In a significant ruling on multi-contract commercial transactions, a Supreme Court bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe has held that an arbitration clause contained in a principal loan agreement binds a personal guarantor where the guarantee forms an integral component of a single, composite transaction. Resolving the central issue of “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, expressly integrated with it but not itself containing an arbitration clause?”, the bench, in a judgment delivered by Justice Alok Aradhe, set aside the judgment of the High Court of Delhi and the order of the Sole Arbitrator which had deleted the personal guarantor from arbitral proceedings. The Court held that the arbitral undertaking stood validly incorporated into the personal guarantee by reference under Section 7(5) of the Arbitration and Conciliation Act, 1996.
Background of the Case
The dispute arose out of a project initiated by the Ministry of Skill Development and Entrepreneurship to establish Model Training Centres across the country, known as “Pradhan Mantri Kaushal Kendra” (PMKK). The appellant, National Skill Development Corporation (NSDC)—a not-for-profit company acting as the implementing agency—issued a Request for Proposal on July 29, 2016, inviting proposals to set up PMKKs.
Surya Wires Private Limited (the Company) and Disha Education Society jointly submitted proposals and were allotted districts to establish the centres. Shanti Finance and Property Development Private Limited joined as a co-borrower providing mortgage security. Respondent No. 2, serving as the Managing Director and Authorized Representative of Surya Wires Private Limited, also executed personal guarantees to secure financial assistance.
On December 20, 2016, the parties executed a cluster of contemporaneous agreements, including a Service Level Agreement (SLA), a First Loan Agreement for Rs. 7,17,63,197, and ancillary “Facility Agreements”—comprising a Deed of Assignment, Deed of Hypothecation, Irrevocable Power of Attorney, Undertaking-cum-Declaration, and a Personal Guarantee executed by Respondent No. 2 on December 27, 2016. A materially identical second set of agreements for an additional loan of Rs. 2,13,83,194, accompanied by a second Personal Guarantee from Respondent No. 2, was executed on August 18, 2017.
Following repayment defaults, NSDC issued Loan Recall Notices on October 29, 2021, and subsequently initiated arbitration before the Indian Council of Arbitration (ICA) on June 21, 2022, seeking recovery against all respondents. Respondent Nos. 2, 3, 5, and 7 filed an application under Section 16 of the Arbitration and Conciliation Act, 1996, contending that the Arbitral Tribunal lacked jurisdiction over them because they had not signed the Loan Agreements in their personal capacities.
On October 23, 2024, the Sole Arbitrator allowed the Section 16 application and directed their deletion. NSDC challenged this deletion before the Delhi High Court under Section 37(2)(a) of the 1996 Act, confining its challenge to Respondent No. 2. On January 28, 2026, the High Court affirmed the Arbitrator’s order, holding that the Personal Guarantees contained no independent arbitration clause, that a general reference does not automatically import an arbitration clause without conscious acceptance, and that NSDC had failed to show that Respondent No. 2 was the “alter ego” of the borrower company or had used the corporate form to perpetrate fraud. NSDC then approached the Supreme Court.
Arguments of the Parties
Appearing for the appellant, counsel argued that a conjoint reading of Clause 11.2 (Dispute Resolution), Article I (definitions), Article XII (miscellaneous provisions), and the Schedules of the Loan Agreements demonstrated that the arbitration clause was incorporated into the Personal Guarantees. Counsel contended that the Personal Guarantees were not collateral or independent documents, but contractually designated “Facility Agreements” and mandatory pre-disbursement conditions forming an inseparable part of the transaction. The appellant submitted that the High Court took an unduly technical and restrictive approach to Section 7(5) of the 1996 Act, running counter to settled law.
Conversely, counsel for Respondent No. 2 submitted that out of seven instruments executed between the parties, only four contained arbitration clauses, and the arbitration clause in the Loan Agreements had never been incorporated into the Personal Guarantees. Characterizing the dispute as a “two-contract case” involving distinct parties and non-standard forms, counsel argued that Clause 11.2 confined arbitration strictly to disputes concerning the Loan Agreement. While conceding that a non-signatory may be bound where mutual intention is established, counsel maintained that such intention must be drawn strictly from the language of the instrument and cannot be presumed.
