Can the State Price a Contractor Out of Arbitration? Supreme Court Refers Validity of Contractor-Only Pre-Deposit Clauses to Larger Bench

Case Name: M/s Santosh Associate Private Limited v. Haryana State Industrial and Infrastructure Development Corporation Ltd.

Date of Judgment: 17 August 2026

Citation: 2026 INSC 872

Bench: Justice Manoj Misra and Justice Manmohan

Held: The Supreme Court held that, as a two-Judge Bench, it could not declare the three-Judge Bench decision in S.K. Jain v. State of Haryana, (2009)  incorrect, sub silentio or no longer binding. Nevertheless, the Court expressed serious doubt about the legality of contractual clauses requiring only a contractor to deposit a substantial percentage of its claim before invoking arbitration. It observed that an arbitration clause cannot impose a pre-deposit condition so onerous that the right to pursue a claim becomes illusory or nugatory. Such a condition may suppress legitimate claims, deter parties from invoking arbitration and defeat the very purpose of alternative dispute resolution. In view of the conflicting legal principles emerging from S.K. Jain, ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board, (2019) , Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., (2024) , and Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2025) , the Court referred the matter to the Chief Justice of India for consideration by a larger Bench.

Summary: Haryana State Industrial and Infrastructure Development Corporation Ltd. awarded the appellant a contract for constructing storm-water drainage systems and associated works at Sector 35, Udyog Vihar, Gurugram. Clause 25-A(vii) of the contract stipulated that where a contractor raised claims of ₹1 lakh or more, no reference to arbitration would be maintainable unless the contractor first deposited 10% of the claimed amount as security. After disputes arose regarding the final settlement of payments, the Punjab and Haryana High Court appointed a sole arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996. The respondent thereafter raised a jurisdictional objection under Section 16 on the ground that the appellant had not deposited 10% of its claim. The arbitrator directed the appellant to make the deposit within 15 days and, when it declined, dismissed its claims in their entirety. The Commercial Court, Gurugram, upheld that order under Section 37(2), relying upon S.K. Jain.

Before the Supreme Court, the appellant argued that the clause was manifestly arbitrary because it imposed the financial burden exclusively upon contractors while exempting the State entity from an equivalent obligation. For a claim of ₹1.77 crore, the appellant would have been required to deposit ₹17.70 lakh merely to access arbitration, an amount considerably higher than the court fee payable on a civil suit for the same claim. It was contended that this unequal stipulation violated Article 14 of the Constitution and Section 18 of the Arbitration and Conciliation Act, which mandates equal treatment of parties. The appellant further argued that speculative concerns about frivolous claims could be adequately addressed by imposing costs under Section 31(8) after adjudication rather than by creating a financial barrier at the threshold.

The respondent defended the clause on the basis that the deposit was refundable and was intended to discourage frivolous or inflated claims. It relied principally upon S.K. Jain, in which a three-Judge Bench had upheld a comparable contractor-only pre-deposit clause as a reasonable balancing measure. The respondent distinguished ICOMM Tele on the ground that the clause considered there contemplated forfeiture of the deposit depending upon the extent of the claimant’s success, whereas the deposit in the present case was refundable after adjustment of arbitral costs.

The Supreme Court observed that ICOMM Tele, being a two-Judge Bench decision, could not override S.K. Jain, which had been delivered by a three-Judge Bench. It also noted that neither Lombardi Engineering nor the Constitution Bench decision in CORE had expressly declared S.K. Jain to be bad law. Judicial discipline therefore prevented the present two-Judge Bench from invalidating the governing precedent. At the same time, the Court prima facie agreed with the reasoning that compelling a contractor to deposit a substantial portion of an unadjudicated claim could obstruct access to arbitration. It emphasised that a right to sue ordinarily inheres in every person unless expressly barred by law and that Section 28 of the Indian Contract Act, 1872 renders void agreements that absolutely restrain enforcement of contractual rights through ordinary legal proceedings. A contractual precondition that makes access to arbitration practically unaffordable may consequently implicate Article 14, Section 18 of the Arbitration Act and Section 28 of the Contract Act.

Decision: The Supreme Court did not finally decide the validity of Clause 25-A(vii) or set aside the orders passed by the sole arbitrator and the Commercial Court. Instead, it directed the Registry to place the civil appeal before the Chief Justice of India for appropriate directions. The Court requested consideration of a larger Bench reference on whether contractor-only pre-deposit clauses violate equal treatment under Section 18 of the Arbitration Act; whether such clauses discourage arbitration and frustrate the objective of reducing court litigation; whether they violate Article 14, the right to sue and Section 28 of the Contract Act; whether a pre-deposit has any rational nexus with curbing frivolous claims; whether refundability saves such a clause from invalidity; and whether S.K. Jain continues to constitute valid and binding precedent.