Absence of Prior Written Trade Authorisation Is Not Fatal If Client's Conscious Participation is Evident: Bombay High Court

A Regulatory Breach Is Not Equivalent to a Shield Against Payment Obligations in Stock Trading - Bombay High Court in Ulhas Dandekar v. Sushil Financial Services Pvt. Ltd. (Commercial Arbitration Petition No. 1175 of 2019 with Arbitration Petition No. 1216 of 2019) dismissed a challenge under Section 34 of the Arbitration and Conciliation Act, 1996 to an arbitral award directing the petitioner to pay dues of over Rs. 69.2 lakhs to his stockbroker. Justice Somasekhar Sundaresan ruled that “the absence of prior written or recorded instructions for trades, though a regulatory breach, is not sufficient to avoid liability if the client's participation and knowledge of the trades is evident.” 
 
Ulhas Dandekar, an architect by profession, maintained a trading account with Sushil Financial Services Pvt. 
Ltd. since 2006. The dispute arose over transactions during the period April 1, 2017, to July 4, 2018, wherein Dandekar claimed that several trades executed by the broker were unauthorized, citing the lack of written or recorded instructions, as required under NSE Regulations and the Broker-Client Agreement. 
 
The first arbitral award rejected both Dandekar’s counter-claim and the broker’s claim. Upon appeal, the appellate tribunal allowed the broker’s appeal and directed Dandekar to pay the outstanding debit balance with 12% interest. Dandekar filed a petition under Section 34 seeking to set aside the appellate award. 
 
 The petitioner’s principal argument was that “in the admitted absence of prior written or recorded authorisation, the trades were unauthorised and thus unenforceable.” He relied heavily on Regulation 3.2.1 of the NSE Regulations and decisions such as Motilal Oswal v. Chandrabhushan Kumar and First Global v. Tarun Gupta to argue that such absence is fatal. 
 
However, the Court held this absolute proposition as untenable:  “The absence of evidence of pre-authorisation is not evidence of absence of instructing the trades... the jurisdictional arbitral tribunal must assess whether the client actively participated in the trades.” 
 
 Justice Sundaresan emphasized that regulatory norms like SEBI Circular dated March 22, 2018, are directory and not mandatory in nature: “The SEBI Circular envisages that in the absence of prior authorisation, other appropriate evidence like post-trade confirmations, transfer of securities, and payment transactions must be considered.” 
 
The Court elaborated that Dandekar consistently received contract notes, SMS alerts, executed transfer instructions, and made payments during the disputed period—actions inconsistent with his claim of ignorance. 

“Every trade was followed by contract notes to his email, SMS alerts, and movements in his demat account requiring signed instructions... Dandekar took no steps to protest until arbitration was initiated.” 
 
 The explanation of a “technical glitch” disabling his email access was dismissed as implausible. 
 
On the broader legal principle, the Court clarified: “Treating a regulatory breach as automatically invalidating financial liability in civil disputes would result in absurd, unintended consequences... Even in cases of market abuse, such a binary approach would protect wrongdoers." 
 
  The Court noted that arbitral tribunals, as masters of evidence, are empowered under Section 28(3) to consider trade usages and practical realities, reaffirming this through Supreme Court precedent in AC Chokshi Share Broker Pvt. Ltd. v. Jatin Pratap Desai (2025 INSC 174): “To prevent mischievous avoidance of liability, courts must consider the reality of conduct rather than formal technicalities.” 
  
 Dismissing Dandekar's challenge, the Court upheld the arbitral award in favor of the stockbroker and imposed costs of Rs. 1,00,000 on Dandekar: 
 “The absence of prior authorisation would not be fatal to the broker’s right to be paid for the client’s trade... These petitions deserve to fail.” 
  
 This ruling significantly clarifies that regulatory lapses alone do not exonerate clients from financial obligations if they have knowingly and actively participated in trading transactions. 
 
Date of Decision: March 27, 2025