Binding The Unbound: Non-Signatory Guarantors In Indian Arbitration Law

INTRODUCTION

The arbitration mechanism has been conceptualized as a form of alternative dispute resolution, grounded in the foundational principles of effectiveness, efficiency, and party autonomy. It represents a consensual process wherein parties voluntarily opt to resolve their disputes outside the conventional judicial framework. In line with established jurisprudence, participation in arbitral proceedings is confined to those who are signatories to the arbitration agreement. Consequently, the arbitral award has a binding and enforceable effect only upon such parties, thereby underscoring the consensual and contractual nature of arbitration.

However, there are certain exceptional circumstances in which a non-signatory, such as a guarantor who is not formally a party to the arbitration agreement, may nevertheless be bound by or directed to participate in arbitral proceedings. Such situations typically arise when the guarantor’s obligations are intrinsically connected to the principal commercial transaction governed by the arbitration clause, or where the deed of guarantee expressly or impliedly incorporates the terms of the underlying contract containing the arbitration agreement.

It is a matter of established commercial practice that, alongside the execution of a loan or facility agreement between a borrower and a lender, a deed of guarantee is often executed to secure the lender’s right to repayment of the loan amount together with applicable interest and other dues. In such arrangements, the guarantee is intended to operate as an ancillary or collateral contract to the primary loan agreement, yet disputes frequently arise as to whether the guarantor, who may not have expressly signed or consented to the arbitration clause in the principal contract, can nevertheless be compelled to arbitrate. This issue has given rise to significant judicial debate, with courts being called upon to consider complex questions of law, including:

1.      Whether a deed of guarantee constitutes an independent contract distinct from the principal agreement/loan agreement, or whether it can be deemed to incorporate the arbitration clause contained therein;

2.      Whether a guarantor’s consent to arbitration can be inferred from the language of the guarantee agreement or the surrounding commercial circumstances;

3.      Whether extending the scope of arbitration to a non-signatory guarantor is compatible with the principles of consent and party autonomy that form the cornerstone of arbitration law; and

4.      If yes, what are the principles/circumstances in which the same will be permissible in law?

The author, in this article, seeks to highlight and critically analyze the judicial precedents that have addressed the aforementioned issues concerning the applicability of arbitration agreements to non-signatory guarantors. The discussion will examine the reasoning adopted by the Hon’ble Courts while interpreting such situations and delineating the boundaries of party consent within the framework of arbitration law. Furthermore, the author shall present an independent analysis and perspective on the evolving judicial approach, assessing its consistency with the foundational principles of arbitration, namely consent, party autonomy, and the contractual nature of the arbitral process.

UNDERSTANDING THE JUDICIAL PRECEDENTS LAID DOWN BY THE HON’BLE COURTS OF INDIA AND THEIR APPLICABILITY

The principle laid down by the Hon’ble Supreme Court in Punjab National Bank Ltd. v. Bikram Cotton Mills & Anr.,[1] is of particular relevance in this context. In the said case, the Hon’ble Supreme Court recognized that when multiple agreements are executed contemporaneously as components of a single, composite commercial transaction, such agreements must be construed harmoniously and read together to give full effect to the parties’ mutual intention. The Hon’ble Supreme Court emphasized that the substance of the transaction, rather than the form or the number of documents executed, should determine the interpretation of the parties’ rights and obligations. Accordingly, where the agreements are interdependent and directed toward achieving a common commercial objective, the terms of one document may, by necessary implication, be read into another to ascertain the true intention underlying the transaction as a whole.

The Hon’ble Supreme Court in the case of M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd.,[2] addressed the issue of whether the arbitration clause from the main contract between the principal employer and the contractor was also applicable to the sub-contract between the contractor and the sub-contractor through incorporation by reference. The Hon’ble Supreme Court in this case referred to Section 7(1)[3] and Section 7(5)[4] of the Arbitration and Conciliation Act, 1996 [“Arbitration Act”] which states the following:

7. Arbitration Agreement. —(1) In this Part, arbitration agreement’ means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

……

(5) 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.”

In simpler words, even in the absence of an express arbitration clause within the contract between the parties, the arbitration provision contained in an independent document may be incorporated and rendered operative by virtue of a reference to that document in the contract, provided that such reference is of a nature that clearly manifests the intention to make the arbitration clause an integral part of the contractual terms. Thus, Section 7(5) of the Arbitration Act[5] contemplates a conscious and deliberate acceptance by the parties of an arbitration clause contained in another document, before such a clause can be construed as forming part of their contractual agreement. In the said case, the Hon’ble Supreme Court drew a clear demarcation between “general reference” and “incorporation by specific reference” wherein the following was explained:

(i) A mere general reference to another contract does not result in the incorporation of its arbitration clause into the parties’ agreement. For such incorporation to occur, there must be a specific reference to the arbitration clause itself.

(ii) Where a contract stipulates that its execution or performance shall be governed by the terms of another contract that contains an arbitration clause, only the performance-related provisions of that referred contract will apply. The arbitration clause will not automatically extend to the new contract unless there is a distinct and express reference to it.

(iii) Conversely, when the parties agree that the standard terms and conditions of a trade or professional association will apply to their contract, those terms, including any arbitration provisions, are deemed to be incorporated by reference, especially where the parties acknowledge familiarity with such terms.

(iv) Similarly, if the contract provides that the general conditions of one party will form part of the agreement, the arbitration clause embedded within those general conditions will also be treated as applicable and binding upon the parties.

