In National Skill Development Corporation v. Surya Wires Private Limited & Ors., a Bench of the Supreme Court comprising Justices Pamidighantam Sri Narasimha and Alok Aradhe has held that a personal guarantee containing no arbitration clause of its own can still be bound by an arbitration clause contained in the loan agreement it secures, where the two documents were executed as part of one composite commercial transaction.
NSDC, acting as implementing agency for Model Training Centres under the "Pradhan Mantri Kaushal Kendra" scheme, had disbursed loans to Surya Wires Private Limited and Disha Education Society under two sets of contemporaneous agreements executed in December 2016 and August 2017. Each Loan Agreement was accompanied by ancillary facility documents, including a Personal Guarantee executed by the borrower company's Managing Director in his individual capacity as a pre-disbursement condition. When a dispute went to arbitration, the sole arbitrator excluded the Managing Director from the proceedings on the footing that he, as guarantor, had never personally signed an arbitration agreement — a view the Delhi High Court upheld on appeal.
The Supreme Court reversed both orders. It held that where a loan agreement and an accompanying personal guarantee are integrated by their own terms into a single commercial arrangement — rather than standing as self-contained, independent contracts — the arbitration clause in the loan agreement is incorporated by reference into the guarantee under Section 7(5) of the Arbitration and Conciliation Act, 1996, which permits an arbitration clause in one document to bind a party through another document that expressly refers to it. On the facts, the guarantee had been executed as a condition of disbursement under the loan documentation and could not be treated as a standalone contract divorced from the loan agreement it secured. The Court accordingly set aside the Delhi High Court's judgment and the arbitrator's order, and restored the Managing Director as a party to the arbitral proceedings.