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HIGH COURT OF DELHI
JUDGMENT
INTEC CAPITAL LIMITED .....Appellant
Through: Mr. Pranav Goyal, Ms. Pooja Chaudhary, Ms. Mreeganka Goyal, Mr. Vishant Singh, Advs.
Through: Mr. Mohit Sharma, Adv.
1. This is an appeal filed under Section 37(2)(a) of the Arbitration and Conciliation Act, 1996 (for brevity “the Act”) against the impugned order dated 20.04.2024 passed by the learned arbitrator in an arbitration matter, being Case Ref. No. DIAC/6864B/09-23 titled as “M/s Intec Capital Ltd. v. M/s Shikhir Plast India Pvt. Ltd. & Others”.
FACTUAL BACKGROUND
2. The description of the parties is that M/s Intec Capital Ltd. (hereinafter referred to as “the appellant”) is a Non-Banking Financial Company incorporated under the provisions of the Companies Act, 1956. Mr. Shekhar Chand Jain (hereinafter referred to as “the respondent No. 1”) is the proprietor of M/s Ganesh Polymers (hereinafter referred to as “the respondent No. 2”).
3. The appellant has preferred the present appeal against the order dated 20.04.2024 passed by the learned arbitrator in the arbitration proceedings, whereby the application filed by the respondents was allowed and the respondents were deleted from the array of parties.
4. The brief facts of the case as per the appellant are that in the year 2012, Ms. Poonam Jain (hereinafter referred to as “the principal borrower No. 1”), the proprietor of M/s Shri Digamber Polymers (hereinafter referred to as “the principal borrower No. 2”), approached the appellant seeking a loan facility. Amongst other securities, the respondents agreed to stand as personal guarantors for the said facility and executed separate Deeds of Guarantee on the same date as the Loan Agreement.
5. Relying upon the representations of the respondents, the appellant sanctioned a loan of Rs. 68,18,000/- to the principal borrower No. 2, with the principal borrower No. 1 as the authorised signatory. The loan was granted vide Loan Agreement dated 21.12.2012 and the respondents executed personal Deeds of Guarantee in support thereof.
6. The principal borrowers repeatedly defaulted in repayment. Consequently, the appellant was constrained to invoke the arbitration agreement contained in the Loan Agreement on 11.07.2015, being Clause 32 of the Loan Agreement, which is reproduced as under: “32.
ARBITRATION 32.[1] Any conflict, difference, controversies, or disputes arising between the parties shall be resolved amicably at the first instance. Unresolved disputes, if any, shall be submitted / referred to arbitration of the Sole Arbitrator. The Sole Arbitrator shall be either the Director or Head Commercial Business of INTEC CAPITAL LIMITED or any other person nominated by him/them. The Arbitration shall be conducted in accordance with the provisions of the Arbitration and Conciliation Act, 1996, Rules thereunder, any amendments thereto and the language of the Arbitration shall be in English. The decision/award of the Arbitrator shall be final/conclusive and binding on the parties. The seat of Arbitration shall be Delhi.”
7. Thereafter, Mr. Ashish Kumar, Advocate, was appointed as the Sole Arbitrator and arbitration proceedings were commenced. The respondents duly participated in these proceedings. However, on 10.07.2023, the learned arbitrator recused himself from the matter.
8. Thereafter, this Court, vide the order dated 15.09.2023, allowed the application of the appellant seeking substitution of the arbitrator and appointed Mr. S.K. Sharma, Advocate, as the Sole Arbitrator to resolve the disputes between the parties. It is pertinent to note that no objection as to the existence of an arbitration agreement was raised before this Court at that stage.
9. Subsequently, on 18.01.2024, the respondents filed an application under Section 151 of the Code of Civil Procedure, 1908, seeking their discharge from arbitration proceedings by relying on certain judicial precedents.
10. The appellant filed detailed written submissions dated 27.02.2024 opposing the application of the respondents. Further, upon additional research, learned counsel of the appellants also came across a judgment of the Hon’ble Supreme Court relevant to the issue and the same was duly forwarded to the learned arbitrator by email dated 10.04.2024. However, the same was not considered while passing the impugned order.
