The Toll Gate at the Threshold: Santosh Associate, Pre-Deposit Clauses and the Right to Arbitrate
By Aditya Bhargava.
About the Author:
The author is a fifth-year student at the National Law School of India University, Bengaluru.
Abstract:
In M/s Santosh Associate Private Limited v Haryana State Industrial and Infrastructure Development Corporation Ltd, the Supreme Court doubted whether a clause compelling a contractor alone to deposit 10% of its claim before invoking arbitration can survive Article 14 of the Indian Constitution, yet referred the question rather than deciding it. This piece argues that the deference is misplaced. SK Jain applied a contractual standard and never engaged the constitutional one, so it cannot bind on a question it never addressed. It further argues that refundability answers only the forfeiture limb of ICOMM, leaving its rational-nexus reasoning wholly untouched by the distinction.
Keywords: Pre-Deposit Clauses; Article 14; Sub Silentio; Access to Arbitration
Introduction
In May 2017, the Haryana State Industrial and Infrastructure Development Corporation awarded a contract for storm water drainage works to a contractor. The scope of the work was later reduced, disputes arose over the final bill, and the contractor invoked arbitration. Clause 25-A(vii) of the contract barred any reference to arbitration by the contractor unless it first furnished a security deposit rising to 10% of the amount claimed. The contractor did not furnish that deposit. The sole arbitrator upheld the objection that followed, dismissed the claim in its entirety, and the Commercial Court affirmed. No forum has examined whether the claim had merit.
On these facts, the Supreme Court in M/s Santosh Associate Private Limited v Haryana State Industrial and Infrastructure Development Corporation Ltd, 2026 INSC 872 (‘Santosh Associate’), held at ¶ 29 that an arbitration clause cannot impose conditions so onerous as to render the right to sue “illusory or nugatory” at the very threshold. It nevertheless declined to decide the matter, referring six questions to the Chief Justice of India for a larger Bench. One of those questions is whether SK Jain v State of Haryana, (2009) 4 SCC 357 (‘SK Jain’), which upheld a pre-deposit clause, remains valid and binding. The question the reference actually poses is, however, broader, because it asks whether the stronger party to a public contract may fix the price of admission to the only forum in which the weaker party may sue. Until it is answered, the appellant’s claim stands dismissed, and the offending clause stands intact.
In this post, I argue that this deference is misplaced, because SK Jain is not an authority on the constitutional question at all. It was decided in the grammar of contract law, which asked about unequal bargaining power, party autonomy and the sanctity of express terms, and the Court has since abandoned that grammar for public-private contracts. I shall develop this argument in four steps. First, I set out the three features of the clause that the case law has conflated, and why the Bench felt constrained to refer rather than decide. Second, I explain why a condition on the arbitral reference differs from one on an ordinary civil suit. Third, I examine what SK Jain actually decided, and argue that refundability cannot save the clause. Finally, I turn to the comparative position.
Santosh Associate and the Toll Gate at the Threshold
The security deposit demanded by Clause 25-A(vii) was graded by claim value, rising to 10% for claims above ₹1,00,000, and was refundable after the award if no costs were awarded against the contractor. When disputes arose, a sole arbitrator was appointed under section 11(6) of the Arbitration and Conciliation Act, 1996 (‘the Act’), the respondent objected under section 16, and that objection succeeded. On appeal under section 37(2), the Commercial Court affirmed the resulting dismissal, relying on SK Jain.
Three features of this clause are analytically distinct, and conflating them is how the jurisprudence went wrong. First, the obligation is unilateral, because the State pays nothing whether it defends the claim or brings a counter-claim of its own. Second, the quantum bears no relation to cost, since it scales with the size of the claim rather than the expense the arbitration will actually incur. As the appellant pointed out at ¶9, on a claim of ₹1.77 crore the deposit came to ₹17.7 lakh, whereas the ad valorem court fee in Haryana would have been ₹7.16 lakh, so that on the contract’s own arithmetic the cheaper forum cost more than twice the price of the expensive one. Third, payment falls due before the tribunal has read a single pleading, and therefore before any assessment of frivolousness is possible. These features therefore attract three separate objections: to equal treatment, to proportionality and to rational nexus, each to be answered on its own terms.
The Bench was, however, unable to act upon that analysis, because of the relationship between the two governing decisions. In SK Jain, a three-Judge Bench upheld a clause requiring the contractor alone to deposit up to 7% of the amount claimed, holding that a graded deposit had “logic in it” and was “the balancing factor to prevent frivolous and inflated claims”. In ICOMM Tele Ltd v Punjab State Water Supply and Sewerage Board, (2019) 4 SCC 401 (‘ICOMM’), a two-Judge Bench struck down a 10% “deposit-at-call” as arbitrary, because a deposit exacted before any determination of frivolousness bore no direct nexus to that object. ICOMM distinguished SK Jain on two grounds, first that no plea under Article 14 had been advanced there, and second that the clause was materially different, the deposit in SK Jain being refunded after adjustment against costs, whereas the ICOMM clause refunded only in proportion to the amount awarded and forfeited the balance to the opposing party even if it had lost.