The Court’s Legal Analysis
The Supreme Court examined the scope and ambit of Section 7(5) of the 1996 Act, tracing the development of the law through several key precedents:
- In M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009), the Court had established the foundational rules governing incorporation by reference, holding that a general reference does not incorporate an arbitration clause from another contract unless there is a clear intention and specific reference, while standard terms of trade associations or general conditions of a contracting party stand on a different footing.
- In Inox Wind Limited v. Thermocables Limited (2018), a two-judge bench reiterated that while a general reference to an earlier contract is insufficient, a general reference to standard forms suffices.
- In Shinhan Bank v. Carol Info Services Limited (2023), a three-judge bench reaffirmed that Section 7(5) is satisfied when the contractual reference makes the arbitration clause a part of the contract.
- In the Constitution Bench judgment in Cox and Kings Limited v. SAP India Pvt. Ltd. (2024), the Court clarified that the definition of “parties” under Section 2(1)(h) read with Section 7 includes both signatories and non-signatories, and that mutual intention can be discerned from conduct and surrounding circumstances, particularly in composite transactions involving multiple follow-up agreements.
- In Ajay Madhusudan Patel and Others v. Jyotrindra S. Patel and Others (2025), a three-judge bench observed that intention can be gauged from a non-signatory’s participation in contract negotiation, performance, and termination.
- In ASF Buildtech Private Limited v. Shapoorji Pallonji and Company Private Limited (2025), the Court emphasized that arbitral mechanisms must remain elastic to accommodate complex multi-party and multi-contract arrangements without compromising party autonomy.
Applying these principles to the contract, the Court observed that Respondent No. 2 executed the instruments in two distinct capacities: as Managing Director in a representative capacity, and as guarantor in his personal capacity.
Scrutinizing the clauses of the Loan Agreements, the Court highlighted that Clause 1.1(b) defined the “Agreement” to include all Schedules; Clause 1.1(l) defined “Facility Agreements” to include all instruments detailed in Schedule IV; and Schedule IV expressly enumerated “Personal Guarantee(s)”. Crucially, Clause 12.1 stipulated that the Facility Agreements “shall be deemed to be part of this Agreement as if the provisions thereof were set out herein in extension.”
Analyzing the contractual language, the Court observed:
“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. The Personal Guarantees do not, therefore, stand apart from the Loan Agreements, and are woven into their very fabric.”
The Court found further support in Schedule I, which made the execution of the Facility Agreements a mandatory pre-disbursement condition, and noted that the contemporaneity of the executions confirmed that the parties intended a single, composite transaction. Addressing the public purpose of the funding, the bench emphasized:
“A guarantee so defined and so integrated cannot be severed, for purposes of dispute resolution alone, from the very Clause 11.2 that governs disputes touching the rights and obligations arising under that Agreement, while remaining tethered to it for every other purpose, including the extent of liability.”
Decision of the Court
The Supreme Court concluded:
“For the foregoing reasons, we hold that the arbitration clause contained in Clause 11.2 of the Loan Agreements stands incorporated, within the meaning of Section 7(5) of the 1996 Act, into the Personal Guarantees dated 27.12.2016 and 18.08.2017 executed by respondent no. 2, who is accordingly bound to submit to arbitration in respect of disputes arising therefrom.”
Accordingly, the Supreme Court allowed the appeal, quashed and set aside the Delhi High Court judgment dated January 28, 2026, and the Sole Arbitrator’s order dated October 23, 2024, to the extent that they had allowed the Section 16 application deleting Respondent No. 2 from the arbitral proceedings.
Case Title: National Skill Development Corporation v. Surya Wires Private Limited & Ors.
Case No.: Civil Appeal No. of 2026 (Arising out of S.L.P. (C) No. 10030 of 2026)
Bench: Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe
Date: September 8, 2026
