THE HON'BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.101 of 2010 20th September, 2011 Between :- M/s.Corporate Deposits and Investments Private Limited Rep.by its Manager – Pradeep Joy .. Applicant And Mrs.D.Anuradha and others .. Respondents THE HON'BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.101 of 2010 ORDER:- This application has been taken out by M/s.Corporate Deposits and Investments Private Limited under Section 11 of the Arbitration and Conciliation Act, 1996 read with para 3 (i)(c) of the Scheme for Appointment of Arbitrator for resolution of the disputes relatable to Term Loan Agreement dated 19-5-2009. 2. The applicant is a Company incorporated under the provisions of the Companies Act, 1956 and its registered Office is located at 3-6-2/1, 3rd Floor, Grandpa’s Royal Mansion, Himayathnagar, Hyderabad. It deals with non-banking finance business. The 1st respondent – Mrs.D.Anuradha approached the applicant for grant of term loan for the purpose of construction and improvement of infrastructure for the school by name Sri Rajendra Talent High School, situated at H.No.8/4/370/513/514, Rajnagar, Borabanda, Hyderabad. The 1st respondent is the Secretary and Correspondent of the School. The applicant sanctioned term loan of Rs.8,85,000/- on 19-5-2009. The 1st respondent along with 2nd respondent executed Term Loan Agreement on the even date. Respondents No.3 and 4 executed a Deed of Personal Guarantee guarantying repayment of the amount disbursed to the 1st respondent. On 26-5-2009 loan amount of Rs.6,50,000/- was disbursed to the 1st respondent vide cheque bearing No.327352 in favour of Sri Sai Engineering & Company and thereafter on 5-8-2009 the applicant further disbursed an amount of Rs.1,20,000/- vide cheque No.344451 in favour of Max Computer Services. Accordingly, the applicant disbursed total loan of Rs.7,70,000/- as per the terms of the Term Loan Agreement. The respondents committed default in paying the loan amount. As per clause 12.4 of the Term Loan Agreement, disputes between the applicant and the respondents are required to be resolved by arbitration. The applicant invoked the arbitration clause and proposed the name of Sri N.Sanyasi Rao, retired District Judge, as sole Arbitrator for resolution of the disputes and called for consent of the respondents by notice dated 7-6-2010. There being no response from the respondents, the applicant has filed this petition seeking the prayer stated supra. 3. Respondent No.4 reported to be no more. Therefore the application against respondent No.4 is dismissed as abated. 4. Respondents No.1 and 2 filed common affidavit whereas 3rd respondent filed separate counter. 5. Respondents No.1 and 2 stated in their counter that the applicant violated the Term Loan Agreement and filed criminal complaint C.C.No.513 of 2011 on the file of the Chief Metropolitan Magistrate, Nampally, Hyderabad, for the entire loan amount of Rs.7,94,941/- and therefore the applicant is not entitled to revoke the arbitration clause. 6. The counter of the 3rd respondent is that he is not a party to the Term Loan Agreement entered between the applicant and the respondents No.1 and 2 and therefore he is not a necessary party to the arbitration clause. 7. Heard learned Counsel appearing for the applicant and the learned Counsel appearing for the respondents No.1 to 3. 8. Learned Counsel appearing for the applicant submits that the applicant disbursed the loan amount of Rs.7,70,000/- pursuant to the Loan Agreement executed by respondents No.1 and 2. A further submission has been made that respondents No.3 and 4 stood as guarantors for the loan availed by respondent No.1, since the respondent No.1 failed to liquidate the liability, it is the obligation on the part of respondents No.2 to 4 to repay the said amount pursuant to their personal guarantee bond executed by them. He would also submit that as per clause 12.4 of the Term Loan Agreement, the disputes between the parties are required to be resolved by way of arbitration and therefore the applicant issued notice dated 7-6-2010 invoking the arbitration clause. Respondents neither consented for the name proposed by the applicant nor indicated their choice of arbitrators, which necessitated the applicant to approach this Court invoking Section 11 of the Arbitration and Conciliation Act. In support of his submissions, reliance has been placed on the decision of the Supreme Court in DATAR SWITCHGEARS LTD. v. TATA FINANCE LTD. AND ANOTHER[1]. Much emphasis has been laid on para 23 of the Judgment which reads as hereunder:- “When parties have entered into a contract and settled on a procedure, due importance has to be given to such procedure. Even though rigor of the doctrine of “freedom of contract” has been whittled down by various labour and social welfare legislation, still the Court has to respect the terms of the contract entered into by parties and endeavor to give importance and effect to it. When the party has not disputed the arbitration clause, normally he is bound by it and obliged to comply with the procedure laid down under the said clause.” 9. Learned Counsel appearing for the respondents No.1 to 3 submits that the applicant fabricated the cheque and initiated criminal proceedings under Section 138 of the Negotiable Instruments Act and therefore the applicant is not entitled to take recourse to the arbitration clause in the Term Loan Agreement. It is also contended by the learned Counsel that the term loan is Rs.8,85,000/- whereas the amount released is only Rs.7,70,000/-. A further submission has been made that 3rd respondent is not a party to the Term Loan Agreement, which contains the arbitration clause, and therefore he is not a necessary party to the arbitration application. 10. As per the Term Loan Agreement, the applicant released Rs.7,70,000/-. The Term Loan Agreement has been executed by respondents No.1 and 2. Respondents No.3 and 4 stood as guarantors to the Term Loan availed by the 1st respondent. The applicant issued notice to the respondents No.1 to 4 invoking the arbitration clause and proposed Sri N.Sanyasi Rao, a retired District Judge, as Arbitrator. Though respondents No.3 and 4 are not parties to the Term Loan Agreement but their liability commences on default of the payment of amount by the principal borrower i.e., the 1st respondent. Therefore the object of sending notice to respondents No.3 and 4 invoking the arbitration clause is to keep them informed of the default committed by the 1st respondent who is the principal borrower. Making respondent No.3 as a party to arbitration proceedings would be for his benefit. Therefore notice issued to all the respondents cannot be construed as a defective notice. It is a matter of record that disputes have arisen between the applicant on the one hand and the respondents No.1 to 3 on the other hand relatable to Term Loan Agreement. These disputes are required to be resolved by taking recourse to arbitration as per clause 12.4 of the Term Loan Agreement. In that view of the matter, I find that the applicant has made out a valid ground for appointment of an Arbitrator. 11. Accordingly, the Arbitration Application is allowed. Sri N.Sanyasi Rao, a retired District Judge, is appointed as Arbitrator for resolution of the disputes between the applicant and the respondents No.1 to 3 relatable to the Term Loan Agreement dated 19- 5-2009. He is at liberty to fix his own fee. No order as to costs. _________________________ B.Seshasayana Reddy, J 20th September, 2011 smr [1] 2000 AIR SCW 3925