Husband is jointly and severally liable for wife’s stock market debt based on an oral contract: Supreme Court

On February 10, 2025 (Monday), the Supreme Court (SC) of India heard a question “Whether the respondent who is the husband of the respondent could have been made a party to the arbitration that was invoked by the appellant, who is a registered stock broker, and held to be jointly and severally liable for the debit balance that had accrued in the wife’s account with the appellant?” In this case, the appellant is a stock broker and a BSE (Bombay Stock Exchange) registered member. In 1999, a husband and wife (respondent no. 1 and 2 respectively) approached the appellant for opening trading accounts, and to this end, they executed individual Client Registration Applications on August 01, 1999. As per the appellant, respondent no. 1 represented that the accounts would be jointly operated by both of them and they would be jointly and severally liable for any losses. The dispute arose over a debit balance in the wife’s trading account. 

As per the appellant, on oral instruction from the husband they transferred funds from his account to his wife’s account to offset the losses. However, due to a stock market crash in 2001, the debit balance in the wife’s account was bludgeoned leading the appellant to seek recovery from both respondents through arbitration. Contesting the claim, the husband argued the appellant transferred the credit balance from his account to his wife’s account without express authority or written consent as is required by SEBI guidelines. The arbitral tribunal allowed the appellant’s claim and held both respondents to be jointly and severally liable to pay the amount and the respondents’ applications under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the arbitral award were dismissed by the learned single judge of the High Court. However, the division bench of the HC allowed the Section 37 appeal preferred by the respondent by order and set aside the arbitral award only against him, which is impugned before the top court in the present appeal. The SC bench of Justice PS Narasimha and Justice Sandeep Mehta allowed the appeal and set aside the impugned order based on the following conclusions: 

• “First, by interpreting Bye-law 248(a) of the Bombay Stock Exchange Bye-laws, 1957 that provides for arbitration between members and non-members of the BSE, and considering the nature of respondent no. 1’s involvement qua transactions conducted in respondent no. 2’s account, we have held that an oral contract undertaking joint and several liability falls within the scope of the arbitration clause and the arbitral tribunal could exercise jurisdiction over respondent.
• Second, considering the settled jurisprudence on the scope of judicial intervention under Section 34 and Section 37 of the Act, we have held that the arbitral tribunal arrived at a reasonable conclusion, based on evidence, as to the joint and several nature of the respondents’ liability. The arbitral award does not suffer from perversity and patent illegality as has been held by the High Court in the Section 37 appeal, and therefore, we have upheld the arbitral award in its entirety.”

During the proceedings, the SC also addressed “Whether the High Court correctly exercised jurisdiction under Section 37 while setting aside the arbitral award against respondent no. 1 on the grounds of perversity and patent illegality by finding that there is no joint and several liability?” It said that the HC, while exercising jurisdiction under Section 37, has set aside the arbitral award against the husband on the grounds of patent illegality and perversity in the following manner: first, that the arbitral award is contrary to Bye-law 247A of the BSE Bye-laws, 1957 and the SEBI Guidelines that mandate express authorization of the client for adjustment of accounts, and second, that the finding of joint and several liabilities is based on the respondents’ marital relationship and past experience, contrary to their distinct legal entities and separate accounts, thereby making it perverse. After hearing the matter, the SC bench concluded, 

• “Under Bye-law 248(a), the arbitral tribunal could have exercised jurisdiction over respondent no. 1 on the basis of an oral contract that he would be jointly and severally liable for the transactions undertaken in respondent no. 2’s account. Such oral contract would not amount to a ‘private’ transaction that falls outside the scope of arbitration.
• The High Court did not correctly exercise jurisdiction under Section 37 as it reappreciated evidence and examined the merits of the award. Upon examination of the findings of the arbitral tribunal, it is clear that the award is not liable to be set aside on the grounds of perversity or patent illegality.”

The top court; therefore set aside the order of the HC and allowed the present appeal. As a consequence, the is upheld in its entirety and respondent no. 1 is jointly and severally liable, along with respondent no. 2, to pay the appellant the debit balance.