The Supreme Court of India, comprising a bench of Justice Manmohan and Justice Manoj Misra, has referred the question of whether a contractual clause requiring a contractor to deposit 10% of a claim amount prior to initiating arbitration is constitutional and legally permissible to the Chief Justice of India for reference to a larger bench. Expressing doubts regarding the validity of the three-judge bench decision in S.K. Jain v. State of Haryana (2009), which had upheld refundable security pre-deposits, the Supreme Court observed that onerous pre-deposit conditions risk rendering the right to sue illusory and defeating the core objective of alternative dispute resolution.
Background of the Case
The dispute stems from an e-tender invited on November 7, 2016, by the respondent, Haryana State Industrial and Infrastructure Development Corporation Ltd., 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 May 17, 2017, for a total consideration of ₹5,14,11,635.
The contract incorporated Clause 25-A(vii), which mandated that where a contractor raises claims of ₹1,00,000 and above, a security deposit of 10% of the claim amount must be furnished prior to reference to arbitration. The clause specified that the sum deposited would be adjusted against any costs awarded by the arbitrator against the claimant, with the remaining balance or the whole amount refunded within one month from the date of the Award if no costs were awarded.
During project execution, site-related challenges led to a significant reduction in scope, and the contract value was revised to ₹2,40,93,059 on January 19, 2021. Following completion of the reduced scope, disputes arose over final payment settlements. On August 8, 2024, the High Court of Punjab and Haryana, exercising jurisdiction under Section 11(6) of the Arbitration and Conciliation Act, 1996, appointed a Sole Arbitrator.
At the outset of the arbitral proceedings, the respondent filed an application under Section 16 of the Act, contending that the reference was not maintainable due to the appellant’s failure to furnish the mandatory 10% pre-deposit for claims exceeding ₹1,00,000. On August 1, 2025, the Sole Arbitrator allowed the Section 16 application, directing the appellant to deposit 10% of the claim amount within 15 days. Upon the appellant’s refusal, the claim was dismissed in its entirety.
The appellant challenged this order under Section 37(2) of the Act before the Commercial Court, Gurugram. On September 12, 2025, the Commercial Court dismissed the appeal, holding that the Sole Arbitrator’s view was plausible and supported by the Supreme Court’s precedent in S.K. Jain v. State of Haryana (2009) 4 SCC 357. The appellant subsequently appealed to the Supreme Court.
Submissions on Behalf of the Appellant
Learned counsel for the appellant argued that Clause 25-A(vii) is unconstitutional and violative of Article 14 of the Constitution of India, as it discriminates against contractors by requiring them alone to furnish a pre-deposit while exempting the State.
It was submitted that the 10% deposit requirement has no rational nexus to the objective of curbing frivolous claims, which can be effectively addressed through the imposition of costs at the conclusion of arbitration under Section 31(8) of the Act. Counsel highlighted that on a claim of ₹1,77,00,000, the appellant would be required to deposit ₹17,70,000 as security, whereas the ad valorem court fee payable for a Civil Suit on the exact same claim amount in Haryana would merely be ₹7,16,300.
Counsel contended that reliance on S.K. Jain was misconceived because that decision rejected pleas of unequal bargaining power and unconscionability without examining whether the clause violated Article 14. It was argued that the clause is manifestly one-sided and contrary to Section 18 of the Act, which mandates equal treatment of parties at all stages of arbitral proceedings.
In support of the appeal, the appellant relied upon ICOMM Tele Ltd. v. Punjab State Water Supply (2019) 4 SCC 401, where a pre-deposit clause was struck down under Article 14, and Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd. (2024) 4 SCC 341. In Lombardi Engineering, a three-judge bench held:
“The concept of “party autonomy” as pressed into service by the respondent cannot be stretched to an extent where it violates the fundamental rights under the Constitution. For an arbitration clause to be legally binding it has to be in consonance with the “operation of law” which includes the Grundnorm i.e. the Constitution. It is the rule of law which is supreme and forms parts of the basic structure. The argument canvassed on behalf of the respondent that the petitioner having consented to the pre-deposit clause at the time of execution of the agreement, cannot turn around and tell the Court in a Section 11(6) petition that the same is arbitrary and falling foul of Article 14 of the Constitution is without any merit”
The appellant further relied on the Constitution Bench decision in Central Organisation for Railway Electrification (CORE) v. M/s ECI-SPIC-SMO-MCML (JV) (2025) 4 SCC 641, which affirmed ICOMM Tele Ltd. and Lombardi Engineering Ltd. Counsel contended that S.K. Jain passed sub silentio on Article 14 and Sections 18 and 38 of the Act, citing Municipal Corporation of Delhi v. Gurnam Kaur (1989) 1 SCC 101, which stated:
“A decision passes sub silentio, in the technical sense that has come to be attached to that phrase, when the particular point of law involved in the decision is not perceived by the court or present to its mind. The court may consciously decide in favour of one party because of point A, which it considers and pronounces upon. It may be shown, however, that logically the court should not have decided in favour of the particular party unless it also decided point B in his favour; but point B was not argued or considered by the court. In such circumstances, although point B was logically involved in the facts and although the case had a specific outcome, the decision is not an authority on point B. Point B is said to pass sub silentio.”
