Vedika Sushil Rathi & Vansh Sharma*
Introduction
In S.K. Jain v. State of Haryana (“S.K. Jain”), a three-judge bench of the Supreme Court (“the Court”) upheld a refundable pre-deposit requirement as a reasonable safeguard against frivolous claims. A decade later, in ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board (“ICOMM Tele”), a two-judge bench of the Court held that a 10% pre-deposit could discourage legitimate claims and make arbitration ineffective. In Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., the contract also required a 7% pre-deposit. Still, the Court struck down that clause as arbitrary under Article 14 of the Constitution.
This produces an unusual doctrinal position: two coordinate three-Judge Benches, examining similar 7% pre-deposit clauses fourteen years apart, reached opposite outcomes; S.K. Jain upheld the clause in 2009; Lombardi struck one down in 2023, without expressly overruling S.K. Jain. Lombardi’s own route to that result was to hold that S.K. Jain and ICOMM Tele were not in conflict because their clauses were materially different and then, having drawn that distinction, invalidated a clause that, on its facts, sat far closer to S.K. Jain’s than to ICOMM Tele’s.
Santosh Associate now brings this tension back before the Court. The harder question it raises is: is a pre-deposit problematic only when it is non-refundable, or can even a refundable deposit become an unreasonable barrier when it must be paid before the claim is heard? The reference shifts the focus from mere contractual consent to the practical burden created by the clause and asks when party autonomy must give way to meaningful access to arbitration.
The Case that Reopened the Question: Santosh Associate
The dispute in Santosh Associate arose from a government construction contract, requiring a 10% pre-deposit before arbitration could be invoked. On a claim of Rs.1.77 crore, the contractor was required to deposit Rs.17.70 lakh at the threshold, more than double the court fee it would have paid for the same claim in a civil suit in Haryana. When it failed to pay, its claim was dismissed, and the Commercial Court at Gurugram upheld that dismissal by relying on S.K. Jain. The contractor then challenged the clause before the Court under Section 18 of the Arbitration and Conciliation Act, 1996 (“the Act”), Article 14 of the Constitution, and Section 28 of the Indian Contract Act, 1872 (“Contract Act”).
Because the deposit was refundable after adjustment of costs, the clause more closely resembled the one upheld in S.K. Jain than the forfeiture-linked clause struck down in ICOMM Tele. Yet, the Bench was prima facie persuaded by ICOMM Tele reasoning that requiring a substantial pre-deposit before any determination of the claim lacked a direct nexus with preventing frivolous claims, particularly since Section 31(8) of the Act already allows costs to be awarded against a losing claimant once the merits are decided. However, as a two-Judge Bench, it could not overrule S.K. Jain, a three-Judge Bench decision. The Court, therefore, referred the issue to a larger Bench.
Why the Wording of the Clauses Matters
The difference between S.K. Jain and ICOMM Tele is easier to grasp once the actual terms of the two contracts are examined. In S.K. Jain, the contractor had to deposit 2%, 5% or 7% of the amount claimed, which was mainly kept as security for costs, with any surplus to be returned.
ICOMM Tele imposed a heavier condition to deposit 10% of the amount claimed, refunded only in proportion to the amount the claimant recovered, with the balance liable to forfeiture in favour of the other party.
Santosh Associates’ clause does not sit neatly within either precedent.
Like ICOMM Tele, it fixed a flat 10% for claims of Rs.1 lakh and above. Like S.K. Jain, however, it was refundable after adjustment against costs, with no forfeiture tied to the claimant’s success on the merits. This hybrid character is precisely what made the case awkward: if refundability is what saved the clause in S.K. Jain, Santosh Associate’s clause should survive on the same logic; but if a flat, claim-linked percentage is what doomed the clause in ICOMM Tele regardless of eventual refundability, Santosh Associate’s clause should fail for the same reason. Unable to locate the case cleanly within either line, the Bench reached for a third precedent, Lombardi.
