Arbitration Clause In One Agreement Can Bind Party To Another Instrument Forming Part Of Composite Transaction: Supreme Court

The Supreme Court has held that where parties structure a single transaction through several interconnected instruments, an arbitration clause contained in one instrument can bind a party through another instrument that is expressly integrated with it, even if the latter instrument does not itself contain an arbitration clause.

A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe heard the case where a contemporaneous loan agreement, containing an arbitration clause, was executed between the parties, which also included a Personal Guarantee by respondent No. 2 in favour of the appellant.

Following default, the appellant sought to invoke arbitration proceedings against the respondents, including the guarantor, respondent No. 2. Respondent No. 2 objected to the invocation of arbitration against him, contending that he was not a signatory to the Loan Agreements in his individual and personal capacity.

Aggrieved by the Arbitral Tribunal's decision allowing respondent No. 2's Section 16 application, the appellant appealed to the Delhi High Court, which upheld the Tribunal's decision, holding that respondent No. 2, being a non-signatory to the Loan Agreement, could not invoke the arbitration clause contained therein in respect of the Personal Guarantee executed by him. Against the Delhi High Court's judgment, the appellant moved the Supreme Court.

Setting aside the impugned decision, the judgment authored by Justice Aradhe referring to the dictums of M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009) and Cox and Kings v. SAP India Pvt. Ltd. 2023 LiveLaw (SC) 1042, said that “…in case of a composite transaction involving multiple agreements, it would be incumbent for the courts and tribunals to assess whether the agreements are consequential or in the nature of a follow-up to, the principal agreement.” According to the court, where a personal guarantee is expressly rendered an integral part of the loan agreement, the arbitration clause contained in the latter must be held to be incorporated by reference under Section 7(5) of the 1996 Act.

Applying the law, the Court observed that since personal guarantees executed by the Respondent No.2 was inseparable from the main loan agreement containing an arbitration clause, therefore it would be wrong to say it formed a separate transaction.

The Court referring to the language employed in the loan agreement binding other arrangements including the personal guarantees with the loan agreement, said:

“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…Read together, the definition clauses under Article I, Article XII and the Schedules conclusively establish that the Loan Agreements and Personal Guarantees were designed to operate not as isolated or self-contained contracts, but as component parts of one composite transaction governing a single commercial arrangement.”

“Respondent no. 2 furnished precisely such a guarantee, contemporaneously with and as a condition precedent to each Loan Agreement, which by its own deeming fiction treats every Facility Agreement, with the Personal Guarantee included, as set out “as if … in extension” of the Agreement itself. 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.”, the Court added.

In terms of the aforesaid, the appeal was allowed.

“…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.”, the Court held. 

Headnote

Arbitration and Conciliation Act, 1996 — Section 7(5) — Arbitration agreement — Incorporation by reference — Composite transaction — Interconnected agreements — Personal Guarantee forming an integral part of Loan Agreement - Where parties structure a single commercial transaction through several interconnected instruments and the ancillary agreement (Personal Guarantee) is contractually defined as a "Facility Agreement" forming an integral and inseparable part of the principal agreement, the arbitration clause in the principal agreement stands incorporated by reference under Section 7(5) into the ancillary agreement - The Supreme Court held that the phrase "shall be deemed to be part of this Agreement as if the provisions thereof were set out herein in extension" operates as an internal deeming fiction that binds every facility agreement including the Personal Guarantee within the same legal and arbitral framework as the principal Loan Agreement - A personal guarantee exacted as a mandatory pre-disbursement condition precedent to secure public funds cannot be severed for the purpose of dispute resolution alone while remaining tethered to the main contract for every other purpose, including liability - the guarantor, despite signing the Loan Agreement only in an official capacity and executing the Personal Guarantee in a personal capacity, is bound to submit to arbitration. [Paras 24-29].

Arbitration and Conciliation Act, 1996 — Section 2(1)(h) read with Section 7 — Definition of "Parties" — Binding Non-Signatories - The requirement of a written arbitration agreement under Section 7 does not preclude binding a non-signatory party - The subjective intention and mutual consent of parties to be bound by an arbitration clause can be gathered from surrounding circumstances, negotiation, execution of composite documents, and conduct. Modern commercial arbitration mechanisms must remain elastic enough to accommodate multi-party and multi contract arrangements without compromising party autonomy. [Relied on ASF Buildtech Private Limited v. Shapoorji Pallonji and Company Private Limited, (2025) 9 SCC 76; Ajay Madhusudan Patel and Others v. Jyotrindra S. Patel and Others, (2025) 2 SCC 147; Cox and Kings Limited v. SAP India Pvt. Ltd., (2024) 4 SCC 1; Inox Wind Limited v. Thermocables Limited, (2018) 2 SCC 519; Paras 20-28].

Cause Title: NATIONAL SKILL DEVELOPMENT CORPORATION VERSUS SURYA WIRES PRIVATE LIMITED & ORS.

Citation : 2026 LiveLaw (SC) 930

Appearance:

For Petitioner(s) : Mr. J.K. Chaudhary, Adv. (arguing counsel) Ms. Shweta Bharti, 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. (arguing counsel) Ms. Sugandha Batra, AOR Mr. Vansh Bhatnagar, Adv.

Related: Arbitration Clause Gets Incorporated In Later Contract When Earlier Agreement Is Imported “Body and Soul” : Supreme Court