Overview
In this case, the Supreme Court considered whether an arbitration clause in a loan agreement can bind a personal guarantor when the guarantee does not have a separate arbitration clause.
The Court held that it can, where connected agreements show that the personal guarantee forms an important part of the main loan agreement.
While applying Section 7(5) of the Arbitration and Conciliation Act 1996, the Court found that the documents together formed one composite transaction. Therefore, the personal guarantor was bound by the arbitration clause.
Facts of the Case
The Ministry of Skill Development and Entrepreneurship decided to establish Pradhan Mantri Kaushal Kendras across the country as Model Training Centres.
In July 2016, National Skill Development Corporation(NSDC), the appellant herein, issued a Request for Proposal for setting up those centres under the scheme in every district as part of the skill development efforts. NSDC was the implementing agency. Surya Wires Pvt. Ltd. and Disha Education Society were selected to establish the training centres together. Shanti Finance and Property Development Private Limited acted as co-borrower and provided mortgage security.
On 20 December 2016, parties entered into a Service Level Agreement, a Loan Agreement for Rs 7,17,63,197 and several Facility Agreements, including a Personal Guarantee given by respondent no. 2, the Managing Director of Surya Wires, in his individual capacity. A second set of agreements was executed in August 2017 for another loan of ₹2,13,83,194 along with another Personal Guarantee.
After certain defaults, NSDC issued notices to recall the loan and initiated arbitration for recovery. Respondent no. 2 challenged the jurisdiction of the tribunal under Section 16, while arguing that he was not a signatory to the Loan Agreements in his personal capacity.
The Sole Arbitrator accepted this objection, and the decision was upheld by the Delhi High Court. NSDC then approached the Supreme Court.
Legal Issues
- Whether the arbitration clause mentioned in the Loan Agreements was incorporated into the Personal Guarantees under Section 7(5).
- Whether respondent no. 2, despite not signing the Loan Agreements personally, could be bound by the arbitration clause.
Decision
The Supreme Court allowed the appeal and held that respondent no. 2 was bound by the arbitration clause. It noted that Section 7(5) permits incorporation by reference when a contract clearly refers to the document containing the arbitration clause and shows an intention to incorporate it.
The Court found that the Loan Agreements expressly dealt with facility agreements, including the Personal Guarantees, as part of the agreements.
The guarantees were mandatory conditions executed near the Loan Agreements. These factors showed that all the documents formed one composite transaction.
The Court held that the absence of the personal signature of respondent no. 2 on the Loan Agreements was not decisive. Since the Personal Guarantees were integrated in the Loan Agreements, Clause 11.2 also applied to them. The Delhi High Court judgment was, therefore, set aside by the Court along with the order by the arbitrator deleting respondent no. 2 from the proceedings. The appeal was allowed with no order as to costs.
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