S.N. PRASAD versus MONNET FINANCE LTD. AND ORS.

Citation: [2010] 13 S.C.R. 207 · Decided: 22-10-2010 · Supreme Court of India · Bench: R.V. RAVEENDRAN · Disposal: Appeal(s) allowed

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Judgment (excerpt)

[201 OJ 13 (ADDL.) S.C.R. 207 
S.N. PRASAD 
v. 
MONNET FINANCE LTD. AND ORS. 
(Civil Appeal No. 9224 of 2010 etc.) 
OCTOBER 22, 2010 
[R.V. RAVEENDRAN AND H.L. GOKHALE, JJ.] 
Arbitration and Conciliation Act, 1996: 
A 
B 
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 
B 
such arbitration agreement by 'non-denial' would not arise. 
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 
The lender company issued a notice demanding 
I 
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 
awards. The first award directed the borrower company, 
B 
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 th

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