The Supreme Court has ruled that where a Personal Guarantee is contractually deemed part of the Loan Agreement ‘as if set out herein in extension’, the arbitration clause therein stands incorporated by reference, and the guarantor cannot be deleted from the arbitral array merely because he signed only in his personal capacity. The Court explained that a Personal Guarantee expressly enumerated as a ‘Facility Agreement’ in the Schedules to a Loan Agreement, and deemed thereunder to form part of the Loan Agreement ‘as if set out herein in extension’, is an integral and inseparable component of the Loan Agreement for all purposes, including dispute resolution.
The Court said that the phrase ‘as if the provisions thereof were set out herein in extension’ operates as a deeming fiction internal to the contract, binding every Facility Agreement, including the Personal Guarantee, within the same legal and arbitral framework as the Loan Agreement. Further, contemporaneity of execution of the Loan Agreement and the Personal Guarantee, coupled with the Personal Guarantee being a mandatory pre-disbursement condition under Schedule I, reinforces the inference that the parties intended the entire cluster of documents to constitute a single, composite transaction.
The Apex Court also held that a non-signatory personal guarantor cannot escape arbitral jurisdiction merely on the ground that he did not append his signature to the Loan Agreement in his personal capacity, where the contractual architecture treats the guarantee as woven into the very fabric of the loan documentation. The Court reaffirmed that arbitration must remain sufficiently elastic to accommodate multi-party and multi-contract arrangements, and that commercial reality cannot be allowed to outgrow the arbitral mechanism, provided consent and party autonomy are traceable to the contractual language.
A Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe framed the core question as whether, where parties structure a single transaction through several interconnected instruments, an arbitration clause contained in one instrument can bind a party through another instrument that is expressly integrated with it but does not itself contain an arbitration clause. The Court surveyed the settled position under Section 7(5) of the 1996 Act, beginning with M.R. Engineers and Contractors v. Som Datt Builders [(2009) 7 SCC 696], which laid down that incorporation by reference requires a clear reference to the document containing the arbitration clause, a clear intention to incorporate that clause, and that the clause must be appropriate and not repugnant to the host contract.
The Court noted that a general reference to another contract does not incorporate its arbitration clause, whereas a general reference to a standard form does, as reaffirmed in Inox Wind v. Thermocables [(2018) 2 SCC 519]. The Constitution Bench decision in Cox and Kings v. SAP India [(2024) 4 SCC 1] was cited for the proposition that ‘parties’ under Section 2(1)(h) read with Section 7 includes non-signatories whose conduct may indicate consent to be bound. The Court also relied on ASF Buildtech v. Shapoorji Pallonji [(2025) 9 SCC 76], observing that arbitration must remain sufficiently elastic to accommodate multi-party and multi-contract arrangements without compromising consent and party autonomy.
Turning to the contractual architecture, the Court noted that respondent no. 2 executed the instruments in two distinct capacities: as Managing Director of the Company in a representative capacity, and in his personal capacity as guarantor under the Personal Guarantees. The Court then examined the relevant clauses of the Loan Agreements, including the definition of ‘Agreement’ in Clause 1.1(b) covering all Schedules and annexures, the definition of ‘Facility Agreements/Facility Documents’ in Clause 1.1(l), and Clause 12.1 of Article XII (Miscellaneous) which deems Facility Agreements to be part of the Loan Agreement ‘as if the provisions thereof were set out herein in extension’.
Briefly, the Ministry of Skill Development and Entrepreneurship launched the ‘Pradhan Mantri Kaushal Kendra’ (PMKK) scheme to set up Model Training Centres in every district, with the National Skill Development Corporation (NSDC), a not-for-profit company, acting as the implementing agency. NSDC issued a Request for Proposal dated July 29, 2016, in response to which Surya Wires Private Limited (the Company) and Disha Education Society (the Society) submitted joint proposals and were allotted districts to set up PMKKs.
On Dec 20, 2016, the parties executed a cluster of contemporaneous agreements, including a Service Level Agreement, a First Loan Agreement for Rs. 7.17 crores, and ancillary Facility Agreements such as a Deed of Assignment, Deed of Hypothecation, Irrevocable Power of Attorney, Undertaking-cum-Declaration, and a Personal Guarantee by respondent no. 2 (Managing Director of the Company) executed on Dec 27, 2016. A second, materially identical set of agreements was executed on Aug 18, 2017, for an additional loan of Rs. 2.13 crores, along with a second Personal Guarantee by respondent no. 2.
Defaults occurred in repayment, leading to Loan Recall Notices on Oct 29, 2021, after which NSDC initiated arbitration before the Indian Council of Arbitration on June 21, 2022, against all seven respondents, including respondent no. 2 in his personal capacity as guarantor. Respondent nos. 2, 3, 5 and 7 filed a Section 16 application before the Sole Arbitrator contending that they were not signatories to the Loan Agreements in their personal capacities. By order dated Oct 23, 2024, the Sole Arbitrator allowed the application and directed deletion of those respondents from the array of parties. The Delhi High Court affirmed the Sole Arbitrator’s order, holding that a general reference does not import an arbitration clause, that proximity of transactions is insufficient, and that NSDC had failed to establish the ‘alter ego’ or fraud threshold to bind a non-signatory.