Accordingly, as per the principles laid down and based on the facts and circumstances stated in the above-mentioned case, the Hon’ble Supreme Court stated the following:

“33. An arbitration clause though an integral part of the contract, is an agreement within an agreement. It is a collateral term of a contract, independent of and distinct from its substantive terms. It is not a term relating to “carrying out” of the contract. In the absence of a clear or specific indication that the main contract in entirety including the arbitration agreement was intended to be made applicable to the sub-contract between the parties, and as the wording of the sub-contract discloses only an intention to incorporate by reference the terms of the main contract relating to execution of the work as contrasted from the dispute resolution, we are of the view that the arbitration clause in the main contract did not form part of the sub-contract between the parties.”

The Hon’ble Supreme Court in S. N. Prasad v. Monnet Finance Ltd.[6] examined the question of whether a guarantor, who is not a party to the loan agreement containing an arbitration clause executed between the lender and the borrower, can be compelled to participate in arbitration proceedings. In the said case, the appellant became a guarantor for the loan amount sanctioned by Monnet Finance Ltd. to the guarantor’s company, in which he was a director and managing director, via a letter dated 27.10.1995. On 28.10.1995, Monnet Finance signed and sanctioned the loan to the guarantor’s company. The loan amount subsequently became the subject matter of a dispute that was referred to arbitration. During the arbitral proceedings, the arbitrator impleaded the appellant as a party and ultimately passed two awards directing the appellant to make payment. The Appellant unsuccessfully challenged the same before the Hon’ble Delhi High Court and approached the Hon’ble Supreme Court. The Hon’ble Supreme Court, while adjudicating on the same, stated the following:

“8. Thus there can be reference to arbitration only if there is an arbitration agreement between the parties. The Act makes it clear that an arbitrator can be appointed under the Act at the instance of a party to an arbitration agreement only in respect of disputes with another party to the arbitration agreement. If there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also non-parties to the arbitration agreement, reference to arbitration or appointment of arbitrator can be only with respect to the parties to the arbitration agreement and not the non-parties.

10. An arbitration agreement between the lender on the one hand and the borrower and one of the guarantors on the other, cannot be deemed or construed to be an arbitration agreement in respect of another guarantor who was not a party to the arbitration agreement. Therefore, there was no arbitration agreement as defined under Sections 7(4)(a) or (b) of the Act, insofar as the appellant was concerned, though there was an arbitration agreement as defined under Section 7(4)(a) of the Act in regard to the second and third respondents. As the letter dated 27-10-1995 does not refer to any document containing an arbitration clause, there is also no arbitration agreement between the first respondent and the appellant as contemplated under Section 7(5) of the Act.

15. Except the aforesaid averment, there is absolutely no reference to any agreement between the first respondent and the appellant or the existence of any arbitration agreement between them. Therefore, the application filed by the first respondent under Section 11 of the Act referring to the loan agreement with Respondents 2 and 3 containing the arbitration agreement cannot be considered or construed to be an allegation of existence of an arbitration agreement between the first respondent and the appellant. If there was no reference to the existence of any arbitration agreement with the appellant, the question of the appellant accepting such arbitration agreement by “non-denial” does not arise.

25. As there was no arbitration agreement between the parties (the first respondent and the appellant), the impleading of the appellant as a respondent in the arbitration proceedings and the award against the appellant in such arbitration cannot be sustained. As a consequence, both the arbitration awards, as against the appellant are liable to be set aside. If the first respondent wants to enforce the alleged guarantee of the appellant, it is open to the first respondent to do so in accordance with law.”

Accordingly, the Hon’ble Supreme Court categorically ruled that a non-signatory, i.e., the guarantor in the above–mentioned case, cannot be bound by the arbitration agreement stated in the loan agreement. The Hon’ble Supreme Court held that mere reference/mention of an arbitration agreement in a document/letter cannot be a ground to implicate a guarantor in an arbitration proceeding, like the observations passed in the case of M.R.Engineers.[7]

The Hon’ble Supreme Court had the opportunity to revisit the concept of reference and incorporation of arbitration clauses to another contract in the case of Inox Wind Ltd. v. Thermocables Ltd..[8] In the said case, Inox Wind issued several purchase orders to Thermocables for the supply of thermocables to be used in its wind-energy projects, with each purchase order expressly stating that the supply would be governed by the terms of the order as well as Inox Wind’s Standard Terms and Conditions, which incorporated an arbitration clause. Thermocables accepted the purchase orders without objection and completed the supplies. Disputes subsequently arose regarding payments and performance, following which Inox Wind invoked the arbitration mechanism and filed an application under Section 11(6) of the Arbitration Act,[9] seeking the appointment of an arbitrator. The Hon’ble Allahabad High Court dismissed the application, holding that although the purchase orders referred generally to the Standard Terms and Conditions, they did not specifically incorporate the arbitration clause, and therefore a valid arbitration agreement had not been demonstrated. The dispute then came before the Hon’ble Supreme Court for the determination of whether such a general reference was adequate to incorporate an arbitration clause contained in a related set of terms forming part of the same contractual arrangement. The Hon’ble Supreme Court affirmed the principles articulated in M.R. Engineers[10] concerning the incorporation of an arbitration clause through general reference, while introducing a nuanced refinement to those principles in the context of a single contractual framework which are highlighted below:

