Kotak Securities Limited v. Gajanan Ramdas Rajguru

13) Rival contentions of the parties now fall for my consideration.

14) The short but interesting issue that arises for consideration is whether Petitioner can pocket profits earned by Respondent through trades executed by him using his own skill and risk, but by making use of margin erroneously reflected in his trading account on account of glitch in Petitioner’s system.

15) Petitioner had initially credited the profit earned by Respondent in his ledger account but later withdrew the same. Upon complaint by the Respondent, GRC and lower Arbitral Tribunal had rejected his claim on the ground that permitting Respondent to retain profits earned out of illegal use of margin would amount to unjust enrichment. The Appellate Arbitral Tribunal has however debunked the theory of unjust enrichment by holding that Respondent cannot be held responsible for deficiency in service and for system error of the Petitioner. The Appellate Arbitral Tribunal has accordingly allowed the claim of the Respondent in the sum of Rs.1,75,01,672.92/- by setting aside the order passed by the GRC and the Award passed by the lower Arbitral Tribunal. It has upheld the claim of the Respondent that he is entitled to retain the profits earned out of trades executed by him by using margin money erroneously made available to him by the Petitioner due to technical glitch in the system.

16) Respondent is a client of the Petitioner, who used to execute trades inter-alia in F&O contracts. SEBI has prescribed certain risk management tools, which are required to be adopted by exchanges as well as by brokers so that credit risk emerging from the trading activities is taken care of and integrity of system is not put to risk. SEBI has accordingly prescribed maintenance of ‘margins’, under which a client has to deposit collateral which may be in the form of cash or fixed-deposits or bank guarantees or even securities or mix of all of them. Margin money is like an initial deposit required to open a leveraged trading position. SEBI and the exchanges have also prescribed that at the time of enrollment as a constituent trading member, each client must be made aware of risk disclosure documents. As per SEBI circular dated 20 July 2020, a broker has to collect the prescribed/applicable margin upfront. Thus, upfront margins are required to be collected from the clients in advance. For trade in the derivative markets the amount of margin is small relating to the value of derivative contracts. It appears that for F&O contracts, the margin money requirement is 40% of the proposed trades to be executed.

17) There is no dispute to the position that the total margin deposit available with the Respondent as on 26 July 2022 was only Rs.3175/-. There is also no dispute to the position that Petitioner’s system had developed a glitch at about 11.46 am and reflected wrong amount being available for margin for the purpose of trading by the Respondent. Though Petitioner claims that the error was rectified by it by 11.46 a.m., there is no dispute to the position that the Respondent was allowed to place orders upto 1.30 p.m. possibly to square off his open positions. It appears that the Respondent initially suffered loss of around Rs.54,00,000/-. But as the trading transactions continued, he finally made gross profit of Rs.1,83,51,383.43/-. It appears that the total booked profit by Respondent was Rs. 2.38 crores and after netting his earlier loss of Rs.54 lakhs, his gross profit was Rs.1,83,51,383.43/- There is also no dispute to the position that the Petitioner initially did not object to the said trades as its system deducted amount of Rs. 8,49,710.37/- towards GST, STT, exchange fees and other statutory levies and the net profit of Rs.1,75,01,673/- was credited to Respondent's ledger. However, later Petitioner reversed the said amount.

18) In the present case, Respondent has utilized the opportunity made available to him in the form of increased margin for the purpose of executing trades in F & O contracts and in the process, was lucky in earning profits (gross profit of Rs.1,83,51,383.43/- and net profit of Rs.1,75,01,673/-). Since the trades executed by the Respondent are on the basis of Petitioner’s margin erroneously made available to the Respondent, Petitioner claims that the profits made by the Respondent are the property of the Petitioner. The issue before the GRC, first Arbitral Tribunal and Appellate Arbitral Tribunal was whether profits earned by Respondent using his skills by making use of opportunity made available to him on account of technical glitch in the system of the Petitioner would enure to the benefit of the Respondent or the same is entitlement of the Petitioner. As observed above, GRC and first Arbitral Tribunal ruled in favour of the Petitioner and rejected the claim of the Respondent essentially invoking the theory of unjust enrichment. The Appellate Arbitral Tribunal however has held that the action of the Petitioner in holding on to the monies earned by the Respondent was not supported by provisions of any rules and regulations of the exchange. The Appellate Arbitral Tribunal took into consideration the terms and conditions of margin trading facility on the website of the Petitioner and held that the approach of the Petitioner lacked bonafides as it did not show due diligence and intentionally and deliberately ignored its own Rules and Regulations and failed to even call up the Respondent and expected the Respondent to convey to it about erroneous margin.

