Can a guarantor of a loan who is not a party to the loan agreement, which contains an arbitration agreement, executed between a lender and borrower, be made a party to arbitration proceedings and therefore subject to an arbitral award?
In SN Prasad v Monnet Finance Ltd & Ors the Supreme Court held that if there was no arbitration agreement between the guarantor and the lender, the guarantor could not be involved in the arbitration proceedings.
In this case the appellant, SN Prasad, stood guarantee by a letter dated 27 October 1995 to a loan sanctioned by Monnet Finance. On 28 October 1995, Monnet Finance signed a loan agreement with a company, of which the appellant was a director, and its managing director. This loan was the cause of a subsequent dispute that was referred to an arbitrator, who impleaded the guarantor as a party in the proceedings and passed two arbitration awards both of which required the guarantor to pay up. The award was challenged unsuccessfully in Delhi High Court by the guarantor.
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The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.