“18. We are of the opinion that though general reference to an earlier contract is not sufficient for incorporation of an arbitration clause in the later contract, a general reference to a standard form would be enough for incorporation of the arbitration clause. In M.R. Engineers [M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696: (2009) 3 SCC (Civ) 271] this Court restricted the exceptions to standard form of contract of trade associations and professional institutions. In view of the development of law after the judgment in M.R. Engineers [M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696: (2009) 3 SCC (Civ) 271] case, we are of the opinion that a general reference to a consensual standard form is sufficient for incorporation of an arbitration clause. In other words, general reference to a standard form of contract of one party will be enough for incorporation of arbitration clause. A perusal of the passage from Russell on Arbitration, 24th Edn. (2015) would demonstrate the change in position of law pertaining to incorporation when read in conjunction with the earlier edition relied upon by this Court in M.R. Engineers case [M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696: (2009) 3 SCC (Civ) 271] . We are in agreement with the judgment in M.R. Engineers case [M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696 : (2009) 3 SCC (Civ) 271] with a modification that a general reference to a standard form of contract of one party along with those of trade associations and professional bodies will be sufficient to incorporate the arbitration clause.

19. In the present case, the purchase order was issued by the appellant in which it was categorically mentioned that the supply would be as per the terms mentioned therein and in the attached standard terms and conditions. The respondent by his letter dated 15-12-2012 confirmed its acceptance of the terms and conditions mentioned in the purchase order except delivery period. The dispute arose after the delivery of the goods. No doubt, there is nothing forthcoming from the pleadings or the submissions made by the parties that the standard form attached to the purchase order is of a trade association or a professional body. However, the respondent was aware of the standard terms and conditions which were attached to the purchase order. The purchase order is a single contract and general reference to the standard form even if it is not by a trade association or a professional body is sufficient for incorporation of the arbitration clause.”

In the case of STCI Finance Ltd. v. Shreyas Kirti Lal Doshi,[11] STCI Finance Ltd., i.e., the lender, extended two loan facilities to Shrenuj Investments & Finance Pvt. Ltd., i.e., the borrower, secured by pledge of shares and after execution of personal guarantees executed by the defendants, Shreyas Kirti Lal Doshi and Vishal Shreyas Doshi (“guarantors”). The borrower subsequently defaulted, leading STCI to invoke the security, issue demand notices, and seek recovery of the outstanding dues. Since the loan facility agreements contained an arbitration clause, STCI invoked arbitration for recovery against the borrower and the guarantors. STCI also filed a commercial suit before the Hon’ble Delhi High Court for recovery of the outstanding amount from the borrower and the guarantors. The Defendants, i.e., the guarantors, then applied under Section 8 of the Arbitration Act,[12] asserting that the dispute ought to be referred/remanded to arbitration as the issues of recovery of amounts from the Defendants are correlated and are in connection with the arbitration proceedings already initiated against the borrower. Accordingly, the Hon’ble Delhi High Court made the following observations while referring to clauses in the agreements:

“20. No where clause 1.15 refers to the Deed of Guarantee as a facility document. In any case, mere reference of Deed of Guarantee in the schedule to the Facility Agreement-II does not entail that the Deed of Guarantee having been separately executed shall form part of Facility Agreement-II. No doubt, the Deeds of Guarantee were to secure the loans availed by the Borrower Company of which the applicants/defendants may be the Directors, but the intention of the parties behind the execution of Deeds of Guarantee was that the applicants/defendants in their personal capacity shall guarantee the loan facilities as given by the plaintiff Company to the Borrower Company. So, it necessarily follows that merely because the Facility Agreement-II encompasses an arbitration Clause, the same shall not also be applicable between the parties to the Deeds of Guarantee. The relationship between the parties shall be regulated strictly in accordance with the terms of Deeds of Guarantee and not in terms of Facility Agreement-II. This position can be seen from the judgment of the Supreme Court in the case of M.R. Engineers (Supra), wherein the issue involved was whether in accordance with Section 7(5) of the Act, an arbitration Clause contained in the main contract would stand incorporated by reference in sub-contract, where the sub-contract provided that “it shall be carried out on the terms and conditions as applicable to the main contract.” It was held by the Supreme Court that the wording of Section 7(5) of the Act makes it clear that mere reference to a document would not have the effect of making arbitration Clause from the document, a part of the contract and that a reference to the document in the contract should be such that it shows the intention to incorporate the arbitration clause contained in the document into the contract. Since, there is nothing in the Deeds of Guarantee to show the intention of the parties, was to incorporate the arbitration Clause as contained in the Facility Agreement-II, it cannot be said that there is an arbitration agreement in the Deeds of Guarantee.”

Accordingly, the Hon’ble Delhi High Court dismissed the application filed by the guarantors under Section 8 of the Arbitration Act[13] and held that the commercial suit instituted by STCI for recovery of the loan amount was maintainable.

