S.N. PRASADversusMONNET FINANCE LTD. AND ORS.

               [201 OJ 13 (ADDL.) S.C.R. 207

                        S.N. PRASAD                                A
                               v.
            MONNET FINANCE LTD. AND ORS.
            (Civil Appeal No. 9224 of 2010 etc.)
                    OCTOBER 22, 2010
                                                                   B
     [R.V. RAVEENDRAN AND H.L. GOKHALE, JJ.]

    Arbitration and Conciliation Act, 1996:

     ss. 7(4)(a), (b), 7(5) - Arbitration agreement - Parties to   C
- Appellant was not a party to the tri-partite agreements
containing arbitration clause executed between lender,
borrower and guarantor - Prior to loan agreements, a letter
was given by appellant to the lender indicating his willingness
to stand guarantee for Joan - The said letter did not contain
a provision for arbitration nor did it refer to any document       D
containing an arbitration clause - Arbitration award directing
appellant also, to repay the loan amount and interest thereon
- Held: 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        E
arbitration or appointment of arbitrator can be only with
respect to the parties to the arbitration agreement and not the
non-parties - As there was no arbitration agreement between
the lender and the appellant as defined u/ss. 7(4)(a) or (b) or
7(5), the claim against appellant could not be referred to         F
arbitration nor could any award be made against him-Awards
against appellant liable to be set aside u/s.34(2)(a)(ii).
     s. 7(4)(c) - When can an exchange of statements of
claims and defence be construed as an 'arbitration
agreement' - Meaning of the words 'existence of the                G
agreement is alleged by one party and not denied by the
other party' Application by lender company u/s. 11 referring to
the loan agreement containing the arbitration clause, which

                             207                                   H
        208   SUPREME COURT REPORTS [2010) 13 (ADDL.) S.C.R.


A       was executed by borrower and guarantor in favour of lender
        - The said application not alleging or referring to the existence
        of any arbitration agreement between lender and appellant -
        Held: In such a case, the question of the appellant accepting
        such arbitration agreement by 'non-denial' would not arise.
B           Pleadings: 'A/legation' of existence of an 'arbitration
        agreement' and denial thereof in the statement of defence -
        Discussed.
            Words and phrases: 'allegation' and 'statement of claim
c       and defence - Meaning of.
             The second respondent company (borrower) sought
        a loan of Rs.75 lakhs. The first respondent company
        (lender) sanctioned the loan. The appellant by letter dated
        27.10.1995 in his capacity as a director of the borrower
D       company agreed to guarantee the loan of Rs.75 lakhs
        sanctioned by the lender company. The third respondent
        was also the director of the borrower company. On
        28.10.1995, a tri-partite loan agreement was entered into
        between the lender company, the borrower company and
E       the third respondent as the guarantor, in regard to the
        lending of a sum of Rs.50 lakhs. The agreement provided
        for the arbitration clause. Similarly another tri-partite loan
        agreement was entered in respect of a loan of Rs.25
        lakhs on 6.11.1995 among the lender company, the
F       borrower company and the third respondent followed by
        a promissory note by the borrower company and a deed
        of guarantee by the third respondent. The appellant was
        not a party to the loan agreements nor did he execute any
        separate deed of guarantee or other document in favour
G       of the lender company. The loan agreements also did not
        refer to the letter of guarantee by the appellant.
    1
    I
       The lender company issued a notice demanding
    1 payment and
               proposing to refer the claims against the
 / borrower company and its guarantors for arbitration. This
~ was followed by two applications by the lender company
S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 209


