Case: S.N. Prasad Vs. Monnet Finance Ltd. and Ors

under Section 11 of the Act was filed in 1998 and decided in 2000 (long prior to the decision in SBP & Co. v. Patel Engineering Ltd., VIII (2005) SLT 405=IV (2005) CLT 236 (SC)=(2005) 8 SCC 618 the prevailing view was that the orders under Section 11 of the Act were administrative orders and that the Designate of the Chief Justice appointing an Arbitrator was not adjudicating on any disputed question of fact, including the existence of any valid arbitration agreement; and that the Arbitrator was required to decide about the existence of arbitration agreement and the arbitrability. 16. The first respondent contended that the appellant having agreed to be a guarantor for the repayment of the loan, cannot avoid arbitration by contending that he was not a signatory to the loan agreement containing the arbitration clause. It was submitted that the liability of the principal debtor and guarantors was joint and several and therefore there could be only one proceeding against all of them; and that if the contention of the appellant was accepted, it would necessitate two proceedings in regard to the same loan transaction and same cause of action, that is an arbitration proceedings against the borrower and one of its guarantors (respondents 2 and 3) and a separate suit against the other guarantor (appellant). It was further submitted that multiple proceedings may lead to divergent findings and results, leading to an anomalous situation. It was also submitted that the letter dated 27.10.1995 guaranteeing the loan of Rs. 75 lakh was written by the appellant, as a Director of the borrower company; and that as the appellant had already given a guarantee letter dated 27.10.1995, he was not required to execute the tripartite loan agreements containing the arbitration clause; that the appellant was aware of the terms of the loan and was further aware that loan agreements with arbitration clause had to be executed; and that therefore it should be deemed that the appellant had agreed to abide by the terms contained in the loan agreements, including the arbitration clause. We find no merit in these contentions. 17. When the appellant gave the guarantee letter dated 27.10.1995, he could not be imputed with the knowledge that the loan agreements which were to be executed in future (on 28.10.1995 and 6.11.1995) would contain an arbitration clause. Further, the appellant did not state in his letter dated 27.10.1995 that he would be bound by the terms of loan agreement/s that may be executed by the borrower. Therefore the question of appellant impliedly agreeing to the arbitration clause does not arise. 18. The apprehension of the first respondent that an anomalous situation may arise if there are two proceedings (one arbitration proceedings against the borrower and one guarantor and a suit against another guarantor), is not a relevant consideration as any such anomalous situation, if it arises, would be the own-making of the first respondent, as that is the consequence of its failure to require the appellant to join in the execution of the loan agreements. Having made only one of the guarantors to execute the loan agreements and having failed to get the appellant to execute the loan agreements, the first respondent cannot contend that the appellant who did not sign the loan agreements containing the arbitration clause should also be deemed to be a party to the arbitration and be bound by the awards. The issue is not one of convenience and expediency. The issue is whether there was an arbitration agreement with the appellant.19. As there was no arbitration agreement between the parties (the first respondent and appellant), the impleading of appellant as a respondent in the arbitration proceedings and the award against the appellant in such arbitration cannot be sustained. As a consequence, both the arbitration awards, as against the appellant are liable to be set aside. If the first respondent wants to enforce the alleged guarantee of the appellant, it is open to the first respondent to do so in accordance with law.20. The above discussion and findings would also apply to the second loan covered by the loan agreement dated 6.11.1995, as the facts are the same.Re: Contention (ii) 21. The appellant contended that on 27.10.1995 he was a Director of the borrower company and he had agreed to guarantee the loan of Rs. 75 lakhs; that subsequently, it was decided as he would be resigning from his directorship on account of his advanced age, his son would be the guarantor; and that, therefore, he did not become a guarantor by executing a deed of guarantee and he did not also execute the loan agreements. It was contended that the fact that ultimately the loan agreements were executed only among the lender (first respondent), the borrower company (2nd respondent) and the 3rd respondent (guarantor) and the further fact that third respondent alone executed the Deed of Guarantee, demonstrated that only third respondent was the guarantor and he was not a guarantor. According to him on execution of the loan agreements among respondents 1, 2 and 3, the letter dated 27.10.1995 given by him agreeing to be a guarantor ceased to be of any effect. We cannot examine these aspects in an appeal arising from a proceeding under Section 11 of the Act. In a proceedings under Section 11 of the Act, what is relevant is existence of arbitration agreement and not the defence on merits. Further, in view of our finding on the first contention, it is not necessary to examine this contention. It is open to appellant to urge this contention, if and when first respondent initiates action against him in accordance with law.Re : Contention (iii)22. It is true that where the letter of Guarantee issued by a guarantor, guarantees repayment of only the principal sum and does not guarantee the payment of any interest, he could not be made liable for the interest. But in view of our finding on the first contention, this issue does not survive for consideration.