The Supreme Court of India has questioned the validity of arbitration clauses mandating contractors to make pre-deposits before initiating arbitration proceedings. This comes after the Court reviewed its own previous decision in Santosh Associate v. HSIIDC, which upheld such clauses. A bench comprising Justices Manoj Misra and Manmohan has referred the matter to the Chief Justice of India for consideration by a larger bench.
Issues for Consideration
The bench has posed several pertinent questions to be addressed by the larger bench, including:
- Does a clause requiring only contractors to make a pre-deposit before arbitration contravene Section 18 of the Arbitration and Conciliation Act, 1996, which ensures equal treatment of both parties at all stages of arbitration?
- Do pre-deposit conditions discourage parties from seeking arbitration, thus undermining its purpose of alleviating court burdens?
- Is such a requirement arbitrary and in violation of Article 14 of the Constitution and Section 28 of the Indian Contract Act, 1872?
- Does a pre-deposit clause serve a legitimate purpose in deterring frivolous claims, especially when costs can be levied at arbitration’s conclusion under Section 31(8) of the Arbitration Act?
- Is a pre-deposit clause valid if the deposit is refundable once arbitration concludes?
- Does the precedent set by SK Jain remain valid and binding?
Background of the Case
The controversy arose from a contract for drainage works awarded to Santosh Associate Private Limited in 2017 by the Haryana State Industrial and Infrastructure Development Corporation. The contract included a clause necessitating a 10% claim amount deposit for claims exceeding ₹1 lakh before arbitration. When the contractor attempted to initiate arbitration due to payment disputes, the Corporation challenged this, noting the absence of the deposit.
The arbitrator upheld the Corporation’s objection and dismissed the claim due to the contractor’s refusal to pay the deposit. This decision was later affirmed by a commercial court in Gurugram, which relied on the Supreme Court’s 2009 ruling in SK Jain v. State of Haryana that had upheld a similar clause.
Arguments Presented
Before the Supreme Court, the contractor argued that such clauses are unconstitutional, as they discriminate by applying solely to contractors without reciprocity for the state. They referenced recent judgments, such as ICOMM Tele Ltd. v. Punjab State Water Supply (2019), which invalidated a similar clause as arbitrary, and Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam (2024), which emphasized that contractual autonomy cannot override fundamental rights.
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The contractor contended that SK Jain was decided “sub silentio,” without an Article 14 challenge, and should not be considered binding. Conversely, the Corporation argued that SK Jain remains valid, emphasizing that the deposit in question was refundable and not subject to forfeiture, unlike the clause in ICOMM Tele Ltd.
Supreme Court’s Observations
The Court acknowledged the apparent conflict in precedents and expressed that a larger bench was necessary to resolve this. They noted that the right to sue should not be hindered by pre-deposit clauses that effectively nullify this right.
Legal representation for the petitioner included Advocates Shreeyash U Lalit, Rishi Kapoor, Arun Choken, Azad Bansala, Shailendra Singh, Inderjeet Dagar, Prakriti Rastogi, Mitul Sehrawat, Naveen Tanwar, and Nadeem Arman. HSIIDC was represented by Senior Additional Advocate General Alok Sangwan, along with Advocates Samar Vijay Singh, Sumit Kumar Sharma, Rajat Sangwan, Vaibhav Yadav, Harsh Mehla, Sabarni Som, Aman Dev Sharma, Gaj Singh, and Keshav Mittal.
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