S N PRASAD Vs. MONNET FINANCE LTD

JUDGEMENT

(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 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 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 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 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.