Supreme Court: In an appeal while examining the validity of a contractual clause requiring a contractor to deposit 10 per cent of the claim amount as a precondition for invoking arbitration, the Division Bench of Manoj Misra and Manmohan*, JJ., expressed doubts about the continuing authority of S.K. Jain v. State of Haryana, (2009) 4 SCC 357, holding that a pre-deposit condition cannot make the right to sue “illusory or nugatory”.
“A stipulation mandating the deposit of a substantial percentage of the claim amount, as a precondition to invoking arbitration would inevitably suppress claims, deter recourse to alternative dispute resolution, and thereby defeat its very object.”
The Court referred the issue to a larger Bench for determination of the following questions:
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Whether requiring only the contractor to make a pre-deposit is inconsistent with Section 18, Arbitration and Conciliation Act, 1996 (the Act), which mandates equal treatment of parties in arbitration?
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Whether such pre-deposit conditions discourage alternative dispute resolution and undermine arbitration’s objective of reducing the burden on courts?
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Whether such a condition is arbitrary and violative of Article 14, the right to sue, and Section 28, Contract Act, 1872?
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Whether a pre-deposit has a rational connection with preventing frivolous claims when frivolousness cannot ordinarily be determined at the threshold?
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Whether a pre-deposit clause remains valid where the deposit is refundable at the conclusion of arbitration?
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Whether S.K. Jain remains a valid and binding precedent?
Factual Matrix
The respondent, Haryana State Industrial and Infrastructure Development Corporation Ltd. invited e-tenders on 7 November 2016 for the execution of storm-water drainage systems and contingent works at Sector-35, Udyog Vihar, Phase-VII, Gurugram. The appellant, M/s Santosh Associate Private Limited, was awarded the contract on 17 May 2017 for ₹5,14,11,635. The contract contained an arbitration clause, Clause 25-A(vii), which required a contractor raising a claim of ₹1 lakh or more to furnish a 10 per cent security deposit before the dispute could be referred to arbitration.
During execution, site-related difficulties resulted in a substantial reduction in the scope of work. The contract value was consequently revised to ₹2,40,93,059 on 19 January 2021. Disputes subsequently arose regarding the final settlement of payments.
The Punjab and Haryana High Court, exercising jurisdiction under Section 11(6) of the Act appointed a Sole Arbitrator on 8 August 2024. At the commencement of the arbitral proceedings, the respondent objected to the maintainability of the claim because the appellant had not furnished the stipulated 10 per cent deposit. The Sole Arbitrator upheld the objection and directed the appellant to make the deposit within 15 days. On the appellant’s refusal, the claim was dismissed in its entirety.
The Commercial Court, Gurugram dismissed the appellant’s challenge under Section 37(2) of the Act, holding that the arbitrator’s view was plausible and supported by S.K. Jain.
Issue for Determination
Clause 25-A(vii) of the contract provided that where the contractor invoked arbitration, “no reference for arbitration shall be maintainable” unless the contractor furnished the prescribed security deposit. For claims of ₹1 lakh and above, the required deposit was 10 per cent of the amount claimed. The clause further provided that the amount deposited would ultimately be adjusted against costs, if any, awarded against the claimant, with the balance refunded after the arbitration. Thus, the controversy was not merely about the existence of a deposit requirement, but about making such deposit a condition precedent to the maintainability of arbitration. The practical stakes of this requirement were illustrated by the appellant: on a claim of ₹1.77 crore, the 10% pre-deposit would amount to ₹17.7 lakh, more than double the ₹7,16,300 ad valorem court fee payable for an equivalent civil suit in Haryana.
Therefore, the following issue arose for consideration:
Whether a contractual requirement compelling a contractor alone to make a substantial pre-deposit before invoking arbitration could legally stand?
Reasoning
The Court examined the development of the law through discussing following precedents:
In S.K. Jain, a three-Judge Bench had upheld a pre-deposit requirement imposed upon a contractor, describing it as a “balancing factor to prevent frivolous and inflated claims”. The Court there considered the condition reasonable and connected to the object sought to be achieved.
However, in ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board, (2019) 4 SCC 401, a Division Bench took a different approach and held that a pre-deposit requirement could discourage arbitration and defeat the objective of declogging the court system. It also held that stipulation mandating a pre-deposit of 10 per cent of the claim amount, prior to any determination of frivolousness, lacked a direct nexus with the object of curbing frivolous claims and was therefore arbitrary
Subsequently, in Lombardi Engg. Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., (2024) 4 SCC 341, it was held that party autonomy cannot be stretched to the point of violating fundamental rights, while also stating that there was no conflict between S.K. Jain and ICOMM Tele because the relevant clauses were materially different.
