Arbitration Clause In Loan Agreement Becomes Incorporated In Deeds Of Guarantee When Both Form Part Of Single Transaction: Delhi HC

The Delhi High Court Bench of Justice Jasmeet Singh has observed that contemporaneously executed Loan Agreement and Deeds of Guarantee, where the intent of the parties to incorporate the Loan Agreement into the Deeds of Guarantee is clear, the Guarantor although a non-signatory to the Loan Agreement, becomes bound by the arbitration clause in the Loan Agreement. Facts The present appeal under Section 37(2)(a), ACA was filed by the Appellant against the order dated 20.04.2024 (“Impugned Order”) passed by the arbitrator whereby an application filed by the Respondents seeking deletion of their name from the array of parties was allowed. In 2012, Ms. Poonam Jain (“principal borrower no.1”), the proprietor of M/s Shri Digamber Polymers (“principal borrower no.2”) sought a loan facility from the Appellant. Among other securities, the Respondents agreed to stand as personal guarantors for the said facility and executed separate Deeds of Guarantee on the same date as the Loan Agreement. Relying upon the representations of the Respondents, the Appellant sanctioned a loan of Rs. 68,18,000 to the principal borrower no.2 with the principal borrower no.1 as the authorized signatory. The loan was granted vide loan agreement dated 21.12.2012 and the Respondents executed personal Deeds of Guarantee in support thereof. The principal borrowers repeatedly defaulted in payment. Consequently, on 11.07.2015, the Appellant invoked the Clause 32 of the Loan Agreement which contained the arbitration agreement. The arbitral proceedings commenced after some procedural delays and on 18.01.2024, the Respondents filed an application under Section 151, CPC seeking their discharge from arbitral proceedings which was opposed by the Appellant. After considering the pleadings, the arbitrator vide impugned order dated 20.04.2024, allowed the application filed by the Respondents and held that there does not exist a valid arbitration agreement between the Appellant and the Respondents. Aggrieved by the Impugned Order, the Appellant filed the present appeal. Contentions The Counsel for the Appellant argued that the Respondents had executed separate deeds of guarantee on the same date i.e. 21.12.2012 in respect of the Loan Agreement. Since the Deeds of Guarantee were standard form agreements prepared by the Appellant, they expressly incorporate and make reference to the Loan Agreement in a number of clauses. The Counsel submitted that these clauses, read together establish that the Guarantee and Loan Agreement form part of a single composite transaction executed contemporaneously and the remaining clauses of the Deeds of Guarantee are complementary in nature and reinforce this position. The Counsel further submitted that the impugned order misinterprets the law laid down in M.R. Engineers & Contractors Pvt Ltd. (“M.R. Engineers”) whereby the court drew a clear distinction between 'incorporation by reference' and 'incorporation in entirety'. The arbitrator erred in holding that the Deeds of Guarantee contained only reference to the Loan Agreement whereas Clause 4 clearly provides that the Loan Agreement stands incorporated in entirety including the arbitration clause. On the other hand, the Counsel for the Respondents submitted that the Respondents had not signed the Loan-cum-Facility Agreement, which alone contained the arbitration clause. The Deeds of Guarantee executed by them did not contain any specific reference to the arbitration. It was their submission that the Respondents executed separate Deeds of Guarantee to secure the loan availed by the principal borrowers. These Deeds of Guarantee were independent contracts, devoid of any arbitration clause or provision binding the Respondents to the terms of the Loan Agreement. The Counsel for the Respondents further submitted that it was a settled position of law that an arbitration clause contained in one agreement could not be enforced against a non-signatory unless there is a clear and specific incorporation by reference which was absent in the present case. The ratio of M.R. Engineers squarely applied to this case where it was held that an arbitration clause contained in the main contract would not apply to disputes arising under a subcontract unless specifically incorporated. Observations The Court observed that since the fact that the Loan Agreement contained an arbitration clause and that the Respondents had not signed the Loan Agreement were undisputed, the main issue for consideration was whether the arbitration clause in the Loan Agreement could be said to have been incorporated into the Deeds of Guarantee. The Court observed that the distinction between “general reference” to another contract and “incorporation by specific reference” laid down in M.R. Engineers was relevant to the present case. In the said case, the Apex Court had held that a general reference to...

Arbitration Clause In Loan Agreement Becomes Incorporated In Deeds Of Guarantee When Both Form Part Of Single Transaction: Delhi HC

Arpita Pande

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