Submissions on Behalf of the Respondent
Learned counsel for the respondent contended that S.K. Jain remains a binding precedent upholding the validity of pre-deposit clauses where deposits are refundable, on the basis that such stipulations serve the legitimate purpose of deterring frivolous disputes.
The respondent presented a comparative analysis of the arbitration clauses in S.K. Jain, ICOMM Tele Ltd., and Lombardi Engineering Ltd. It was submitted that in ICOMM Tele Ltd., the clause was struck down because it mandated forfeiture of deposits even when the claimant succeeded. In contrast, the present clause—akin to the one in S.K. Jain—merely requires a refundable security deposit without any punitive forfeiture.
It was argued that Lombardi Engineering Ltd. reaffirmed that only clauses foreclosing access to arbitration or mandating partial forfeiture irrespective of outcome offend Article 14. Thus, refundable deposit clauses remain valid, and the Arbitrator and Commercial Court correctly applied S.K. Jain.
Analysis by the Court
The Supreme Court examined the ratio decidendi of S.K. Jain, ICOMM Tele Ltd., Lombardi Engineering Ltd., and CORE. The court noted that in S.K. Jain, a three-judge bench held that a pre-deposit condition “…is the balancing factor to prevent frivolous and inflated claims” and was non-arbitrary.
However, the bench observed that judicial discipline prevented a two-judge bench from declaring S.K. Jain to be sub silentio or no longer good law, despite being “prima facie in agreement with the reasoning advanced in ICOMM Tele Ltd.” The court noted that Lombardi Engineering Ltd. (a three-judge bench) had explicitly observed that no conflict existed between S.K. Jain and ICOMM Tele Ltd. due to material distinctions in their contractual clauses, and neither Lombardi Engineering Ltd. nor the Constitution Bench in CORE held S.K. Jain to be invalid.
The Supreme Court highlighted an additional unconsidered principle: the right to sue inheres in every individual save where expressly barred by statute, citing Smt. Ganga Bai v. Vijay Kumar and Ors. (1974) 2 SCC 393. Under Section 28 of the Indian Contract Act, 1872, agreements absolutely restraining legal proceedings are void, with arbitration standing as a statutory exception.
Highlighting the historical perception of arbitration in India, the court quoted the foreword authored by late Senior Advocate Fali S. Nariman in Mediation Practice and Law: The Path to Successful Dispute Resolution:
“……the truth is that ADR (Alternate Dispute Resolution) is not yet ingrained in the Indian psyche. It is a new graft, like a new heart or a new kidney: and as with the human body, the ‘body-commercial looks for an opening to reject it. The reason is historical. Traditionally, it was the judges of the Kings’ Courts in England who were the embodiment of the law: as one commentator in the nineteenth century had said, ‘the Common Law is wrapped up in the collective breasts of His Majesty’s Judges’: to which one of the judges responded (somewhat pompously), ‘and a very happy residence too’! During two centuries of British rule, we in India were sustained on the milk of Anglo-Saxon jurisprudence-and Anglo-Saxon jurisprudence simply abhorred resolution of disputes outside His Majesty’s Courts! What England abhorred, we in British India were taught to abjure. Ever since the Contract Act was introduced in India’s legal system more than 100 years ago, alternate dispute resolution was outlawed: resolution of disputes by arbitration being simply tolerated!….”
The bench observed that an arbitration clause cannot impose pre-deposit conditions so onerous as to render the right to sue illusory at the threshold. Stipulations requiring substantial pre-deposits inevitably suppress claims, deter recourse to alternative dispute resolution, and defeat its foundational purpose.
Decision of the Court
Sitting in a two-judge combination and doubting the legality and validity of the three-judge bench decision in S.K. Jain, the Supreme Court applied the principles governing orders of reference reaffirmed in Aligarh Muslim University v. Naresh Agarwal & Ors. (2025) 6 SCC 1 and Central Board of Dawoodi Bohra Community & Anr. v. State of Maharashtra & Anr. (2005) 2 SCC 673.
The Registry was directed to place the appeal before the Chief Justice of India for appropriate directions to refer the following questions to a larger bench:
A. 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?
B. Whether pre-deposit conditions in contracts having Arbitration clause discourages Alternative Dispute Resolution and undermine its objective of declogging the court system?
C. 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 of the Indian Contract Act, 1872?
D. 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?
E. Whether a pre-deposit condition is valid in an arbitration case where said deposit is refundable upon the conclusion of arbitration proceedings?
F. Whether S.K. Jain (Supra) is a valid and binding precedent?
Case Title: M/S Santosh Associate Private Limited v. Haryana State Industrial and Infrastructure Development Corporation Ltd.
Case No.: Civil Appeal No. ___ of 2026 (@ SLP (C) No. 31245 of 2025)
Bench: Justice Manmohan, Justice Manoj Misra
Date: August 17, 2026
