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Santosh Associate vs HSIIDC: Supreme Court Refers Pre-Deposit Clause Validity in Arbitration to Larger Bench
A Clause That Demands Cash Before Claims
The has referred to a larger bench the critical question of whether contractual clauses that force a contractor to deposit 10% of the claim amount before invoking arbitration are constitutionally valid. The referral, made by a two-judge bench comprising Justice Manmohan and Justice Manoj Misra on , arose from a dispute between and the . At the heart of the matter is Clause 25-A(vii) of the HSIIDC contract, which required the contractor to furnish a equivalent to 10% of the claimed amount as a precondition to arbitration.
The clause had already derailed the contractor’s claim of ₹1.77 crore. When Santosh Associate sought arbitration, the sole arbitrator, Justice (Retd.) Surender Gupta, upheld HSIIDC’s objection under , and dismissed the claim for non-compliance with the . The affirmed this decision, relying on the three-judge bench precedent in S.K. Jain v. State of Haryana (2009). Unwilling to let the matter rest, Santosh Associate appealed to the Supreme Court.
The Unequal Burden: Only Contractors Must Pay
Appearing for the appellant, senior counsel argued that the clause was , imposing an obligation solely on the contractor while exempting the state. He contended that this violated (equality before law) and , which mandates of parties at all stages of proceedings. He pointed to the glaring disparity: for a claim of ₹1.77 crore, the contractor would have to deposit ₹17.7 lakh—more than double the of ₹7.16 lakh that a civil suit on the same amount would attract in Haryana.
Mr. Lalit relied heavily on the Supreme Court’s decisions in ICOMM Tele Ltd. v. Punjab State Water Supply (2019) and Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd. (2024), both of which struck down pre-deposit clauses as arbitrary and violative of Article 14. He also invoked the Constitution bench ruling in Central Organisation for Railway Electrification (CORE) v. ECI-SPIC-SMO-MCML (JV) (2025), which affirmed that Section 18 applies throughout arbitral proceedings and cannot be contracted out.
HSIIDC’s counsel, , countered that S.K. Jain remained good law and that the clause in question was materially different from those struck down in ICOMM Tele and Lombardi . The deposit was refundable, not forfeited; it merely served as a deterrent against . He argued that refundable deposits passed constitutional muster because they did not permanently deny the claimant any money.
vs. Constitutional Doubt
The bench found itself in a bind. While it expressed “ agreement” with the reasoning in ICOMM Tele that pre-deposit clauses discourage arbitration and are arbitrary, it acknowledged that S.K. Jain —a three-judge bench decision—had upheld a similar refundable deposit clause. prevented a two-judge bench from overruling a larger bench precedent, even if doubts existed about its correctness.
The Court noted that Lombardi Engineering had explicitly stated there was no conflict between S.K. Jain and ICOMM Tele , distinguishing the clauses on their facts. The Constitution bench in CORE had also not overruled S.K. Jain . Consequently, the Court concluded that the matter required authoritative resolution by a larger bench.
In a crucial passage, the Court observed: “An arbitration clause cannot impose pre-deposit conditions so onerous as to render the , at the very threshold, . 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 , and thereby defeat its very object.”
Key Observations: Cannot Be Burdened
The judgment underscored that the inheres in every individual and cannot be burdened by conditions that make it prohibitively expensive. The Court recalled the settled principle from Ganga Bai v. Vijay Kumar (1974) that a litigant may institute a suit at his own peril, and no law bars a claim merely for being frivolous—that is a matter for costs at the end of the trial.
Drawing on the historical scepticism toward in Anglo-Saxon jurisprudence, the Court noted that arbitration remains an exception to litigation in courts, not a substitute. Requiring a pre-deposit before even accessing that exception, the Court reasoned, transforms the remedy into an obstacle.
What the Larger Bench Must Decide
The Supreme Court has framed six questions for the larger bench, including: - Whether a binding only the contractor violates Section 18’s mandate of ? - Whether such clauses discourage arbitration and undermine its objective of declogging the court system? - Whether the condition is arbitrary under Article 14 and violative of ? - Whether the deposit requirement bears any rational nexus to curbing , given that costs under already address that concern? - Whether a refundable deposit is constitutionally valid? - Whether S.K. Jain remains a binding precedent?
Legal commentators have noted that the asymmetry—requiring only one party to deposit—is the decisive vice. As one analysis points out, “a clause that obligates only the contractor to deposit 10% of their claim, without obliging the other party, clearly makes the parties unequal. Refundability speaks to the extent of the burden, not its distribution.” The larger bench now has an opportunity to clarify that access to arbitration must cost the same for both parties, or it must be free.
The case has been placed before the Chief Justice of India for appropriate directions on constituting a larger bench. Until then, contractors across the country remain saddled with a pre-deposit requirement that, in the Court’s own words, “inevitably suppresses claims.”
