Supreme Court Asks CJI To Consider Larger Bench To Examine Validity Of Pre-Deposit Clauses In Arbitration Agreements

The Supreme Court on Monday requested the Chief Justice of India to consider whether a larger Bench should examine the validity of contractual clauses requiring a party to deposit a percentage of its claim before invoking arbitration.

The issue arose from a clause requiring the contractor in the present case to deposit 10% of its claim before the dispute could be referred to arbitration.

A Bench of Justices Manoj Misra and Manmohan expressed doubts over the correctness of the three-Judge ruling in S.K. Jain v. State of Haryana, which had upheld a similar pre-deposit condition.

The bench was hearing an appeal concerning a contractual clause requiring a contractor to deposit 10% of its claim before the dispute could be referred to arbitration. It requested the CJI to consider whether the questions framed in the judgment warrant reference to a larger Bench.

The court noted that S.K. Jain, decided by a three-Judge Bench, had described the pre-deposit requirement as a “balancing factor to prevent frivolous and inflated claims." It held the condition to be non-arbitrary, reasonable, and having a nexus with the object sought to be achieved.

The present Bench observed that it was “prima facie in agreement” with the reasoning in ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board. That two-Judge Bench had held that a pre-deposit requirement could discourage alternative dispute resolution and undermine its objective of declogging the court system.

The court further observed, “This Court is of the considered 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.”

The present appeal was filed by Santosh Associate Private Limited against Haryana State Industrial and Infrastructure Development Corporation Ltd.

The dispute arose from a contract awarded in May 2017 for storm water drainage systems in Gurugram.

The contract was initially valued at about ₹5.14 crore. After site-related challenges led to a reduction in the scope of work, its value was revised to about ₹2.40 crore in January 2021.

Disputes later arose over the final settlement of payments. The Punjab and Haryana High Court appointed Justice (Retd.) Surender Gupta as the sole arbitrator in August 2024.

At the start of the arbitration, the corporation objected to the claim being heard because the appellant had not made the mandatory 10% deposit. Under the contract, a contractor had to deposit 10% of any claim of ₹1 lakh or more before invoking arbitration.

The arbitrator upheld the objection and gave the appellant 15 days to make the deposit. When it declined, the entire claim was dismissed.

The Commercial Court, Gurugram, later upheld the decision on September 12, 2025, relying on S.K. Jain.

Before the Supreme Court, the appellant argued that the clause violated Article 14 of the Constitution because it required contractors alone to furnish the pre-deposit. It also argued that the 10% requirement had no rational connection with preventing frivolous claims.

The appellant pointed out that its claim was ₹1.77 crore. It submitted that it would therefore have to deposit ₹17.70 lakh, while the court fee payable on a civil suit involving the same claim in Haryana would be about ₹7.16 lakh.

The appellant relied on ICOMM Tele, where the Supreme Court had struck down a similar clause as arbitrary under Article 14. It also relied on Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., where a three-Judge Bench held that party autonomy cannot be stretched to contractual terms that violate fundamental rights.

The present Bench noted that ICOMM Tele was decided by two judges and therefore could not override the three-Judge ruling in S.K. Jain. At the same time, it observed that it was “prima facie in agreement” with the reasoning in ICOMM Tele.

The court noted that a three-Judge Bench in Lombardi Engineering had held that there was no conflict between S.K. Jain and ICOMM Tele because the arbitration clauses in the two cases were materially different. It also noted that neither Lombardi Engineering nor the Constitution Bench ruling in Central Organisation for Railway Electrification had held that S.K. Jain was no longer good law.

The bench also considered the right to institute a suit and referred to the Supreme Court's decision in Smt. Ganga Bai v. Vijay Kumar. It noted that a person can institute a suit unless an enactment prohibits it.

It also examined Section 28 of the Indian Contract Act, 1872. The provision generally makes an agreement void if it absolutely restrains a party from enforcing its contractual rights through ordinary legal proceedings, subject to the statutory exception for arbitration.

The bench also referred to Section 18 of the Arbitration and Conciliation Act, 1996.

The provision requires equal treatment of parties during arbitral proceedings, and the Constitution Bench in the Central Organisation for Railway Electrification had held that this requirement applies at all stages of arbitration.

The court also questioned whether a pre-deposit requirement has a rational connection with preventing frivolous claims. It framed for consideration whether such claims may instead be addressed through costs at the conclusion of arbitration under Section 31(8) of the 1996 Act.

The bench framed six questions and requested the CJI to consider whether they warrant 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?

B. Whether pre-deposit conditions in contracts having an arbitration clause discourage 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?

The court did not hold that S.K. Jain is no longer good law. It held that a two-Judge Bench could not disagree with the three-Judge ruling and therefore requested the CJI to consider whether the issues warrant reference to a larger Bench.

The registry was directed to place the civil appeal before the Chief Justice of India for appropriate directions.

For Appellant: Advocates, Shreeyash U Lalit, Angad Pahel, Azad Bansala, Arun Choken, Shailendra Baisla, Aviral Mishra,Rishi Kapoor, AOR

For Respondent: Alok Sangwan, Sr. A.A.G., Samar Vijay Singh, AOR, Advocates Sumit Kumar Sharma, Rajat Sangwan, Vaibhav Yadav, Harsh Mehla, Divya Sharma, Sabarni Som, Aman Dev Sharma, Rajmani Mohanty, Itbar Singh, Ayush Kumar Shukla