Delhi High Court | Arbitration Clause in Loan Agreement Extends to Deeds of Guarantee When Executed as Single Transaction | Section 37(2)(a) Appeal Allowed Under Arbitration and Conciliation Act
Isabella Mariam
The High Court of Delhi Single Bench of Justice Jasmeet Singh has held that when a loan agreement and deeds of guarantee are executed contemporaneously, and the parties’ intent to incorporate the loan agreement into the deeds is clear, guarantors become bound by the arbitration clause in the loan agreement despite being non-signatories. Allowing an appeal under Section 37(2)(a) of the Arbitration and Conciliation Act, 1996, the Court set aside the arbitral tribunal’s order discharging guarantors, ruling that the loan agreement and deeds of guarantee constituted a single composite transaction enforceable through arbitration.
The appellant in the matter is a non-banking financial company incorporated under the provisions of the Companies Act, 1956. The respondents include an individual, who is the proprietor of a concern. The dispute arose from a loan sanctioned by the appellant to certain principal borrowers in December 2012. The respondents executed separate deeds of guarantee in support of the loan. The loan agreement dated 21.12.2012 contained Clause 32, which provided for disputes to be referred to arbitration.
The principal borrowers defaulted on repayment obligations, and the appellant invoked arbitration under Clause 32 on 11.07.2015. An arbitrator was appointed, and the respondents participated in proceedings until the appointed arbitrator recused himself on 10.07.2023. Thereafter, this Court appointed a new sole arbitrator. No objections were raised to the existence of an arbitration agreement at that stage. Subsequently, on 18.01.2024, the respondents filed an application under Section 151 of the Code of Civil Procedure, 1908, seeking their discharge from arbitration proceedings. The respondents argued that they were not bound by the arbitration clause as they were not signatories to the loan agreement. The arbitrator allowed their application on 20.04.2024 and discharged them from proceedings.
The appellant challenged the order by filing the present appeal under Section 37(2)(a) of the Arbitration and Conciliation Act, 1996. The appellant argued that the deeds of guarantee expressly incorporated the terms of the loan agreement and formed an integral part of a composite transaction. According to the appellant, this incorporation extended to the arbitration clause. The appellant placed reliance on several judgments, including Shinhan Bank v. Carol Info Services Ltd., Punjab National Bank Ltd. v. Bikram Cotton Mills & Anr., Inox Wind Ltd. v. Thermocables Ltd., and a decision of the Delhi High Court in RBCL Piletech Infra v. Bholasingh Jaiprakash Construction Ltd. & Ors.
The respondents contended that they had not signed the loan agreement, which contained the arbitration clause, and that the deeds of guarantee contained no arbitration clause or reference to arbitration. They argued that the deeds of guarantee were independent contracts and could not be merged with or treated as part of the loan agreement. Reliance was placed on M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd., NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd., S.N. Prasad, Hitek Industries (Bihar) Ltd. v. Monnet Finance Ltd. & Ors., Vidya Drolia v. Durga Trading Corporation, N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., and STCI Finance Ltd. v. Shreyas Kirti Lal Doshi & Anr.
The arbitrator had relied on M.R. Engineers & Contractors Pvt. Ltd. to hold that no arbitration agreement existed between the appellant and respondents. The arbitrator concluded that since the respondents were not signatories to the loan agreement, they could not be compelled to arbitration. Consequently, the respondents were deleted from the array of parties.
Justice Jasmeet Singh recorded: “The question, therefore, turns on whether the arbitration clause in the Loan Agreement can be said to have been incorporated into the Deeds of Guarantee.”
The Court examined Clauses 2, 3, and 4 of the deeds of guarantee, noting particularly Clause 4, which read: “The Guarantor confirms to have read and understood the terms and conditions governing the LOAN and agrees to be bound by the same. The Guarantor acknowledges and accepts that this Guarantee shall form an integral part of the Agreement.” Justice Singh stated that this clause was significant as it denoted that the guarantee was not intended to operate as an isolated instrument but as an integral part of the loan agreement.
The Court cited Section 7(5) of the Arbitration and Conciliation Act, 1996: “The 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 that arbitration clause part of the contract.” The Court observed that Clause 4 satisfied the statutory test, as it incorporated the loan agreement in entirety, thereby including its arbitration clause.
Referring to M.R. Engineers & Contractors Pvt. Ltd., the Court stated: “There is a difference between reference to another document in a contract and incorporation of another document in a contract, by reference.” Justice Singh held that in the present case, Clause 4 was not a mere general reference but an express incorporation of the loan agreement in entirety.
The Court further relied on Shinhan Bank v. Carol Info Services Ltd. and noted: “The plain consequence of Clause (1) of the amenities agreement is that all the terms of that agreement constitute an integral part of the Leave and Licence agreement… By doing so, the parties have intended to make the arbitration clause in the amenities agreement an integral part of the Leave and Licence agreement.”
The Court distinguished NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd. and S.N. Prasad v. Monnet Finance Ltd. on facts, observing that in those cases the non-signatories had not incorporated the terms of the principal contract, whereas in the present case, Clause 4 of the deeds of guarantee expressly did so.
Justice Singh further recorded that even if Clause 4 was construed as a mere reference, the principle in Inox Wind Ltd. v. Thermocables Ltd. would apply, as the loan agreement and deeds of guarantee were standard form contracts. The Court noted: “In the present case, the Loan Agreement and the Deeds of Guarantee are standard form documents, thereby satisfying this test as well.”
The Court also held that the arbitrator erred in treating the matter as a “two-contract” scenario. Justice Singh observed: “The Loan Agreement and the Deeds of Guarantee, though distinct in form, are part of a single composite transaction executed on the same date and intended to govern the same commercial arrangement.” It was further noted: “The evident commercial intention was to secure the repayment of the loan by binding both the borrower and the guarantors to the same set of obligations, including the dispute resolution mechanism.”
The Court concluded: “On a proper construction, the terms of the Deeds of Guarantee establish incorporation of the Loan Agreement in entirety, thereby binding the respondents to its arbitration clause.”
The judgment recorded: “Hence, the impugned order dated 20.04.2024 passed by the learned arbitrator suffers from patent illegality under Section 37(2)(a) of the Act and is liable to be set aside.”
“For the said reasons, the present appeal filed under Section 37(2)(a) of the Act is allowed and the impugned order dated 20.04.2024 passed by the learned arbitrator in the arbitrator matter, being Case Ref. No. DIAC/6864B/09-23 titled as ‘M/s Intec Capital Ltd. v. M/s Shikhir Plast India Pvt. Ltd. & Others’, is hereby set aside.”
Advocates Representing the Parties
For the Petitioners: Mr. Pranav Goyal, Ms. Pooja Chaudhary, Ms. Mreeganka Goyal, Mr. Vishant Singh, Advocates
For the Respondents: Mr. Mohit Sharma, Advocate
Case Title: Intec Capital Limited v. Shekhar Chand Jain & Another
Neutral Citation: 2025: DHC:7730
Case Number: ARB. A. (COMM.) 25/2024
Bench: Justice Jasmeet Singh
