Supreme Court Questions Constitutional Validity of Mandatory Pre-Deposit for Invoking Arbitration; Refers Dispute to Larger Bench

The Supreme Court of India has recently addressed a critical intersection between contractual party autonomy and fundamental constitutional rights within the realm of alternative dispute resolution. In a significant judicial development, a two-judge bench has expressed profound doubts regarding the legality of arbitration clauses that compel a contractor to deposit a specified percentage of their claim amount as a prerequisite to initiating arbitral proceedings.

The matter, which highlights an apparent conflict in previous apex court rulings regarding arbitrary contractual conditions, has now been referred to the Chief Justice of India for the constitution of a larger bench. The core debate revolves around whether such onerous financial preconditions render the fundamental right to seek legal recourse illusory and whether they violate the principles of equality enshrined in the Constitution.

Factual Matrix of the Dispute

The legal controversy stems from the case of Santosh Associate Private Limited Vs Haryana State Industrial And Infrastructure Development Corporation Ltd. (Supreme Court of India). The genesis of the dispute lies in a tender floated by the Respondent on 07 November 2016 for the construction of storm water drainage systems and associated works situated at Sector-35, Udyog Vihar, Phase-VII, Gurugram.

The Appellant emerged successful in the bidding process and was subsequently awarded the contract on 17 May 2017. The initial agreed-upon consideration for the project was ₹5,14,11,635/-. However, due to various site-specific complications and a subsequent reduction in the scope of the project, the total contract value was formally revised downwards to ₹2,40,93,059/- on 19 January 2021. Upon the conclusion of the reduced project scope, disagreements surfaced between the parties regarding the final settlement of accounts and payments.

The Contentious Arbitration Clause

The focal point of the litigation is Clause 25-A(vii) of the contract agreement. This specific provision dictated that if the contractor wished to invoke arbitration for claims exceeding ₹1,00,000/-, they were mandatorily required to furnish a security deposit equivalent to 10% of the total claim amount. The clause specified that this deposit was to be made prior to the dispute being referred to an arbitrator. Furthermore, the clause stipulated that this amount would be adjusted against any costs awarded by the arbitrator against the claimant, and any remaining balance would be refunded within one month following the issuance of the arbitral award.

Procedural History

To resolve the payment disputes, the High Court of Punjab and Haryana, exercising its powers, appointed a Sole Arbitrator on 08 August 2024. At the very inception of the arbitral proceedings, the Respondent filed an application under Section 16 of the Arbitration and Conciliation Act, 1996, challenging the maintainability of the reference. The Respondent argued that the Appellant had failed to comply with the mandatory 10% pre-deposit condition outlined in the contract.

The Sole Arbitrator found merit in the Respondent's objection and ordered the Appellant to deposit the requisite 10% amount within a timeframe of fifteen days. When the Appellant declined to fulfill this financial precondition, the Arbitrator dismissed the claim in its entirety.

Seeking redress, the Appellant challenged this dismissal by filing an appeal under Section 37(2) of the Arbitration and Conciliation Act, 1996 before the Commercial Court in Gurugram. On 12 September 2025, the Commercial Court dismissed the appeal, validating the Arbitrator's decision by relying heavily on the precedent established by a three-judge bench of the Supreme Court in S.K. Jain v. State of Haryana, (2009) 4 SCC 357.