This article examines the validity of mandatory pre-deposit clauses in government contract arbitrations, analysing the conflict between judicial precedents, equality under Section 18 of the Arbitration and Conciliation Act, 1996, and Article 14 of the Constitution.
As commercial dispute lawyers in India, we are all too familiar with the reality of standard form government tenders. When a client secures a public contract, the negotiation of the dispute resolution clause is rarely a negotiation at all. It is, in practice, a “take it or leave it” proposition. The arbitration clause is typically embedded in a voluminous tender document, drafted by the State’s legal team, and presented to bidders as a non-negotiable condition of participation. For years, practitioners have grappled with one particularly contentious feature of these adhesion contracts which is the mandatory pre-deposit clause, which requires a contractor to deposit a fixed percentage of the claim amount, often 7 per cent — 10 per cent, as a precondition to invoking arbitration.
The Supreme Court’s recent order in Santosh Associate (P) Ltd. v. Haryana SIIDC Ltd.1, has brought this issue back into sharp focus. In that order, a Division Bench expressed serious doubts about the constitutional validity of such pre-deposit clauses and referred the question to a larger Bench to resolve the conflict between earlier precedents. For a commercial litigation lawyer, this reference is not merely an academic development, it is a critical turning point that may redefine how we advise clients on risk allocation, draft Section 11 applications, and structure post-award strategy in arbitrations arising out of government contracts.
The 10 per cent hurdle: Facts, procedure, and the present conflict
The factual matrix in the Santosh Associate case mirrors what we routinely encounter in practice. The contractor was awarded a storm-water drainage project by a State institution and proceeded to execute the works. Upon completion, disputes arose regarding the final measurement, deductions, and release of retention money. When the contractor sought to invoke arbitration to resolve these payment disputes, it encountered Clause 25-A(vii) of the contract, which stipulated that for any claim exceeding Rs 1,00,000, the contractor must first deposit 10 per cent of the claim amount as a refundable security in order to maintain the reference to arbitration.
The contractor, unable or unwilling to lock up such a substantial sum, proceeded to seek the appointment of an arbitrator without making the pre-deposit. The sole arbitrator, relying on the plain language of the contract and the precedent in S.K. Jain v. State of Haryana2, held that the pre-deposit was a mandatory condition precedent to the invocation of arbitration. Consequently, the arbitrator dismissed the claim in its entirety under Section 16, Arbitration and Conciliation Act, 1996, (Arbitration Act) on the ground that the Tribunal lacked jurisdiction to entertain a claim that had not complied with the pre-condition. The learned Commercial Court, in appeal, upheld the arbitrator’s order, again leaning heavily on the S.K. Jain case.
This outcome sits uncomfortably with a conflicting line of authority that has emerged over the last decade and a half. In the S.K. Jain case, a Full Bench of the Supreme Court upheld a 7 per cent refundable pre-deposit clause in a government contract, reasoning that such a requirement served as a legitimate deterrent against frivolous, inflated, and speculative claims by contractors. The court viewed the clause as a reasonable restriction, grounded in party autonomy and commercial pragmatism, and held that it did not violate Article 14 of the Constitution.
However, subsequent a Division Bench have taken a markedly different view. In ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board3, the Supreme Court struck down a 10 per cent pre-deposit clause as arbitrary and unconstitutional under Article 14. The court emphasised that such clauses impose a disproportionate financial burden on one party, operate in a context of unequal bargaining power, and are not reasonably connected to the objective of curbing frivolous claims. The judgment underscored that arbitration is intended to be a cost-effective and accessible mechanism, and that pre-deposit requirements of this magnitude risk rendering the right to arbitrate illusory.
More recently, in Lombardi Engg. Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd.4, the court reaffirmed that party autonomy cannot override fundamental rights and highlighted the tension between the S.K. Jain case and the ICOMM case. The judgment signalled growing judicial discomfort with clauses that effectively condition access to justice on the ability to pay a substantial upfront sum. Against this backdrop, the two-Judge Bench in the Santosh Associate case has concluded that the law is in an untenable state of conflict and has requested the Chief Justice of India to constitute a larger Bench to settle the position definitively.