Further, in Central Organisation for Railway Electrification (CORE) v. ECI-SPIC-SMO-MCML (JV), (2025) 4 SCC 641, the Constitutional Bench reaffirmed that Section 18 of the Act is mandatory and applies throughout the arbitral process. It also recognised that a contractual clause may be arbitrary where it is “unfair and unjust and which no reasonable man would agree to”, particularly where a pre-deposit requirement acts as a deterrent to invoking arbitration.
The Court noted that, S.K. Jain was a three-Judge Bench decision, whereas ICOMM Tele was decided by 2 Judges. Consequently, the latter could not simply override the former. The Court expressly observed that although it was “prima facie in agreement with the reasoning advanced in ICOMM Tele”, judicial discipline prevented two-Judge Bench from treating the three-Judge decision in S.K. Jain as no longer binding.
The Court also noted that Lombardi Engineering had expressly held that there was no conflict between S.K. Jain and ICOMM Tele, and neither Lombardi Engineering nor the Constitution Bench in CORE had declared S.K. Jain to be bad law.
Further, the Court considered the broader principle that the right to sue inheres in every individual, unless expressly barred by law. It referred to Ganga Bai v. Vijay Kumar, (1974) 2 SCC 393, where the Court recognised that the apparent frivolousness of a claim does not by itself extinguish the right to institute proceedings. It also considered Section 28, Contract Act, under which agreements absolutely restraining enforcement of contractual rights through ordinary tribunals are void, subject to the statutory exception for arbitration.
“Arbitration, under the framework of our Contract law, remains an exception to litigation in courts, not its substitute or alternative!”
The Court opined that “an arbitration clause cannot impose pre-deposit conditions so onerous as to render the right to sue, at the very threshold, illusory or nugatory”. A substantial percentage of the claim, demanded as a condition for invoking arbitration, could suppress claims and deter parties from pursuing alternative dispute resolution and thereby defeat its very object.
Decision
The Court did not decide the constitutional validity of Clause 25-A(vii). But, due to the doubt regarding the continuing authority and correctness of S.K. Jain, the Court opined that the matter required consideration by a larger Bench. Therefore, the Court requested the Chief Justice of India to consider whether the following formulated questions, or other relevant questions, should be referred to a larger Bench:
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Whether a stipulation requiring the contractor alone to make a pre-deposit of security/fees prior to reference of disputes to arbitration is contrary to Section 18 of the Act which mandates equal treatment of parties at all stages of arbitration?
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Whether pre-deposit conditions in contracts having Arbitration clause discourages Alternative Dispute Resolution and undermine its objective of declogging the court system?
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Whether a condition of pre-deposit of security/fees prior to reference to Arbitration is arbitrary and violative of the right to sue as well as Article 14 of the Constitution and Section 28, Contract Act?
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Whether requirement of pre-deposit of security/fees has any rational relation to the object of curbing frivolous claims as at that stage it cannot be said that the claims are frivolous and moreover such frivolous claims may adequately be addressed under Section 31(8) of the Act through imposition of costs at the conclusion of the arbitration proceedings?
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Whether a pre-deposit condition is valid in an arbitration case where said deposit is refundable upon the conclusion of arbitration proceedings?
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Whether S.K. Jain is a valid and binding precedent?
[Santosh Associate (P) Ltd. v. Haryana State Industrial and Infrastructure Development Corpn. Ltd., 2026 SCC OnLine SC 1584, decided on 17-8-2026]
*Judgment Authored by Justice Manmohan
Advocates who appeared in this case:
For the Appellant: Mr. Shreeyash U. Lalit, Adv., Mr. Rishi Kapoor, AoR, Mr. Arun Choken, Adv., Mr. Azad Bansala, Adv., Mr. Shailendra Singh, Adv., Mr. Inderjeet Dagar, Adv., Mr. Prakriti Rastogi, Adv., Mr. Mitul Sehrawat, Adv., Mr. Naveen Tanwar, Adv., Mr. Nadeem Arman, Adv.
For the Respondent: Mr. Alok Sangwan, Sr. A.A.G., Mr. Samar Vijay Singh, AoR, Mr. Sumit Kumar Sharma, Adv., Mr. Rajat Sangwan, Adv., Mr. Vaibhav Yadav, Adv., Mr. Harsh Mehla, Adv., Ms. Sabarni Som, Adv., Mr. Aman Dev Sharma, Adv., Mr. Gaj Singh, Adv., Mr. Keshav Mittal, Adv.