In the case of Aditya Birla Finance Ltd. v. Siti Networks Ltd.,[14] Aditya Birla Finance Limited (“ABFL”) extended a term loan to SITI Networks Limited (“SITI”) by way of a Credit Arrangement Letter and a Facility Agreement. Zee Entertainment Enterprises Ltd. (“Zee”) and Essel Corporate LLP (“Essel”), entities belonging to the same corporate group as SITI, issued letters of comfort assuring ABFL that SITI would repay the loan. A default by SITI followed and ABFL invoked arbitration against SITI and also sought to include Zee and Essel in the proceedings, relying on the “group of companies” doctrine on the basis that Zee and Essel were part of the same economic group and had participated in the transaction. The guarantor-entities contested inclusion on the ground that they had not executed the arbitration agreement. The Hon’ble Delhi High Court in the said case ruled that Zee, Essel and SITI belonged to the same economic group, i.e., the Essel Group, and displayed inter-corporate relationships in the borrowing transaction and negotiations, for example, Zee and Essel’s participation in interest-rate discussions and issuance of letters of comfort. Even though the court ruled that the letters of comfort did not amount to guarantees under Section 126 of the Indian Contract Act, 1872, however the letters of comfort were nonetheless “promissory in nature” and evidentiary of a legal relationship intent arising from a commercial transaction. Accordingly, the Hon’ble Delhi High Court held that Zee and Essel could be made parties to the arbitration, because the nature of the transaction was composite, and the non-signatories had manifested sufficient connection to the contract containing the arbitration clause, thereby satisfying the conditions for applying the group of companies’ doctrine.

Subsequently, the Hon’ble Supreme Court in the case of Shinhan Bank v. Carol Info Services Ltd.,[15] Shinhan Bank entered into a Leave and License Agreement with Carol Info Services Ltd. for commercial premises at Bandra Kurla Complex, Mumbai, followed by a contemporaneous Amenities Agreement executed on the same dates for both the initial term in 2011 and the renewed term in 2016. After issuing a termination notice and seeking a refund of its security deposits upon expiry of the lock-in period, Shinhan Bank invoked arbitration to resolve the dispute regarding the refund and alleged outstanding dues. Carol Info Services resisted the invocation on the ground that the Leave and License Agreement did not contain an arbitration clause, even though the Amenities Agreement did. The bank relied upon the contractual stipulation that the Amenities Agreement formed an integral part of the Leave and License Agreement and that disputes were to be referred to arbitration. After taking into consideration the relevant clauses of the Leave and License Agreement and Amenities Agreement, the Hon’ble Supreme Court stated the following:

“11. The amenities agreement which was entered into between the parties on 25-8-2016, inter alia, contains the following provision:

“This Agreement is executed contemporaneously with the said Leave and Licence Agreement and shall be read and construed accordingly. The provision of this Agreement shall be deemed to be and shall constitute an integral part of the said Leave and Licence Agreement in respect of the Licence of the Licensed Premise granted by the Licensors to the Licensee. All provisions of the said Leave and Licence Agreement shall, mutatis mutandis; apply to this amenities agreement”

12. The amenities agreement contains a provision to resolve disputes through arbitration. Clause 17 is in the following terms:

“17. All disputes, controversies or claims arising out of or relating to this Agreement: including existence or interpretation of any clause hereof, shall be referred to arbitration by a sole arbitrator duly appointed by mutual consent of both the parties in writing, failing which under the provisions of the Arbitration and Conciliation Act, 1966. The cost of the arbitration shall be borne equally. The place of arbitration shall be Mumbai and the arbitration shall be governed by the Arbitration and Conciliation Act, 1966 as amended from time to time. The language of the arbitration proceedings shall be English. The award shall be final and conclusive. The Courts in Mumbai shall have exclusive jurisdiction to try and entertain matters arising herefrom.”

15. 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. The amenities agreement does not merely contain a reference to the Leave and Licence agreement. It incorporates all the terms of the amenities agreement as 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.

16. Section 7(5) of the Arbitration and Conciliation Act, 1996 stipulates that 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. Clause (1) of the amenities agreement is intended to make the arbitration clause which is embodied in the amenities agreement (Clause 17) an integral part of the Leave and Licence agreement.

19. The arbitration agreement which is embodied in Clause 17 of the amenities agreement was intended by the parties for all intents and purposes to be a part of the Leave and Licence agreement.”

Accordingly, the Hon’ble Supreme Court, while relying on the principles laid down in the case of M.R.Engineers,[16] directed the parties to resolve the disputes via arbitration and appointed the Ld. Arbitrator.

In the meantime, a five–judge bench of the Hon’ble Supreme Court dealt with the important issue of the group of companies doctrine in the case of Cox and Kings Ltd v SAP India Pvt Ltd.[17] After hearing the submissions of the parties, the Hon’ble Supreme Court upheld the ‘group of companies’ doctrine and made the following observations pertaining to the same:

“121. Evaluating the involvement of the non-signatory party in the negotiation, performance, or termination of a contract is an important factor for a number of reasons. First, by being actively involved in the performance of a contract, a non-signatory may create an appearance that it is a veritable party to the contract containing the arbitration agreement; second, the conduct of the non-signatory may be in harmony with the conduct of the other members of the group, leading the other party to legitimately believe that the non-signatory was a veritable party to the contract; and third, the other party has legitimate reasons to rely on the appearance created by the non-signatory party so as to bind it to the arbitration agreement.

164. In case of joinder of non-signatory parties to an arbitration agreement, the following two scenarios will prominently emerge: first, where a signatory party to an arbitration agreement seeks joinder of a non-signatory party to the arbitration agreement; and second, where a non-signatory party itself seeks invocation of an arbitration agreement. In both the scenarios, the referral court will be required to prima facie rule on the existence of the arbitration agreement and whether the non-signatory is a veritable party to the arbitration agreement. In view of the complexity of such a determination, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory party is indeed a party to the arbitration agreement on the basis of the factual evidence and application of legal doctrine. The tribunal can delve into the factual, circumstantial, and legal aspects of the matter to decide whether its jurisdiction extends to the non-signatory party. In the process, the tribunal should comply with the requirements of principles of natural justice such as giving opportunity to the non-signatory to raise objections with regard to the jurisdiction of the arbitral tribunal. This interpretation also gives true effect to the doctrine of competence-competence by leaving the issue of determination of true parties to an arbitration agreement to be decided by arbitral tribunal under Section 16.

