Supreme court clarifies when an arbitration clause in a loan agreement binds a personal guarantor

Supreme Court Provides Clarity on Arbitration Clauses in Loan Agreements Affecting Personal Guarantors.

The Supreme Court of India, in National Skill Development Corporation v. Surya Wires Private Limited & Ors., decided on 8 September 2026, examined whether an arbitration clause contained in a Loan Agreement could bind a person who had executed a Personal Guarantee in his individual capacity, where the Guarantee was expressly incorporated into the Loan Agreement. The Court considered this issue in the context of Section 7(5) of the Arbitration and Conciliation Act, 1996 and the principle of incorporation of an arbitration clause by reference. The dispute arose under the Pradhan Mantri Kaushal Kendra scheme, under which the Ministry of Skill Development and Entrepreneurship decided to establish Model Training Centres across the country. The National Skill Development Corporation was the implementing agency. Surya Wires Private Limited and Disha Education Society had been allotted districts for establishing such centres, while Shanti Finance and Property Development Private Limited acted as a co borrower providing mortgage security. Respondent No. 2 was the Managing Director and authorised representative of Surya Wires Private Limited.

On 20 December 2016, the parties entered into a number of interconnected agreements, including Loan Agreements and various Facility Agreements. These included a Deed of Assignment, Deed of Hypothecation, Irrevocable Power of Attorney and Undertaking cum Declaration. Respondent No. 2 subsequently executed a Personal Guarantee in favour of the National Skill Development Corporation in his individual capacity. A second set of substantially similar agreements was executed in August 2017, including another Personal Guarantee.

The borrowers subsequently defaulted in repayment of the amounts due under the Loan Agreements. The National Skill Development Corporation issued Loan Recall Notices and thereafter initiated arbitral proceedings before the Indian Council of Arbitration for recovery of the amounts due under the two Loan Agreements.

Respondent No. 2 challenged the jurisdiction of the Arbitral Tribunal under Section 16 of the Arbitration and Conciliation Act, 1996. His argument was that he had signed the Loan Agreements as Managing Director in a representative capacity and had not signed them in his personal capacity. Although he had executed the Personal Guarantees personally, those Guarantees did not themselves contain an arbitration clause. The Sole Arbitrator accepted this objection and directed his deletion from the arbitral proceedings. The Delhi High Court subsequently affirmed that decision.

Before the Supreme Court, the National Skill Development Corporation argued that the Personal Guarantees could not be viewed as independent documents. The Loan Agreements expressly included Personal Guarantees within the Facility Agreements and treated the Facility Agreements as an integral part of the Loan Agreements. According to the appellant, the arbitration clause contained in the Loan Agreements was therefore incorporated into the Personal Guarantees.

The Supreme Court examined Section 7(5) of the Arbitration and Conciliation Act, 1996, which permits an arbitration clause contained in another document to be incorporated into a contract where the reference is such as to make the arbitration clause part of that contract. Relying upon M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited and Inox Wind Limited v. Thermocables Limited, the Court reiterated that a mere general reference to another agreement is ordinarily insufficient. There must be a clear reference and an intention to incorporate the arbitration clause into the contract.

The Court also considered the Constitution Bench judgment in Cox and Kings Limited v. SAP India Private Limited, which recognized that an arbitration agreement may, in appropriate circumstances, bind a non-signatory. The Court observed that where a transaction consists of multiple interconnected agreements, the relationship between those agreements and the intention of the parties must be examined rather than treating each document in isolation.

Applying these principles, the Supreme Court placed particular emphasis on the language of the Loan Agreements. The definition of Facility Agreements expressly included Personal Guarantees. Schedule IV specifically listed Personal Guarantees as Facility Agreements, while Clause 12.1 provided that the Facility Agreements would be deemed to form part of the Loan Agreement as though their provisions were set out in it. Further, execution of the Loan Agreement and other Facility Agreements was prescribed as a pre disbursement condition.

The Court held that these provisions demonstrated that the Personal Guarantees were not merely documents connected with the Loan Agreements but were integral and inseparable components of the same composite transaction. The contractual language showed an explicit intention to bring the Personal Guarantees within the same legal and arbitral framework as the Loan Agreements.

The Court further clarified the capacity in which Respondent No. 2 had signed the documents. He had signed the Loan Agreements as Managing Director in a representative capacity, while he had executed the Personal Guarantees in his individual capacity. The Supreme Court held that his failure to sign the Loan Agreements in his personal capacity was not decisive in the circumstances of the case because the Personal Guarantees that he had personally executed were expressly incorporated into the Loan Agreements.

The Supreme Court therefore held that the arbitration clause contained in Clause 11.2 of the Loan Agreements stood incorporated into the Personal Guarantees under Section 7(5) of the Arbitration and Conciliation Act, 1996. Respondent No. 2, having executed the Personal Guarantees in his individual capacity, was consequently bound to submit to arbitration in respect of disputes arising from the Guarantees.

The Court accordingly allowed the appeal and set aside the judgment of the Delhi High Court dated 28 January 2026 and the order of the Sole Arbitrator dated 23 October 2024, insofar as they concerned Respondent No. 2. There was no order as to costs.

The judgment is significant because it demonstrates that whether a Personal Guarantor is bound by an arbitration clause cannot always be determined merely by asking whether the guarantor signed the principal agreement in his personal capacity. The Court must examine the actual contractual language, the relationship between the documents and the intention of the parties. In the present case, the express inclusion of the Personal Guarantees within the Facility Agreements, their incorporation into the Loan Agreements and their status as mandatory pre disbursement documents established that the documents formed part of one composite transaction.

Importantly, the judgment does not lay down a general rule that every Personal Guarantor is automatically bound by an arbitration clause contained in a Loan Agreement. The Supreme Court's conclusion was based on the specific contractual provisions and structure of the transaction before it. Where the contractual documents clearly demonstrate an intention to incorporate a Personal Guarantee into the principal agreement containing an arbitration clause, Section 7(5) may operate to make that arbitration clause applicable to the Guarantee. In this case, the specific contractual framework led the Supreme Court to hold that Respondent No. 2 was bound by the arbitration agreement.