Can a personal guarantee expressly defined as an integral part of a loan agreement be severed from the loan agreement's arbitration clause for dispute resolution?

Paragraph 25A conjoint and harmonious reading of the aforesaid clauses admits of no doubt that the Personal Guarantees constitute an integral and inseparable part of Loan Agreements. The Personal Guarantees are expressly enumerated in Schedule IV as included in the “Facility Agreements”, and sub-clauses (b) and (u) of Clause 1.1 of Article I declare, in terms, that the “Agreement” includes all Schedules annexed to it. Clause 12.1 of Article XII (Miscellaneous) goes further and stipulates that facility agreements “shall be deemed to be part of this agreement as if provisions thereof were set out herein in extension”. The phrase “as if the provisions thereof were set out herein in extension” operates as a deeming fiction internal to the contract, binding every facility agreement, including the Personal Guarantee, within the same legal and arbitral framework as the Loan Agreement. The Personal Guarantees do not, therefore, stand apart from the Loan Agreements, and are woven into their very fabric.

Paragraph 28The fact that respondent no. 2 did not append his signature to the Loan Agreements in his personal capacity is not, in the circumstances of this case, decisive. The Loan Agreements were not instruments of an ordinary private bargain, they were the means by which the appellant, a not-for-profit company disbursed funds to training partners such as the Company for establishment of Model Training Centres. Training partners engaged under such a scheme are frequently thinly capitalized special-purpose entities, and it is for this reason that personal guarantees of the individuals controlling them are exacted as a mandatory pre-disbursement condition under Schedule I, the guarantee being the real, and often the only, assurance that funds disbursed for the public purpose of skill training will be accounted for and, if necessary, recovered. Respondent no. 2 furnished precisely such a guarantee, contemporaneously with and as a condition precedent to each Loan Agreement, which by its own deeming fiction treats every Facility Agreement, with the Personal Guarantee included, as set out “as if … in extension” of the Agreement itself. A guarantee so defined and so integrated cannot be severed, for purposes of dispute resolution alone, from the very Clause 11.2 that governs disputes touching the rights and obligations arising under that Agreement, while remaining tethered to it for every other purpose, including the extent of liability.

Paragraph 29For the foregoing reasons, we hold that the arbitration clause contained in Clause 11.2 of the Loan Agreements stands incorporated, within the meaning of Section 7(5) of the 1996 Act, into the Personal Guarantees dated 27.12.2016 and 18.08.2017 executed by respondent no. 2, who is accordingly bound to submit to arbitration in respect of disputes arising therefrom.