11. After considering the pleadings, the learned arbitrator, vide the impugned order dated 20.04.2024, allowed the application filed by the respondents and held that there does not exist a valid arbitration agreement between the appellant and the respondents, placing reliance upon the judgment of the Hon’ble Supreme Court in M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696.
12. Aggrieved by the impugned order dated 20.04.2024 passed by the learned arbitrator, the appellant has filed the present appeal.
SUBMISSIONS OF THE APPELLANT
13. Learned counsel for the appellant submits that the central issue for determination before this Court is whether the respondents, who executed separate Deeds of Guarantee, can be held bound by the arbitration agreement contained in the Loan Agreement dated 21.12.2012.
14. It is submitted at the outset that the principal borrowers are undisputedly bound by the arbitration agreement, both having executed the Loan Agreement dated 21.12.2012 which expressly contains an arbitration clause. This position is admitted and remains unchallenged on record. However, the learned arbitrator discharged the respondents from the reference on the ground that no arbitration agreement exists between the appellant and the respondents.
15. Insofar as the respondents are concerned, they executed separate Deeds of Guarantee on the same date, i.e., 21.12.2012, in respect of the said Loan Agreement. The Deeds of Guarantee, being standard form agreements prepared by the appellant, expressly incorporate and make reference to the Loan Agreement. The material clauses are as follows:
16. It is submitted that the impugned order is unsustainable as the learned arbitrator has erred in law by misinterpreting the judgment of the Hon’ble Supreme Court in M.R. Engineers & Contractors Pvt. Ltd. (supra). In paragraphs 8 and 9 of the said judgment, the Court drew a clear distinction between “incorporation by reference” and “incorporation in entirety”. However, the learned arbitrator wrongly proceeded on the footing that the Deeds of Guarantee contained only a reference to the Loan Agreement, whereas Clause 4 makes it clear that the Loan Agreement stands incorporated in entirety, including its arbitration clause. The impugned order, having been passed in contradiction to the record and in disregard of binding precedent, suffers from patent illegality.
17. Further reliance is placed upon the judgment of the Hon’ble Supreme Court in Shinhan Bank v. Carol Info Services Ltd., (2023) 20 SCC 388, which categorically held that where the amenities agreement records that it forms part of the leave and license agreement, all terms of the amenities agreement, including the arbitration clause, stand incorporated. Applying this ratio, the present case goes beyond mere reference and falls squarely within the principle of incorporation.
18. It is pertinent to note that the Loan Agreement and the Deeds of Guarantee were executed as part of one composite transaction. The principle laid down in Punjab National Bank Ltd. v. Bikram Cotton Mills & Anr., AIR 1970 SC 1973, therefore applies. The Hon’ble Supreme Court in that case recognized that where agreements are executed contemporaneously as part of a single transaction, they must be read together to give full effect to the intention of the parties. The intention here was clearly that the Loan Agreement and the Deeds of Guarantee operate together, binding both the Borrower and the Guarantors.
19. In arguendo, it is submitted that if the case is treated as one of “reference” rather than “incorporation”, the position would still not aid the respondents. Both the Loan Agreement and the Deeds of Guarantee are standard form contracts drafted by the appellant. In such circumstances, the law laid down in M/s Inox Wind Ltd. v. M/s Thermocables Ltd., (2018) 2 SCC 519, becomes applicable. In the said judgment, the Hon’ble Supreme Court, relying on the dictum of Bingham LJ in Federal Bulk Carriers Inc. v. C. Itoh & Co. Ltd., (1989) 1 Lloyd’s Rep 103 (CA), held that where agreements are standard form contracts, even a general reference is sufficient to incorporate an arbitration clause, including in “two-contract” situations. Thus, whether tested on the basis of incorporation or reference, the arbitration clause contained in the Loan Agreement stands attracted to the Deeds of Guarantee.
20. Further reliance is placed upon the judgment of this Court in RBCL Piletech Infra v. Bholasingh Jaiprakash Construction Ltd. & Ors., 2024:DHC:5415, where this Hon’ble Court held that in composite transactions, guarantors who acknowledge liability as directors / partners / group entities of the borrower and at whose instance the loan is disbursed, are bound by the arbitration clause.