The Bench in Santosh Associate doubted both grounds. It observed at ¶21 that, because SK Jain had held the graded deposit to be non-arbitrary, reasonable and possessed of a nexus with its object, it was “prima facie difficult for a combination of two Judges to hold that the argument qua Article 14 was not advanced” there. It noted at ¶26 that Lombardi Engineering Ltd v Uttarakhand Jal Vidyut Nigam Ltd, (2024) 4 SCC 341 (‘Lombardi’), a three-Judge Bench, had held that no conflict exists between the two. Mindful of judicial discipline, it therefore held that ICOMM, being a two-Judge decision, could not override the principle laid down in SK Jain, even though it was prima facie in agreement with ICOMM’s reasoning. It then added at ¶27 a fresh argument from the right to sue.
Why the Threshold Is Different
Section 28 of the Indian Contract Act, 1872, voids any agreement that absolutely restrains a party from enforcing its rights by the usual proceedings in ordinary tribunals, and the only exception it saves is the reference of disputes to arbitration. Arbitration is therefore an exception carved out of the civil suit, not a parallel avenue. Once parties have contracted into arbitration, sections 5 and 8 of the Act close the courthouse door behind them, and the arbitral reference ceases to be one of two forums and becomes the only one. This matters because Ganga Bai v Vijay Kumar, (1974) 2 SCC 393, holds that the right to sue inheres in every person and requires no statutory sanction. A pre-deposit condition therefore does not divert that right elsewhere but extinguishes it, as the appellant’s dismissed claim demonstrates. Therefore, the order is right to invoke, at ¶28, Fali Nariman’s observation that alternative dispute resolution remains a new graft upon the Indian legal psyche.[i] A graft takes only if the host accepts it, and arbitration will not take root if entry must be purchased before the claim is read, because a remedy the claimant cannot afford to invoke is no remedy at all.
[i] Fali S Nariman, Foreword to Sriram Panchu, Mediation Practice and Law: The Path to Successful Dispute Resolution (LexisNexis Butterworths Wadhwa 2011), quoted in M/s Santosh Associate Private Limited v Haryana State Industrial and Infrastructure Development Corporation Ltd 2026 INSC 872 [28].
Law on Pre-Deposit Clauses
What SK Jain actually decided requires re-reading, because the judgment runs to only fifteen paragraphs. The Court rejected the plea of unequal bargaining power on the authority of Central Inland Water Transport Corporation Ltd v Brojo Nath Ganguly, (1986) 3 SCC 156, which had held that the concept has no application to commercial contracts. At ¶12, it held that sections 31(8) and 38 of the Act operate only where the parties have made no agreement as to costs, and it then invoked Excise Commissioner v Issac Peter, (1994) 4 SCC 104, for the proposition that no doctrine of fairness may alter the express terms of a contract with the State. Its entire reasoning on the pre-deposit appears at ¶14 and occupies four sentences.
It is to be noted that it is structured on the basis of the quantum involved. Higher the claim, the higher is the amount of fee chargeable. There is a logic in it. It is the balancing factor to prevent frivolous and inflated claims.
Nowhere does the judgment ask whether the measure bears a rational nexus to the object of curbing frivolous claims, and nowhere does it ask whether it is proportionate to that object. Whether or not the word “arbitrary” appeared in the pleadings, the standard the Court actually applied was contractual rather than constitutional. That is precisely what sub silentio means on the formulation adopted in Municipal Corporation of Delhi v Gurnam Kaur, (1989) 1 SCC 101, which at ¶11 quoted the twelfth edition of Salmond on Jurisprudence.[i]
A decision passes sub silentio, in the technical sense that has come to be attached to that phrase, when the particular point of law involved in the decision is not perceived by the court or present to its mind … although point B was logically involved in the facts and although the case had a specific outcome, the decision is not an authority on point B.
The treatment of section 38 in SK Jain was, moreover, inverted. Section 38 vests the power to fix deposits in the tribunal for the costs it expects will be incurred, while its second sub-section directs that any such deposit shall be payable in equal shares by the parties. The statutory regime is therefore symmetric, fixed by the adjudicator and tied to cost, whereas Clause 25-A(vii) is the opposite on each count, being asymmetric, fixed by one party and tied to the size of the claim. Therefore, to treat section 38 as a default that private agreement may displace is to turn a provision built upon equality into a bargaining chip. Nor does the contractor’s signature answer the point, since Lombardi held at ¶¶84 and 85 that party autonomy cannot be stretched to violate fundamental rights, and that such rights cannot be waived.
