Arbitration Clause in Loan Agreement Can Bind Personal Guarantor When Guarantee Is Integral Part of Composite Transaction

The Supreme Court has held that an arbitration clause contained in a loan agreement can be incorporated into a separate Personal Guarantee where the guarantee is expressly made an integral and inseparable part of the loan agreement.

A Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe delivered the judgment on September 8, 2026, in National Skill Development Corporation v. Surya Wires Private Limited & Ors., 2026 INSC 977.

Background

The case arose from loans provided by the National Skill Development Corporation (NSDC) for establishing Pradhan Mantri Kaushal Kendra (PMKK) centres. Surya Wires Private Limited and Disha Education Society had jointly undertaken the project.

The parties executed Loan Agreements along with several Facility Agreements, including Personal Guarantees furnished by respondent no. 2. The first loan was for approximately ₹7.17 crore, while a second loan of approximately ₹2.13 crore was subsequently sanctioned.

After repayment defaults, NSDC initiated arbitration against all the respondents. The Managing Director who had furnished the Personal Guarantees challenged his inclusion in the arbitration, arguing that the Personal Guarantees did not themselves contain an arbitration clause.

The Sole Arbitrator accepted the objection and deleted him from the proceedings. The Delhi High Court subsequently upheld that decision.

Supreme Court's Ruling

The Supreme Court reversed the High Court and held that the arbitration clause in the Loan Agreements was incorporated into the Personal Guarantees under Section 7(5) of the Arbitration and Conciliation Act, 1996.

The Court noted that the Loan Agreements expressly defined the “Facility Agreements” to include Personal Guarantees. Further, the agreements provided that the Facility Agreements would be deemed to form part of the Loan Agreement as if their provisions had been incorporated into it.

The Court also noted that execution of the Loan Agreement and other Facility Agreements was a pre-disbursement condition. The Personal Guarantees were executed contemporaneously with the respective Loan Agreements, demonstrating that the documents formed part of a single composite commercial transaction.

The Supreme Court emphasized that the absence of the guarantor's personal signature on the Loan Agreement was not decisive in the circumstances. The guarantee had been expressly integrated into the contractual framework and could not be separated from the arbitration mechanism governing the underlying transaction.

Section 7(5) and Incorporation by Reference

The Court reiterated that under Section 7(5), an arbitration clause contained in another document can become part of a contract where the reference to that document clearly indicates an intention to incorporate the arbitration clause.

A mere general reference to another contract ordinarily does not suffice. However, where the contractual documents, read together, demonstrate a clear intention to incorporate the referred document into the principal agreement, the arbitration clause may also become binding.

The Court relied upon principles laid down in M.R. Engineers, Inox Wind, Shinhan Bank and the Constitution Bench judgment in Cox and Kings, among others.

The Supreme Court concluded that the arbitration clause contained in Clause 11.2 of the Loan Agreements stood incorporated into the Personal Guarantees dated 27 December 2016 and 18 August 2017.

Consequently, the guarantor was held bound to submit to arbitration in respect of disputes arising from the guarantees. The Supreme Court therefore set aside the Delhi High Court judgment dated January 28, 2026, as well as the Sole Arbitrator's order dated October 23, 2024, insofar as they concerned respondent no. 2. The appeal was allowed with no order as to costs.

Representation:-

For Petitioner(s) :Ms. Shweta Bharti, Adv. Mr. J.K. Chaudhary, Adv. Mr. Ankit Konwar, Adv. Mr. Prateek Singh, Adv. Mr. Abhinav Agrawal, AOR Mr. Piyush Bhardwaj, Adv. Mr. Shivam Sengupta, Adv.

For Respondent(s) :Mr. Sudev Juneja, Adv. Ms. Sugandha Batra, AOR Mr. Vansh Bhatnagar, Adv.