Validity Of Prior Deposit Requirement Clause As Precondition To Invoke Arbitration: Supreme Court Doubts Its Earlier SK Jain Judgment

The Apex Court was considering an appeal filed against the judgment passed by the Commercial Court, Gurugram, whereby the appeal filed by the Appellant under Section 37(2) of the Arbitration & Conciliation Act, 1996 was dismissed. The Commercial Court affirmed the order passed by the Sole Arbitrator, who had allowed the Respondent’s application under Section 16 and dismissed the Appellant’s claim in its entirety for non-compliance with the contractual stipulation requiring a prior security deposit of ten per cent (10%) of the claim amount.

The Two Judges Bench of Justice Manoj Misra and Justice Manmohan held, “Consequently, this Court requests the Hon’ble Chief Justice of India to consider the desirability as to whether the issues formulated hereunder, or such other issues as may be deemed relevant, do warrant a reference 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?...”

Advocate Shreeyash U Lalit represented the Appellant while Additional Advocate General Alok Sangwan represented the Respondent.

Factual Background

The Respondent invited e-tenders in 2016 for the execution of stormwater drainage systems and contingent works at Sector-35, Udyog Vihar, Phase-VII, Gurugram. The Appellant participated in the bidding process and was awarded the contract for a total consideration of Rs 5,14,11,635. The contract contained an arbitration clause, Clause 25-A(vii), which mandated that a contractor, in the event of raising claims exceeding Rs 1 Lakh, must deposit 10% of the claim amount as security prior to reference to arbitration. During execution, the project encountered site-related challenges, resulting in a significant reduction in scope. Consequently, the contract value was revised to Rs 2,40,93,059.

Upon completion of the reduced scope, disputes arose concerning final settlement of payments. The High Court of Punjab and Haryana, exercising jurisdiction under Section 11(6) of the Act, appointed Justice (Retd.) Surender Gupta as Sole Arbitrator. The Respondent filed an application under Section 16, contending that the reference was not maintainable owing to the Appellant’s failure to furnish the mandatory 10% deposit for claims exceeding Rs 1 lakh. The Sole Arbitrator upheld the Respondent’s objection and directed the Appellant to deposit 10% of the claim amount within 15 days. Upon refusal, the Appellant’s claim was dismissed in its entirety. Aggrieved thereby, the Appellant filed an appeal under Section 37(2) before the Commercial Court, Gurugram. The Court dismissed the appeal, holding that the Arbitrator’s view was plausible and supported by the precedent in S.K. Jain vs. State of Haryana (2009).

Reasoning

The Bench noted that in S.K. Jain (supra), a three-Judge Bench of the Apex Court rejected the plea of unequal bargaining power of the parties and unconscionability of the arbitration clause to the extent it required the contractor alone to make a pre-deposit of seven per cent (7%) of the amount claimed before reference of disputes to arbitration. The pre-deposit condition was held to be non-arbitrary, reasonable and having nexus with the object sought to be achieved.

It was noticed that in ICOMM Tele Ltd. vs. Punjab State Water Supply (2019), a two-Judge Bench held that any requirement for pre-deposit prior to reference of the matter to arbitration would discourage alternative dispute resolution and would be contrary to the objective of declogging the court system. Considering that in a three-Judge Bench in Lombardi Engineering Ltd. vs. Uttarakhand Jal Vidyut Nigam Ltd., (2024) expressly held that there was no conflict between S.K. Jain (supra) and ICOMM Tele Ltd. (supra), the Bench stated, “Consequently, it is difficult for this two Judge Bench combination to hold that S.K. Jain (supra) judgment is sub silientio or no longer good law.”

Highlighting the bounds of judicial discipline and the enduring authority of precedents, the Bench observed that ICOMM Tele Ltd. (supra), being a decision of a two Judge Bench, could not override the principle of law enunciated by the three Judge Bench in S.K. Jain (supra), even though the Apex Court was prima facie in agreement with the reasoning advanced in ICOMM Tele Ltd. (supra).

The Bench was of the view 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 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”, it added.

The Bench thus requested the Chief Justice to consider the desirability as to whether the following issues warrant a reference to a larger Bench:

• 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?
• Whether pre-deposit conditions in contracts having an arbitration clause discourage Alternative Dispute Resolution and undermine its objective of de-clogging the court system?
• 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.

Cause Title: M/S Santosh Associate Private Limited v. Haryana State Industrial and Infrastructure Development Corporation Ltd. (Neutral Citation: 2026 INSC 872)

Appearance

Appellant: Advocate Shreeyash U Lalit, AOR Rishi Kapoor, Advocates Arun Choken, Azad Bansala, Shailendra Singh, Inderjeet Dagar, Prakriti Rastogi, Mitul Sehrawat, Naveen Tanwar, Nadeem Arman

Respondent: Senior Additional Advocate General Alok Sangwan, AOR Samar Vijay Singh, Advocates Sumit Kumar Sharma, Rajat Sangwan, Vaibhav Yadav, Harsh Mehla, Sabarni Som, Aman Dev Sharma, Gaj Singh, Keshav Mittal

Click here to read/download Judgment