Factual Background and Procedural History
The appeal before the Delhi High Court arose from an arbitral order dated 20 April 2024, passed in Case Ref. No. DIAC/6864B/09-23 titled Intec Capital Ltd. v. Shikhir Plast India Pvt. Ltd. & Others.
Intec Capital Limited, a Non-Banking Financial Company (NBFC), had extended a loan of ₹68,18,000 to M/s Shri Digamber Polymers under a Loan Agreement dated 21 December 2012. The principal borrowers were Ms. Poonam Jain and M/s Shri Digamber Polymers.
To secure repayment, Mr. Shekhar Chand Jain, proprietor of M/s Ganesh Polymers, and another respondent executed separate Deeds of Guarantee on the same date. The Deeds expressly stated that the guarantors had read, understood, and agreed to be bound by the terms and conditions of the Loan Agreement.
Upon default by the principal borrower, Intec Capital invoked the arbitration clause (Clause 32) in the Loan Agreement and initiated proceedings before a Sole Arbitrator. During the course of arbitration, the respondents (guarantors) filed an application under Section 151 CPC, seeking discharge from proceedings on the ground that they were not parties to the arbitration agreement. The learned arbitrator allowed the application, relying on M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd. (2009) 7 SCC 696, and held that the guarantors could not be bound by the arbitration clause.
Aggrieved, the appellant preferred the present appeal under Section 37(2)(a) of the Arbitration and Conciliation Act, 1996, before the Delhi High Court.
The judgment was reserved on 18 July 2025 and pronounced on 4 September 2025 by Justice Jasmeet Singh.
Identification of Legal Issues
The central legal issue before the Court was:
Whether guarantors who executed separate Deeds of Guarantee can be bound by the arbitration clause contained in the Loan Agreement executed between the lender and the principal borrower.
Subsidiary issues included:
- Whether the Deeds of Guarantee incorporated the arbitration clause by reference under Section 7(5) of the Arbitration and Conciliation Act, 1996.
- Whether the arbitrator’s reliance on M.R. Engineers was correct in the context of a composite loan and guarantee transaction.
- Whether the impugned arbitral order suffered from “patent illegality” justifying interference under Section 37(2)(a).
Arguments of the Parties
Appellant (Intec Capital Limited)
- The appellant contended that the Deeds of Guarantee and the Loan Agreement were executed contemporaneously as part of a single commercial transaction.
- Clauses 2, 3, and particularly Clause 4 of the Deeds of Guarantee expressly stated that the guarantor had read, understood, and agreed to be bound by all terms and conditions of the Loan Agreement and that the Guarantee would form an “integral part” of the Agreement.
- Relying on Section 7(5) of the Act, the appellant argued that such language clearly incorporated the arbitration clause into the Guarantee.
- The appellant criticized the arbitrator’s reliance on M.R. Engineers as misconstrued, since that decision distinguishes between “mere reference” and “incorporation in entirety,” and the present case fell within the latter.
- Reliance was placed upon:
- Shinhan Bank v. Carol Info Services Ltd. (2023) 20 SCC 388 – holding that where one agreement forms an integral part of another, the arbitration clause stands incorporated.
- Inox Wind Ltd. v. Thermocables Ltd. (2018) 2 SCC 519 – general reference sufficient where contracts are standard form.
- Punjab National Bank Ltd. v. Bikram Cotton Mills AIR 1970 SC 1973 – contemporaneous agreements forming one composite transaction must be read together.
- RBCL Piletech Infra v. Bholasingh Jaiprakash Construction Ltd. (2024:DHC:5415) – guarantors bound by arbitration clauses in composite commercial arrangements.
- Shinhan Bank v. Carol Info Services Ltd. (2023) 20 SCC 388 – holding that where one agreement forms an integral part of another, the arbitration clause stands incorporated.
Respondents (Guarantors)
- The respondents argued that they were not signatories to the Loan Agreement, which alone contained the arbitration clause.
- The Deeds of Guarantee were independent contracts with no arbitration clause or specific incorporation of Clause 32.