165. In view of the discussion above, we arrive at the following conclusions:

a. The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties;

b. Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement;

c. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties;

d. Under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement;

e. The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the nonsignatory party to the arbitration agreement;

f. The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine;

g. The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act;

h. To apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises (supra). Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine;

i. The persons “claiming through or under” can only assert a right in a derivative capacity;

j. The approach of this Court in Chloro Controls (supra) to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law;

k. The group of companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements;

l. At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and

m. In the course of this judgment, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.”

In the case of Moneywise Financial Services (P) Ltd. v. Dilip Jain & Ors.,[18] Moneywise Financial Services Pvt. Ltd. (“Moneywise”), a non-banking financial company, advanced a loan to one M/s Primex Infrastructure Pvt. Ltd., of which Dilip Jain and another individual were directors and personal guarantors. The loan was granted under a facility agreement that contained an arbitration clause. Upon default in repayment, Moneywise issued a loan recall notice and invoked the arbitration clause against the borrower and guarantors, seeking appointment of a sole arbitrator. The respondent Dilip Jain resisted the reference, contending that he was not a party to the loan agreement in his individual capacity and had executed only a deed of guarantee, which did not contain any arbitration clause. Moneywise argued that the guarantee was intrinsically linked to the principal loan agreement and that the arbitration clause should also extend to the guarantor. Thus, the parties approached the Hon’ble Delhi High Court to determine whether a guarantor, who signed only a separate guarantee deed lacking an arbitration clause, could nevertheless be compelled to arbitrate under the clause contained in the principal loan agreement executed between the lender and the borrower. The Hon’ble Delhi High Court, while relying on the findings in the case of Cox & Kings[19] observed the following:

“15. A perusal of the above judgment reflects that the Court in Section 11 jurisdiction is only required to see the existence of the arbitration clause and the issue of non-signatory party shall be left open for the arbitral tribunal to decide.

17. Prima facie, I am of the view that the respondent Nos. 3 to 5 are a veritable party to the Loan Agreement as they are connected with the loan documents and form part of the loan transaction as in one way or the other, they have assured the petitioner regarding the execution of the loan documents and provided a security to the petitioner towards the loan transaction.

18. Further, the fact that whether the respondent Nos. 3 to 5 can be bound by the Loan Agreement and can be impleaded as parties to the arbitral proceedings is left open for the to Arbitral Tribunal decide. Also, the Arbitral Tribunal will also decide whether M/s SMC Global Securities Limited is a proper and necessary party to the arbitral proceedings.”

It is interesting to note that in the above–mentioned case, the Hon’ble High Court has not referred to the principle of mere reference or incorporation of reference as laid down in the case of M.R.Engineers[20] or Inox Wind[21] to decide whether the guarantors can be considered as veritable parties to the loan agreement and refused to adjudicate on the same while exercising its limited powers as provided under Section 11 of the Arbitration Act and left the issue pertaining to impleadment of parties to the arbitral tribunal.

Thereafter, in the case of NBCC (India) Limited v. Zillion Infraprojects Private Limited,[22] the dispute arose between the parties from a tender issued by Damodar Valley Corporation (“DVC”) for the construction of a weir and related structures at the Chandrapura Thermal Power Station in Jharkhand, pursuant to which NBCC, acting as an intermediary executing agency, awarded the contract to Zillion through a Letter of Intent (“LOI”) dated 4 December 2006. The tender documents issued by DVC contained detailed contractual conditions, including an arbitration clause governing dispute resolution, and the LOI issued by NBCC expressly incorporated all terms and conditions of the DVC tender mutatis mutandis, except where specifically modified. However, the LOI also included a standalone dispute resolution clause stating that any disputes between NBCC and Zillion would be subject only to the jurisdiction of the Delhi civil courts. When disputes later arose regarding performance, Zillion invoked arbitration based on the arbitration clause incorporated from the DVC tender and, after NBCC failed to cooperate in the appointment process, initiated proceedings under Section 11 before the Hon’ble Delhi High Court, which appointed a sole arbitrator. NBCC challenged this appointment before the Supreme Court, contending that the jurisdiction clause in the LOI indicated that arbitration was not the agreed mechanism between the parties. The Hon’ble Supreme Court, while referring to the principles laid down in the case of M.R.Engineers[23] and Inox Wind[24] made a distinction between a ‘single contract’ and ‘two way’ contract’ expounded on the same:

