Rameshwar Lal vs Escorts Finance Ltd. And Ors.
2015 Latest Caselaw 3827 Del

$~17
*    IN THE HIGH COURT OF DELHI AT NEW DELHI
+
                 O.M.P. 308 of 2014

       RAMESHWAR LAL                             ..... Petitioner
                   Through:           Ms. Padma Priya, Advocate

                         versus

       ESCORTS FINANCE LTD. AND ORS.      ..... Respondents
                    Through: Mr. Sidhant Kaushik, Advocate
                              for Respondent No.1;
                              Mr. A.K.Mishra for Respondent
                              No.2

       CORAM: JUSTICE S. MURALIDHAR
                   ORDER

% 14.05.2015

1. The challenge in this petition under Section 34 of the Arbitration &

Conciliation Act, 1996 is to an Award dated 20th December, 2013

passed by the learned Arbitrator.

2. The background to this petition is that Escorts Finance Limited

(„EFL‟), Respondent No. 1 herein, advanced a loan in the sum of Rs.

14 lakhs to Mr. Kartha Ram Chowdhry (Respondent No. 3) under a

Hire-Purchase Agreement dated 25th December, 2001. The Petitioner,

who stood as guarantor, was also a party to the Agreement.

3. When Respondent No. 3 defaulted in repayment of the loan, after

having paid the last instalment on 31st March, 2005, Respondent No. 1

purportedly invoked the arbitration clause and had the dispute referred

to the arbitration of a sole Arbitrator nominated by it by letter dated

14th March, 2012.

4. It is seen from the impugned Award that notice of arbitral

proceedings was first issued by the learned Arbitrator on 22nd March,

2012 and the notice was despatched on 26th March 2012 by registered

post. The notice was made returnable on 4th May, 2012 on which date

only the Authorized Representative (AR) of EFL appeared. The

proceedings were adjourned to 5th June, 2012, on which date none

appeared for the Petitioner herein (Respondent No. 2 in the arbitral

proceedings). Accordingly, he was proceeded ex parte.

5. However, on the next date, i.e. 22nd September, 2012 counsel for

Respondent No. 2 (Petitioner herein) filed his vakalatnama. The

application filed by the Petitioner herein on 13th October, 2012 for

setting aside the ex parte order was allowed by the learned Arbitrator.

On 17th November 2012, Respondent No. 3, the Principal Borrower

(who was Respondent No. 1 before the learned Arbitrator) was

proceeded ex parte. Later, counsel for Respondent No. 3 appeared. An

application filed by him for setting aside ex parte order qua

Respondent No.2 was allowed by the learned Arbitrator.

6. Thereafter, an application was filed by the Petitioner before the

learned Arbitrator under Section 12 and 13 of the Act praying that he

should cease to act as such. When the learned Arbitrator failed to

decided the said application, the Petitioner filed OMP No. 1000 of

2013 before this Court. During the hearing of the said petition on 26 th

November 2013, the Court was informed that the Arbitrator had

decided the said application on 26th October, 2013. The Court was also

informed that the Arbitrator had reserved orders in the main matter for

pronouncement of the award. The Court reserved the right of the

Petitioner to urge the grounds which were the subject matter of OMP

No. 1000 of 2013, in a petition that might be preferred under Section

34 of the Act.

7. In the impugned Award dated 20th December, 2013, the learned

Arbitrator came to the conclusion that the claim against the Principal

Borrower i.e. Respondent No. 3 (who was Respondent No. 1 before the

learned Arbitrator) was barred by limitation. However, the learned

Arbitrator held that the claim against the Petitioner herein, i.e.

guarantor was within limitation. Learned Arbitrator observed that a

demand letter issued by EFL to the Principal Borrower was dated 16 th

January, 2009 and going by that date, EFL could proceed against the

guarantor up to 15th January, 2012. The learned Arbitrator came to the

above conclusion after noticing the judgment of the Supreme Court in

Syndicate Bank vs. Channaveerappa Beleri 2006 11 SCC 506.

Consequently, learned Arbitrator held that EFL was entitled to recover

R. 23,72,860/- from the Petitioner herein along with interest @ 9% per

annum from 30th March, 2012 till the date of payment and that in turn

the Petitioner was at liberty to recover the said amount from the

Principal Borrower.

