Pricing out Justice? The Supreme Court’s Reference in Santosh Associate

[Pranav is a student at NALSAR University of Law.]

For over a decade, courts have been troubled by contractual provisions that require only the contractor to pay a deposit before invoking arbitration, and this issue has now been brought before the Chief Justice of India. When considering the case of Santosh Associate v. Haryana State Industrial and Infrastructure Development Corporation, which was decided on 17 August 2026, a bench consisting of Justices Manoj Misra and Manmohan cast doubt about a three-judge decision that has been in force since 2009 and requested that the validity of clauses requiring only the contractor to make a pre-deposit be referred to a larger bench. The reference brings a familiar clause back into focus and provides the court with an opportunity to resolve a question which its own rulings have not settled.

Background

In 2016, the Haryana State Industrial and Infrastructure Development Corporation (HSIIDC) called for tenders relating to storm-water drainage works in Gurugram, and the following year, the contract was awarded to Santosh Associate for a sum of about INR 5.14 crore. According to clause 25-A(vii) of the Agreement, any contractor who wished to make a claim of INR 1 lakh or more had to provide as a security deposit 10% of the claim amount before any reference to arbitration could be made. The scope of work was subsequently reduced, and the contract value was lowered accordingly, but disagreements over final payment continued. In 2024, a sole arbitrator was appointed by the Punjab and Haryana High Court, and HSIIDC objected on the ground that Santosh Associate had not supplied the deposit. When the deposit had not been paid, the claim was entirely dismissed, and the Commercial Court at Gurugram affirmed that decision by citing the judgement in SK Jain v. State of Haryana.

The Precedent Conflict

The clause in Santosh Associate was the same as that which a three-judge bench had previously affirmed in SK Jain, where the deposit had been regarded as a balancing factor against inflated and frivolous claims. 

A different view was taken a decade later in ICOMM Tele v. Punjab State Water Supply & Sewerage Board (ICOMM Tele), where a two-judge bench struck down a similar clause. That clause allowed for forfeiture, and the court held that a flat 10% deposit had no rational connection with weeding out frivolous claims, since frivolousness could not be assessed before a claim was even examined.

The apparent conflict was addressed again in Lombardi Engineering v. Uttarakhand Jal Vidyut Nigam (Lombardi), where a 7% pre-deposit condition was struck down as manifestly arbitrary, while S. K. Jain and ICOMM Tele were held not to be in conflict at all, because the two clauses before them had been materially different. Neither Lombardi nor the Constitution Bench in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (CORE), which reaffirmed the mandatory nature of Section 18 of the Arbitration and Conciliation Act 1996 (Act) throughout the arbitral process, held that SK Jain was wrongly decided.

The Court’s Reasoning

Bound by that line of reasoning, the bench in Santosh Associate could not treat a three-judge precedent as no longer binding, even while acknowledging that it was prima facie in agreement with ICOMM Tele. It went further, though, in the language used to describe the risk that such clauses carry. 

The court, referring to the case of Ganga Bai v. Vijay Kumar, stated that every individual has the right to sue unless that right is expressly taken away by law, and that the apparent frivolousness of a claim in no way of itself deprives one of that right. Since Section 28 of the Indian Contract Act 1872, nullifies agreements that completely prevent a party from enforcing their rights through ordinary courts, the court described arbitration as a statutory exception to that provision and one that cannot be invoked to eliminate the right to sue. Acting on this basis, the court decided that an arbitration clause cannot impose pre-deposit conditions so severe and onerous as to render the right to sue “illusory or nugatory” at the very outset, before the claim is even considered on its merits. 

The Chief Justice was accordingly asked to consider referring six questions to a larger bench, going to whether contractor-only pre-deposits breach Section 18’s guarantee of equal treatment, whether they discourage recourse to arbitration, whether they are arbitrary under Article 14 of the Constitution, whether they bear any rational connection to curbing frivolous claims, whether refundability cures the defect, and whether SK Jain remains good law.

What is at Stake?

The disproportion in Santosh Associate’s own facts illustrates why these questions matter. On a claim of about INR 1.77 crore, a 10% deposit is roughly INR 17.7 lakhs, more than double the ad valorem court fee of about INR 7.16 lakhs that a civil suit of the same value would have attracted in Haryana. A mechanism meant to be a cheaper and faster alternative to litigation had, on these numbers, become the costlier route into dispute resolution. 

The burden was also distributed unevenly. Clause 25-A(vii) only came into effect when the contractor attempted to invoke arbitration, and HSIIDC had no corresponding obligation of its own when bringing any counter-claims. The Section 18 guarantee, which CORE refers to as mandatory and applicable throughout the arbitral process, is inconsistent with a financial checkpoint, which requires only one party to go through it.

The justification usually offered for such clauses, that they deter frivolous or inflated claims, rests on assessing a claim’s merit before it is heard, when the Act already screens for it afterwards. Section 31(8), read with Section 31A, already equips tribunals to penalise abusive or unsuccessful claims through costs once proceedings conclude, when the merits are known, and not at the outset. A blanket percentage-based deposit charged before any hearing takes place addresses a problem that the Act has already equipped tribunals to handle, in a cruder and more exclusionary way. 

A financial threshold of some kind need not be based on the value of the claim. It would be sufficient to have a nominal and uniform filing fee, which is paid by the party who opts for arbitration, to achieve any legitimate administrative purpose more fairly than a security deposit calculated as a percentage. Thus, a check would be maintained against opportunistic references without driving genuine claims out of the process, and at the same time, it would meet the objection concerning equality that is made in Section 18, since it would be the same regardless of which party initiates the procedure. 

SK Jain has not yet been overruled, and by choosing to distinguish rather than overrule it, Lombardi has left scope for pre-deposit clauses to continue in some form. The decision taken by the larger bench will have implications that extend well beyond Santosh Associate’s particular case. If the court’s ruling were limited to clauses involving a forfeiture provision, as it was in ICOMM Tele, then refundable deposits such as that in Clause 25-A(vii) would mostly remain unaffected. On the other hand, a ruling that declares any onerous and one-sided deposit to be inconsistent with Section 18 and Article 14 would go much further. The clause is not unique to HSIIDC. SK Jain, ICOMM Tele, and Lombardi all arose out of comparable pre-deposit terms used by state bodies in Haryana, Punjab, and Uttarakhand, and a ruling striking such terms down as a class would put public contracts carrying a similar clause in question. Either way, the reference gives the court a chance to state plainly whether a contractor’s access to arbitration can be made to depend on liquidity it may not have, for a dispute whose merits have not yet been tested.