A note on pre-deposit of a security amount prior to reference to Arbitration.

Anand Byra Reddy. Judge (Rtd). Karnataka High Court.

M/s Santosh Associate Private Limited vs. Haryana State Industrial and Infrastructure Development Corporation Limited. In the above matter, a condition in an arbitration clause, in a contract, requiring a pre-deposit of a security amount - prior to reference to Arbitration, was held violates Article 14 of the Constitution of India and the right to sue, as considered under Section 28 of the Indian Contract Act, 1872; Also, Section 18 of the Arbitration and Conciliation Act, 1996 (A & C Act) seeking reference to a larger Bench by a 2-Judge Bench of the Supreme Court of India, was the subject matter.

The facts: 1. The Respondent is said to have invited tenders for construction of storm water drain systems, the Appellant being the successful bidder, had been awarded the contract valued at over Rs.5 Crore. It is said the contract contained a Clause that in the event of the Contractor, the appellant in the case on hand, if should raise claims - he should deposit a percentage of the claim amount as security, prior to reference to arbitration, as per the arbitration clause - in the Agreement between the parties. It transpired that the Appellant did raise a dispute on completion of certain works.

2. At the instance of the Appellant, the jurisdictional High Court is said to have nominated a sole arbitrator, under Section 11(6) of the A & C Act. On the Arbitrator entering upon the Reference, the Respondent is said to have filed an Application under Section 16 of the Act, to contend that the Claim was not maintainable without the pre-deposit of the security amount. This was said to be upheld by the Arbitrator. Against which Order, the Appellant is said to have approached the jurisdictional Commercial Court, with an Appeal. The said Court is said to have dismissed the Appeal.

3. In an Appeal, arising out of SLP (C) No. 31245 of 2025-filed by the Appellant above named, challenging the judgment of the Commercial Court under Section 37 (2) of the A & C Act; Which had been dismissed on the ground that there was non-compliance of a contractual stipulation requiring a prior security deposit of a percentage of the Claim amount. 4. The Appellant was hence, before the Apex Court in the above Appeal; On a consideration of the contentions of the parties and on a conspectus of the law the Apex Court has held as follows:

The Hon. Court has firstly, considered the ratio decidendi flowing from the cases of: i. S.K. Jain vs. State of Haryana, (2009) 4 SCC 357; ii. ICOMM Tele Ltd. vs. Punjab State Water Supply, (2019) 4 SCC 401; iii. Lombardi Engineering Ltd. vs. Uttarakhand Jal Vidyut Nigam Ltd. (2024) 4 SCC 341 and iv. Central Organisation for Railway Electrification (CORE) vs. M/s ECI-SPIC-SMO-MCML (JV), (2025) 4 SCC 641.

5. The Court has found that in S.K. Jain (supra), a 3-Judge Bench of the Apex Court, had rejected the challenge to an arbitration clause, which required the contractor to make a pre-deposit of a percentage of the amount of Claim, prior to the reference of the disputes to arbitration. In Lombardi Engineering (supra) a 3-judge Bench of the Apex Court, had held that party autonomy cannot extend to contractual terms that infringe fundamental rights and the frivolous claims can be addressed through costs. However, in the very judgment it was held that there is no conflict between S.K. Jain and ICOMM Tele Ltd. (supra) as the relevant arbitration clauses in the two cases were distinct and stood on different footings. And that, the Constitution Bench in CORE (supra) held that Section 18 of the A & C Act, is mandatory and a non-derogable provision which would apply to all stages of the arbitral proceedings, including the process of appointment of the arbitral tribunal. It was found to be held that the predeposit clause was arbitrary, for it defeated the purpose of arbitration as held in ICOMM (supra); And that party autonomy cannot be stretched to an extent - that it violated the fundamental rights under the Constitution, as held in Lombardi (supra), namely, that it violated Article 14 of the Constitution of India.

However, in the present Appeal with which the Hon. Court was dealing, it was stated that having regard to the bounds of judicial discipline and the authority of precedents, it was observed that the decision in ICOMM, being a 2- Judge Bench decision, could not override the principle enunciated in S.K.Jain, a 3-Judge Bench decision, even though it was also in agreement with the reasoning in ICOMM. Consequently, it was opined that it is difficult for a 2-Judge Bench combination to hold that S.K.Jain judgment is sub silentio or no longer good law. And that neither in Lombardi nor in CORE, was it held that S.K. Jain was not good law.

6. It was held that an arbitration clause cannot impose - onerous predeposit conditions so as to render the right to sue, at the threshold, nugatory. This, it is held, would defeat the very object of alternative dispute resolution.

7. Therefore, as the Court was in doubt about the legality and validity of the 3-Judge Bench decision in S.K. Jain as a binding precedent, was of the opinion, that the matter called for a reference to a larger Bench. Accordingly, the Court requested the Hon. CJI to consider the desirability as to whether the issues formulated would warrant a reference to a larger Bench. The following 6 Issues were tentatively formulated, or such other Issues as may be deemed relevant:

a. Whether a stipulation requiring the contractor alone to make a predeposit of security/fees prior to reference of disputes to arbitration is contrary to Section 18 of the Act which mandates equal treatment of parties at all stages of arbitration?

b. Whether pre-deposit conditions in contracts having Arbitration clause discourages Alternative Dispute Resolution and undermine its objective of de-clogging the court system?

c. Whether a condition of pre-deposit of security/fees prior to reference to Arbitration is arbitrary and violative of the right to sue as well as Article 14 of the Constitution and Section 28 of the Indian Contract Act, 1872?

d. Whether requirement of pre-deposit of security/fees has any rational relation to the object of curbing frivolous claims as at that stage it cannot be said that the claims are frivolous and moreover such frivolous claims may adequately be addressed under Section 31(8) of the Act through imposition of costs at the conclusion of the arbitration proceedings?

e. Whether a pre-deposit condition is valid in an arbitration case where the said deposit is refundable upon the conclusion of arbitration proceedings? f. Whether S.K. Jain (supra) is a valid and binding precedent? Observations on the above judgment: When the Supreme Court itself, has declared that S.K. Jain (supra) holds the field as on date and that it may require reconsideration, in the vein suggested. It is unnecessary to suggest any other views. Except to ponder on some points.

As it is the arbitral tribunal which is most competent to determine any and all questions pertaining to the arbitration before it, it should be left to the Tribunal to finally determine whether the Claim was frivolous, and the discretion is already available to the Tribunal to impose costs, if it is found to be frivolous, on a final determination of the Claim.

There cannot be a phenomenal pre-deposit - on a percentage of the Claim at the threshold. And it should be applied to a Counterclaim as well, if at all.

Given that Claims these days, frivolous or not, may run into several hundred crores of rupees and it also not being unusual for matters to hang fire, well past the period prescribed under the Act, for determination of the Disputes; Where should the pre-deposit be lodged? Certainly not with the parties. In escrow? Why should a party who has suffered losses already, add to it? And who is entitled to the Interest that may accrue on the Pre-deposit? Sheet Continuation.

Any such agreements in arbitration clauses, in contracts, already executed -must be held to be void – in relation to such requirement of pre-deposits, on a reference to a larger Bench - by that larger Bench.