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Supreme court doubts correctness of S.K. Jain verdict on arbitration pre-deposit clauses, refers question to larger bench
Case Title: Santosh Associate Pvt. Ltd. v. Haryana State Industrial and Infrastructure Development Corporation Ltd.
Case No. : Civil Appeal No. 10953 of 2026 (SLP (C) No. 31245 of 2025)
Coram: Justice Manoj Misra and Justice Manmohan
Date of Judgment: 17 August 2026
The Supreme Court has expressed doubt over the continued binding effect of its three-judge bench decision in S.K. Jain v. State of Haryana, (2009) 4 SCC 357, which had upheld a pre-deposit clause in an arbitration agreement, and has requested the Chief Justice of India to consider referring the question to a larger bench.
A Bench of Justice Manoj Misra and Justice Manmohan was hearing an appeal against a judgment of the Commercial Court, Gurugram, which had dismissed the appellant's appeal under Section 37(2) of the Arbitration and Conciliation Act, 1996 and upheld an order of the Sole Arbitrator dismissing the appellant's claim in entirety under Section 16 of the Act.
Background
The dispute arose from a contract awarded to the appellant for execution of storm water drainage and contingent works in Gurugram. Clause 25-A(vii) of the contract required a contractor invoking arbitration for claims exceeding Rs 1,00,000 to furnish a security deposit of ten per cent of the claim amount, adjustable against costs, if any, awarded against the claimant, and refundable thereafter. On a claim of Rs 1,77,00,000, the appellant was required to deposit Rs 17,70,000. Upon its failure to furnish the deposit despite direction from the Sole Arbitrator, its claim was dismissed in entirety under Section 16 of the Act. The Commercial Court upheld this order, relying on S.K. Jain v. State of Haryana.
Contentions
The appellant argued that Clause 25-A(vii) was violative of Article 14 of the Constitution as it discriminated against contractors alone, bore no rational nexus with the object of curbing frivolous claims since Section 31(8) of the Act already permitted imposition of costs for such claims, and was contrary to Section 18 of the Act mandating equal treatment of parties. It was submitted that S.K. Jain did not consider the question of Article 14 and was sub silentio on the point, and reliance was placed on ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board, (2019) 4 SCC 401, Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., (2024) 4 SCC 341, and the Constitution Bench decision in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2025) 4 SCC 641.
The respondent argued that S.K. Jain continued to bind as it upheld a refundable pre-deposit clause similar to the one in question, and sought to distinguish ICOMM Tele Ltd. on the ground that the clause struck down there provided for forfeiture of the deposit even where the claimant succeeded, unlike the present refundable clause.
Comparative Table Placed By The Respondent
Counsel for the respondent placed before the Court a comparative table of the arbitration clauses considered in S.K. Jain, ICOMM Tele Ltd. and Lombardi Engineering Ltd. It was pointed out that the clause in S.K. Jain, a three-judge bench decision, required a security deposit determined on a graded scale depending on the amount claimed, adjustable against costs awarded against the claimant, with the balance refundable within one month of the award, a structure mirrored in Clause 25-A(vii) in the present case. The clause in ICOMM Tele Ltd., a two-judge bench decision, by contrast, required a deposit-at-call of ten per cent of the amount claimed, refundable only in proportion to the amount actually awarded, with the balance forfeited to the other party regardless of costs. The clause considered in Lombardi Engineering Ltd. required a fixed deposit of seven per cent of the claim as security, without a comparable forfeiture mechanism. On this basis, the respondent sought to justify continued reliance on S.K. Jain as the governing precedent for refundable, cost-adjustable pre-deposit clauses.
Court's Reasoning
The Court noted that while S.K. Jain had rejected the plea of unequal bargaining power and unconscionability regarding a similar pre-deposit clause, and had additionally upheld the graded structure of the deposit as a balancing factor to prevent frivolous and inflated claims, it was prima facie difficult to hold that the Article 14 argument had not been advanced in that case, notwithstanding the observation to the contrary in ICOMM Tele Ltd. The Court also noted that Lombardi Engineering Ltd., a three-judge bench decision, had expressly held in paragraph 61 that there was no conflict between S.K. Jain and ICOMM Tele Ltd., making it difficult for a two-judge bench to treat S.K. Jain as no longer good law or rendered sub silentio.
The Court further recorded that the Constitution Bench in CORE, while quoting S.K. Jain with approval, had summarised ICOMM Tele Ltd. as having held that a contractual clause would be arbitrary if it was unfair and unjust and one which no reasonable person would agree to, and had termed the pre-deposit clause in that case violative of Article 14 for being excessive, disproportionate, and contrary to the object of arbitration insofar as it deterred a party from invoking the process. The Constitution Bench had similarly recorded that Lombardi Engineering Ltd. concluded that party autonomy could not be stretched to violate fundamental rights, and that the pre-deposit clause in that case violated Article 14.
Right To Sue And Section 28 Of The Contract Act
The Court observed that an argument not considered in the earlier judgments was that the right to sue inheres in every individual, save where expressly barred by statute, referring to its decision in Smt. Ganga Bai v. Vijay Kumar and Ors., (1974) 2 SCC 393, for the proposition that a litigant may, at his own peril, institute a suit of his choice, and that the maintainability of a suit, unlike an appeal, requires no statutory sanction. The Court further noted that Section 28 of the Indian Contract Act, 1872 declares void any agreement that absolutely restrains a party from enforcing its contractual rights through the usual proceedings in ordinary tribunals, with the reference of disputes to arbitration being the sole statutory exception to this rule, first under the Arbitration Act, 1940 and presently under the Arbitration and Conciliation Act, 1996. The Court observed that arbitration remains an exception to litigation in courts, and not a substitute for it, and referred in this context to the historical reluctance in Indian legal practice towards alternative dispute resolution, as recorded in the foreword to a text on mediation practice authored by the late Mr. Fali S. Nariman, Senior Advocate.
On this basis, the Court observed that an arbitration clause cannot impose pre-deposit conditions so onerous as to render the right to sue illusory or nugatory at the threshold, and that a stipulation mandating deposit of a substantial percentage of the claim amount as a precondition to invoking arbitration would inevitably suppress claims, deter recourse to alternative dispute resolution, and thereby defeat its very object.
Reference To A Larger Bench
Referring to the principles governing references to larger benches as reiterated in Central Board of Dawoodi Bohra Community v. State of Maharashtra, (2005) 2 SCC 673, and reaffirmed by a seven-judge bench in Aligarh Muslim University v. Naresh Agarwal, (2025) 6 SCC 1, the Court noted that a bench of lower or equal strength doubting the correctness of a decision of larger strength cannot itself dissent from it, but may invite the attention of the Chief Justice of India to seek a reference to a bench of greater strength. Holding that the correctness of S.K. Jain, being a three-judge bench decision, could only be doubted by a bench of equal strength, the Court, sitting in a combination of two judges, accordingly requested the Chief Justice of India to consider the desirability of referring the matter to a larger bench.
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