“22. No doubt that this Court in Inox Wind Ltd. v. Thermocables Ltd. [Inox Wind Ltd. v. Thermocables Ltd., (2018) 2 SCC 519: (2018) 2 SCC (Civ) 195] has distinguished the law laid down in M.R. Engineers & Contractors [M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 696:96 : (2009) 3 SCC (Civ) 271] . In the said case (i.e. Inox Wind [Inox Wind Ltd. v. Thermocables Ltd., (2018) 2 SCC 519 : (2018) 2 SCC (Civ) 195] ), this Court has held that though general reference to an earlier contract is not sufficient for incorporation of an arbitration clause in the later contract, a general reference to a standard form would be enough for incorporation of the arbitration clause. Though this Court in Inox Wind [Inox Wind Ltd. v. Thermocables Ltd., (2018) 2 SCC 519: (2018) 2 SCC (Civ) 195] agrees with the judgment in M.R. Engineers & Contractors [M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696 : (2009) 3 SCC (Civ) 271] , it holds that general reference to a standard form of contract of one party along with those of trade associations and professional bodies will be sufficient to incorporate the arbitration clause. In the said case (i.e. Inox Wind [Inox Wind Ltd. v. Thermocables Ltd., (2018) 2 SCC 519 : (2018) 2 SCC (Civ) 195] ), this Court found that the purchase order was issued by the appellant therein in which it was categorically mentioned that the supply would be as per the terms mentioned therein and in the attached standard terms and conditions. The respondent therein by his letter had confirmed its acceptance. This Court found that the case before it was a case of a single contract and not two-contract case and, therefore, held that the arbitration clause as mentioned in the terms and conditions would be applicable.

23. The present case is a “two-contract” case and not a “single-contract” case.

24. It will be relevant to refer to Clause 3.34 of the Additional Terms & Conditions of Contract as contained in the tender issued by DVC to NBCC. Clause 3.34 reads thus:

“3.34. settlement of disputes & arbitration

Any dispute(s) or difference(s) arising out of or in connection with the contract shall to the extent possible be settled amicably between the owner and supplier/contractor.

In the event of any dispute or difference whatsoever arising under the contract or in connection therewith including any question relating to existence meaning and interpretation of the contract or any alleged breach thereof the same shall be referred to the sole arbitration of the Secretary, CEO of Damodar Valley Corporation, Kolkata-54 or to a person appointed by him for that purpose. The arbitration shall be conducted in accordance with the provisions of arbitration and conciliation law 1996 and the decision/judgment of arbitrator shall be final and binding on both the parties.

All suits arising out of this enquiry and subsequent purchase order, if any, are subject jurisdiction of court in the City of Kolkata only and no other door when resolution/settlement through mutual discussion and arbitration fails.”

25. No doubt that Clause 3.34 provides for a reference of the dispute to the sole arbitration of the Secretary, CEO of Damodar Valley Corporation, Kolkata-54 or to a person appointed by him for that purpose.

26. It will also be apposite to refer to Clauses 1.0, 2.0, 7.0 and 10.0 of the LoI, which read thus:

“1.0. The work shall be executed you on contractual, financial and technical conditions of contract as contained in the following documents which shall be applicable and binding on you for execution of works and shall form part of agreement with you as also mentioned in the abovementioned NIT-01/WEIR/06 dated 3-11-2006.

(a) Notice Inviting Tender

(b) General Conditions of Contract

(c) Special Conditions of Contract

(d) Bill of Quantity

2.0. All terms and conditions as contained in the tender issued by DVC to NBCC shall apply mutatis mutandis except where these have been expressly modified by NBCC.

***

7.0. The redressal of dispute between NBCC and you shall only be through civil courts having jurisdiction of Delhi alone. The laws applicable to this contract shall be the laws enforceable in India.

***

10.0. This letter of intent shall also form a part of the agreement.”

27. In view of Clause 1.0, the documents stated therein shall also form part of the agreement. In view of Clause 2.0, all terms and conditions as contained in the tender issued by DVC to NBCC shall apply mutatis mutandis except where these have been expressly modified by NBCC. Clause 7.0 specifically provides that the redressal of dispute between NBCC and the respondent shall only be through civil courts having jurisdiction of Delhi alone. Clause 10.0 further provides that the LoI shall also form a part of the agreement.

28. It is thus clear that the intention between the parties is very clear. Clause 7.0 of the LoI which also forms part of the agreement specifically provides that the redressal of the dispute between NBCC and the respondent shall only be through civil courts having jurisdiction of Delhi alone. It is pertinent to note that Clause 7.0 of the LoI specifically uses the word “only” before the words “be through civil courts having jurisdiction of Delhi alone”.

29. As already discussed hereinabove, when there is a reference in the second contract to the terms and conditions of the first contract, the arbitration clause would not ipso facto be applicable to the second contract unless there is a specific mention/reference thereto.

30. We are of the considered view that the present case is not a case of “incorporation” but a case of “reference”. As such, a general reference would not have the effect of incorporating the arbitration clause. In any case, Clause 7.0 of the LoI, which is also a part of the agreement, makes it amply clear that the redressal of the dispute between NBCC and the respondent has to be only through civil courts having jurisdiction of Delhi alone.

The Hon’ble Supreme Court clarified that where parties operate under a two-contract structure, with one contract referencing terms from another contract involving different parties, any arbitration clause contained in the referenced document will bind the parties only if specifically and consciously incorporated. Mere general incorporation of “all terms and conditions” is inadequate. The Court further held that an express dispute resolution clause excluding arbitration, such as an exclusive jurisdiction clause in favor of civil courts, will override any implied incorporation of arbitral terms.