The refundability distinction fares no better, because the ratio of ICOMM is not confined to forfeiture. Its central holding appears at ¶23.
A “deposit-at-call” of 10 per cent of the amount claimed, which can amount to large sums of money, is obviously without any direct nexus to the filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at the very threshold. A 10 per cent deposit has to be made before any determination that a claim made by the party invoking arbitration is frivolous.
That reasoning says nothing about the wording of the clause before the Court, nor do the further holdings. At ¶24 the Court held that any deposit requirement is a clog upon a process that ought to be encouraged and will often exceed the court fee payable on a suit, and at ¶27 that a 10% pre-deposit renders the arbitral process “ineffective and expensive”. Only the illustration of proportionate forfeiture turns on the wording of that clause, and Lombardi therefore reconciled the two decisions upon the narrowest of ICOMM’s reasons. Lombardi is, however, more than an obstacle. At ¶68, the same three-Judge Bench struck down a 7% pre-deposit for violating Article 14, because the contract said nothing about how it would ultimately be adjusted. All three clauses were thus sorted by their refund mechanics alone, precisely the axis this post contends is the wrong one. Lakshya Gupta observed on the Kluwer Arbitration Blog, shortly after ICOMM, that pre-deposit clauses remained unbanned because SK Jain had been distinguished rather than overruled. The present reference vindicates that prediction.
Refundability answers the forfeiture point and nothing else. A refundable deposit is not a costless deposit, because it remains the price of capital immobilised for the life of the arbitration, borne by the party least able to bear it, a contractor whose receivables are still outstanding from the counterparty it seeks to sue. The deterrent lies in the outlay itself, not in where the money eventually goes.
The Constitution Bench in Central Organisation for Railway Electrification v ECI-SPIC-SMO-MCML (JV), (2025) 4 SCC 641 (‘CORE’) held in its concluding ¶169 that equal treatment applies at every stage of arbitration and that unilateral clauses in public-private contracts violate Article 14, and at ¶¶ 147 to 149 it summarised ICOMM and Lombardi with approval. The premises upon which SK Jain rested therefore no longer hold. One caveat is nevertheless warranted. The CORE majority held section 18 to be mandatory and non-derogable at every stage, including the appointment of the tribunal, but Justice Narasimha, concurring, doubted at ¶54.3 whether a provision placed in the chapter governing the conduct of proceedings can govern anything before the tribunal exists. Section 18 is therefore contestable in a way that Article 14 read with section 28 is not, and it is upon the latter that the reference stands most secure.
[i] PJ Fitzgerald (ed), Salmond on Jurisprudence (12th edn, Sweet & Maxwell 1966) 153, quoted in Municipal Corporation of Delhi v Gurnam Kaur (1989) 1 SCC 101 [11].
The Comparative Position
No mature arbitral system permits the stronger contracting party to set the entry fee in advance of the dispute. Section 38(3) of the English Arbitration Act 1996 confers the power to order security for costs on the tribunal rather than on the parties by contract. Article 18 of the UNCITRAL Model Law, from which section 18 derives, likewise addresses the tribunal. Rule 53(3) of the 2022 ICSID Arbitration Rules goes further, requiring a tribunal to weigh the effect an order for security may have on a party’s ability to pursue its claim. In the United States, Green Tree Financial Corp v Randolph, 531 US 79 (2000), accepted that prohibitive costs may render an arbitral forum inaccessible, though it placed the burden of showing them on the party resisting arbitration. The thread running through these regimes is that policing unmeritorious claims is an adjudicative discretion exercised on the material, and that equal treatment, as Ilias Bantekas puts it, means no party may be preferred however strong its bargaining power. Clause 25-A(vii) therefore inverts every premise, being contractual rather than adjudicative, automatic rather than discretionary, and blind to the claimant’s capacity to pay.
Conclusion
The legislative route has stalled. The Viswanathan Expert Committee reported in February 2024, and the resulting Draft Arbitration and Conciliation (Amendment) Bill, 2024 went out for consultation that October, but has still not reached Parliament. The reference is therefore the only live route to an answer, and in framing its six questions at ¶32 the Bench has signalled the answer it expects. The larger Bench should accordingly hold that SK Jain does not bind, and that refundability is a distinction without a difference. It should also go further, because, as Ria Bansal and Raaghavi Tandon note, an Article 14 holding protects only those who contract with the State, leaving MSMEs and start-ups exposed to private clauses that deliver formal equality without equity. The more durable answer lies where the Act had already placed it, in sections 31A and 38, which leave costs and security to the tribunal once the claim is known. Until then, the cost of deferral will fall upon the appellant, whose claim stands dismissed without adjudication on its merits, and upon every contractor whose arbitrator will go on applying a 2009 precedent that three later Benches have in substance already left behind.