- They contended that mere reference to the Loan Agreement does not import its arbitration clause, absent clear consent.
- Reliance was placed upon:
- M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd. (2009) 7 SCC 696
- NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd. (2024) 7 SCC 174
- S.N. Prasad v. Monnet Finance Ltd. (2011) 1 SCC 320
- Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1
- N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (2021) 4 SCC 379
- STCI Finance Ltd. v. Shreyas Kirti Lal Doshi 2020 SCC OnLine Del 100
- M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd. (2009) 7 SCC 696
They contended that compelling them to arbitrate would amount to enforcing a contract they never consented to, contrary to the principle of party autonomy.
Court’s Analysis and Reasoning
The Court commenced by reaffirming the principles laid down in M.R. Engineers, distinguishing between “reference” and “incorporation.” Justice Jasmeet Singh emphasized that incorporation requires a clear intention that the referred document is to form part of the contract in entirety.
Upon examining Clause 4 of the Deeds of Guarantee, the Court noted that it was not a mere general reference but an express acknowledgment that:
“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.”
This language, the Court held, demonstrated the parties’ intention to incorporate the Loan Agreement — and consequently its arbitration clause — into the Deeds of Guarantee.
The Court relied upon Section 7(5), which provides that a reference to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the contract.
Applying this principle, the Court observed:
- The Deeds of Guarantee formed an integral and contemporaneous part of the same transaction as the Loan Agreement.
- The phrase “integral part” established that the Loan Agreement was incorporated in entirety.
- Therefore, the arbitration clause bound the guarantors.
In support, the Court referred to Shinhan Bank (supra), which upheld incorporation when one agreement was expressly made part of another. The Court also cited Inox Wind Ltd. (supra), holding that even a general reference suffices where standard form contracts are involved.
Rejecting the respondents’ reliance on NBCC (India) Ltd. and S.N. Prasad, the Court held that those cases involved independent contracts without express incorporation. Here, by contrast, the Deeds of Guarantee expressly adopted the terms of the Loan Agreement.
Finally, applying the principle in Punjab National Bank Ltd. v. Bikram Cotton Mills, the Court concluded that the Loan Agreement and the Deeds of Guarantee formed a single composite commercial transaction executed on the same day for the same purpose. Consequently, the arbitration clause bound both borrower and guarantor.
The arbitrator’s finding that no arbitration agreement existed was thus held to be patently illegal under Section 37(2)(a).
Final Conclusion and Holding
The Delhi High Court allowed the appeal, set aside the arbitral order dated 20 April 2024, and held that:
- The Deeds of Guarantee incorporated the terms of the Loan Agreement in entirety.
- The arbitration clause (Clause 32) was validly incorporated into the Guarantees by virtue of Section 7(5) of the Arbitration and Conciliation Act, 1996.
- The respondents, being guarantors under the same composite transaction, were bound by the arbitration clause and could not be discharged from arbitral proceedings.
FAQs:
1. Can a guarantor be bound by an arbitration clause if they did not sign the main agreement?
Yes. If the guarantee deed expressly incorporates or refers to the loan agreement as an integral part of the same transaction, the guarantor may be bound by its arbitration clause under Section 7(5) of the Arbitration Act.
2. What does “incorporation by reference” mean in arbitration law?
It means that a contract can include terms, including an arbitration clause, from another document by clear reference—making those terms part of the contract even if not reproduced verbatim.
3. What is the difference between “reference” and “incorporation” under Section 7(5)?
A mere “reference” points to another document, while “incorporation” imports its terms in entirety. Only the latter brings the arbitration clause into the new contract.
4. Can non-signatories be compelled to arbitrate?
Generally no, unless they fall within recognized doctrines such as group of companies, agency, or incorporation by reference, showing a clear intent to be bound by the arbitration clause.
5. How does this judgment affect loan and guarantee transactions?
It clarifies that in composite financial transactions, guarantors cannot escape arbitration if the guarantee instrument acknowledges and incorporates the loan terms as part of a single contractual framework.
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