Paying to Arbitrate: What the Santosh Associate Reference Gets Right and What it Leaves Unresolved

[Kusumitha is a student at National Law University and Judicial Academy, Assam.]

In M/s Santosh Associate Private Limited v. Haryana State Industrial and Infrastructure Development Corporation Limited, a two-judge bench of the Supreme Court declined to strike down a contractual pre-deposit clause, but made clear it wanted to. Bound by a three-Judge precedent it no longer trusted, the bench referred the question to a larger bench instead. The order is worth reading not just as a status update on pending litigation, but as a case study in how doctrinal categories can obscure the actual problem a clause creates.

The Clause and Its Justification

Clause 25-A(vii) of the HSIIDC contract required any contractor raising a claim of INR 1 lakh or more to deposit 10% of that claim as security before arbitration could be invoked. When Santosh Associate's claim, arising from a mid-contract scope reduction that cut the contract value from INR 5.14 crore to INR 2.40 crore, was referred to a sole arbitrator, HSIIDC objected that the deposit had not been made. The arbitrator agreed, ordered the deposit within 15 days, and dismissed the claim when it was not paid. The commercial court affirmed, relying on SK Jain v. State of Haryana, a three-judge bench ruling that had upheld materially similar clauses.

The standard defence of such clauses, repeated across the litigation history this order surveys, is that they filter out frivolous or inflated claims. A contractor with real skin in the game, the argument goes, will only invoke arbitration for genuine disputes.

That justification deserves more scrutiny than it usually gets, and the bench's order, while sympathetic to striking the clause down, does not fully supply it.

Why “Filtering Frivolity” Does Not Hold Up

A flat percentage deposit filters for one thing only, that is, a contractor’s available liquidity at the moment of filing. It has no logical connection to the merit of the underlying claim. A contractor with a strong, well-documented INR 50 lakh claims but a cash-flow crunch, quite plausibly caused by the very non-payment giving rise to the dispute, is screened out exactly as effectively as one filing a speculative claim. Meanwhile, a well-capitalized contractor can advance a weak claim without friction. If the objective is to deter weak claims, a deposit conditioned on outcome (costs awarded against an unsuccessful claimant, for instance) targets the problem directly. A deposit conditioned on invoking arbitration at all does not. The bench’s own language that such conditions ‘inevitably suppress claims’ and ‘defeat’ arbitration’s purpose, implicitly concedes this, but the order stops short of naming the mismatch between the stated rationale and the clause's actual mechanics.

This matters for how the larger bench should approach the case. If the pre-deposit clause is upheld again on the theory that it filters frivolous claims, that holding will rest on an empirical assumption of liquidity correlates with claim merit, that nobody in this litigation has actually tested or defended.

Is Section 18 the Right Provision?

The bench framed one of its referred questions around Section 18 of the Arbitration and Conciliation Act 1996, which requires equal treatment of parties ‘at every stage’ of arbitral proceedings. It is an intuitively appealing hook. The clause burdens only the contractor, never the government body on the other side but it may be the wrong tool for the job. Section 18 governs the conduct of arbitration once initiated: how evidence is heard, how hearings are scheduled, how each side is given a fair opportunity to present its case. A pre-deposit clause operates at the threshold, before the tribunal is even constituted in a functional sense. Stretching “equal treatment” to cover pre-arbitral access conditions is not obviously wrong, but it invites a narrower counter-reading under which Section 18 simply does not reach this fact pattern at all, leaving the entire objection to rest on Article 14 of the Constitution of India and Section 28 of the Indian Contract Act 1872 instead.

That distinction is not pedantic. If the larger bench ultimately decides Section 18 does not apply but Article 14 does, the outcome for contractors could be the same, but the reasoning would travel very differently. Article 14 analysis in contractual settings requires the clause to be judged against the “state action” doctrine and standards of manifest arbitrariness, which is a higher and more contested threshold than a straightforward procedural parity argument under Section 18. The bench's decision to frame both questions side by side, without prioritising between them, leaves this structural ambiguity for the larger bench to sort out rather than resolving it now.

The Refundability Question Cuts Less Than It Appears To

One of the specific questions referred asks whether a pre-deposit condition is saved by refundability, since HSIIDC’s clause returned the deposit after adjustment of any costs awarded against the claimant. This is worth being sceptical of. The barrier a pre-deposit clause creates is not a permanent loss of funds. It is an upfront liquidity requirement at a moment the contractor may not control. A refundable deposit still has to be found before arbitration can start, from working capital, credit, or elsewhere, and for a contractor already in dispute with its counterparty over money it says it’s owed, that liquidity may simply not exist. Refundability addresses the wrong harm. It answers “will the contractor eventually get its money back” when the operative question is “can the contractor access arbitration at all”. A clause can be perfectly refundable and still be exclusionary in practice. The larger bench would do well to treat refundability as, at most, a mitigating factor on the quantum of unfairness, not a cure for the access problem itself.

The Precedent Tangle: A Symptom, Not the Disease

Much of the order’s structure is dictated by stare decisis mechanics. A three-Judge ruling in SK Jain v. State of Haryana binds a two-Judge Bench, even one that finds a later two-Judge decision in the ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another more persuasive, and even where a separate three-Judge ruling in the Lombardi Engineering Limited v. Uttarakhand Jal Vidyut Nigam Limited held there was no real conflict between the two. This is a reasonably clean illustration of how binding precedent can preserve a rule the current bench believes is wrong, purely on institutional hierarchy grounds, until a competent bench is convened to revisit it. That is not a criticism of the bench's approach, referring the matter was the correct institutional move, but it is worth flagging that the 16 years' gap between SK Jain v. State of Haryana and this reference reflect how rarely settled arbitration clause questions get revisited, even as arbitration has grown into the default dispute mechanism for public contracts.

What's at Stake Beyond This Contract

Clauses like 25-A(vii) are close to standard form across Indian public works contracts. A ruling striking them down would not just resolve Santosh Associate's INR 2.40 crore dispute, it would require government departments and public-sector undertakings nationwide to redraft a common boilerplate provision, and would likely invite fresh challenges in pending matters where similar deposits have already barred claims from reaching arbitration. Conversely, an affirmance of SK Jain v. State of Haryana, even a qualified one, would need to directly answer the liquidity-versus-merit mismatch this piece has traced, or risk being seen as form triumphing over the substance of access to dispute resolution.

The larger bench, when constituted, has an opportunity to do more than choose between SK Jain v. State of Haryana and ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another. It can clarify which constitutional and statutory provision actually governs pre-arbitral access conditions, test the frivolity-filtering rationale against how such clauses actually operate, and decide whether refundability is doing any real work at all. The current order asks the right questions. Whether it gets analytically rigorous answers is now up to a bench yet to be named.

Conclusion

Ultimately, the value of this reference lies less in its outcome and more in the framework it compels the larger bench to build. A clause that has quietly shaped Indian public contracting for over a decade cannot be resolved by simply picking a side between two conflicting precedents, it demands an honest reckoning with what “access” to arbitration actually requires, and whether cost-based deterrents can ever substitute for merit-based ones. Until that reckoning happens, contractors across the country remain in the same position M/s Santosh Associate Private Limited v. Haryana State Industrial and Infrastructure Development Corporation Limited did: bound by a clause the court itself doubts, waiting for a bench with the authority to say so.