S.N. Prasad Vs. Monnet
Finance Ltd. & Ors.
JUDGMENTR.
V.RAVEENDRAN, J.
1.
Leave
granted.
2.
These
appeals involve the question whether 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. 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 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 imp
leaded as respondents in the said application.
5.
The
High Court of Delhi by two orders dated 23.5.2000 appointed are tired 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 3and 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 2and 3 and appellant to pay
Rs.46,49,315/- (that is Rs.25 lakhs with interest at20% 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 (OMPNo.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 22.5.2006dismissed
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 the lender, the borrower and borrower's Managing
Director-cum-Guarantor) containing the arbitration clause. He had merely given
a short letter dated 27.10.1995 standing guarantee for a loan of Rs.75 lakhs sanctioned
by the first respondent. As there was no arbitration agreement between the
first respondent and appellant, the claim against the appellant could not be
referred to arbitration, nor could any award be made against him. The awards
against the appellant were therefore liable to be set aside under section
34(2)(a)(ii) of the Act.
(ii) The appellant
had merely given a letter dated 27.10.1995 indicating his willingness to
stand guarantee, but he did not execute the loan agreement or any deed of
guarantee, as it was decided that the third respondent would be the guarantor
instead of appellant. Consequently, the third respondent executed the loan
agreement as guarantor as also a deed of Guarantee. Therefore, the appellant
was not a guarantor and is not liable.(iii) Even assuming without conceding
that there was an arbitration agreement between the appellant and first
respondent, and that he was liable in respect of the loan amount, there could
be no award for interest against him as he had not agreed to guarantee the
payment of interest. Re : Contention (i)
7.
Section
2(b) defines "arbitration agreement' as an agreement referred to in
section 7 of the Act. Section 2(h) defines "party" as party to an
arbitration agreement. Section 7 of the Act defines an `arbitration agreement'.
Sub-section (1) of Section 7 defines an arbitration agreement as an agreement
by the parties to submit to arbitration all or certain disputes which have arisen
or which may arise between them in respect of a defined legal relationship,
whether contractual or not. Sub-section (2) provides that an arbitration
agreement may be in the form of an arbitration clause in a contract or in the
form of a separate agreement. Sub-section (3) requires an arbitration agreement
to be in writing. Sub-section (4) explains as to when an arbitration agreement
could be said to be in writing, that is : (a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of
telecommunication which provide a record of the arbitration agreement; or (c)
an exchange of statements of claim and defense in which the existence of the
arbitration agreement is alleged by one party and not denied by the other.
Sub-section (5) provides that the reference in a contract to a document
containing an arbitration clause constitutes an arbitration agreement if the
contract is in writing and the reference is such as to make that arbitration
clause a part of the contract. Thus 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 parties 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 for arbitration. The said provision for arbitration is extracted below:"In
the event of any dispute, question or difference arising out of or in connection
with this agreement and the respective rights and obligations of the parties
hereunder, the same shall be referred to the arbitration in accordance with the
provisions of the Arbitration Act, 1940." But the appellant was not a
party to the same. In fact appellant's letter of guarantee for Rs.75 lakhs 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 27.10.1995given 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 the Act.
9.
What
therefore remains to be considered is whether there is an arbitration agreement
as contemplated under section 7(4)(c) of the Act, which provides that 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. The
statement of claim filed by the first respondent before the arbitrator does not
contain an allegation or assertion of an arbitration agreement between the
first respondent and appellant. Nor has the appellant accepted the existence of
any arbitration agreement by not denying such arbitration agreement in the
defence filed before the arbitrator. On the other hand, the appellant
specifically contended before the arbitrator that there was no arbitration
agreement between them (first respondent and appellant) and therefore the
arbitrator did not have jurisdiction.
10.
But
the words, `statements of claim and defence' occurring in section7(4)(c) of the
Act, are not restricted to the statement of claim and defence filed before the
arbitrator. If there is an assertion of existence of an arbitration agreement
in any suit, petition or application filed before any court, and if there is no
denial thereof in the defence/counter/written statement thereto filed by the
other party to such suit, petition or application, then it can be said that
there is an "exchange of statements of claim and defence" for the
purposes of section 7(4)(c) of the Act. It follows that 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.
11.
The
question therefore is whether in this case, the application under section 11 of
the Act had alleged the existence of an arbitration agreement between first
respondent and appellant and such allegation was accepted by non-denial
thereof, by the appellant. The application 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 2and 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 the
appellant. The only averment found in the entire application with reference to
the document executed by the appellant is extracted below:"Respondent No.3
vide his letter dated 27.10.95 guaranteed the repayment of the total amount of
loan i.e. Rs.75,00,000 (Rupees Seventy Five Lakhs) sanctioned by the Petitioner
to Respondent No.1. Copy of the letter dated 27.10.95 from Respondent No.3
guaranteeing repayment of loans is annexed herewith and marked as
"ANNEXURE-C".(Note: The term `petitioner' refers to the lender,
respondent No.1 refers to the borrower and respondent No.3 refers to the
appellant).
Except the 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 by `non-denial' does not arise.
12.
The
first respondent contended that the application under section 11 of the Act
consisted of two parts, that is a preamble containing three columns -column (1)
relating to the "provision under which the application was filed”, column
(2) relating to "Name of applicant with complete address" and column
(3) relating to "Name of the other parties to the arbitration agreement
with complete address"; and the second part contained the running
averments. It is submitted that the name of first respondent is shown as the
applicant in column (2); and against column (3) relating to "Names of the
other parties to the arbitration agreement", the names of Hitek Industries(second
respondent), Prem Prakash Verma (third respondent) and S.N.Prasad (appellant)
was shown and that amounted to an allegation that the appellant was a party to
the arbitration agreement.
13.
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 and `non-denial' thereof
by the other party. An `allegation' is 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) 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 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 and defence'. Bethat as it may.
15.
Before
the Arbitrator, the appellant specifically contended that by relying upon the
section 2(1)(h) and section 7 of the Act that he was not a party to the
arbitration agreement and therefore there could be no arbitration in regard to
the claim against him. The said contention was rejected by the arbitrator on
the ground that the designate of the Chief Justice, in his order dated
23.5.2000 appointing the arbitrator, had observed that the existence of
arbitration agreement was not denied and there was no dispute regarding the
existence of the arbitration agreement. But what was not denied was the
arbitration agreement between first respondent and respondents 2 and 3. The
arbitrator held that in view of the positive finding of the designate of the
Chief Justice about the existence of an arbitrator agreement notwithstanding
the fact that the letter of guarantee does not refer to the loan agreement
which was executed subsequently, it could not be said that there was no
arbitration agreement between the parties. The arbitrator ought to have
considered and decided the objections of the appellant that he was not a party
to the arbitration agreement on merits, instead of referring to the order of
the designate of the Chief Justice appointing the arbitrator. As noted above,
when the said application under section 11 of the Act was filed in1998 and
decided in 2000 (long prior to the decision in SBP & Co. vs. Patel
Engineering Ltd. - (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 lakhs 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 dated27.10.1995 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 the3rd 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 proceeding under section 11 of the Act. In 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.
Conclusion
23.
In
view of the above, these appeals are allowed and the impugned order of the High
Court and awards of the Arbitrator are set aside in part, in so far as the
appellant is concerned.
..............................J.
(R V Raveendran)
;
............................J. (H L Gokhale)
New
Delhi
October
22, 2010.
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