The issue of privity to an arbitration agreement has been the subject of much controversy, especially in the context of the grant of interim measures under section 17 (by the arbitral tribunal) and section 9 (by the Court). In SN Prasad v. Monnet Finance, the Supreme Court had occasion to revisit this very issue, albeit in a different context.
The facts which fell for the Court’s consideration were quite straightforward. The appellant had, by virtue of a letter, stood as guarantor for a loan made by the first respondent to the second respondent. Shortly after, the first and second respondents entered into a loan agreement for that very amount, to which the third respondent stood as guarantor. This loan agreement contained an arbitration clause. Subsequently, under this arbitration clause, the first respondent obtained an award against the second and third respondents, and sought to enforce it against the appellant. The appellant, as would be expected, contended that he was not party to the loan agreement in which the arbitration clause was contained, and hence was not bound by the award.
Now, there were two ways in which the respondents could have established that the appellant was bound by the agreement- first, to argue that the arbitration clause was incorporated into the earlier guarantee by means of incorporation by reference (section 7(5)), which has been discussed earlier here); or that the arbitration agreement was created by ‘an exchange of statements of claim and defence in which the existence of the arbitration agreement is alleged by one party and not denied by the other’ (section 7(4)(c)). The Court, after considering both these contentions, rightly considered them worthy of dismissal.
The first of these was not really an issue before the Court. Section 7(5) provides that ‘The reference in a contract to a document containing an arbitration clause’ may constitute an arbitration agreement. Since the letter of guarantee predated the loan agreement, and contained no reference to any possibility of arbitration, this provision was of no assistance. What was more controversial, and led to potentially relevant observations by the Court was the applicability of section 7(4)(c) to the matter at hand. Section 7(4)(c) provides that an arbitration agreement is in writing if it is contained in ‘an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other’. The first respondent, in the course of a section 11 application under the loan agreement entered into with the second and the third respondent, had also listed the appellant under the heading ‘Names of other parties to arbitration agreement’. There was no assertion there was an arbitration agreement between the respondent and the appellant in the body of the application. However, it was contended that this inclusion of the appellant’s name was sufficient for the purposes of section 7(4)(c), and the non-denial by the appellant led to a binding arbitration agreement between the parties.
The Court roundly rejected this argument, on two bases-
First, it was pointed out that an allegation of the existence of an arbitration agreement requires more than an oblique reference of the sort being relied on by the respondent. In the words of the Court,
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)(c) of the Act cannot therefore be relied upon to prove the existence of an Arbitration agreement.
Secondly, and more interestingly, the Court also placed great stock by the fact that at the time when the section 11 application was filed in 1998 and decided in 2000, “the prevailing view was that the orders under section 11 of the Act were administrative orders”. This meant that the application could not be considered a statement of claim; and also, reduced the probative value of the findings of the Chief Justice. However, while the Court suggests that this is not the basis of its decision, it’s opinion that SBP v. Patel Engineering, decided in 2005, did not affect the nature of the section 11 proceedings in 2000 may not withstand scrutiny. It is very well recognised that while judgments may seem to make law, in principle, they are only declaring the law. Hence, when in 2005, SBP held that section 11 applications are judicial, it did not mean that they became judicial after 2005. It also meant that they were always judicial. This same issue has been considered and debated by the House of Lords in decisions like Kleinwort Benson v. London City Council,  UKHL 38, and Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners,  UKHL 49, where the House of Lords has concluded that the legal effect of judicial decisions dates back. Hence, although section 11 was interpreted as an administrative proceedings in 2000, after SBP, it is deemed to have been a judicial proceeding even in 2000. Although accrued rights cannot be affected by a subsequent judicial decision, when characterising the nature of the proceedings, which is what the Court was doing here, the effect of SBP will have to date back. Fortunately, however, this was not one of the important bases of the decision, and the conclusion arrived at by the Court cannot be faulted.
In sum, the Court held that in the absence of an arbitration agreement, either in writing, or expressly alleged in a statement of claim, an award cannot be enforced against a party merely by virtue of their association with the matter or the parties involved.