Supreme Court refers validity of arbitration pre-deposit clauses to larger Bench
A two-judge Bench doubted whether S.K. Jain remains good law and referred six questions on pre-deposit clauses required before arbitration to a larger Bench.
A two-judge Bench of the Supreme Court has referred to a larger Bench the question whether an arbitration clause can compel a contractor to deposit a percentage of its claim before disputes are referred to arbitration. In M/s Santosh Associate Private Limited v. Haryana State Industrial and Infrastructure Development Corporation Ltd., decided on 17 August 2026, Justice Manoj Misra and Justice Manmohan held that they harboured doubts about the continuing authority of the three-judge decision in S.K. Jain v. State of Haryana, which had upheld such refundable pre-deposit conditions.
Unable, as a two-judge combination, to disagree with a larger Bench, the Court framed six questions and asked the Chief Justice of India to consider a reference. The order leaves the substantive challenge open while flagging tension between older precedent and later rulings on Article 14 and party autonomy.
How the dispute reached the Court
The Haryana State Industrial and Infrastructure Development Corporation Ltd. invited e-tenders on 7 November 2016 for storm water drainage works at Sector-35, Udyog Vihar, Phase-VII, Gurugram. The appellant was awarded the contract on 17 May 2017 for ₹5,14,11,635. Following a reduction in scope, the contract value was revised to ₹2,40,93,059 on 19 January 2021, after which disputes arose over final payments.
Clause 25-A(vii) of the contract required that where a contractor invoking arbitration raised claims exceeding ₹1,00,000, it had to deposit ten per cent of the claim amount as security before any reference to arbitration. The deposit was refundable on termination of proceedings after adjustment against any costs awarded.
On 8 August 2024, the High Court of Punjab and Haryana appointed Justice (Retd.) Surender Gupta as Sole Arbitrator under Section 11(6). The Corporation then filed an application under Section 16, contending the reference was not maintainable because the contractor had not furnished the ten per cent deposit. The Arbitrator directed the appellant to deposit the amount within fifteen days; on refusal, the claim was dismissed in entirety.
The Commercial Court, Gurugram dismissed the appellant's appeal under Section 37(2) on 12 September 2025, holding the Arbitrator's view plausible and supported by S.K. Jain v. State of Haryana, (2009) 4 SCC 357.
The competing lines of precedent
Counsel for the appellant, Mr. Shreeyash U. Lalit, argued that Clause 25-A(vii) violated Article 14 by requiring the contractor alone to furnish a pre-deposit while the State was exempt. He submitted that a ten per cent deposit bore no rational nexus with curbing frivolous claims, which could be addressed through costs under Section 31(8). He pointed out that on a claim of ₹1,77,00,000, the deposit would be ₹17,70,000, against ad valorem court fee of ₹7,16,300 for a civil suit in Haryana on the same amount.
He relied on ICOMM Tele Ltd. v. Punjab State Water Supply, (2019) 4 SCC 401, which struck down a similar clause as arbitrary; on Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., (2024) 4 SCC 341; and on the Constitution Bench in Central Organisation for Railway Electrification (CORE) v. M/s ECI-SPIC-SMO-MCML (JV), (2025) 4 SCC 641. He contended that S.K. Jain was sub silentio on Article 14 and Sections 18 and 38 of the Act, having decided only unequal bargaining power and unconscionability.
Counsel for the Corporation, Mr. Harsh Mehla, argued that S.K. Jain remained binding. He drew a distinction between clauses: in ICOMM Tele Ltd., the clause was struck down because it permitted forfeiture even when the claimant succeeded, whereas the present clause was refundable and non-punitive. Refundable deposit clauses, he submitted, were designed to discourage unmeritorious claims and remained valid.
Why the Bench felt bound but doubtful
The Court recapitulated the ratio of each precedent. In S.K. Jain, a three-judge Bench had rejected the plea of unequal bargaining power and held that a higher security deposit commensurate with the claim's magnitude was “the balancing factor to prevent frivolous and inflated claims”, treating the pre-deposit condition as non-arbitrary and reasonable.
The Bench observed that it was “prima facie difficult” for two judges to hold that the Article 14 argument was not advanced in S.K. Jain. It recorded that ICOMM Tele Ltd., a two-judge decision, could not override the principle laid down by the three-judge Bench, even though the present Bench was prima facie in agreement with the reasoning in ICOMM Tele Ltd.
The Bench noted that Lombardi Engineering Ltd. had expressly held there was no conflict between S.K. Jain and ICOMM Tele Ltd., and that neither Lombardi nor the Constitution Bench in CORE had held S.K. Jain to be no longer good law. On that footing, the two-judge combination found it difficult to declare S.K. Jain sub silentio or overruled.
The right to sue and Section 28
The Court added a strand not considered in the earlier judgments. It observed that the right to sue inheres in every individual save where expressly barred by statute, relying on Smt. Ganga Bai v. Vijay Kumar, (1974) 2 SCC 393, which held that a litigant may institute a suit of choice at his own peril, and that the maintainability of a suit needs no statutory sanction.
It noted that Section 28 of the Indian Contract Act, 1872 renders void any agreement that absolutely restrains a party from enforcing rights by usual proceedings in ordinary tribunals, with arbitration being the statutory exception. The Court held that an arbitration clause cannot impose pre-deposit conditions so onerous as to render the right to sue “illusory or nugatory” at the threshold, since a substantial pre-deposit would suppress claims and defeat the object of alternative dispute resolution.
The questions referred
Applying the principles on references reiterated in Aligarh Muslim University v. Naresh Agarwal, (2025) 6 SCC 1, and Central Board of Dawoodi Bohra Community v. State of Maharashtra, (2005) 2 SCC 673, the Court requested the Chief Justice of India to consider a reference on the following issues:
Whether a stipulation requiring the contractor alone to make a pre-deposit before reference is contrary to Section 18; whether pre-deposit conditions discourage alternative dispute resolution and undermine declogging of courts; whether such conditions are arbitrary and violative of the right to sue, Article 14, and Section 28 of the Contract Act; whether pre-deposit bears any rational relation to curbing frivolous claims when frivolousness cannot be assessed at that stage and can be met by costs under Section 31(8); whether a pre-deposit condition is valid where the deposit is refundable at the conclusion of arbitration; and whether S.K. Jain is a valid and binding precedent.
Order
The Court referred the matter to a larger Bench, expressing doubts about the legality and validity of the three-judge decision in S.K. Jain as a binding precedent. The Registry was directed to place the Civil Appeal before the Chief Justice of India for appropriate directions. The order was passed on 17 August 2026 by Justice Manoj Misra and Justice Manmohan.