Whether A Non-Signatory Guarantor Can Be Impleaded As A Party To Arbitration Is For Arbitral Tribunal To Decide: Delhi High Court

The bench of Justice Jasmeet Singh following Cox & Kings held that the scope at referral stage is only limited to prima facie examination of arbitration agreement and forming a prima facie view on non-signatory being a veritable party and once both the tests are satisfied, the Court would refer the parties to arbitration leaving he tribunal to conclusively decide on impleading the non-signatory party under Section 16 of the A&C Act.

Facts

A loan agreement dated 01.05.2019 was executed between the petitioner and respondent no.1 with petitioner being the lender and respondent no.1 as the borrower. Clause 27 provided for resolution of dispute through arbitration. Respondent no. 2 signed the agreement in capacity of a guarantor.

Respondent Nos. 3-5 were not signatories to the loan agreement but were guarantors to the loan agreement and provided security for the loan availed by the respondent no. 1.

The petitioner issued a loan recall cum notice of arbitration dated 27.04.2023. Upon the failure of the parties to mutually appoint the arbitrator, the petitioner filed the application under Section 11 of the A&C Act.

Contention of the Parties

The respondents objected to the maintainability of the petition on the following ground(s):

• Respondent nos. 3-5 are not signatories to the loan agreement, ergo, they cannot be impleaded as parties to the arbitration.
• Judgment of SC in Cox & Kings is inapplicable in as much as it only applies to group of companies and not to guarantor falling outside the rubric of group of companies.

Analysis by the Parties

The Court observed that that though respondent nos. 3-5 were not signatories to the loan agreement but have stood as guarantors to it securing the loan amount.

The Court held that upon a prima facie examination, the non-signatory respondents appears to be veritable parties 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.

The Court held that a determination on the impleadment of a non-signatory guarantor to the arbitration proceedings should be made by the arbitral tribunal once the referral court forms a prima facie view on non-signatory being a veritable party.

The Court following Cox & Kings held that the scope at referral stage is only limited to prima facie examination of arbitration agreement and forming a prima facie view on non-signatory being a veritable party and once both the tests are satisfied, the Court would refer the parties to arbitration leaving he tribunal to conclusively decide on impleading the non-signatory party under Section 16 of the A&C Act.

Accordingly, the Court allowed the petition and referred the parties to arbitration with liberty to the tribunal to decide the issue conclusively.

Case Title: MONEYWISE FINANCIAL SERVICES V. DILIP JAIN

Citation: 2024 LiveLaw (Del) 319

Counsel for the Petitioner: Mr. Aditya Srinivasan, Mr. Mehvish Khan, Mr. Rishabh Kanojiya and Mr. Ankur Das, Advs.

Counsel for the Respondents: Mr. Purushottam Kr. Jha and Mr. A Pani, Advs.

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