21. For the aforementioned reasons, the Deeds of Guarantee must be read as an integral part of the Loan Agreement and the respondents cannot escape the scope of the arbitration agreement. The impugned order dated 20.04.2024, by which the learned arbitrator discharged them from the arbitration proceedings, suffers from legal infirmity and is liable to be set aside. Accordingly, the present appeal deserves to be allowed.
SUBMISSIONS OF THE RESPONDENTS
22. Learned counsel for the respondents submits that the respondents have not signed the Loan-cum-Facility Agreement, which alone contains the arbitration clause. Neither the Deeds of Guarantee executed by them contain any specific reference to the arbitration clause, nor is the clause itself reproduced therein. Hence, the respondents cannot be subjected to arbitral proceedings in the present matter.
23. The respondents executed separate Deeds of Guarantee to secure the loan availed by the principal borrowers. These Deeds of Guarantee are independent contracts, devoid of any arbitration clause or provision binding the respondents to the terms of the Loan Agreement.
24. It is submitted that while there are two distinct agreements: (i) the Loan Agreement containing the arbitration clause (to which the respondents are not signatories), and (ii) the Deeds of Guarantee (to which the respondents are signatories), the latter contains no arbitration clause. Being separate instruments, the Deeds of Guarantee cannot be merged with or treated as part of the Loan Agreement.
25. Clause 32.[1] of the Loan Agreement uses the expression “parties”, which evidently refers only to the signatories of that agreement. Neither the language of the Loan Agreement nor the Deeds of Guarantee suggest that the terms of the Loan Agreement, including the arbitration clause, were incorporated or made applicable to the Guarantors.
26. The present case involves two separate and distinct agreements entered into by different sets of parties. The respondents were never made aware of the terms of the Loan Agreement and undertook liability solely to the extent of guaranteeing repayment of the loan upon default. The respondents never agreed to be bound by procedural terms such as arbitration. Thus, the essential elements of informed consent and mutual understanding, which are the foundation of contractual obligations, were absent.
27. It is a settled principle of contract law that an arbitration clause contained in one agreement cannot be enforced against a non-signatory unless there is a clear and specific incorporation of such clause by reference. In the present matter, such incorporation is conspicuously absent.
28. The Deeds of Guarantee do not contain any clause that could even remotely be construed as incorporating or adopting the arbitration clause of the Loan Agreement. Hence, it cannot be presumed or implied that the respondents agreed to submit disputes to arbitration.
29. In M.R. Engineers & Contractors Pvt. Ltd. (supra), the Hon’ble Supreme Court held that the arbitration clause contained in the main contract would not apply to disputes arising under a subcontract unless specifically incorporated. Therefore, the ratio of this case directly supports the contention of the respondents that they cannot be compelled to arbitrate.
30. Reliance is placed on the judgment of the Hon’ble Supreme Court in NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd., (2024) 7 SCC 174, wherein the Court reiterated that a mere general reference in one contract to another contract does not result in incorporation of the arbitration clause of the latter. Similarly, in S.N. Prasad, Hitek Industries (Bihar) Ltd. v. Monnet Finance Ltd. & Ors., (2011) 1 SCC 320, the Hon’ble Supreme Court held that arbitration under the Act can only take place between parties to the arbitration agreement. If disputes involve both signatories and nonsignatories, arbitration may proceed only as between signatories, but cannot bind non-signatories.
31. Further reliance is placed upon the judgments of the Hon’ble Supreme Court in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 and N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2021) 4 SCC 379, both of which reaffirm that the existence of a valid arbitration agreement is a sine qua non for reference to arbitration.
32. Similarly, this Court in STCI Finance Ltd. v. Shreyas Kirti Lal Doshi & Anr., 2020 SCC OnLine Del 100, held that in the absence of a binding arbitration agreement, guarantors cannot be forced into arbitration proceedings.
