2010 (10) TMI 1014 - SC - Indian Laws

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.

Summary

Issues Involved:
1. Whether a guarantor, who is not a party to the loan agreement containing an arbitration agreement, can be subjected to arbitration.
2. Whether the appellant was a guarantor for the loan.
3. Whether the appellant could be liable for interest if he was a guarantor.

Issue-wise Detailed Analysis:

Issue 1: Arbitration Agreement Applicability to Non-Signatory Guarantor
The primary question was whether a guarantor, who did not sign the loan agreement containing the arbitration clause, could be subjected to arbitration and its resultant award. The loan agreements among the lender, borrower, and a guarantor (third respondent) contained an arbitration clause. However, the appellant only provided a letter of guarantee and did not sign any loan agreement or arbitration clause.

Legal Analysis:
- Section 2(b) and 2(h) of the Act: Define "arbitration agreement" and "party" respectively.
- Section 7 of the Act: Specifies that an arbitration agreement must be in writing and can be part of a contract or a separate agreement. It can also be inferred from an exchange of statements of claim and defense, provided the existence of the arbitration agreement is not denied.
- Findings: The appellant's letter of guarantee did not contain an arbitration clause, nor did it reference any document with such a clause. The loan agreements executed later did not include the appellant as a party. Therefore, there was no arbitration agreement between the lender and the appellant as per Section 7(4)(a) or (b) of the Act. The application under Section 11 of the Act did not allege an arbitration agreement with the appellant, and thus, the appellant did not accept any such agreement by non-denial.

Conclusion: There was no arbitration agreement between the appellant and the lender, making the arbitration awards against the appellant unsustainable.

Issue 2: Status as a Guarantor
The appellant contended that he was not a guarantor as he did not execute the loan agreements or a deed of guarantee. He argued that his initial letter of guarantee was rendered ineffective when the third respondent executed the loan agreements and the deed of guarantee.

Legal Analysis:
- Appellant's Position: The appellant provided a guarantee letter while he was a director of the borrower company. It was later decided that the third respondent would be the guarantor, and the appellant did not execute any further documents.
- Court's Position: The court noted that this contention pertains to the merits of the case and not the existence of an arbitration agreement. Therefore, it was not necessary to examine this contention in the current proceedings.

Conclusion: The appellant's status as a guarantor was not examined in detail due to the resolution of the primary issue regarding the arbitration agreement.

Issue 3: Liability for Interest
The appellant argued that even if he were considered a guarantor, he did not agree to guarantee the payment of interest, only the principal amount.

Legal Analysis:
- Guarantee Terms: If a guarantor's letter only guarantees the principal sum and not the interest, the guarantor cannot be held liable for interest.
- Court's Position: Given the resolution that there was no arbitration agreement with the appellant, this issue became moot and was not further considered.

Conclusion: The issue of liability for interest did not require further examination due to the finding on the primary issue.

Conclusion:
The appeals were allowed, and the impugned order of the High Court and the arbitration awards were set aside in part, specifically concerning the appellant. The court held that there was no arbitration agreement between the appellant and the lender, thus invalidating the arbitration proceedings and awards against the appellant. If the lender wishes to enforce the guarantee, it must do so through appropriate legal channels outside of arbitration.