The Delhi High Court has held that a loan agreement and a deed of personal guarantee executed in relation to the same financial transaction cannot be treated as independent and unrelated contracts for the purposes of dispute resolution. Justice Jasmeet Singh observed that both documents formed part of a single composite commercial arrangement and were meant to secure the same underlying obligations.
A petition was filed under Section 11 of the Arbitration and Conciliation Act, 1996 by Mahindra and Mahindra Financial Services Ltd., seeking the appointment of a sole arbitrator to adjudicate disputes arising from a term loan of ₹2 crore granted to Bhoruka Classic Finance Pvt. Ltd., which was secured by a personal guarantee executed by its director.
The respondents opposed the petition on multiple grounds. They contended that the loan agreement and the deed of guarantee were separate and independent contracts, each containing distinct arbitration clauses with different venues, Delhi and Mumbai indicating an intention to have separate arbitral proceedings. They further argued that since arbitrators had already been appointed earlier, the petitioner should have sought substitution under Sections 14 and 15 of the Act instead of filing a fresh Section 11 petition. Additionally, they claimed that the petition was barred by limitation.
Rejecting these objections, the Court held that the personal guarantee was not an independent contract but merely a security instrument to ensure compliance with the repayment obligations under the loan agreement. The Court noted that the guarantee expressly referred to the loan transaction and was executed in the capacity of the guarantor as a director of the borrowing company. It ruled that the two agreements were interdependent and had to be read together as part of one composite transaction.
On the issue of conflicting arbitration clauses, the Court clarified that the loan agreement was the principal or “parent” contract, while the deed of guarantee was only incidental. Therefore, the jurisdiction and dispute resolution mechanism under the main agreement would prevail. It further held that a mere reference to a different venue in the guarantee did not create a separate arbitral seat.
The Court also rejected the argument that the petition was not maintainable. It held that clauses allowing unilateral appointment of arbitrators by one party were no longer valid in light of the Supreme Court’s rulings in TRF Ltd. v. Energo Engineering Projects Ltd, (2017) 8 SCC 377 and Perkins Eastman Architects DPC v. HSCC (India), (2020) 20 SCC 760 , necessitating court intervention for appointment.
On limitation, the Court took into account the exclusion of time during the COVID-19 pandemic as directed by the Supreme Court and held that the petition was filed well within the prescribed limitation period.
Allowing the petition, the Court appointed Advocate Dr. Amit George as the sole arbitrator and directed that the arbitration be conducted under the aegis of the Delhi International Arbitration Centre (DIAC). All rights and contentions of the parties, including issues of arbitrability and merits, were left open for determination by the arbitral tribunal.
Appearances:
For the Petitioner: Ms Harshita Sukhija, Mr Joginder Sukhija and Ms Karuna Chhatwal, Advocates
For the Respondents: Mr. Karunesh Tandon , Mr. Sarthak Mittal , Mr. Prabin Mohan, Advs.