under Section 11 of the Arbitration and Conciliation Act,      A
1996 for appointment of an arbitrator. The borrower
company, its Director-cum-Guarantor, and the appellant
were impleaded as respondents in the said application.
    The arbitrator was appointed who passed two
                                                               B
awards. The first award directed the borrower company,
the third respondent and the appellant to pay Rs.96.23
lakhs including interest in respect of the loan amount of
Rs.50 lakhs. The second award directed the borrower
company, the third respondent and the appellant to pay
Rs.46.49 lakhs including the interest in respect of loan of    C
Rs.25 lakhs. The awards were challenged by the
appellant, the borrower company and the third
respondent. The High Court upheld the awards. The
instant appeals were filed challenging the order of the
High Court.                                                    D
     It was contended for the appellant that he was not a
party to the tri-partite loan agreements containing the
arbitration clause and he merely gave a short letter dated
27.10.1995 standing guarantee for a loan of Rs.75 lakhs        E
sanctioned by the lender company. As there was no
arbitration agreement between the lender company and
the 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)
                                                               F
of the Arbitration and Conciliation Act.
    Allowing the appeals, the Court
     HELD: 1.1. Section 2(b) of the Arbitration and
                                                               G
Conciliation Act, 1996 defines "arbitration agreement' as
an agreement referred to in Section 7 of the Act. 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         H
    210   SUPREME COURT REPORTS [201 OJ 13 (ADDL.) S.C.R.


A 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
B 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 sign«~d by
  the parties; (b) an exchange of letters, telex, telegrams or
  other means of telecommunication which provide a
c record of the arbitration agreement; or (c) 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. Sub-section (5)
  provides that the reference in a contract to a document
  containing an arbitration clause constitutes an arbitration
0
  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.
E 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
F 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. [Para 7] [217-F-G; 218-A-E]
G      1.2. There is no dispute that the loan agreements
  among the lender company, the borrower company and
  the third respondent (guarantor) contained a provision
  for arbitration. But the appellant was not a party to the
  same. In fact, the appellant's letter of guarantee for Rs.75
H lakhs was given on 27.10.1995, prior to the dates of the
S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 211

two loan agreements. It was also not disputed that the          A
letter dated 27.10.1995 given by the appellant to the
lender company 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            8
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      C
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 borrower company and
third respondent. As the letter dated 27.10.1995 did not
refer to any document containing an arbitration clause,         D
there wai;; also no arbitration agreement between lender
company and the appellant as contemplated under
Section 7(5) of the Act. [Para 8) [218-A-H; 219-A-D]
      1.3. To constitute an arbitration agreement under         E
 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   F
to the narration of a transaction. The statement of claim
filed by the lender company before the arbitrator does not
contain an allegation or assertion of an arbitration
agreement with the appellant. Nor has the appellant
accepted the existence of any arbitration agreement by          G
not denying such arbitration agreement in the defence
filed before the arbitrator. On the other hand, the
appellant had specifically contended before the arbitrator
that there was no arbitration agreement between them
and, therefore, the arbitrator did not have jurisdiction. The
                                                                H
    212   SUPREME COURT REPORTS [2010] 13 (AODL) S.C.R.


A   words 'statements of claim and defence' occurring in
    Section 7(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
8   any court, and if there is no denial thereof in the defemce/
    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
C   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
D   the parties. In the instant case, the application filed by the
    lender company under Section 11 of the Act referred to
    the loan agreement containing the arbitration clause,
    which was executed by the borrower company and the
    third respondent as borrower and guarantor in favour of
E   the lender company. The said application did not allege
    or refer to the existence of any arbitration agreement
    between the lender company and the appellant. There
    was absolutely no reference to any agreement between
    the lender company and the appellant or the existence
F   of any arbitration agreement between them. 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' did
    not arise. [Paras 10, 11, 13] [220-A-E; 223-8-C]
G        1.4. The Designate of the Chief Justice, in his order
    dated 23.5.2000 appointing the arbitrator, had observed
    that there was no dispute regarding the existence of the
    arbitration agreement. The arbitrator had held that in view
    of the positive finding of the Designate of the Chief
H
S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 213


Justice about the existence of an arbitration agreement        A
notwithstanding the fact that the letter of guarantee did
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         B
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. During the relevant period, the law was that the
orders under Section 11 of the Act were administrative         c
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          D
agreement and the arbitrability. [Para 15] [222-F-H; 223-
A-D]
     SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618
- referred to.
                                                               E
      2. 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
                                                               F
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 did not arise. The
apprehension of the lender company that an anomalous
situation may arise if there are two proceedings (one          G
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 lender
company, as that is the consequence of its failure to          H
    214    SUPREME COURT REPORTS (2010) 13 (ADDL.) S.C.R.