19) Petitioner claims that since the resultant profits emanat out of margin money of the Petitioner, such profits become the property of the Petitioner. Reliance is placed on provisions of Sections 71 and 163 of the Contract Act. Section 71 deals with the responsibility of finder of goods and provides thus:-

71. Responsibility of finder of goods.— A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee

20) Section 163 of the Contract Act provides for bailor’s entitlement to profit from goods bailed. Section 163 provides thus:-

163. Bailor entitled to increase or profit from goods bailed.— In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed. Illustration A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as well as the cow to A.

21) The illustration below Section 163 explains the concept of bailor’s entitlement to profit in a more simplified terms. If an owner leaves a cow in the custody of another person and the cow has a calf, the person with whom cow is left must return not just the cow but also the calf to the owner. Since the present case does not involve Petitioner voluntarily providing or making available the margin to the Respondent, the provisions of Section 71 of the Contract Act are also pressed into service. Under Section 71, even a finder of goods belonging to another person and taking the goods into his custody is made subject to some responsibility as a bailee.

22) Thus, Petitioner has sought to apply combined effect of provisions of Section 71 (finder of goods) and Section 163 (bailee’s duty to return profits) for the purpose of cliaming profits earned by Respondent by using margin money of the Petitioner.

23) However, the issue is whether margin made available by Petitioner to Respondent can be treated as ‘goods’ for application of provisions of Sections 71 and 163 of the Contract Act. Indian Contract Act does not separately define the term ‘goods’. Section 2(7) of the Sale of Goods Act, 1930 defines the term ‘goods’ as under: (7) “goods” means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

24) Thus, under the definition of the term ‘goods’, every form of movable property other than actionable claims and money is included. The term ‘goods’ also include stock and shares. Since definition of the term ‘goods’ does not include money, the margin money provided by Petitioner or made available to the Respondent would not strictly fall into the definition of the term ‘goods’. Making available margin means essentially making available money for effecting trades on the platform. The margin money so made available to a client/investor becomes usable as consideration for trades executed in the stock market. The margin is required to be maintained in the form of cash, fixed deposit receipts, bank guarantee or even shares. In that sense, making available margin is akin to handing over money for execution of trades. Since the term ‘margin’ virtually means monetory security, the same would not be covered by 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.

25) Also, reflection of undue margin in the account of a trading member is akin to making available mere opportunity to trade. It is like making available money for execution of trades. It can also be treated as loaning money temporarily. This appears to be the reason why Petitioner charged interest on the margin money made available to Respondent. It is another thing that it was advised to reverse the entry of interest subsequently, possibly for staking claim to profits earned by use of the margin. Therefore it becomes difficult to place the transaction of reflection of margin on trading account on the same pedestal as that of finder of goods under Section 71 read with Section 163 of the Contract Act.

26) Even otherwise, I find the claim of the Petitioners to retain profits earned by the Respondent through trades executed by him to be wholly unjustifiable. There is no doubt to the position that making available margin of about Rs.40 crores to the Respondent was a fault/mistake of the Petitioner. What is done by the Respondent is to make use of the undue opportunity erroneously made available to him. Mere exploitation of 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 risk of incurring losses or to earn profit, depending on Respondent’s skill. As a matter of fact, Respondent initially incurred losses to the tune of Rs.54,00,000/- but later managed to earn substantial profit of Rs.2.38 crores thereby resulting in actual profit of Rs.1.83 crores. The Respondent thus used his own skills and risks for earning the profits and mere provision of opportunity did not automatically result in profits for him. If Respondent was to suffer losses in the trades by using Petitioner’s margin, the Respondent would have been liable to repay the amount of losses to the Petitioner. It cannot be that the Respondent would only be liable to repay the amount of losses but cannot be permitted to retain the profits. Similarly, there cannot be a win-win situation for the Petitioner, where it would recover losses from the Respondent but retain the whole profit earned by Respondent on a specious plea that the profit was earned by using Petitioner’s margin.

