Position of a guarantor for a loan, who is not a party to the loan agreement containing the arbitration agreement

S N Prasad Vs Monnet Finance Ltd - Hon'ble Supreme Court of India observed as "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....

13. To constitute an arbitration agreement under section 7(4) (c ) of the Act, what is required is a statement of claim containing a specific allegation about the existence of an arbitration agreement by the applicant and 'non- denial' thereof by the other party. An 'allegation' is an assertion or declaration about a fact and also refers to the narration of a transaction. As noticed above, in the entire application under section 11 of the Act, there was no allegation as to the existence of any arbitration agreement between first respondent and the appellant. Column (3) containing 'Names of other parties to arbitration agreement with addresses' cannot be considered to be an assertion or declaration about the existence of an arbitration agreement between the first respondent and appellant. Section 7(4)© of the Act cannot therefore be relied upon to prove the existence of an Arbitration agreement....

17. When the appellant gave the guarantee letter dated 27.10.1995, he could not be imputed with the knowledge that the loan agreements which were to be executed in future (on 28.10.1995 and 6.11.1995) would contain an arbitration clause. Further, the appellant did not state in his letter dated 27.10.1995 that he would be bound by the terms of loan agreement/s that may be executed by the borrower. Therefore the question of appellant impliedly agreeing to the arbitration clause does not arise. 

18. The apprehension of the first respondent that an anomalous situation may arise if there are two proceedings (one arbitration proceedings against the borrower and one guarantor and a suit against another guarantor), is not a relevant consideration as any such anomalous situation, if it arises, would be the own-making of the first respondent, as that is the consequence of its failure to require the appellant to join in the execution of the loan agreements. Having made only one of the guarantors to execute the loan agreements and having failed to get the appellant to execute the loan agreements, the first respondent cannot contend that the appellant who did not sign the loan agreements containing the arbitration clause should also be deemed to be a party to the arbitration and be bound by the awards. The issue is not one of convenience and expediency. The issue is whether there was an arbitration agreement with the appellant.

19. As there was no arbitration agreement between the parties (the first respondent and appellant), the imp leading of appellant as a respondent in the arbitration proceedings and the award against the appellant in such arbitration cannot be sustained."