Recently, the Hon’ble Delhi High Court dealt with the case of Intec Capital Ltd. v. Shekhar Chand Jain[25] with a similar set of facts and issues as in the case of Moneywise Financial.[26] In the case of Intec Capital Ltd.,[27] the appellant granted a loan to certain borrowers pursuant to a Loan Agreement, which contained an arbitration clause. On the same day, the respondents, including Shekhar Chand Jain, executed separate Deeds of Guarantee in favor of Intec Capital in respect of the loan facility. The borrowers defaulted in repayment, whereupon the lender invoked the arbitration clause in the Loan Agreement. The guarantors, however, contended that they were not parties to the Loan Agreement and the Deeds of Guarantee did not themselves contain an arbitration clause; accordingly, they challenged their inclusion in the arbitral proceedings. The key factual issue was whether the arbitration clause in the Loan Agreement could be deemed incorporated by reference into the Deeds of Guarantee, thereby binding the guarantors. The Hon’ble Delhi High Court referred to findings in the case of M.R. Engineers,[28] Shinhan Bank,[29]NBCC[30] and S.N.Prasad[31] and observed the following:

“46. Applying this principle to the present case, it is seen that Clause 4 of the Deeds of Guarantee is not a mere general reference but expressly acknowledges that the Guarantor has read and understood the Loan Agreement, agrees to be bound by its terms and accepts the Guarantee to be an “integral part” of the Loan Agreement. The use of the phrase “integral part” is significant, as it denotes that the Guarantee is not intended to operate as an isolated instrument, but in conjunction with and subject to the terms of the Loan Agreement.

47. Thus, this satisfies the test of incorporation of the Loan Agreement in entirety.

53. On perusal, in NBCC (India) Ltd. (supra) and S.N. Prasad (supra), the nonsignatories were not shown to have expressly incorporated the terms of the principal contract. By contrast, in the present case, Clause 4 of the Deeds of Guarantee goes beyond a general reference and reflects express incorporation, thereby attracting the arbitration clause.

54. Even assuming that Clause 4 of the Deeds of Guarantee amounts only to a reference to the Loan Agreement, the present case would still fall within the exception recognized in Inox Wind Ltd. (supra), wherein the Hon'ble Supreme Court held that in the context of standard form contracts, even a general reference is sufficient to incorporate the arbitration clause. In the present case, the Loan Agreement and the Deeds of Guarantee are standard form documents, thereby satisfying this test as well.

56. I am of the considered view that this finding of the learned arbitrator is erroneous, as the Hon'ble Supreme Court clarified in paragraph 16 of Inox Wind Ltd. (supra), the principle applicable to “single contract” cases has been extended even to situations where separate contracts exist, provided they are part of a single commercial relationship.

57. In light of this exposition, 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. 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 principle that contemporaneous documents forming part of a single transaction must be read together, as enunciated in Punjab National Bank Ltd. (supra), also fortifies the case of the appellant. Therefore, the present case squarely falls within the “single contract” scenario envisaged in Inox Wind Ltd. (supra) and the arbitration clause contained in the Loan Agreement stands duly incorporated into the Deeds of Guarantee.

It can be said that even though the case of Intec Capital[32] does not create a new legal doctrine, but refines existing jurisprudence by bringing an intent-centric, contract-specific, and consent-protective lens to the incorporation of reference debate. Further, the said judgment can be said to have bridged the reasoning from S.N.Prasad,[33] Moneywise Financial Services,[34] and NBCC[35] into a coherent and practical framework, thus marking a progressive development in the intersection of arbitration law and financial contracts.

ANALYSIS AND CONCLUSION

The purpose and objective of a referral court under Sections 8[36] and 11[37] of the Arbitration and Conciliation Act, 1996, is limited to a prima facie determination of whether an arbitration agreement exists between the parties for the resolution of their disputes. The author notes that the powers conferred under these provisions were never intended to extend to questions concerning the impleadment or non-impleadment of parties at the stage of reference to arbitration or appointment of an arbitrator. Reliance is placed on the observations of the Hon’ble Supreme Court in SBI General Insurance Co. Ltd. v. Krish Spinning & Weaving Mills Pvt. Ltd.[38], wherein it was held that if a referral court were to examine issues such as “accord and satisfaction” while appointing an arbitrator, it would encroach upon the arbitral tribunal’s jurisdiction and undermine the principle of arbitral autonomy. The author also strongly relies on the case of Cox & Kings,[39] wherein the Hon’ble Supreme Court clearly stated that when the question of joining a non-signatory arises, whether initiated by a signatory or the non-signatory itself, the referral court’s role is limited to a prima facie assessment of the arbitration agreement’s existence. The detailed determination of whether the non-signatory is bound by or entitled to invoke the arbitration clause should be left to the arbitral tribunal under the doctrine of kompetenz-kompetenz, ensuring observance of natural justice. Therefore, the author states that the decision with respect to the impleadment of non-signatories, i.e., the guarantors, should be left to the wisdom of the arbitral tribunal.

With reference to the judicial principles evolved through precedents, it can be observed that prior to the exception carved out in Inox Wind Ltd.,[40] a mere reference to the arbitration clause contained in a loan agreement within a supporting guarantee agreement could not have been regarded as a valid incorporation of the arbitration clause by reference, in line with the ratio of M.R. Engineers.[41] However, Inox Wind[42] introduced a significant exception by holding that in the context of standard form of contracts, even a general reference may suffice to incorporate the arbitration clause. The Court further extended the principle applicable to “single contract” cases to scenarios involving multiple but interrelated contracts forming a single commercial relationship. Subsequently, the Hon’ble Delhi High Court in the case of Intec[43] reaffirmed this position, holding that a loan agreement and its supporting deeds of guarantee constitute parts of a single commercial transaction and thus fall within the exception applicable to standard form of contracts.

