Case at a Glance
A Gurugram drainage contractor’s arbitration claim of about ₹1.77 crore was dismissed because it refused to deposit 10% of the claim as security, as required by Clause 25-A(vii) of its contract with HSIIDC; the Commercial Court, Gurugram upheld the dismissal. Before the Supreme Court, the contractor argued that a contractor-only pre-deposit violates Article 14, Section 18 of the Arbitration Act and the right to sue. The two-Judge Bench said it was prima facie in agreement with ICOMM, which struck down such a clause, but could not override the three-Judge decision in S.K. Jain v. State of Haryana, (2009) 02 SC CK 0089. It framed six questions and asked the Chief Justice of India to consider a reference to a larger bench.
HSIIDC invited e-tenders on 7 November 2016 for storm water drainage works at Sector-35, Udyog Vihar Phase-VII, Gurugram, and on 17 May 2017 awarded the contract to the appellant for ₹5,14,11,635, later revised to ₹2,40,93,059 on 19 January 2021 after the scope was reduced. Clause 25-A(vii) provided that “no reference for arbitration shall be maintainable unless” a contractor raising claims above ₹1,00,000 furnished a security deposit, at 10% for such claims; the deposit would be adjusted against costs awarded against the claimant and any balance refunded within a month of the award.
On 8 August 2024 the Punjab and Haryana High Court appointed Justice (Retd.) Surender Gupta as sole arbitrator. HSIIDC objected under Section 16 that the reference was not maintainable without the deposit. The arbitrator directed the deposit within 15 days and, when the appellant refused, dismissed the claim in its entirety on 1 August 2025. The appellant said its claim was ₹1,77,00,000, requiring a deposit of ₹17,70,000, while the ad valorem court fee for a civil suit of the same amount in Haryana would be ₹7,16,300. The Commercial Court, Gurugram dismissed its Section 37(2) appeal on 12 September 2025.
The Key Question Before the Court
Is a contract clause that requires only the contractor to make a pre-deposit of 10% of its claim before arbitration valid, and is S.K. Jain v. State of Haryana still binding on that question?
Three Lines of Precedent and a Bench Bound by the Larger One
In S.K. Jain v. State of Haryana, (2009) 4 SCC 357, a three-Judge Bench upheld a 7% pre-deposit, rejecting arguments of unequal bargaining power and unconscionability and finding a nexus with preventing frivolous claims. In ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board, (2019) 03 SC CK 0043, (2019) 4 SCC 401, a two-Judge Bench struck down a 10% pre-deposit as arbitrary, holding that such conditions discourage ADR. In Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., (2023) 11 SC CK 0002, (2024) 4 SCC 341, a three-Judge Bench held that party autonomy cannot override fundamental rights and that frivolous claims can be addressed through costs, but found no conflict between S.K. Jain and ICOMM because the clauses differed. The Constitution Bench in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2024) 11 SC CK 1273, (2025) 4 SCC 641 held Section 18 mandatory at all stages, quoting S.K. Jain with approval.
The Bench said it was prima facie difficult for a two-Judge Bench to hold that S.K. Jain did not consider Article 14, and that ICOMM, though the Bench prima facie agreed with it, could not override a three-Judge decision; neither Lombardi nor CORE held S.K. Jain to be bad law. Applying the rules of precedent in Aligarh Muslim University v. Naresh Agarwal, (2025) 6 SCC 1 and Central Board of Dawoodi Bohra Community v. State of Maharashtra, (2004) 12 SC CK 0018, (2005) 2 SCC 673, it noted an argument not considered earlier: that the right to sue (Smt. Ganga Bai v. Vijay Kumar, (1974) 04 SC CK 0018, (1974) 2 SCC 393) is inherent, and an arbitration clause “cannot impose pre-deposit conditions so onerous as to render the right to sue” illusory, especially given Section 28 of the Contract Act. With doubts about S.K. Jain’s continued binding force, it made a reference.
What the Court Actually Held
- The Bench did not decide the appeal on merits; the validity of Clause 25-A(vii) remains open.
- It framed six questions: whether a contractor-only pre-deposit violates Section 18; whether pre-deposits discourage ADR; whether they are arbitrary and violate the right to sue, Article 14 and Section 28 of the Contract Act; whether they rationally curb frivolous claims given costs under Section 31(8); whether refundability saves them; and whether S.K. Jain is a valid, binding precedent.
- The Chief Justice of India was requested to consider a reference to a larger bench on these “or such other issues as may be deemed relevant.”
- The Registry was directed to place the civil appeal before the Chief Justice “for appropriate directions.”
Why This Judgment Matters
- Pre-deposit clauses are common in government works contracts, and a larger-bench ruling could reshape access to arbitration for contractors.
- It squarely raises whether one-sided conditions can coexist with the equal-treatment mandate of Section 18 after the CORE Constitution Bench.
- Until the reference is decided, S.K. Jain remains binding, so such clauses continue to be enforced.
What Should Advocates Take Away From the Judgment?
For Contractors
- Until the larger bench rules, a pre-deposit clause like Clause 25-A(vii) may still be enforced; refusal can lead to dismissal of the claim.
- Compare the deposit with the court fee for a civil suit; the gap was part of the argument here.
For Counsel
- Preserve challenges to pre-deposit clauses on Article 14, Section 18 and Section 28 Contract Act grounds pending the reference.
- Distinguish clauses carefully: Lombardi treated differences in clause wording as decisive.
- Point to costs under Section 31(8) as the less restrictive means of deterring frivolous claims.
Key Takeaways
- A two-Judge Bench cannot overrule the three-Judge S.K. Jain, so it sought a larger bench.
- The Bench prima facie agreed with ICOMM that pre-deposits discourage arbitration.
- Six questions, including the validity of refundable deposits, have been framed for reference.
- The contractor’s appeal remains pending before the Chief Justice for directions.
Frequently Asked Questions
Are pre-deposit clauses in arbitration agreements valid now?
For now, the three-Judge decision in S.K. Jain upholding such a clause remains binding. The two-Judge Bench doubted it and asked the Chief Justice to consider referring the issue to a larger bench.
What was the contractor asked to deposit?
According to the contractor, its claim was ₹1.77 crore, so the 10% clause required a deposit of ₹17.7 lakh, compared with a court fee of about ₹7.16 lakh for a civil suit of the same value in Haryana.
Did the Supreme Court restore the arbitration?
No. It did not decide the appeal on merits; it framed issues and directed that the matter be placed before the Chief Justice of India for directions on a larger-bench reference.
Conclusion
The order puts a long-running conflict over contractor-only pre-deposit clauses on course for a larger bench, with the two-Judge Bench openly signalling sympathy for the view that such clauses discourage arbitration and may make the right to sue illusory.
Practical takeaway: Contractors facing pre-deposit clauses should raise and preserve Article 14, Section 18 and right-to-sue objections, while remembering that S.K. Jain binds until a larger bench decides.
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