The “pay-to-play” problem: Unequal bargaining power, Section 18, and Article 14
At the heart of the dispute lies the structural imbalance in bargaining power between the State and private contractors. Government tenders are classic contracts of adhesion, the State drafts the terms, sets the conditions, and leaves bidders with the binary choice of accepting the contract as-is or walking away. In this context, a clause that compels only the private contractor to lock up a significant portion of its working capital, while the State remains entirely exempt, raises serious questions of fairness and constitutional validity.
The Arbitration Act, is explicit on this point. Section 18 mandates that the parties shall be treated with equality and that each party shall be given a full opportunity to present its case. Pre-deposit clauses that apply unilaterally to contractors, and not to the State, are difficult to reconcile with this statutory command of equal treatment at all stages of the arbitral proceedings. When the State can initiate or defend claims without any financial precondition, while the contractor must first part with a substantial sum merely to access the forum, the statutory guarantee of equality is undermined in both form and substance.
The constitutional dimension is equally compelling. Article 14 of the Constitution prohibits arbitrary and discriminatory state action. A contractual term that imposes a heavy financial barrier on one class of parties (private contractors) in disputes against the State, without any corresponding obligation on the State, is inherently suspect. The Supreme Court in ICOMM case characterised such clauses as manifestly arbitrary, noting that they bear no rational nexus to the stated objective of deterring frivolous claims and instead operate as a blunt instrument that penalises all claimants, regardless of the merits of their case.
The financial impact can be severe. In the Santosh Associate case, a claim of Rs 1.77 crores required a pre-deposit of Rs 17.7 lakhs, a sum that, as pointed out before the court, was more than double the ad valorem court fee payable to file a civil suit of the same value in Haryana. When the cost of accessing arbitration exceeds the cost of approaching the civil courts, the very rationale for arbitration as a streamlined, cost-effective alternative is turned on its head. In such circumstances, the clause risks being characterised not merely as a procedural hurdle, but as an absolute restraint on legal proceedings under Section 28, Contract Act, 1872, which renders void any agreement that absolutely restricts a party from enforcing its rights through ordinary legal proceedings.
How pre-deposit clauses drive litigation back to court
Arbitration was conceived as the antidote to an overburdened court system, a mechanism to resolve commercial disputes swiftly, efficiently, and with minimal judicial intervention. Yet, the proliferation of pre-deposit clauses in government contracts has produced a paradoxical outcome, instead of keeping disputes out of court, these clauses actively drive them back in.
Because State entities routinely insist on strict compliance with “pay-to-play” provisions, contractors who cannot or will not make the pre-deposit are forced to initiate parallel litigation. This takes the form of writ petitions challenging the clause as arbitrary and unconstitutional, or protracted applications under Section 11 (for appointment of arbitrator) and Section 37 (appeals against orders relating to jurisdiction and interim measures). What was intended as a threshold filter to deter frivolous claims ends up generating years of preliminary litigation, delaying the resolution of the substantive dispute and clogging the very courts that arbitration was meant to spare.
Compounding this problem is the practical impossibility of assessing whether a claim is “frivolous” at the threshold stage. At the point when the pre-deposit is demanded, pleadings are typically incomplete, evidence has not been led, and the arbitrator has not had an opportunity to evaluate the merits. Requiring a contractor to deposit 10 per cent of the claim amount before even being allowed to present its case amounts to a presumption of bad faith that is neither legally sound nor commercially sensible. The statute already provides a more nuanced and appropriate mechanism to address the concern of baseless claims: Section 31(8) empowers arbitrators to impose exemplary costs at the conclusion of the proceedings if a claim is found to be frivolous or vexatious. Imposing costs at the end of a case is a much fairer approach than demanding an upfront fee that penalises everyone trying to file a claim.
