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Issues: (i) Whether past consideration could sustain a contract of guarantee and render the guarantors liable despite the arbitrator's reliance on illustration (c) to Section 127 of the Contract Act. (ii) Whether the arbitral award, insofar as it exonerated the guarantors and denied the petitioners' claims against them, was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.
Issue (i): Whether past consideration could sustain a contract of guarantee and render the guarantors liable despite the arbitrator's reliance on illustration (c) to Section 127 of the Contract Act.
Analysis: The Court held that the language of Section 127 is wide enough to include consideration arising from prior transactions or forbearance, and that illustration (c) cannot cut down the scope of the section. The arbitrator's view that a past liability could not furnish consideration for a guarantee was found inconsistent with the settled judicial interpretation that anything done for the benefit of the principal debtor, including a prior liability or forbearance to sue, may constitute sufficient consideration. The guarantors were also not treated as strangers to the transaction, and the deeds of guarantee executed contemporaneously with the ICD agreement were linked to the admitted indebtedness of the principal debtor.
Conclusion: The Court held that past consideration was sufficient consideration for the contract of guarantee and that the guarantors could not be exonerated on the ground adopted in the award.
Issue (ii): Whether the arbitral award, insofar as it exonerated the guarantors and denied the petitioners' claims against them, was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.
Analysis: The Court found that the award suffered from patent illegality and unfairness because it accepted the claim against the principal debtor but, on an incorrect view of law, denied recovery against the guarantors who had executed the security documents for the same liability. The distinction drawn by the arbitrator between the principal debtor and the guarantors was held to be unsupported by the record and contrary to law. The Court further held that the illegality went to the root of the matter and justified interference under Section 34. It clarified that the liability of the guarantors would follow the liability already fastened upon the principal debtor, and that the award could be modified to that extent.
Conclusion: The Court set aside the award to the extent it had disallowed the petitioners' claims against the guarantors and clarified that the petitioners could execute the award against them for the same amounts determined against the principal debtor.
Final Conclusion: The petitions succeeded, the arbitral award was interfered with to the extent necessary, and the petitioners were held entitled to enforce the awarded liability against the guarantors as well as the principal debtor.
Ratio Decidendi: An award based on an erroneous reading of Section 127 of the Contract Act that excludes past consideration from a contract of guarantee is patently illegal, and where the guarantors are parties to the same underlying transaction, the award may be set aside under Section 34 to the extent it wrongly exonerates them.
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