A require the appellant to join in the execution of th~ 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 lender
  company cannot contend that the appellant who did not
B 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
c appellant. As there was no arbitration agreement between
  the parties (the lender company and the 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
D the arbitration awards, as against the appellant are liable
  to be set aside. If the lender company wants to enforce
  the alleged guarantee of the appellant, it is open to the
  first respondent to do so in accordance with law. [Paras
  17-19) [224-C-H; 225-A-B]
E                       Case Law Reference:
          (2005) s sec s1 s      referred to         Para 15
        CIVIL APPELLATE JURISDICTION : Civil Appeal No.
    9224 of 2010.
F       From the Judgment & Order dated 22.05.2006 of the High
    Court of Delhi at New Delhi in O.M.P. No. 319 of 2002.     ·
                               WITH
G Civil Appeal No. 9225 of 2010.
         Dr. Rajeev Dhawan, Gaurav Kejriwal, Keshav Mohan for
    the Appellant.
      S.P. Kalra, Rajiv Kapoor, Sumit Kumar for the
H Respondents.
 S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 215


      The Judgment of the Court was delivered by                      A

      R.V.RAVEENDRAN, J. 1. 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
                                                                      B
 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       C
 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.    D
 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.
                                                                      E
        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     F
  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            G
  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         H
     216    SUPREME COURT REPORTS (2010] 13 (ADDL.) S.C.R.


A    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.
 B
       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
C 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
D 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%
E 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
F 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
G 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 :

-H         (i) The appellant was not a party to the tripartite loan
S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 217
            [R.V. RAVEENDRAN, J.]
    agreements executed among respondents 1, 2 and 3 (that       A
    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         B
    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.             c
    (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,   D
    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      E
    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)
                                                                 F

     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) G
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 in1 H
    218     SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.


A 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
B 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 defence 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
c 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
0
  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
E 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
F   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 an"sing
          out of or in connection with this agreement and the
G
          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
H letter of guarantee for Rs.75 lakhs was given on 27.10.1995,
S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 219
            [R.V. RAVEENDRAN, J.]
prior to the dates of the two loan agreements. It is also not in      A
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           B
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,         c
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        D
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     E
·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    F
 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    G
 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'
                                                                      H
    220    SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.


A occurring in section 7(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
B 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 applic<Jlnt asserts the existence of an
C 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
D   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 1.tl the loan
E   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
F   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
G   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
H
S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 221
            [R.V. RAVEENDRAN, J.]

    27.10.95 from Respondent No.3 guaranteeing repayment            A
    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       B
    the appellant).

Except the aforesaid averme~t, there is absolutely no reference
to any agreement betweE;in the first respondent and the
                          of
appellant or the existence any arbitration agreement between
them. Therefore the app¥cation filed by the first respondent        C
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        D
any arbitration agreement with .appellant, the question of the
appellant accepting suth arbitration agreement by 'non-denial'
does not arise.
                                  .                 .
      12. The first respondent contended that the application E
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) relafi:ng to "Name of the other parties to .the jt
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 G
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        H
    222   SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.


A 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.
B 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
c 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
D 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
E 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 rnay.

        15. Before the Arbitrator, the appeliant specifically
F 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
G 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
H
S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 223
            [R.V. RAVEENDRAN, J.]
designate of the Chief Justice about the existence of an              A
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        B
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 in 1998 and
decided in 2000 (long prior to the decision in SBP & Co. vs.          c
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
                                                                      0
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,        E
can not 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           F
contention of the appellant was accepte~. 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       G
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         H
    224   SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.


A 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;
B 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
C 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
D 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
E 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
F 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
G 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.

H
S.N. PRASAD v. MONNET FINANCE LTD. AND ORS. 225
            [R.V. RAVEENDRAN, J.]
     19. As there was no arbitration agreement between the        A
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    B
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       C
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        D
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
                                                                  E
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 the
3rd respondent (guarantor) and the further fact that third
respondent alone executed the Deed of Guarantee,
                                                                  F
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       G
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
                                                                  H
    226    SUPREME COURT REPORTS [2010] 13 (ADDL.) S.C.R.


A   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)
B         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.
c
    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
0   concerned.

    D.G.                                           Appeals allowed.