Strategic takeaways for commercial litigation counsel: Navigating the uncertainty —
Until a larger Bench resolves the conflict between the S.K. Jain case and the ICOMM case, we must adopt a pragmatic and multi-layered strategy when advising corporate clients on government contracts containing pre-deposit clauses.
Contract formation and pre-bid strategy
Where possible, advise clients to formally object to pre-deposit clauses during the pre-bid query stage. Many tender documents provide a window for bidders to seek clarifications or propose modifications to standard terms. While the State may not always accede to such requests, creating a paper trail that the clause was contested can be invaluable later. It supports an argument that the clause was imposed under duress, in a context of unequal bargaining power, and without meaningful negotiating factors that strengthen a challenge under Article 14 and Section 18.
In parallel, counsel should conduct a risk assessment at the bidding stage. If the pre-deposit clause is particularly onerous (for example, 10 per cent with no cap), clients should factor this into their pricing and cash-flow projections. In some cases, it may be commercially prudent to walk away from a tender where the dispute resolution terms expose the client to unacceptable liquidity risk.
Navigating Section 11 applications: Severability, equality, and access
When a dispute arises and the client is unable or unwilling to make the pre-deposit, the Section 11 application becomes the primary battleground. In drafting these applications, counsel should anchor their arguments in the ICOMM and Lombardi line of cases, emphasising that:
1. The pre-deposit clause is arbitrary and discriminatory, violating Article 14 because it imposes a unilateral financial burden on the contractor while exempting the State.
2. The clause contravenes Section 18, Arbitration Act by failing to treat the parties equally at the stage of invoking arbitration.
3. To the extent that the clause operates as an absolute restraint on legal proceedings, it is void under Section 28, Contract Act.
A critical doctrinal tool here is the doctrine of severability, often referred to as the “blue pencil” test. Counsels should argue that the pre-deposit requirement is a separate, ancillary condition that can be severed from the core agreement to arbitrate. By striking down only the pre-deposit obligation while preserving the underlying arbitration clause, the court can give effect to the parties’ intention to arbitrate without enforcing an unconstitutional precondition. This approach aligns with the pro-arbitration ethos of the Arbitration Act and avoids the all-or-nothing outcome that would leave the parties without any agreed dispute resolution mechanism.
Where appropriate, counsels may also seek interim directions from the Court under Section 11, requesting that the arbitration be allowed to proceed without compliance with the pre-deposit, pending a final determination of the clause’s validity. Some courts have been receptive to such requests, particularly where the claimant demonstrates financial hardship or where the pre-deposit amount is disproportionately high relative to the claim.
Post-award strategy and cost allocation—
Even if the arbitration proceeds subject to the pre-deposit clause, for instance, where the client ultimately makes the deposit to avoid delay, counsel should keep the issue alive for a potential challenge at the enforcement stage. More importantly, in the course of the arbitration, counsel should remind the Tribunal that the appropriate mechanism to deter frivolous claims lies in the allocation of costs under Sections 31-A and 31(8) of the Act, not in upfront financial barriers.
In written submissions and during hearings, emphasise that:
1. The arbitrator has ample discretion to impose exemplary costs on a party whose claims or defences are found to be baseless, vexatious, or motivated by delay.
2. Pre-deposit clauses, by contrast, operate indiscriminately and penalise meritorious claimants who may be cash-strapped but have legitimate grievances.
3. A cost-based approach at the conclusion of proceedings is more consistent with the principles of natural justice, as it allows the Tribunal to assess the conduct of the parties in light of the full evidentiary record.
This narrative not only strengthens the client’s position on the merits but also lays the groundwork for a future challenge to the pre-deposit clause, should the issue reach the Supreme Court in a substantive appeal.
*Associate, Alagh & Kapoor Law Offices. Author can be reached at: rahul.raj@aklawoffices.in.
2. (2009) 4 SCC 357 : (2009) 2 SCC (Civ) 163.
3. (2019) 4 SCC 401 : (2019) 2 SCC (Civ) 370.
4. (2024) 4 SCC 341 : (2024) 2 SCC (Civ) 763.
