Stockbroker is vicariously liable for agent’s fraudulent unauthorized trades notwithstanding the client's delayed objection.

The Appellant, a SEBI-registered stockbroker, challenged an Arbitral Award dated 10.03.2025 and a subsequent District Court order dated 10.10.2025 which dismissed its Section 34 application

The Respondent opened a trading account through the Appellant’s Alliance Partner (sub-broker), Manvendra Pratap Singh

Between July and September 2024, the Respondent suffered losses of approximately Rs. 14,37,200

He alleged that the Alliance Partner's employees (Vishnu and Vishal) executed unauthorized trades without his consent, used pressure tactics, promised guaranteed returns, and engaged in "brokerage churning"

Notably, out of the total investment, Rs. 9,48,302 was consumed by brokerage charges alone

The Arbitrator found that on one occasion, a balance of Rs. 9,50,128 was reduced to Rs. 36,187 within 66 seconds due to high-volume trading

1. Whether, in the absence of prior written or recorded instructions, a client can disown trade losses if they failed to object within a reasonable time

2. Whether the stockbroker is vicariously liable for the fraudulent or prejudicial trade transactions conducted by its Alliance Partner and their employees

The court primarily applied Section 37 and Section 34 of the Arbitration and Conciliation Act, 1996 regarding the scope of judicial interference

It relied on the principles from Ulhas Dandekar v. Sushil Financial Services Pvt. Ltd. and Erach Khavar v. Nirmal Bang Securities Pvt. Ltd., which establish that while pre-trade authorization is mandatory under NSE/SEBI regulations, its absence does not automatically allow a client to "wriggle out" of losses if they confirmed the trades through subsequent conduct or silence

the court distinguished these from "blatantly unauthorized trades" or "civil fraud" as per Sharekhan Ltd. v. Monita Kisan Khade

Finally, it applied Sections 237 and 238 of the Indian Contract Act, 1872, and the precedent in State Bank of India v. Shyama Devi, regarding a principal’s vicarious liability for an agent’s fraud committed in the course of business

The court observed that while a client generally cannot disown trades after receiving SMS/email alerts without timely objection, this rule is not absolute

In this case, the Arbitrator recorded a specific finding of "civil fraud," noting that the transactions were structured primarily to benefit the broker and Alliance Partner through excessive commissions (brokerage churning) rather than the client's interests

The court found that a brokerage fee of nearly Rs. 10 lakh on a Rs. 15 lakh deposit evidenced a "systematic erosion of funds"

Consequently, the court held that these transactions constituted "blatantly unauthorized trades," which fall outside the principle of acquiescence

Regarding vicarious liability, the court rejected the Appellant's claim that it was not responsible for the acts of the Alliance Partner's employees

It reasoned that since the Alliance Partner acted within the scope of the agency and the Appellant was the ultimate beneficiary of the generated brokerage, the broker is liable for the agent’s fraud under Section 238 of the Contract Act

It held that the stockbroker is vicariously liable for the fraudulent acts of its Alliance Partner and their servants committed during the course of business, regardless of whether the broker specifically authorized the fraud

The court found no patent illegality or perversity in the Arbitrator's findings that warranted interference under Section 37

All pending civil applications were disposed of