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

These appeals involve the question whether a guarantor for a loan, who is not a party to the loan agreement containing the arbitration agreement executed between the lender and borrower, can be made a party to a reference to arbitration in regard to a dispute relating to repayment of such loan and subjected to the arbitration award.2. The second respondent company is a borrower from the first respondent. Third respondent is the Managing Director of the second respondent. The appellant, father of the third respondent, was a Director of the second respondent. The second respondent (also referred to asafter repaying an earlier loan taken from the first respondent (also referred to as thesought a fresh loan of Rs. 75 lakh. The first respondent sanctioned the loan. The appellant by letter dated 27.10.1995 in his capacity as a Director of the second respondent, stood guarantee for the loan of Rs.75 lakh sanctioned by the first respondent.3. A loan agreement dated 28.10.1995 was entered between the lender, the borrower, and the third respondent as the guarantor, in regard to the lending of a sum of Rs. 50 lakh. The agreement provided that the amount advanced had to be repaid within three months with interest at 20% per annum and if there was default, the borrower was liable to pay a compound interest at the rate of 5% per month with quarterly rests. Clause 18 of the said loan agreement provided for settlement of disputes by arbitration. In addition to the loan agreement, the borrower executed an on demand promissory note for the amount borrowed and the third respondent executed a Deed of Guarantee guaranteeing repayment of the loan amount with interest. Similarly, a tripartite loan agreement was entered in respect of a loan of Rs. 2500,000/- on 6.11.1995, among the first respondent, second respondent and third respondent followed by a promissory note by second respondent and Deed of Guarantee by third respondent. The appellant was not a party to the loan agreements nor did he execute any separate deeds of guarantee or other document in favour of the first respondent. The loan agreements did not refer to the letter of guarantee by the appellant.4. The lender issued a notice through Counsel demanding payment and proposing to refer the claims against the borrower and its guarantors for arbitration. This was followed by two applications by the lender under Section 11 of the Arbitration and Conciliation Act, 1996for short) for appointment of an Arbitrator. The borrower, its Managing Director-cum-Guarantor, and the appellant were impleaded as respondents in the said application.5. The High Court of Delhi by two orders dated 23.5.2000 appointed a retired Judge of the High Court as the sole Arbitrator. The arbitrations ended in two awards dated 1.5.2002. The first award directed respondents 2 and 3 and appellant to pay Rs. 93,23,288/- (that is Rs. 50 lakh with interest at 20% up to the date of the appointment of Arbitrator) with interest at 18% per annum from 24.5.2000. Similarly the second award directed respondents 2 and 3 and appellant to pay Rs. 46,49,315/- (that is Rs. 25 lakh with interest at 20% upto the date of appointment of Arbitrator) with interest at 18% per annum from 24.5.2000. The two arbitration awards were challenged by the appellant by filing applications under Section 34 of the Act (OMP Nos. 319/2002 and 322/2002). The second and third respondents also challenged the awards in OMP Nos. 320/2002 and 321/2002. A learned single Judge of the Delhi High Court by a common order dated 22.5.2006 dismissed the said applications. The said common order dated 22.5.2006, insofar as it dismisses OMPs 319/2002 and 322/2002, is challenged by the appellant in this appeals by special leave.

Court's reasoning:
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.