27) The theory of unjust enrichment pressed into service by the Petitioner does not appeal to this Court. Earning of profits by Respondent through execution of valid and legal trades cannot be treated as unjust enrichment. If there is unjust enrichment in the present case, it is by the Petitioner. It is the Petitioner who committed the mistake in making available margin for the Respondent. It initially charged interest on such margin money. It has also recovered various levies and fees in respect of trades legitimately executed. It has not suffered any loss on account of erroneous making available of margin to the Respondent. However, it wants to unjustly enrich itself by retaining the profits earned by Respondent through his own skills and risks on a specious plea that earning of profits was through Petitioner’s margin. In a converse situation, Petitioner would not have given up the claim for recovery of losses on the ground that losses were suffered due to its error of making available margin to the client. Petitioner thus wants to enrich itself for his own mistake.

28) Thus, the Appellate Arbitral Tribunal has rightly held that Petitioner has acted unreasonably and arbitrarily in the present case. There is no unjust enrichment on the part of the Respondent and therefore the judgment of the Apex Court in Machhindranath s/o Kundlik Tarade (deceased) (supra) has no application to the facts and circumstances of the present case. The principle of party not being permitted to take benefit of his own wrong, urged on behalf of Petitioner, will apply against the Petitioner. The wrong is committed by the Petitioner in the form of making available margin to the Respondent and after sensing that the Respondent was able to earn profits through the trades, it has conveniently pocketed those profits. Just because Respondent has utilized the opportunity made available to him, it would not mean that he has committed any wrong. By using such opportunity, the Respondent could have incurred losses, which would be recovered by the Petitioner. In the situation of losses, would Petitioner have raised a plea that since losses resulted out of erroneous use of margin, it would not recover such losses? Answer to the question appears to be in the negative. Thus, in the present case, Petitioner has committed the wrong and is attempting to take benefit of its own wrong by retaining the profits earned by the Respondent. Therefore the judgment in Machhindranath s/o Kundlik Tarade (deceased), far from assisting the case of the Petitioner, actually militates against it.

29) Petitioner’s criticism of impugned Award that it is based on settlement offer made during proceedings before GRC and Arbitral Tribunal is again misplaced. The settlement offer was not made by the Petitioner only after initiation of proceedings before the GRC. The Petitioner itself admits in para-3.[7] of the Petition as under:

3.7. The Respondent complained to the Petitioner regarding the debit of the amount from his account. The Petitioner's officials visited the Respondent for a possible amicable resolution of the issue, however there was no resolution. The Respondent admitted to the Petitioner that he was aware of the wrong margins uploaded on 26.07.2022 and gains he made would not have been possible has the wrong margins not been uploaded in his account.

30) Thus, the officials of the Petitioner voluntarily approached the Respondent for possible amicable solution of the issue. Therefore, it cannot be said that the offer for settlement was made only after initiation of proceedings by the Respondent. In that view of the matter, provisions of Section 81 of the Arbitration Act or of Section 23 of the Evidence Act would have no application in respect of the settlement offer made by the Petitioner. The fact that such settlement offer was made would indicate an attempt on the part of the Petitioner to retain some part of profits due and payable to the Respondent. The Appellate Arbitral Tribunal has rightly held that Petitioner did not provide any clarification as to why it made offer of Rs.50 lakhs to the Respondent if it was sure that it had not committed any mistake. However, it is clarified that making of settlement offer by the Petitioner to the Respondent is not the only reason why Respondent’s claim is upheld. It is just an additional facet for upholding the award in favour of the Respondent. Even without such settlement offer, Respondent’s claim can rightly be upheld.

