WHEN DOES AN ARBITRATION CLAUSE BIND A PERSONAL GUARANTOR? SUPREME COURT CLARIFIES THE LAW

INTRODUCTION

In National Skill Development Corporation Vs. Surya Wires Private Limited & Ors., 2026 INSC 977, the Supreme Court of India, by its Judgment dated 8 September 2026, comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, considered an important question under the Arbitration and Conciliation Act, 1996. The Court examined whether an arbitration clause contained in a loan agreement can bind a personal guarantor who has not signed that loan agreement in his personal capacity, where the personal guarantee is expressly made an integral part of the loan transaction. The Supreme Court answered the question in the affirmative and held that, in the facts of the case, the Arbitration Clause in the Loan Agreements stood incorporated into the Personal Guarantees.

 

BACKGROUND OF THE CASE

The dispute arose out of a scheme for establishing Pradhan Mantri Kaushal Kendra (PMKK) or Model Training Centres, across the country. The National Skill Development Corporation (NSDC) was the implementing agency for the Scheme.

Surya Wires Private Limited and Disha Education Society had approached NSDC for setting up these training centres. NSDC provided financial assistance through loan agreements. A finance company was also involved as a co-borrower providing mortgage security.

Two sets of Agreements were executed. The first set was executed in December 2016 and involved a loan of approximately Rs. 7.17 crore. A second set was executed in August 2017 for an additional loan of approximately Rs. 2.13 crore.

Along with these loan agreements, several other documents were executed, including deeds of hypothecation, assignment documents, powers of attorney and personal guarantees. Respondent No. 2, who was the Managing Director of Surya Wires, executed the personal guarantees in his individual capacity.

 

HOW DID THE DISPUTE ARISE?

The Borrowers subsequently defaulted in repayment. NSDC issued loan recall notices and later commenced arbitration proceedings for recovery of the outstanding amounts.

Respondent No. 2 was made a party to the Arbitration because of the personal guarantees executed by him. He objected to this and argued that he could not be subjected to arbitration because he had not signed the loan agreements in his personal capacity.

The Sole Arbitrator accepted this argument and directed that Respondent No. 2 be deleted from the proceedings. The Delhi High Court also upheld that decision.

NSDC then approached the Supreme Court.

 

THE LEGAL ISSUE

The central question before the Supreme Court was fairly simple: Can a person who has signed a personal guarantee be bound by an arbitration clause contained in the loan agreement, even though the guarantee itself does not contain a separate arbitration clause?

The answer depends upon Section 7(5) of the Arbitration and Conciliation Act, 1996, which permits an arbitration clause contained in another document to become part of a contract through reference.

However, a mere general reference to another document is ordinarily not enough. There must be sufficient indication that the parties intended to incorporate the arbitration clause into their agreement.

 

WHAT DOES SECTION 7(5) REQUIRE?

The Supreme Court relied upon its earlier decisions, particularly M.R. Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Ltd. and Inox Wind Ltd. v. Thermocables Ltd.

The basic principle is that when one contract refers to another document, the arbitration clause in that other document will not automatically become part of the first contract. The reference must be clear enough to show an intention to incorporate the arbitration provision.

At the same time, the Court also referred to the Constitution Bench decision in Cox and Kings Ltd., which recognised that an arbitration agreement can, in appropriate circumstances, bind a non-signatory party. The Court must examine the overall transaction and the conduct and intention of the parties.

 

WHY WAS THE PERSONAL GUARANTEE DIFFERENT IN THIS CASE?

The Supreme Court found that the documents executed in the present case were closely connected and were not independent contracts.

The Loan Agreement itself defined “Facility Agreements” broadly to include documents such as personal guarantees. Further, the Agreement specifically stated that the Schedules and Facility Agreements would be treated as part of the Loan Agreement.

Most importantly, Clause 12.1 provided that the Facility Agreements would be treated as if their provisions had been set out in the Loan Agreement itself. The personal guarantees were also expressly listed in Schedule IV.

The Court therefore found that the Parties had deliberately created one composite transaction rather than a collection of unrelated documents.

 

THE FACT THAT THE GUARANTOR DID NOT SIGN THE LOAN AGREEMENT PERSONALLY

The Court also rejected the argument that Respondent No. 2 could not be bound merely because he had not signed the loan agreements in his personal capacity.

The Court noted that he had signed the personal guarantees in his individual capacity and that those guarantees were executed as a mandatory pre-disbursement condition for the loans.

In other words, the personal guarantee was not an unrelated document. It was an essential part of the arrangement through which the loans were sanctioned and disbursed.

 

SUPREME COURT’S DECISION

The Supreme Court ultimately held that the Arbitration Clause contained in Clause 11.2 of the Loan Agreements was incorporated into the personal guarantees under Section 7(5) of the 1996 Act.

Accordingly, Respondent No. 2 was held bound by the Arbitration Agreement and could be proceeded against in Arbitration in respect of disputes arising from the guarantees. The Supreme Court therefore set aside both the Order of the Sole Arbitrator and the Judgment of the Delhi High Court.

 

CONCLUSION

The Judgment is significant because it shows that the absence of a separate arbitration clause in a personal guarantee is not, by itself, sufficient to keep a guarantor outside arbitration.

What matters is the intention of the parties and the manner in which the different agreements are drafted. Where the guarantee is expressly made an integral part of the principal agreement and the contractual documents clearly bring the guarantee within the framework of the principal agreement, the arbitration clause may also travel with it.

The decision therefore serves as an important reminder that parties entering into interconnected commercial documents must carefully examine the language dealing with incorporation, dispute resolution and the relationship between the various agreements.

 

SARTHAK KALRA

Senior Legal Associate

The Indian Lawyer & Allied Services

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