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TMI Blog2010 (10) TMI 1014X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;), 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;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 27.10.1995 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 the Act. 9. What therefore remains to be considered is whether there is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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'. Be that 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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