Uduwara and others v. L.B. Finance Co. Ltd.
UDUWARA & OTHERSv
L.B. FINANCE CO. LTD.COURT OF APPEALAMERATUNQA, J.
A. L.A. 269/03
C. COLOMBO 30364/MR/02OCTOBER 21, 2003
Lease agreement -Two guarantors – Arbitration clause in lease agreement—Dbputes referred to arbitration – Award made – Can the guarantors be suedunder the guarantee bonds to obtain payment under the Award ?- CivilProcedure Code, section 18 – Necessary party.
The guarantors were not signatories to the lease agreement and in thearbitration clause there was no reference to guarantors.
In the guarantee bonds signed by the defendants there was no referenceto arbitration in respect of the question relating to defendant guarantors'liability under the bonds.
Per Amaratunga, J.
“An agreement to proceed to arbitration being an agreement in deroga-tion of a party's right to have recourse to a court of law, there must bespecific consent expressed by the plaintiff in writing, if his claim againstthe guarantors too is to be submitted to arbitration before action is filedin court; there is no such agreement.”
On the question of addition of a party—
As an award had been made the lessee is not a necessary party in anyevent, under section 18.
APPLICATION for leave to appeal from an o.rdej: of the learned District Judgeof Colombo.
Ali Sabri with Eresha Malidasa for defendant-petitionerMahesh Katulanda for plaintiff-respondent
Sri Lanka Law Reports
 2 Sri L.R
January 13, 2004
GAMINI AMARATUNGA, J.This is an application for leave to appeal against the order of the 01learned District Judge of Colombo rejecting the objection raised bythe defendant-petitioners (defendants) to the jurisdiction of theDistrict Court to entertain and try the action filed against them bythe plaintiff-respondent (plaintiff). The defendants were the guaran-tors of the obligations of a lessee named W.L. Wijesiri arising out ofa lease agreement entered into between the said Wijesiri and theplaintiff to lease the vehicle belonging to the plaintiff to the saidWijesiri. The said lease agreement has been produced, marked B,along with the defendants’ leave to appeal application.10
Clause 25 of the said lease agreement is a clause what is com-monly known and called an arbitration clause. It provides that alldisputes, differences and questions arising between the LESSORand the LESSEE in relation to or in respect of the said lease agree-ment shall be referred to arbitration by a single arbitrator accordingto the Arbitration Ordinance, the Civil Procedure Code or any statu-tory re-enactment or modification thereof for the time being in force.The guarantors were not signatories to this lease agreement andin the arbitration clause there was no reference to guarantors.
The two guarantors have signed two separate guarantee bonds 20guaranteeing the performance of the lessee’s obligations under thelease agreement and undertaking the performance of lessee’sobligations in the event of his failure to act according to his obliga-tions.
In the guarantee and indemnity bonds signed by the defendantsthere were no references whatsoever to arbitration proceedings inrespect of questions relating to the defendants’ liability under thebonds. Instead the bonds contain a clause stating that they agreethat guarantors are liable in all respects under the bond as princi-pal debtors including the liability to be sued before recourse is had 30against the lessee. The use of the word ‘sued’ very clearly indicatesthat the action contemplated against the guarantors in the event oftheir failure or refusal to fulfill their obligations under the bonds isan action in a court of law and not proceedings before an arbitrator.
Uduwara and others v. LB. Finance Co. Ltd.
When the lessee had failed to perform his obligations under thelease agreement, the plaintiff acting according to the arbitrationclause has proceeded to arbitration and obtained award. Thelessee has failed to satisfy the award and in the present action theplaintiff has sued the defendants in the District Court of Colombounder the guarantee bonds to obtain payment under the Award and 40interest payable thereunder. The defendants have objected to thejurisdiction of the District Court on the basis that the plaintiff had noright to file action against them and that the plaintiff should proceedto arbitration against the guarantors too. Their argument was thatsince their guarantee bonds referred to the lease agreement, thearbitration clause was incorporated into the said bonds. Thelearned Judge has rejected this argument on the basis that theagreement to resort to arbitration existed only between the lesseeand the lessor.
This conclusion was correct. An agreement to proceed to arbi- 50tration being an agreement in derogation of a party’s right to haverecourse to a Court of Law, there must be specific consentexpressed by the plaintiff in writing, if his claim against the guaran-tors too is to be submitted to arbitration before action is filed incourt. There is no such agreement.
The other argument of the defendants was the lessee was anecessary party to the action and without adding the lessee interms of section 18 of the Civil Procedure Code, the action was notproperly constituted. The learned Judge has held that since thematter concerning the lessee had been dealt with in arbitration pro- 60ceedings and an award had been made he was not a necessaryparty to the action against the defendants.
Both reasons given by the learned Judge for rejecting the objec-tions of the defendants were correct in law. As such there is no rea-son to grant leave to appeal. Accordingly leave to appeal is refusedand the application is dismissed costs fixed at Rs. 5000/-.
UDUWARA & OTHERS v. L. B. FINANCE CO.LTD