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]us there can be reference to arbitration only if there is an arbitration agreement between the parties. The Act makes it clear that an Arbitrator can be appointed under the Act at the instance of a party to an arbitration agreement only in respect of disputes with another party to the arbitration agreement. If there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also non-parties to the arbitration agreement, reference to arbitration or appointment of Arbitrator can be only with respect to the parties to the arbitration agreement and not the non-parties.8. There is no dispute that the loan agreements among the first respondent (lender), the second respondent (borrower) and the third respondent (guarantor) contained a provision forthe appellant was not a party to the same. In factletter of guarantee for Rs. 75 lakh was given on 27.10.1995, prior to the dates of the two loan agreements. It is also not in dispute that the letter dated 27.10.1995 given by appellant to the first respondent did not contain a provision for arbitration; and that except the said letter dated 27.10.1995, the appellant did not execute any document or issue any communication. An arbitration agreement between the lender on the one hand and the borrower and one of the guarantors on the other, cannot be deemed or construed to be an arbitration agreement in respect of another guarantor who was not a party to the arbitration agreement. Therefore, there was no arbitration agreement as defined under Section 7(4)(a) or (b) of the Act, in so far as appellant was concerned, though there was an arbitration agreement as defined under Section 7(4)(a) of the Act in regard to the second and third respondents. As the letter dated 27.10.1995 does not refer to any document containing an arbitration clause, there is also no arbitration agreement between first respondent and appellant as contemplated under Section 7(5) of theapplication filed by the first respondent under Section 11 of the Act referred to the loan agreement containing the arbitration clause, which was executed by respondents 2 and 3 as borrower and guarantor in favour of the first respondent. The application specifically relied upon the provisions of Clause 18 of the loan agreement as the arbitration agreement under which appointment of an Arbitrator was sought. Significantly, the application under Section 11 of the Act did not allege or refer to the existence of any arbitration agreement between the first respondent and thethe aforesaid averment, there is absolutely no reference to any agreement between the first respondent and the appellant or the existence of any arbitration agreement between them. Therefore the application filed by the first respondent under Section 11 of the Act referring to the loan agreement with respondents 2 and 3 containing the arbitration agreement cannot be considered or construed to be an allegation of existence of an arbitration agreement between first respondent and appellant. If there was no reference to the existence of any arbitration agreement with appellant, the question of the appellant accepting such arbitration agreement by13. To constitute an arbitration agreement under Section 7(4)(c) of the Act, what is required is a statement of claim containing a specific allegation about the existence of an arbitration agreement by the applicant andthereof by the other party. Anis an assertion or declaration about a fact and also refers to the narration of a transaction. As noticed above, in the entire application under Section 11 of the Act, there was no allegation as to the existence of any arbitration agreement between first respondent and the appellant. Column (3) containingof other parties to arbitration agreement withcannot be considered to be an assertion or declaration about the existence of an arbitration agreement between the first respondent and appellant. Section 7(4)(c) of the Act cannot therefore be relied upon to prove the existence of an arbitration agreement.14. It is of some relevance to note that in the year 1998 when the applications under Section 11 of the Act was filed and in the year 2000 when the applications were allowed, an application under Section 11 of the Act was not considered to be a judicial proceeding and the order appointing an Arbitrator was considered to be an administrative order. Therefore at the relevant time, the application under Section 11 of the Act and the counter if any thereto were not in the nature of ‘statements of claim andBe that as it may.The apprehension of the first respondent that an anomalous situation may arise if there are two proceedings (one arbitration proceedings against the borrower and one guarantor and a suit against another guarantor), is not a relevant consideration as any such anomalous situation, if it arises, would be the own-making of the first respondent, as that is the consequence of its failure to require the appellant to join in the execution of the loan agreements. Having made only one of the guarantors to execute the loan agreements and having failed to get the appellant to execute the loan agreements, the first respondent cannot contend that the appellant who did not sign the loan agreements containing the arbitration clause should also be deemed to be a party to the arbitration and be bound by the awards. The issue is not one of convenience and expediency. The issue is whether there was an arbitration agreement with the appellant.19. As there was no arbitration agreement between the parties (the first respondent and appellant), the impleading of appellant as a respondent in the arbitration proceedings and the award against the appellant in such arbitration cannot be sustained. As a consequence, both the arbitration awards, as against the appellant are liable to be set aside. If the first respondent wants to enforce the alleged guarantee of the appellant, it is open to the first respondent to do so in accordance with law.20. The above discussion and findings would also apply to the second loan covered by the loan agreement dated 6.11.1995, as the facts are the same.Re: Contentioncannot examine these aspects in an appeal arising from a proceeding under Section 11 of the Act. In a proceedings under Section 11 of the Act, what is relevant is existence of arbitration agreement and not the defence on merits. Further, in view of our finding on the first contention, it is not necessary to examine this contention. It is open to appellant to urge this contention, if and when first respondent initiates action against him in accordance with law.Re : Contention (iii)22. It is true that where the letter of Guarantee issued by a guarantor, guarantees repayment of only the principal sum and does not guarantee the payment of any interest, he could not be made liable for the interest. But in view of our finding on the first contention, this issue does not survive for consideration.