The Madras High Court has reaffirmed that brokers cannot unilaterally square off client positions without providing effective notice, even when contractual clauses appear to permit such action. This judgment clarifies that procedural fairness and adherence to internal risk policies are non-negotiable under the Arbitration and Conciliation Act, 1996.
Background & Facts
The Dispute
The dispute arose from the petitioner, M/s. Angel One Limited, squaring off the respondent’s securities account on 21.1.2016 due to alleged margin shortfall. The respondent, Mr. S.X.J. Vasan, claimed the squaring off was unlawful and resulted in a loss of Rs.48,77,111. The petitioner relied on Clause 5 of the client agreement, which purportedly granted it the right to liquidate positions without prior notice. However, the respondent contended that no valid notice was issued, and margin calls were either delayed, automated, or contradicted by actual account movements.
Procedural History
- 2013: Respondent began trading with petitioner as a client.
- January 2016: Margin shortfall of Rs.35,62,758/- reported; respondent issued cheque for Rs.20 lakhs on 18.1.2016.
- 19.1.2016: Petitioner credited Rs.20 lakhs, reducing shortfall to Rs.11,94,351/-.
- 20.1.2016: Cheque dishonoured; respondent issued new cheque for Rs.11 lakhs and another for Rs.20 lakhs on same day.
- 21.1.2016: Petitioner squared off respondent’s positions before crediting the fresh Rs.20 lakh cheque, which was cleared on 25.1.2016.
- 2016: Initial arbitration at NSE resulted in an award; petitioner challenged it in court.
- 27.8.2021: Madras High Court set aside the NSE award and appointed a sole arbitrator by consent.
- 10.6.2023: Sole Arbitrator held squaring off illegal and awarded compensation.
- 27.1.2026: Madras High Court dismissed Section 34 petition to set aside the award.
Relief Sought
The petitioner sought to set aside the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing perversity and patent illegality in the arbitrator’s appreciation of evidence. The respondent sought confirmation of the award and costs.
The Legal Issue
The central question was whether Clause 5 of the client agreement permits a broker to square off client positions without issuing effective notice, and whether an arbitral award finding such action illegal can be set aside under Section 34 on grounds of perversity or patent illegality.
Arguments Presented
For the Petitioner
The petitioner contended that Clause 5 of the agreement explicitly allowed it to square off without prior notice, and that the respondent was aware of the margin shortfall through automated alerts (Ex.C.10). It argued that the arbitrator ignored the clear contractual right and misappreciated evidence by disregarding the debit balance of Rs.11,94,351/- as of 21.1.2016. Reliance was placed on the principle that arbitration awards must not override unambiguous contractual terms.
For the Respondent
The respondent argued that Clause 5 must be read in conjunction with the broker’s internal risk management policy (Ex.C.22), which mandated a sequence of steps before squaring off. He demonstrated that the Rs.20 lakh cheque issued on 21.1.2016 was credited only after squaring off, proving the action was premature. He further contended that automated SMS alerts (Ex.C.10) were not personalized notices and could not satisfy the requirement of effective communication under principles of natural justice.
The Court's Analysis
The Court emphasized that while Clause 5 grants broad powers, it does not override the requirement of procedural fairness or internal compliance mechanisms. The arbitrator’s finding that Ex.C.10 consisted of automated, generic messages - rather than individualized notices - was not perverse but grounded in evidence. The Court noted:
"The sole Arbitrator came to the conclusion that Ex.C.10 could not be considered in isolation and it had to be seen along with all those events that had taken place between 18.1.2016 to 21.1.2016."
The Court further held that the risk management policy (Ex.C.22), though internal, formed part of the broker’s operational conduct and was binding in practice. The failure to follow the prescribed sequence - such as crediting funds before liquidation - constituted a breach of procedural norms. The Court cited settled law that an arbitral award cannot be set aside merely because a different view was possible. The arbitrator’s conclusion that squaring off occurred before the margin shortfall was resolved was a reasonable inference from the chronology of transactions. The Court also upheld the compensation amount as unchallenged and the interest rate of 9% as compliant with Section 31(7)(a) of the Act.
The Verdict
The respondent won. The Madras High Court dismissed the petition under Section 34 and upheld the arbitral award, holding that squaring off without effective notice and in violation of internal risk protocols constitutes patent illegality. The petitioner was ordered to pay Rs.1,50,000 in costs to the respondent.
What This Means For Similar Cases
Notice Must Be Effective, Not Automated
- Practitioners must now distinguish between automated system alerts and legally sufficient notice under contractual or regulatory frameworks.
- Brokers must issue personalized, time-stamped communications before exercising rights to liquidate client positions.
- Automated messages alone will not satisfy the threshold for notice under Section 34 challenges.
Risk Management Policies Are Binding in Arbitration
- Internal compliance manuals, even if not part of the contract, become relevant when consistently applied in practice.
- Arbitrators may treat such policies as industry standards, and deviations may be deemed illegal.
- Firms must ensure their operational procedures align with contractual clauses to avoid arbitral liability.
Section 34 Is Not a Re-Appreciation Tool
- Courts will not interfere with arbitral findings merely because a different interpretation of evidence is possible.
- Perversity requires evidence of total disregard for material facts - not mere disagreement.
- Practitioners should focus Section 34 arguments on procedural flaws, bias, or violation of public policy, not factual disputes.
