Guarantor Can Be Bound By Arbitration Clause Despite Not Signing Loan Agreement: Supreme Court

The Supreme Court has held that an arbitration clause in one agreement can also apply to another related agreement, even if the latter does not itself contain an arbitration clause, provided the documents are clearly intended to be part of the same transaction.

A Bench of Justices P S Narasimha and Alok Aradhe, in a judgment dated September 9, 2026, said that in cases involving composite transactions structured through multiple interconnected instruments, an arbitration clause in the principal agreement can bind a non-signatory party where an ancillary agreement executed by that party is an integral and inseparable part of the principal agreement.

Court made the observation while dealing with an appeal filed by the National Skill Development Corporation (NSDC), holding that personal guarantees executed in connection with loan agreements constituted an integral and inseparable part of those agreements and, therefore, bound the non-signatory guarantor to the arbitration clause.

The case background

The case concerned a composite transaction involving several interconnected agreements. The question before the Supreme Court was whether an arbitration clause contained in one agreement could bind a party through another agreement which did not itself contain an arbitration clause but was expressly integrated with the principal agreement.

The appeal before the Supreme Court arose from a January 28, 2026 judgment of the Delhi High Court. The high court had affirmed an October 23, 2024 order of the Sole Arbitrator directing the deletion of respondent nos. 2, 3, 5 and 7 from the arbitral proceedings.

How did the dispute arise?

The NSDC, a not-for-profit company, had extended financial assistance to companies and organisations providing skill training.

Under a proposal to establish Model Training Centres, known as “Pradhan Mantri Kaushal Kendra” (PMKK), in every district of the country, respondent no. 1, Surya Wires Private Limited, and respondent no. 4, Disha Education Society, submitted technical and financial proposals for allotment of clusters/districts for jointly setting up PMKKs.

The NSDC subsequently allotted districts to the two entities for establishing the training centres.

Respondent no. 6, Shanti Finance and Property Development Private Limited, was the co-borrower and provided mortgage security. Respondent nos. 2 and 3 were the Managing Director/Authorised Representative and Director, respectively, of the company. Respondent no. 5 was the Authorised Representative of the society, while respondent no. 7 was the Authorised Representative of the finance company.

In 2016, the parties executed a cluster of contemporaneous agreements, including a Service Level Agreement and a First Loan Agreement for Rs 7,17,63,197.

In 2017, an additional loan of Rs 2,13,83,194 was extended and further agreements were executed, including a second Personal Guarantee by respondent no. 2.

Defaults subsequently occurred in repayment of the amounts due under the Loan Agreements. In 2022, the NSDC initiated arbitral proceedings before the Indian Council of Arbitration.

Why did the Sole Arbitrator exclude the respondents?

On an application filed during the arbitral proceedings, the Sole Arbitrator passed an order on October 23, 2024 directing the deletion of respondent nos. 2, 3, 5 and 7 from the array of parties.

The Sole Arbitrator held that these respondents, being directors and/or authorised representatives of the borrower entities, were not signatories to the Loan Agreements in their individual or personal capacities and could not therefore be retained as parties to the Statement of Claim.

Aggrieved by the order, the NSDC approached the Delhi High Court.

What did the Delhi High Court hold?

On January 28, 2026, the Delhi High Court affirmed the Sole Arbitrator’s order.

The high court noted that the Personal Guarantees admittedly did not contain an arbitration clause of their own. It held that a mere general reference to another document does not automatically incorporate an arbitration clause and that there must be conscious acceptance by the parties to make the arbitration clause part of the secondary contract.

The high court further held that the jurisdiction of an arbitral tribunal cannot be based merely on the proximity of transactions or commercial linkage between different instruments. It must be traceable to an express or validly incorporated arbitration undertaking by the party sought to be bound.

The high court also found that the NSDC had failed to produce material showing that respondent no. 2 was the “alter ego” of the company or had used the corporate form to perpetrate fraud- the high threshold required to bind a non-signatory.

The NSDC then challenged the high court judgment before the Supreme Court.

What did the Supreme Court hold on incorporation of an arbitration clause?

Allowing the appeal, the Supreme Court referred to Section 7(5) of the Arbitration and Conciliation Act, 1996.

The provision states that a reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make the arbitration clause part of the contract.

Court also referred to the Constitution Bench judgment in Cox and Kings Limited, which held that the definition of “parties” under Section 2(1)(h), read with Section 7 of the 1996 Act, includes both signatory and non-signatory parties. The conduct of a non-signatory party can also indicate its consent to be bound by an arbitration agreement, Court noted.

In the present case, the Supreme Court noted that respondent no. 2 had executed the instruments in 2016 and 2017 in two distinct capacities: first, as Managing Director of the company in a representative capacity, and secondly, in his personal capacity as guarantor under the Personal Guarantees.

“A conjoint and harmonious reading of the clauses admits of no doubt that the Personal Guarantees constitute an integral and inseparable part of Loan Agreements... The Personal Guarantees do not, therefore, stand apart from the Loan Agreements, and are woven into their very fabric,” the Bench said.

Court noted that the definition clauses under Article I, Article XII and the Schedules conclusively established 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.

“The intention of the parties to incorporate the Personal Guarantees into the Loan Agreements is, in these circumstances, explicit, rather than a matter of inference,” the Bench held.

Court further said that the fact that respondent no. 2 had not signed the Loan Agreements in his personal capacity was not decisive in the circumstances of the case.

Personal guarantor bound by arbitration clause

The Supreme Court ultimately held that the arbitration clause contained in Clause 11.2 of the Loan Agreements stood incorporated, within the meaning of Section 7(5) of the 1996 Act, into the Personal Guarantees executed by respondent no. 2 in 2016 and 2017.

He was, therefore, bound to submit to arbitration in respect of disputes arising from those agreements.

Allowing the appeal, the Supreme Court quashed and set aside the January 28, 2026 judgment of the Delhi High Court and the October 23, 2024 order of the Sole Arbitrator.

Case Title: National Skill Development Corporation Vs Surya Wires Private Limited & Ors

Bench: Justices P S Narasimha and Alok Aradhe 

Date of Judgment: September 09, 2026