NLA Insights
17 August 2026
Santosh Associate (P) Ltd. v. HSIIDC, 2026 SCC OnLine SC 1584. Where a contract requires a contractor to deposit 10% of its claim before it can even reach arbitration, is that a filter against frivolous claims or a toll on access to justice? The Supreme Court has referred the question to a larger Bench.
In the context of construction contracts, dispute resolution clauses are intended to provide parties with an effective mechanism for resolution of disputes arising during the execution of the contract. However, where such clauses impose a financial obligation on the aggrieved party to furnish a security or make a pre-deposit before its dispute can be referred to arbitration, the contractual mechanism may operate as a significant barrier to the exercise of the right to arbitrate.
This article examines the impediment created by contractual provisions in construction contracts that require a party seeking to invoke arbitration to furnish a security deposit or make a pre-deposit as a condition precedent for the commencement of arbitral proceedings. The issue was recently considered by the Hon’ble Supreme Court in Santosh Associate (P) Ltd. v. Haryana State Industrial and Infrastructure Development Corporation Ltd.
The Appellant entered into a Contract Agreement with the Haryana State Industrial and Infrastructure Development Corporation Limited (“HSIIDC”) in 2017 for the execution of storm-water drainage systems and contingent works at Sector-35, Udyog Vihar, Phase-VII, Gurugram. Clause 25-A(vii) of the Contract Agreement stipulated that where a contractor raised claims exceeding INR 1 lakh, it was required to furnish security equivalent to 10% of the claim amount as a condition precedent to the reference of such claims to arbitration. During execution, the project encountered various site-related impediments, resulting in a substantial reduction in the scope of work. Upon completion of the reduced scope, disputes arose concerning the final settlement of payments, following which the Appellant sought to invoke the arbitration mechanism under the Contract Agreement. Pursuant thereto, the High Court of Punjab and Haryana, exercising jurisdiction under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), appointed a Sole Arbitrator.
At the threshold of the arbitral proceedings, HSIIDC raised an objection under Section 16 of the Arbitration Act, contending that the reference was not maintainable in the absence of the mandatory 10% security deposit. The Sole Arbitrator upheld the objection and, upon the Appellant’s refusal to furnish the stipulated security, dismissed the claims. The Commercial Court, Gurugram affirmed the decision in proceedings under Section 37(2) of the Arbitration Act, relying upon the principle laid down by the Supreme Court in S.K. Jain v. State of Haryana. The Appellant therefore approached the Hon’ble Supreme Court by way of a Special Leave Petition.
While adjudicating the question on the validity of pre-deposit clauses, the three-judge bench in S.K. Jain (Supra) rejected the argument of unequal bargaining power extended by the arbitrariness of the clause requiring only the contractor to furnish a pre-deposit prior to reference of disputes to arbitration. The bench in S.K. Jain (Supra) established that the quantum of pre-deposit being proportional to the claims acts as a balancing factor to prevent frivolous and inflated claims.
In ICOMM Tele Ltd. v. Punjab Board, (2019) 4 SCC 401, the Contract Agreement in terms of Clause 25(viii) stipulated that the party invoking arbitration shall furnish a deposit-at-call for 10% of the total claim amount, and if awarded in favour, such deposit shall be refunded in proportion to the amount awarded with reference to the amount claimed, and the balance shall stand forfeited and paid to the other party. The two-judge bench in ICOMM Tele Ltd. (Supra) held that such a deposit is wrongfully mandated without any direct nexus to the filing of frivolous claims, as it applied to all kinds of claims made at the very threshold. This, according to the analysis of the bench, rendered the entire clause arbitrarily excessive and disproportionate. It also highlighted the importance of Alternative Dispute Resolution mechanisms and that such clauses clog the process and discourage arbitration. The Court subsequently struck down Clause 25(viii) of the contract agreement.
The issue was subsequently considered by a three-Judge Bench in Lombardi Engineering v. UJVNL. The Court held that party autonomy cannot extend to contractual terms that infringe fundamental rights. At the same time, Lombardi Engineering (Supra) held that there was no conflict between S.K. Jain and ICOMM Tele, treating the arbitration clauses considered in those cases as materially different.
Faced with the question on the validity of the pre-deposit clause modelled squarely on the lines of S.K. Jain (Supra), the bench in the present case considered the reasoning laid down in the precedents and recorded its agreement with the reasoning in ICOMM Tele Ltd. (Supra). Since a two-judge bench in the present case could not overrule the decision of a three-judge bench in S.K. Jain (Supra), it addressed the gap between precedents and referred the issues to a larger bench.
The Bench’s primary observation was that the ICOMM Tele Ltd. (Supra) reasoning was not binding on the precedential decision of a three-judge bench in S.K. Jain (Supra). The reference also affirms that the ratio, which considers the arbitrariness of pre-deposit applied indiscriminately before the adjudicating authority, finds it frivolous and cannot reasonably rest on the clause aimed at limiting frivolous claims. The bench highlighted the artefact of precedent hierarchy by clarifying that the Tribunals and Commercial courts confronting these clauses remain formally bound to follow S.K. Jain (Supra) wherever a clause is structured similarly, while clauses such as the ones raised in the dispute of ICOMM Tele (Supra) fall to be struck down even without waiting for the reference to resolve.
The reference sits on a broader and developing thread of commercial contract jurisprudence. The starting proposition is that challenges based on unequal bargaining power do not travel well into commercial contracting relationships. The judgment pronounced in S.K. Jain (Supra) relied on this proposition to reject the unconscionability of the pre-deposit clauses, while ICOMM Tele (Supra) laid down a separate constitutional test based on Article 14 to determine whether the clause in itself is unfair or unjust.
The Supreme Court has identified six questions for consideration by the larger Bench, including whether:
Santosh Associate (Supra) is significant not because it conclusively invalidates pre-deposit conditions, but because it places the validity of such clauses squarely before a larger Bench for reconsideration. The judgment brings together competing strands of Supreme Court jurisprudence concerning contractual autonomy, equal treatment in arbitration, Article 14, access to justice and the purpose of alternative dispute resolution.
For parties operating in the construction and infrastructure sector, the outcome of the reference may have substantial contractual and practical consequences. A larger Bench’s determination will potentially clarify whether an employer can contractually require a contractor to assume a significant financial burden before its claims can be adjudicated, and whether the fact that such a deposit is ultimately refundable is sufficient to save the clause from a challenge based on arbitrariness or unequal treatment.
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