The Bombay High Court has upheld an Appellate Arbitral Award allowing a trader to retain profits of approximately Rs. 1.75 Crores earned from trades executed using erroneous margin credited due to a technical glitch in the broker’s system.
Justice Sandeep V. Marne, while dismissing the petition filed by Kotak Securities Limited under Section 34 of the Arbitration and Conciliation Act, 1996, ruled that the broker could not claim the profits on the ground of unjust enrichment when it had suffered no loss and had, in fact, charged brokerage and interest on the transactions. The Court held that margin money does not constitute “goods,” and thus the laws regarding a “finder of goods” do not apply.
The central legal issue was whether profits generated by a client using an “undue trade opportunity” resulting from a broker’s system error belong to the client or the broker. Kotak Securities contended that the client had unjustly enriched himself from a mistake. The Court rejected this, holding that the client bore the risk of the trades and used his own skill. Since the broker would have held the client liable for any losses, it could not claim the profits.
Background of the Case
The Respondent, Gajanan Ramdas Rajguru, held a trading account with Kotak Securities Limited (the Petitioner). On July 26, 2022, the Respondent had a ledger balance of only Rs. 3,175.69.
Due to a technical glitch in the Petitioner’s system, the Respondent received an undue credit in his margin. Utilizing this erroneous limit, the Respondent executed high-value trades in Future and Options (F&O) contracts worth approximately Rs. 94.81 Crores within a 20-minute window. Under normal circumstances, such trades would have required a margin of roughly Rs. 40 Crores.
The trades resulted in a net profit of Rs. 1.75 Crores. Kotak Securities initially issued a contract note crediting the profit but subsequently reversed the entry, debiting Rs. 1,75,01,672.92 from the Respondent’s account. The broker claimed the trades were unauthorized due to insufficient margin.
The dispute was first heard by the Grievance Redressal Committee (GRC) and a lower Arbitral Tribunal, both of which rejected the Respondent’s claim. However, the Appellate Arbitral Tribunal, by an award dated October 25, 2023, reversed these findings and directed Kotak Securities to pay the withheld amount with 12% interest. Kotak Securities challenged this award before the Bombay High Court.
Arguments of the Parties
Submissions by Kotak Securities Limited: Senior Advocate Mr. Pesi N. Modi, appearing for Kotak Securities, argued that the Respondent “misused” the system glitch. His key contentions were:
- Unjust Enrichment: The Respondent cannot be allowed to retain benefits derived purely from a mistake.
- Finder of Goods: Relying on Sections 71 and 163 of the Indian Contract Act, 1872, it was argued that a person who finds goods belonging to another must return any accretion to such goods.
- Regulatory Violation: Under Regulation 3.10 of the NSE (F&O) Regulations, depositing margin is mandatory before trading.
- Settlement Offer: The Petitioner noted that the Respondent had previously offered to settle for a lower amount, implying he knew he wasn’t entitled to the full profit.
Submissions by the Respondent: Advocate Mr. Nitesh V. Bhutekar, representing the Respondent, supported the Appellate Award, submitting:
- Risk and Skill: The Respondent used his own skills to execute trades and assumed the risk. Had the trades resulted in a loss, the Petitioner would have recovered the amount from the Respondent.
- Valid Contract: The Petitioner issued contract notes, deducted levies, and charged interest, treating the trades as valid transactions.
- No Loss to Broker: The Petitioner did not suffer any financial loss due to the glitch but was attempting to appropriate the Respondent’s profits.
- System Failure: The error was solely attributable to the Petitioner’s failure to maintain proper risk management protocols.
Court’s Analysis and Observations
Justice Marne meticulously analyzed the applicability of the Contract Act and the doctrine of unjust enrichment.
1. Margin Money is Not ‘Goods’ The Court rejected the Petitioner’s reliance on Sections 71 and 163 of the Indian Contract Act (pertaining to the finder of goods).
“The word ‘Goods’ is defined under Section 2(7) of the Sale of Goods Act, 1930… The definition of Goods specifically excludes ‘money’… Therefore, the margin money erroneously made available by Petitioner to Respondent cannot be treated as ‘goods’ within the meaning of Sale of Goods Act.”
2. Rejection of Unjust Enrichment Claim The Court observed that the Petitioner suffered no actual loss and had earned brokerage. The Court stated:
“It is not the case of Petitioner that it has suffered any losses on account of the mistake of erroneously making available margin to the Respondent… 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.”
3. Allocation of Risk and Reward The Court emphasized that the profit was the result of the Respondent’s trading decisions and risk-taking.
“Respondent made use of such undue opportunity, took risk, used his skills and earned profits… If the trades were to result in losses, Petitioner would have most certainly recovered the same from the Respondent… If the liability for losses was to be of the Respondent, the benefit of profits must also vest in him.”
4. Failure of Risk Management The Court criticized the Petitioner for the system failure and its subsequent conduct:
“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 later took a volte face and reversed the entry.”
Decision
The High Court found no patent illegality or perversity in the Appellate Arbitral Tribunal’s decision. The Court held that the view taken by the Tribunal—that a mere system error does not entitle a broker to claim client profits—was a plausible one.
The Order:
“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.”
The Court granted a stay of five weeks on the withdrawal of funds to allow the Petitioner to appeal.
Case Details:
- Case Title: Kotak Securities Limited Vs Gajanan Ramdas Rajguru
- Case Number: Commercial Arbitration Petition No. 788 of 2024
- Coram: Justice Sandeep V. Marne
- Counsel for Petitioner: Mr. Pesi N. Modi, Senior Advocate with Mr. Kunal Kataria, Mr. Shailesh Prajapati & Mr. Ankit Singhal i/b Dua Associates.
- Counsel for Respondent: Mr. Nitesh V. Bhutekar with Mr. Aaditya Mahamiya.
