Parties Assuring Document Execution And Providing Security For Transaction Are Part Of Loan Agreement: Delhi High Court Refers Parties To Arbitration

The Delhi High Court single bench Justice Jasmeet Singh that the parties which assured document execution and provided security for the transaction are integral part of the loan agreement. “Prima facie, I am of the view that the respondent Nos. 3 to 5 are a veritable party to the Loan Agreement as they are connected with the loan documents and form part of the loan transaction as in one way or the other, they have assured the petitioner regarding the execution of the loan documents and provided a security to the petitioner towards the loan transaction.” Brief Facts: The Petitioner approached the Delhi High Court (“High Court”) for appointment of an Arbitrator pursuant to Clause 27 of the Master Loan Agreement (“Loan Agreement”). This Agreement was executed between the Petitioner and respondent No.1, with Respondent No.2 also signing as a guarantor. The Petitioner contended that due to the Respondents' failure to settle outstanding dues, the Petitioner issued a loan recall notice invoking arbitration. In support of the petition, the Petitioner argued that Respondent Nos. 3 to 5 must be included as parties to the arbitration proceedings since they are signatories to the Loan Agreement. It argued that the case aligned with the precedent set by the Supreme Court in Cox & Kings Ltd. v. SAP India (P) Ltd 2023 LiveLaw (SC) 1042. Contrary to the Petitioner's stance, Respondents argued that Respondent Nos. 3 to 5, not being signatories to the arbitration agreement, should not be part of the arbitration proceedings. It emphasized that only parties directly involved in the arbitration agreement can participate. Observations by the High Court: The High Court noted that it was undisputed that Respondent Nos. 1 and 2 were parties to the Loan Agreement, establishing its validity and binding nature between the Petitioner and these Respondents. It noted that the Respondent No. 5 endorsed a promissory note as a guarantor in favor of the Petitioner. Further, Respondent No. 3 and 4 individually wrote letters to the Petitioner regarding the loan. The High Court noted that the Supreme Court in Cox & Kings delineates two scenarios concerning the joinder of non-signatory parties to an arbitration agreement. Firstly, when a signatory party seeks to include a non-signatory party, and secondly, when a non-signatory party itself seeks arbitration. The Supreme Court highlighted the complexity of determining the involvement of non-signatory parties and recommended leaving such determinations to the arbitral tribunal. It emphasized that the tribunal, considering factual evidence and legal doctrine, should decide the extent of jurisdiction over non-signatory parties while adhering to principles of natural justice. The High Court held that in Section 11 jurisdiction, the Court has the role which is limited to verifying the existence of the arbitration clause, leaving the question of non-signatory parties for the arbitral tribunal's consideration. While both parties acknowledged the existence of the arbitration clause, the Respondents' objection pertained solely to Respondent Nos. 3 to 5 not being signatories to the Loan Agreement. The High Court held that the prima facie examination suggested that Respondent Nos. 3 to 5 were integral to the Loan Agreement as they were connected with the loan documents and were involved in assuring the Petitioner regarding document execution and providing security for the transaction. However, whether these Respondents can be bound by the Loan Agreement and included as parties in the arbitral proceedings remained a matter for the Arbitral Tribunal to decide. Consequently, the High Court directed the parties to arbitration for the resolution of their disputes arising from the Loan Agreement. Justice Ali Mohammad Magray (Retd.), Chief Justice of J&K High Court, was appointed as the Sole Arbitrator to adjudicate the disputes between the parties. Case Title: M/S Moneywise Financial Services Pvt Lt Vs Dilip Jain And Ors.Citation: 2024 LiveLaw (Del) 354 Case Number: ARB.P. 702/2023 & I.A. 4255/2024 Advocate for the Petitioner: Mr. Aditya Srinivasan, Mr. Mehvish Khan, Mr. Rishabh Kanojiya, Advs. Advocate for the Respondent: Mr. Purushottam Kr. Jha, Mr. A Pani. Click Here To Read/Download Order

Parties Assuring Document Execution And Providing Security For Transaction Are Part Of Loan Agreement: Delhi High Court Refers Parties To Arbitration

Rajesh Kumar

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