. The Court determined that the husband's liability for the debit balance in his wife's account provided sufficient grounds for invoking the arbitration clause.

“They have effectively entered into the transactions undertaken in each of their trading accounts together, i.e., the performance of the transactions in respondent no. 2's trading account is not only on her behalf but also on behalf of respondent no. 1. Therefore, respondent no. 1 is effectively a party to the client agreement between the appellant and respondent no. 2.”, the court observed.

“In this light, the High Court's reasoning in the impugned order that arbitration was only invoked against respondent no. 2 as only her client code and client agreement were referenced by the appellant is a hyper-technical approach as the claim had been filed against both respondents. While interpreting contracts, courts must acknowledge the practicalities of how parties execute and participate in transactions and how they understand and perform mutual obligations under the contract. To facilitate ease of contract and to prevent respondent no. 1 from mischievously wriggling out of his liability for the transactions, it is necessary to take into account the reality of the situation. The appellant conducted the transactions in each their accounts based on an oral agreement among all the parties that the respondents will jointly operate and manage both accounts and undertake liability for the same. Therefore, in these facts, even respondent no. 1 is a “non-member” or client under Bye-law 248(a) with respect to the account in respondent no. 2's name.”, the court added.

Accordingly, the appeal was allowed.

Case Title: AC CHOKSHI SHARE BROKER PRIVATE LIMITED VERSUS JATIN PRATAP DESAI & ANR.

Citation : 2025 LiveLaw (SC) 178

Click here to read/download the judgment

Appearance:

For Petitioner(s) Mr. Dhruv Mehta, Sr. Adv. Mr. Dharav Shah, Adv. Mr. Dhawal Desai, Adv. Ms. Nishi Sangtani, Adv. Mr. Pranaya Goyal, AOR

For Respondent(s) Mr. Mayilsamy K, Adv. Mr. G Ananda Selvam, Adv. Dr. Gayathiri A. S, Adv. Mr. Arun Pandiyan S, Adv. Mr. V. Pavel, Adv. Mr. Nihangam R Maurya, Adv. Mr. P. Soma Sundaram, AOR Mr. Kabilan Manoharan, Adv. Mr. K Vijay Anand, Adv.