Guarantor-director cannot be dragged into arbitration

The Supreme Court (SC) ruled last week that a guarantor outside an arbitration agreement cannot be made a party to the arbitration proceedings. It reversed the judgment of the Delhi high court which had asked the guarantor to comply with the award of the arbitrator. In this case, S N Prasad vs Monnet Finance Ltd, Prasad, who was then a director, stood as guarantor for the managing director of the borrower company and later resigned. Disputes arose between the lender and borrower companies. It was referred to an arbitrator under the Arbitration and Conciliation Act. The arbitrator made Prasad a party in the proceedings, against his protest. He challenged the award as far as it affected him. The high court rejected his petition and told him to pay the awarded amount to the lender. The SC allowed his appeal, stating he was not a party to the agreement and, therefore, there could be no arbitration in regard to the claim against him. The court, however, added though the arbitration award could not deal with his guarantee, the lender could enforce it by other legal remedies.