Challenge to pre-deposit clauses as violative of the Arbitration and Conciliation Act, 1996

Case Description

On 17 August 2026, the Division Bench of Justices Manoj Misra and Manmohan referred a challenge against pre-deposit contractual clauses to a larger bench. These clauses obligate parties claiming a higher settlement amount to deposit a percentage of the claim as security before reference to arbitration. The Bench refrained from deciding the matter on merits as the petition challenges the validity of a three-judge decision in S.K. Jain v State of Haryana (2009).

In 2017, the petitioner, Santosh Associate Private Limited, was awarded a contract for the execution of storm water drainage systems and contingent work in Gurugram for a total consideration of ₹5.14 crores. Clause 25(A)(vii) of the contract held the petitioner liable for a deposit of 10% of the claim amount as security prior to reference to arbitration, in the event of a raised compensation claim. In 2021, the cost of the project was revised down to ₹2 crores, owing to reduced scope of work. Thereafter, disputes arose over the settlement of final payments. 

The matter was heard by the appointed Sole Arbitrator, Justice (Retd.) Surender Gupta of the Punjab and Haryana High Court. The Respondents, Haryana State Industrial and Infrastructure Development Corporation, moved an application under Section 16 of the Arbitration and Conciliation Act, 1996, contending that the reference was not maintainable owing to the appellant’s failure to deposit 10% of the claim. 

When the Sole Arbitrator directed the appellant to deposit the said amount, the appellant refused and their claim was dismissed. Aggrieved by the dismissal, the appellant moved the Commercial Court, Gurugram, which dismissed the appeal, citing the precedent in S.K. Jain v State of Haryana (2009). 

In S.K. Jain, a three-judge Bench held that Sections 31(8) and 38 of the Act do not invalidate pre-deposit contractual clauses since the provisions operate in absence of a contractual agreement between the parties. The Judgement further stated that the security deposit acts as a “balancing factor” to prevent frivolous claims while dismissing the argument that such deposits are manifestly one-sided and operate solely against service-providers. The Court noted, “a claimant who is making higher claim stands on a better pedestal” to hold pre-deposit of security justifiable. 

The appellants moved the Supreme Court on the ground that the reliance on S.K. Jain was misconceived and that it did not constitute binding precedent. The petitioner contended that the Judgement is sub-silentio on Article 14 and Sections 18 and 38 of the Act. The petitioner relied on decisions of the Supreme Court in ICOMM Tele v Punjab State Water Supply (2019) and Lombardi Engineering v Uttarakhand Jal Vidyut Nigam (2024). 

In ICOMM Tele, the Supreme Court held that pre-deposit clauses could not be imposed unless litigation was shown to be frivolous. In Lombardi Engineering, the Court held that signing of the contract does not bar the contracting parties from challenging the same as unconstitutional in the Courts. 

The matter now lies before the Chief Justice of India for appropriate directions on its reference to a larger bench.