31) Petitioner’s contention that the Award needs to be set aside for maintaining sanctity of risk management system appears to be attractive in the first blush. However the same is misplaced. Petitioner, who is carrying the flag of maintaining the sanctity of risk management system first made voluntary attempts to settle the matter by offering to share part of profits with Respondent. Now what Petitioner desires to do by urging this Court to set aside the Award is to retain the entire profits earned out of the trades, which its own system permitted. If the Award is set aside to ensure the sanctity of the system, Petitioner would retain the profits, which situation this Court is unable to uphold. Apart from its own system failure, Petitioner apparently did not take the adequate and timely measures to mitigate the consequences arising out of malfunctions of the system. There is sufficient material on record to indicate that the Petitioner did not invoke risk control protocols. Far from warning Respondent that it was unauthorisedly trading on erroneous margin, Petitioner issued contract notes upon execution of trades, deducted levies and even charged interest for use of margin. It even credited the net profit in Respondent’s ledger. It later took a volte face and reversed the entry. Now it raises a specious plea that it must be permitted to retain the profits so that the sanctity of risk management system is maintained. Considering the peculiar circumstances of the case I am unable to accept the contention raised on behalf of Petitioner.

32) Present case depicts a unique conundrum, where Respondent has profiteered on Petitioner’s monies. Ordinarily, Courts would not have encouraged the activity of trading on someone else’s monies on a stock exchange. Respondent has gambled on Petitioner’s margin money. However, it is not that Respondent has stolen the monies of Petitioner. Admittedly none of the acts of Respondent are responsible for reflection of erroneous margin in his trading account. There is no dispute to the position that Petitioner’s system is solely responsible for making available the margin money to the Respondent, who has used his skills to make most of the opportunity and has earned profits. Someone will have to be given those profits. Given that there is system glitch attributable to Petitioner coupled with failure to invoke adequate and timely risk protocols, Petitioner cannot be permitted to retain the profits. On the other hand, Respondent is not responsible in any manner for development of system glitch and has used his own skills and has taken the risk in executing the trades. Therefore if only one out of the two parties can be permitted to retain the profits, it would be Respondent and not Petitioner. Considering the above position, the Appellate Arbitral Tribunal has also held that profits need to be handed over to Respondent. May be that alternate view of handing over profits to Petitioner is also possible. However, mere possibility of different view cannot be a ground for setting aside the Award. It is not that the findings of Respondent’s entitlement to profits is something which no fair minded person can ever record in the facts and circumstances of the case. Even otherwise, this Court is unable to accept the position that Petitioner would commit a mistake and though it has not suffered any losses out of that mistake, it would enrich itself by claiming profits out of the trades executed by Respondent. For trades effected by Respondent, Petitioner would still earn brokerage and would benefit to some extent. Therefore this Court is not inclined to take a view different than the one taken by the Appellate Arbitral Tribunal.

33) Considering the overall conspectus of the case, I am of the view that the Appellate Arbitral Tribunal has taken a plausible view by not permitting the Petitioner to retain the profits earned by the Respondent just because such profits are outcome of opportunity made available to him by the Petitioner. In fact, I am of the view that the view taken by the Appellate Arbitral Tribunal is correct view. There is no perversity in the findings recorded by the Appellate Arbitral Tribunal. The impugned Award cannot be said to be in conflict with public policy of India or in contravention of fundamental policy of Indian law. The Award also does not suffer from any patent illegality. The Award is unexceptionable warranting dismissal of the Petition. Though the Petition is being dismissed, I am not inclined to impose any costs on the Petitioner while dismissing the Arbitration Petition as Appellate Arbitral Tribunal has already directed payment of 12% interest on the awarded sum from 26 July 2022.

34) In my view therefore, no case is made out by the Petitioner for interference in the impugned Award. The Arbitration Petition must fail. It is accordingly dismissed. Respondent shall be entitled to withdraw the entire amount deposited in this Court along with accrued interest. With dismissal of Petition nothing would survive in the Interim Application and the same is also disposed of. [SANDEEP V. MARNE, J.]

35) After the judgment is pronounced, the learned counsel appearing for the Petitioner prays for stay of the directions for withdrawal of the deposited amount by the Respondent for a period of five weeks. The request is opposed by the learned counsel appearing for the Respondent. It is directed that while the Respondent can commence the process for withdrawal of the deposited amount, the Prothonotary & Senior Master shall not actually release the deposited amount in favour of the Respondent for a period of five weeks. [SANDEEP V. MARNE, J.]