Husband can be held liable for wife’s stock trading losses based on oral contract: Supreme Court

New Delhi: The Supreme Court on Tuesday ruled that a husband can be held jointly and severally liable for the debit balance in his wife’s stock trading account based on an oral agreement and the nature of their financial dealings.

A bench comprising Justice PS Narasimha and Justice Sandeep Mehta held that an arbitral tribunal can exercise jurisdiction over the husband in such cases under Bye-law 248(a) of the Bombay Stock Exchange (BSE) Byelaws,1957.

“Under Bye-law 248(a) (BSE), the arbitral tribunal could have exercised jurisdiction over respondent no. 1 (husband) based on an oral contract that he would be jointly and severally liable for the transactions undertaken in respondent no. 2’s (wife) account. Such oral contract would not amount to a ‘private’ transaction that falls outside the scope of arbitration,” the Court ruled.

The central issue in the appeal was whether the husband of a woman could be made a party to an arbitration initiated by a registered stockbroker to recover a debit balance in the wife’s trading account.

The dispute arose when the wife’s trading account, which was operated jointly with her husband, showed a significant debit balance. The respondents had opened separate trading accounts with the appellant stockbroker in 1999. The broker claimed that the couple had orally agreed to operate their accounts jointly and share liability for any losses.

By early 2001, the wife’s account had incurred substantial losses, while the husband’s account maintained a credit balance. On oral instructions from the husband, the broker transferred funds from his account to the wife’s account to offset the losses. However, due to a stock market crash, the debit balance further escalated, prompting the broker to seek recovery from both respondents through arbitration.

The husband contested the claim, arguing that he was wrongly included in the arbitration proceedings and that the fund transfer lacked written authorisation under SEBI guidelines.

The arbitral tribunal ruled in favour of the broker, holding both respondents jointly and severally liable for the losses. It relied on evidence showing the husband’s active involvement in the transactions and his agreement to cover the shortfall. The tribunal acknowledged SEBI guidelines requiring written authorisation for fund transfers but justified its decision based on the couple’s financial relationship and past dealings.

However, when the respondents challenged this decision under Section 34 of the Arbitration and Conciliation Act, a single judge of the Bombay High Court dismissed their applications.

On appeal under Section 37, a Division Bench of the High Court overturned the tribunal’s ruling against the husband. The High Court held that the husband’s alleged liability stemmed from a private understanding, separate from the BSE rules and that oral agreements could not override official trading records and SEBI guidelines.

The Supreme Court overturned the High Court’s decision, holding that the arbitral tribunal had jurisdiction over the husband under BSE Bye-law 248(a). The Court found that the oral agreement establishing joint and several liability was incidental to the transactions conducted on the stock exchange.

The Court emphasised that the husband’s involvement in managing both accounts and the financial dealings between the parties supported the tribunal’s jurisdiction.

“Once the arbitral tribunal arrived at a finding that respondent no. 1 is jointly and severally liable for the debit balance in respondent no. 2’s account, which we have upheld above, Bye-law 247A permits the withdrawal of the credit balance from respondent no. 1’s account,” the court stated.

The Supreme Court further noted that although the arbitral tribunal mentioned the requirement for written authorisation for fund adjustments, Bye-law 247A and SEBI guidelines did not mandate it. The Court found that the tribunal’s conclusion on joint and several liability was reasonable and based on evidence, including affidavits and the conduct of the parties.

The court criticised the High Court for re-appreciating evidence, which was beyond the scope of a Section 37 appeal.

The apex court upheld the arbitral tribunal’s award dated February 26, 2004, holding the husband jointly and severally liable along with the wife for the sum of Rs. 1,18,48,069/- along with 9% interest per annum from May 1, 2001, until the date of repayment.

The court upheld the legal validity of oral agreements in financial dealings and reaffirmed the jurisdictional authority of arbitral tribunals under stock exchange regulations.