Extra Profit Received By Broker Due To Technical Glitch Not Unjust Enrichment: Bombay High Court Upholds Award In Favour Of Kotak Securities

The Bombay High Court has held that profits earned by a client by utilising an increased trading margin erroneously reflected due to a technical glitch in the broker's system cannot be treated as “unjust enrichment”. The Court observed that mere availability of margin created an opportunity to trade, but the profits ultimately arose from the client's skill and risk-taking, and not automatically from the margin itself.Justice Sandeep V. Marne was hearing a petition filed by Kotak Securities Limited under Section 34 of the Arbitration Act, challenging an appellate arbitral award passed under the bye-laws of the National Stock Exchange of India Ltd. The dispute arose from events on 26 July 2022, when, due to a technical glitch in Kotak Securities' system, the respondent-client was erroneously shown an inflated trading margin despite having an actual margin of only ₹3,175.69. Taking advantage of the margin reflected in the system, the respondent executed large-value futures and options trades within a short window. Though the respondent initially incurred losses, he ultimately earned gross profits exceeding ₹1.83 crores. Kotak Securities contended that it was earned by the misuse of margin. The Court examined the broker's contention that Sections 71 and 163 of the Indian Contract Act, 1872 entitled it to retain the profits, holding that these provisions were inapplicable since “margin” essentially represents money and not “goods” within the meaning of the Sale of Goods Act, 1930. “Since the term 'margin' virtually means monetary security, the same would not be covered by the definition of the term 'goods'. Therefore, the provisions of Sections 71 and 163 of the Contract Act would not strictly apply to the transactions in question,” the Court observed. The Court observed that the erroneous margin merely provided an opportunity to trade and did not itself generate profit. It held that if losses had occurred, the broker would have recovered them from the client, and therefore could not claim a one-sided right to appropriate profits. The Court further noted that Kotak Securities had failed to promptly invoke risk control protocols, permitted trading for a considerable duration, charged brokerage and levies, and even sought an amicable settlement, which undermined its plea of illegality. It observed:“Mere exploitation of the subject opportunity automatically does not result in any profits for him. The margin reflected in his account merely opened doors for him to trade on the exchange platform. The opportunity came with the risk of incurring losses or earning profit, depending on the Respondent's skill.”The Court rejected the argument that retention of profits by the client would undermine the sanctity of the risk management system, holding that the broker could not benefit from its own system failure. It concluded that the arbitral tribunal's view that there was no unjust enrichment on the part of the client was reasonable and did not suffer from perversity, patent illegality, or conflict with public policy. Accordingly, the Court dismissed the petition and upheld the arbitral award directing payment of the profits with interest to the client.Case Title: Kotak Securities Limited v. Gajanan Ramdas Rajguru [COMMERCIAL ARBITRATION PETITION NO. 788 OF 2024 WITH INTERIM APPLICATION (LODG.) NO. 35173 OF 2023]Click Here To Read/Download Order

Extra Profit Received By Broker Due To Technical Glitch Not Unjust Enrichment: Bombay High Court Upholds Award In Favour Of Kotak Securities

Saksham Vaishya

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