The Larger-Bench Question: What Exactly is Wrong with a Pre-Deposit?
The strongest argument for a pre-deposit remains party autonomy: Parties who freely enter a contract ordinarily should be held to its terms. But Lombardi makes clear that party autonomy cannot extend to contractual conditions that violate fundamental rights. The position was further strengthened in Central Organisation for Railway Electrification v. M/s ECI-SPIC-SMO-MCML (JV) (“CORE”), where the Constitution Bench recognised Section 18 as a mandatory and non-derogable requirement of equal treatment throughout the arbitral process. In Santosh Associate, the Court relied on this principle while examining whether a contractor-only pre-deposit requirement could withstand scrutiny.
Refundability does not necessarily remove the barrier. Santosh Associate invoked Ganga Bai v. Vijay Kumar, where the Court recognised the right to sue unless expressly barred by law, and linked this to Section 28 of the Contract Act, which limits contractual restraints from enforcing its rights. A Rs.17.70 lakh deposit, even if refundable, may still prevent a claimant from reaching arbitration in the first place.
Towards a Workable Test
The better approach is not to invalidate every pre-deposit clause, but to examine the burden it places on access to arbitration. Five questions can guide that inquiry.
First, who bears the burden? A condition imposed only on the claimant raises a greater equality concern than one applying equally to both parties.
Second, how substantial is it? A modest security may be reasonable; a large percentage of the claim may make arbitration difficult to pursue at all.
Third, when is it imposed? Demanding a deposit before a case is even heard is far more punitive than requiring security after a claim is found to be weak.
Fourth, what is its purpose and effect? A deposit genuinely securing costs is different from one that effectively penalises a claimant for failing to recover the entire amount.
Finally, is there a less restrictive way to achieve the same purpose? Section 31(8) already permits costs to address unmeritorious claims after adjudication, without foreclosing access at the threshold.
Refundability, therefore, should not be decisive. A deposit returned at the end cannot assist a claimant who could not afford to enter arbitration in the first place. The real question is whether, considering its amount, timing, one-sidedness and purpose, the clause creates a disproportionate financial barrier to exercising the right to arbitrate.
What the Reference Means for Contract Drafting
The reference also has practical implications for how pre-deposit clauses are drafted. A clause that places a substantial burden only on the claimant is more vulnerable to challenge because it raises concerns under Section 18 and Article 14. In Santosh Associates, the contractor alone was required to deposit 10% of its claim, making the issue one of both financial burden and unequal treatment.
At the same time, the judgment does not suggest that every security deposit is invalid. The more relevant distinction may be between a deposit that is genuinely connected to costs and one that operates as a barrier to initiating arbitration. Even refundability may not be sufficient where the amount is substantial and must be paid before the claim is examined.
For future contracts, the safer approach may therefore be to keep any security proportionate, clearly linked to costs, and no more restrictive than necessary, while considering alternatives such as costs under Section 31(8) to address unmeritorious claims.
Conclusion: What Does the Deposit Actually Do?
The debate over pre-deposit clauses should therefore move beyond whether the parties consented to them. S.K. Jain recognised the deposit in deterring frivolous claims; ICOMM Tele exposed the risk that the same requirement can deter legitimate ones. While Lombardi sought to reconcile the two by distinguishing the clauses, however, Santosh Associate revealed the limit of that approach: even a refundable clause can impose a substantial, one-sided burden before a claim is heard.
The larger Bench now has an opportunity to supply a clearer principle. Party autonomy deserves protection, but not when it renders arbitration practically inaccessible. The focus should be on the effect of the clause, not merely its form, its amount, timing, purpose and how the burden is distributed between the parties.
The question is not whether arbitration can come with a price, but whether that price can lawfully be made the condition for entering the arbitral forum at all.
* The authors are fourth-year B.A. LL.B. students at Government Law College, Mumbai.
This blog reflects the personal views of the author and does not necessarily represent the views of The Policy Chronicle.