8. This Court has heard the submissions of Ms. Padma Priya, learned

counsel for the Petitioner and Mr. Siddhant Kaushik, learned counsel

appearing for EFL.

9. The legal position on the liability of a guarantor has been discussed

extensively in the decision in Syndicate Bank (Supra). It has been

explained that a guarantor‟s liability depends on the terms of the

contract and that a „continuing guarantee‟ is different from an ordinary

guarantee. It has been emphasised that the extent of liability under

guarantee as also the question as to when the liability of a guarantor

will arise, would depend purely on the terms of the contract. It was

pointed out that in case where guarantee is payable on demand, "the

limitation begins to run when the demand is made and the guarantor

commits breach by not complying with the demand".

10. It is noticed that in the present case, Clause 14.1 of the Hire-

Purchase Agreement dated 25th December, 2001 states that: "the

guarantor shall on demand and without any demur or protest, contest or

recourse pay the Owner all moneys and discharge all obligations and

liabilities. ............". Consequently it was imperative that there had to

be a demand made on the guarantor by the lender i.e. EFL. Under

Clause 17, any notice on demand had to be given in writing and sent

either by post or delivered by hand at the last known address of the

parties. There is no document placed on record by EFL to show that

prior to filing a claim before the learned Arbitrator, any notice on

demand was served in writing on the guarantor i.e. the Petitioner

herein. On the other hand, it is stated in para 7 of the statement of

claims that "Several letters and reminders were sent to the Respondents

to clear the outstanding balance but all in vain. Despite several efforts,

Respondents failed to clear the outstanding dues to the claimant."

Consequently one of the conditions of the contract between the parties,

namely the raising of a demand on the Petitioner, was not complied

with by the EFL.

11. The other factor to be noticed is that the last payment made by

the Principal Borrower, as per the statement of account placed by the

EFL before the learned Arbitrator, was on 31st March 2005. There is no

other entry after that date. Therefore, even as regards the Principal

Borrower, a demand for payment had to be made by EFL within three

years of that date. In any event, the claim itself had to be preferred

within three years from that date.

12. Significantly the learned Arbitrator himself has not accepted the

plea of the EFL that since "the account was not settled" the liability

continued as far as the Principal Borrower is concerned. The learned

Arbitrator held that the claim as far as the Principal Borrower is

concerned was barred by limitation.

13. Where the claim against the Principal Borrower is itself barred by

limitation and no demand is made against the guarantor, then clearly

there can be no claim maintainable against the guarantor as well. In the

present case, even as noted by the learned Arbitrator, the claim against

the Principal Borrower was made for the first time only on 16 th

January, 2009 by a demand letter which was already beyond the

limitation which expired on 31st March, 2008. Therefore, on 16 th

January, 2009 the claim against the Principal Borrower itself was no

longer a live claim. As explained in Syndicate Bank (supra) "if the

debt had already become time-barred against the principal debtor, the

question of the creditor demanding payment thereafter, for the first

time, against the guarantor, would not arise."

14. There is no merit in the plea of the counsel for the Respondent that

the claim filed before the learned Arbitrator was analogous to a notice

under Section 106 of the Transfer of Property Act, 1882, and therefore

satisfied the requirement of a demand having to be made in writing

against the guarantor. Apart from the analogy being inapposite, the

submission overlooks the legal requirement of the claim against the

Principal Borrower having to be "live claim" on the date on which a

demand is made against the guarantor. In this case, there is no doubt

that on the date the claim was filed against the guarantor, the claim

against the Principal Borrower was a dead claim.

15. For the aforementioned reasons, the Court is satisfied that the

impugned Award of the learned Arbitrator suffers from a patent

illegality as it is contrary to the statutory law of India i.e. Limitation

Act 1963, Therefore, it is fundamentally opposed to the public policy

of Indian law. It is also contrary to the very terms of the Hire-Purchase

Agreement to which the Petitioner and EFL were parties. The

impugned Award is accordingly unsustainable in terms of Section

34(2) (b) (ii) of the Act and is hereby set aside.

16. The petition is accordingly allowed with costs of Rs. 10,000/-

which will be paid by EFL to the Petitioner within four weeks.

S.MURALIDHAR, J MAY 14, 2015/rs