33. It is further submitted that the reliance of the appellant on Inox Wind Ltd. (supra), Shinhan Bank (supra) and RBCL Piletech Infra (supra) are misplaced. In Inox Wind Ltd. (supra), the arbitration clause formed part of a standard form contract mutually signed by both parties. By contrast, in the present matter, the respondents never signed or consented to the Loan Agreement or its arbitration clause. In Shinhan Bank (supra), both agreements were executed by the same parties, which is not the case here. In RBCL Piletech Infra (supra), the facts involved composite commercial transactions unlike the present matter where the Deeds of Guarantee are independent contracts.
34. Therefore, it is submitted that the arbitration clause being part of a separate contract to which the respondents were not parties cannot bind them in the absence of express incorporation or consent. Hence, compelling the respondents to arbitrate would amount to enforcing upon them a contract to which they never agreed, something impermissible in law.
35. For the aforementioned reasons, the learned arbitrator has correctly allowed the application filed by the respondents and thereby the respondents were deleted from the array of parties on the ground that no arbitration agreement exists between the appellant and the respondents. Thus, the present appeal is liable to be dismissed.
ANALYSIS AND FINDINGS
36. I have heard learned counsels of the parties and perused the material available on record.
37. The learned arbitrator held as under:
38. The core issue requiring determination is whether the arbitration clause contained in the Loan Agreement dated 21.12.2012 binds the respondents, who executed contemporaneous Deeds of Guarantee securing the said loan.
39. At the outset, it is undisputed that the Loan Agreement, executed between the appellant and the principal borrowers, contains an arbitration clause, being Clause 32. It is also not in dispute that the respondents did not sign the Loan Agreement but executed separate Deeds of Guarantee on the same date. The question, therefore, turns on whether the arbitration clause in the Loan Agreement can be said to have been incorporated into the Deeds of Guarantee.
40. The appellant has placed reliance upon Clauses 2, 3 and 4 of the Deeds of Guarantee, particularly Clause 4, which records that the Guarantor has read and understood the Loan Agreement, agrees to be bound by its terms and conditions and accepts that the Guarantee shall form an integral part of the Loan Agreement. The Clauses are reproduced as under:
41. According to the appellant, these clauses establish incorporation of the Loan Agreement in its entirety, thereby attracting the arbitration clause by virtue of Section 7(5) of the Act, which reads as under:
42. Per contra, the respondents contend that the Deeds of Guarantee are independent contracts, not containing any arbitration clause or express incorporation of Clause 32 of the Loan Agreement. It is urged that unless the Deeds of Guarantee specifically incorporate the arbitration clause of the Loan Agreement, the respondents cannot be bound by arbitration proceedings. The respondents rely heavily on the judgment of the Hon’ble Supreme Court in M.R. Engineers & Contractors Pvt. Ltd. (supra), to argue that mere reference to another contract does not ipso facto incorporate its arbitration clause.
43. In my considered view, the distinction between “general reference” to another contract and “incorporation by specific reference” laid down in the decision of the Hon’ble Supreme Court in M.R. Engineers & Contractors Pvt. Ltd. (supra) is relevant and apposite. The relevant paragraphs of the said judgment read as under:
the purposes of the contract. In the second case, the parties intend to incorporate the referred document in entirety, into the contract. Therefore when there is a reference to a document in a contract, the court has to consider whether the reference to the document is with the intention of incorporating the contents of that document in entirety into the contract, or with the intention of adopting or borrowing specific portions of the said document for application to the contract. We will give a few instances of incorporation and mere reference to explain the position (illustrative and not exhaustive).
9. If a contract refers to a document and provides that the said document shall form part and parcel of the contract, or that all terms and conditions of the said document shall be read or treated as a part of the contract, or that the contract will be governed by the provisions of the said document, or that the terms and conditions of the said document shall be incorporated into the contract, the terms and conditions of the document in entirety will get bodily lifted and incorporated into the contract. When there is such incorporation of the terms and conditions of a document, every term of such document, (except to the extent it is inconsistent with any specific provision in the contract) will apply to the contract. If the document so incorporated contains a provision for settlement of disputes by arbitration, the said arbitration clause also will apply to the contract.”