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2010 (7) Supreme 851
SUPREME COURT OF INDIA
R V Raveendran and H L Gokhale, JJ.
S.N. Prasad — Appellant
versus
Monnet Finance Ltd. & Ors. — Respondents
Civil Appeal No. 9224 of 2010
[Arising out of SLP [C] No.17114/2008]
with
Civil Appeal No. 9225 of 2010
[Arising out of SLP [C] No.17115/2008]
Decided on : 22-10-2010
(b) Arbitration Act, 1940 – Section 7(4)(a) and (b) – Appellant not a party to the arbitration agreement – Guarantee given prior to the date of loan agreement – Guarantor’s letter not containing provision for arbitration – An arbitration agreement between the lender and the borrower cannot be deemed or construed to be an arbitration agreement in respect of another guarantor who was not a party to the arbitration agreement. (Para 8)
(c) Arbitration Act, 1940 – Section (4)(c) – Scope – An arbitration agreement in writing can be said to exist, if it is contained in an exchange of statements of claim and defence in which the existence of the arbitration agreement is alleged by one party and not denied by the other – ‘Statements of claim and defence’ not restricted to the statement of claim and defence filed before the arbitrator – If in the application filed under section 11 of the Act, the applicant asserts the existence of an arbitration agreement with each of the respondents and if the respondents do not deny the said assertion, in their statement of defence, the court can proceed on the basis that there is an arbitration agreement in writing between the parties. (Paras 9 and 10)
(d) Arbitration Act, 1940 – Section 7(4)(c) – Arbitration agreement – In absence of any agreement between the lender and the guarantor the application filed u/s 11 cannot be construed to be an allegation of existence of an arbitration agreement with the appellant. (Para 11)
(e) Arbitration Act, 1940 – Section 11 – No allegation in the application as to the existence of any arbitration agreement between first respondent and the appellant – Column (3) containing “Names of other parties to arbitration agreement with addresses” cannot be considered to be an assertion or declaration about the existence of an arbitration agreement. (Para 13)
(f) Arbitration Act, 1940 – Section 11 – During the years 1998-2000 an proceeding section 11 was not considered to be a judicial proceeding, and the order appointing an arbitrator was considered to be an administrative order – Therefore the application under section 11 was not in the nature of ‘statements of claim and defence’. (Para 14)
(g) Arbitration Act, 1940 – Section 11 – At the relevant time proceeding u/s 11 was not held to be judicial proceeding – Designate of the Chief Justice was not adjudicating any dispute regarding existence of arbitration agreement – Arbitrator was therefore required to decide about the existence of arbitration agreement and the arbitrability. (Para 15)
(2005) 8 SCC 618 – Relied upon
(h) Arbitration Act, 1940 – Section 2(1)(h) and section 7 – While giving the guarantee letter the appellant could not know that the loan agreements which were to be executed in future would contain an arbitration clause – Appellant never undertook to be bound by the terms of loan agreement/s that may be executed by the borrower – The question of appellant impliedly agreeing to the arbitration clause does not arise. (Para 17)
Facts of the case:
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.
Finding of the Court:
Appellant cannot be impleaded in the arbitration proceeding.
Result : Appeals allowed.
JUDGMENT
R.V. Raveendran, J. —
Leave granted. 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 as ‘borrower’) after repaying an earlier loan taken from the first respondent (also referred to as the ‘lender’), sought a fresh loan of Rs.75 lakhs. 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 lakhs 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 lakhs. 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, 1996 (‘Act’ for 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 lakhs 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 lakhs 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 No.319/2002 and 322/2002). The second and third respondents also challenged the awards in OMP No.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 OMP 319/2002 and 322/2002, is challenged by the appellant in this appeals by special leave.
6. The following contentions are urged by the appellant :
(i) The appellant was not a party to the tripartite loan agreements executed among respondents 1, 2 and 3 (that is t
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