However, the author further feels that the principle of ‘incorporation by reference’ conflicts with the observations passed in the Cox & Kings[44] judgement. The Hon’ble Supreme Court in Cox & Kings[45] judgment while affirming the validity of ‘group of companies’ doctrine stated that when Section 2 (1) (h)[46] is read in conjunction with Section 7[47] of the Arbitration Act, it does not explicitly mandate that a “party” to an arbitration agreement must necessarily be a signatory to the agreement or to the underlying contract containing the arbitration clause. The Hon’ble Supreme Court has interpreted the legislative intent of Section 7 of the Arbitration Act to mean that arbitration is not confined solely to relationships arising from formal contracts. Rather, any legal relationship, whether contractual or otherwise, that emerges from the conduct, actions, or interactions between persons or entities may constitute a valid subject matter of an arbitration agreement. Further, while applying the ‘group of companies’ doctrine, it is necessary that cumulative factors such as the relationship between the signatory and non-signatory, mutual intent of the parties, nature of the transaction, and commonality of the subject matter which ought to be considered before binding a non-signatory to an arbitration proceeding.[48] 

The author observes that, in most cases, guarantors under loan or facility agreements are directors of the borrower company, who play a pivotal role as decision-makers and negotiators in the process of raising debt. Given that both the guarantors and the borrower share a common commercial objective, i.e., to secure financing and ensure repayment in accordance with the terms of the loan agreement and the supporting deeds of guarantee, their interests are intrinsically aligned. Accordingly, the author contends that, given the transactional structure of loan agreements with related guarantee deeds and in light of the observations in Cox & Kings Ltd.,[49] the ‘doctrine of incorporation’ by reference should not be required for the imposition of arbitration on guarantors in such circumstances.

The author contends that Indian courts have not comprehensively considered the full spectrum of judicial precedents while addressing the issue of impleadment of guarantors in arbitration proceedings, particularly in the post-Cox & Kings[50] era. The author endorses the approach adopted by the Hon’ble Delhi High Court in Moneywise[51], wherein the question of impleadment of guarantors was appropriately left open for determination by the arbitral tribunal. Consequently, the author submits that, in line with established jurisprudence and the principle of arbitral autonomy, courts at the referral or preliminary stage ought not to adjudicate upon the impleadment of guarantors but should defer such determinations to the arbitral tribunal under Section 16 of the Arbitration Act.[52] Accordingly, the author concludes that, in terms of Section 128 of the Indian Contract Act, 1872,[53] as the liability of a guarantor is co-extensive with that of the borrower, in light of this principle, guarantors ought to be regarded as proper and necessary parties to arbitration proceedings arising out of disputes between the borrower and the lender.

Footnotes

[1] Punjab National Bank Ltd. v. Shri Vikram Cotton Mills, (1970) 1 SCC 60; Paras 10 to 13.

[2] M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696

[3] The Arbitration and Conciliation Act 1996, 7 (1).

[4] The Arbitration and Conciliation Act 1996, 7 (5).

[5] Ibid.

[6] S.N. Prasad v. Monnet Finance Ltd., (2011) 1 SCC 320.

[7] Supra Note 2.

[8] Inox Wind Ltd. v. Thermocables Ltd., (2018) 2 SCC 519

[9] The Arbitration and Conciliation Act 1996, 11 (6).

[10] Supra Note 2.

[11] STCI Finance Ltd. v. Shreyas Kirti Lal Doshi, 2020 SCC OnLine Del 100

[12] The Arbitration and Conciliation Act 1996, s.8.

[13] Ibid.

[14] Aditya Birla Finance Ltd. v. Siti Networks Ltd., 2023 SCC OnLine Del 1290

[15] Shinhan Bank v. Carol Info Services Ltd., (2023) 20 SCC 388.

[16] Supra Note 2.

[17] Cox and Kings Ltd v SAP India Pvt Ltd, 2023 INSC 1051.

[18] Moneywise Financial Services (P) Ltd. v. Dilip Jain, 2024 SCC OnLine Del 1896.

[19] Supra Note 17.

[20] Supra Note 2.

[21] Supra Note 8.

[22] NBCC (India) Limited v. Zillion Infraprojects Private Limited, 2024 SCC OnLine SC 323.

[23] Supra Note 2.

[24] Supra Note 8.

[25] Intec Capital Ltd. v. Shekhar Chand Jain, 2025 SCC OnLine Del 5787.

[26] Supra Note 18.

[27] Supra Note 25.

[28] Supra Note 2.

[29] Supra Note 15.

[30] Supra Note 22.

[31] Supra Note 1.

[32] Supra Note 25.

[33] Supra Note 1.

[34] Supra Note 18.

[35] Supra Note 22.

[36] Supra Note 12.

[37] The Arbitration and Conciliation Act 1996, s.11.

[38] SBI General Insurance Co. Ltd. v. Krish Spinning, 2024 SCC OnLine SC 1754.

[39] Supra Note 17.

[40] Supra Note 8.

[41] Supra Note 2.

[42] Supra Note 8.

[43] Supra Note 25.

[44] Supra Note 17.

[45] Supra Note 17.

[46] The Arbitration and Conciliation Act 1996, s.2(1)(h).

[47] The Arbitration and Conciliation Act 1996, s.11.

[48] ONGC Ltd. v. Discovery Enterprises (P) Ltd.,(2022) 8 SCC 42.

[49] Supra Note 17.

[50] Supra Note 17.

[51] Supra Note 18.

[52] The Arbitration and Conciliation Act 1996, s.11.

[53] The Indian Contract Act 1872, s 128.