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An arbitration clause in loan agreements can bind non-signatory personal guarantors where such guarantees constitute an inseparable part of the loan agreement
In National Skill Development Corporation vs. Surya Wires Private Limited and Ors.[1], the Supreme Court of India (“Supreme Court“) has, inter alia, held that where loan agreements and personal guarantees form part of a composite transaction, personal guarantees are an inseparable part of the loan agreement. In such cases the arbitration clause in the loan agreements stands incorporated into the personal guarantees under Section 7(5) [2] of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). This judgment signals that non-signatory status alone will no longer shieldpersonal guarantors from arbitration where transaction documents are drafted to operate as one.
Brief facts
The Ministry of Skill Development and Entrepreneurship appointed the National Skill Development Corporation (“Appellant”) as the implementing agency for setting up certain model training centers in every district of the country. The Appellant jointly allotted certain districts to Surya Wires Private Limited (“Respondent No. 1”) and Disha Education Society while Shanti Finance and Property Development Private Limited provided mortgage security as the co-borrower.
The parties executed a cluster of contemporaneous agreements, comprising a service level agreement, a first loan agreement and ancillary facility agreements, including a personal guarantee issued by the managing director of Respondent No. 1 (“Respondent No. 2”) in the Appellant’s favour. The parties executed a materially identical set of agreements, including a second personal guarantee by Respondent No. 2, for an additional loan. The respondents defaulted in repaying the amounts due under the loan agreements, and the Appellant issued loan recall notices to several respondents, including Respondent No. 2 as a signatory to the personal guarantees.
The Appellant instituted arbitral proceedings for recovery of amounts against the respondents. Several respondents, including Respondent No. 2, filed an application under Section 16[3] of the Arbitration Act on the ground that they were not signatories to the loan agreements in their personal capacities (“Application”). The Sole Arbitrator allowed the Application and directed the deletion of Respondent No. 2, among others, from the array of parties.
Being aggrieved, the Appellant filed an appeal under Section 37(2)(a) of the Arbitration Act before the Delhi High Court (“Delhi HC”), limited to Respondent No. 2’s deletion.
The Delhi HC affirmed the Sole Arbitrator’s order (“Impugned Order”). The Appellant then filed a special leave petition against the Impugned Order before the Supreme Court.
Issue
Whether, in a single transaction through several interconnected instruments, an arbitration clause contained in one instrument can bind a party through another instrument expressly integrated with it but not itself containing an arbitration clause?
Findings and analysis
The Supreme Court allowed the appeal, set aside the judgment of the Delhi HC and observed as follows:
- as settled in R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited[4] and Inox Wind Limited vs. Thermocables Limited[5], for the purposes of Section 7(5) of the Arbitration Act, a general reference to an earlier contract does not suffice to incorporate an arbitration clause into a later contract, whereas a general reference to a standard form of contract suffices for that purpose;
- the decision in Ajay Madhusudan Patel Jyotrindra S. Patel[6] clarifies that the intention of the parties to be bound by an arbitration agreement can be gauged from the circumstances surrounding the participation of the non-signatory party in the negotiation, performance and termination of the underlying contract containing such an agreement;
- reading the clauses in the loan agreements together shows that the personal guarantees constituted an integral and inseparable part of those agreements, particularly in view of a clause stating that the facility agreements (including the personal guarantee) are deemed to be a part of the loan agreement “as if the provisions thereof were set out herein in extension”; and
- the deeming fiction created by such a clause bound every facility agreement, including the personal guarantee, within the same legal and arbitral framework as the loan agreement. As such, the intention of the parties to incorporate the personal guarantees into the loan agreements was explicit. Accordingly, the fact that Respondent No. 2 did not sign the loan agreement in his personal capacity was not decisive.
Conclusion
This ruling reinforces the position that a party cannot avoid arbitration merely by relying on its non-signatory status where the contractual framework expressly integrates the ancillary agreement into the principal agreement through a deeming fiction. For lenders and other commercial entities, this decision highlights the need to examine the principal agreement for such deeming provisions before executing any ancillary agreements. That examination will help ensure that the contractual framework clearly brings such agreements and their signatories within the intended arbitral framework.
This Prism is prepared by:
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Dheeraj Nair |
Pratik Pawar |
Shanaya Cyrus Irani |
Vishrutyi Sahni |
Sanjana Pandey |
Sneha Arora |
For more details, please contact km@jsalaw.com.
[1] 2026 SCC OnLine SC 179 (decided on September 8 2026)
[2] Section 7(5) of the Arbitration Act provides that a reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement, provided that the contract is in writing and the reference is such as to make the arbitration clause part of the contract.
[3] Section 16 of the Arbitration Act embodies the principle of kompetenz-kompetenz empowers an arbitral tribunal to rule on its own jurisdiction, including on any objections with respect to the existence or validity of the arbitration agreement.
[4] (2009) 7 SCC 696
[5] (2018) 2 SCC 519
[6] (2025) 2 SCC 147
