In 𝑴/𝒔 𝑺𝒂𝒏𝒕𝒐𝒔𝒉 𝑨𝒔𝒔𝒐𝒄𝒊𝒂𝒕𝒆 𝑷𝒓𝒊𝒗𝒂𝒕𝒆 𝑳𝒊𝒎𝒊𝒕𝒆𝒅 𝒗. 𝑯𝒂𝒓𝒚𝒂𝒏𝒂 𝑺𝒕𝒂𝒕𝒆 𝑰𝒏𝒅𝒖𝒔𝒕𝒓𝒊𝒂𝒍 𝒂𝒏𝒅 𝑰𝒏𝒇𝒓𝒂𝒔𝒕𝒓𝒖𝒄𝒕𝒖𝒓𝒆 𝑫𝒆𝒗𝒆𝒍𝒐𝒑𝒎𝒆𝒏𝒕 𝑪𝒐𝒓𝒑𝒐𝒓𝒂𝒕𝒊𝒐𝒏 𝑳𝒊𝒎𝒊𝒕𝒆𝒅, [1] the Hon’ble Supreme Court was hesitant in upholding a contract term which required a party to make substantial pre-deposit prior to initiating arbitration proceedings. By referring the matter to Larger Bench, the Supreme Court deliberated upon the law enshrined in 𝘚. 𝘒. 𝘑𝘢𝘪𝘯 𝘷. 𝘚𝘵𝘢𝘵𝘦 𝘰𝘧 𝘏𝘢𝘳𝘺𝘢𝘯𝘢 [2] and its applicability to the Constitution, especially, Article 14, insofar as Section 28 of the Indian Contract Act, 1872 and Section 18 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) are concerned.
The Haryana State Industrial and Infrastructure Development Corporation Limited (“Respondent”) and M/s Santosh Associate Private Limited (“Appellant”) had entered into a contract for carrying out storm-water drainage and other works in in Gurugram. The contract value, which was initially around INR 5.14 crore, was reduced to about INR 2.41 crore due to site conditions and reduced scope of work. Thereafter, a dispute arose with regard to payment of the amounts due under the contract. The dispute was subject to arbitration as per the following arbitration clause of the agreement.
As the Appellant claimed about INR 1.77 crore, but failed to make the pre-deposit of 10%, a sole arbitrator was appointed by the Punjab and Haryana High Court under Section 11(6) of the A&C Act. Pursuant thereto, an application by the Respondent under Section 16 of the A&C Act was filed before the Arbitral Tribunal, the arbitrator decided that the reference to arbitration was not maintainable as the Appellant had not made the pre-deposit as stipulated under the contract. He further directed the Appellant to make the pre-deposit of 10%. As the Appellant refused to comply with the said order, its claim was dismissed in its entirety. While upholding the award of the arbitrator, the Ld. Commercial Court, Gurugram relied upon the decision of the Supreme Court in 𝘚. 𝘒. 𝘑𝘢𝘪𝘯 𝘷. 𝘚𝘵𝘢𝘵𝘦 𝘰𝘧 𝘏𝘢𝘳𝘺𝘢𝘯𝘢 (𝘚𝘶𝘱𝘳𝘢).
The issues which arose before the Hon’ble Supreme Court were: a. Whether a contract term requiring the contractor to make a substantial pre-deposit before referring the dispute to arbitration was invalid as being discriminatory and violative of the principle of equality as embodied in Section 18 of the A&C Act as well as Article 14 of the Constitution of India and Section 28 of the Indian Contract Act, 1872? b. Having regard to the conflict between the said provision and various sections of the A&C Act, and the Constitution, whether the arbitration agreement was fair and reasonable?
The Hon’ble Supreme Court was of the view that the issues raised in the appeal were of wider applicability. Consequently, after briefly referring to various judgments on the issue, including, 𝘚.𝘒. 𝘑𝘢𝘪𝘯 (𝘚𝘶𝘱𝘳𝘢) 𝘢𝘯𝘥 𝘐𝘊𝘖𝘔𝘔 𝘛𝘦𝘭𝘦 𝘓𝘪𝘮𝘪𝘵𝘦𝘥 𝘷. 𝘗𝘶𝘯𝘫𝘢𝘣 𝘚𝘵𝘢𝘵𝘦 𝘞𝘢𝘵𝘦𝘳 𝘚𝘶𝘱𝘱𝘭𝘺 𝘢𝘯𝘥 𝘚𝘦𝘸𝘦𝘳𝘢𝘨𝘦 𝘉𝘰𝘢𝘳𝘥 [3], the Hon’ble Supreme Court proceeded to decide the issues before it.
In S.K. Jain case, a three-Judge Bench of this Court had upheld a contract term under which “𝘪𝘯 𝘤𝘢𝘴𝘦 𝘰𝘧 𝘢𝘯𝘺 𝘥𝘪𝘴𝘱𝘶𝘵𝘦, 𝘵𝘩𝘦 𝘤𝘰𝘯𝘵𝘳𝘢𝘤𝘵𝘰𝘳 𝘴𝘩𝘢𝘭𝘭 𝘣𝘦 𝘢𝘵 𝘭𝘪𝘣𝘦𝘳𝘵𝘺 𝘵𝘰 𝘳𝘦𝘧𝘦𝘳 𝘵𝘩𝘦 𝘴𝘢𝘮𝘦 𝘵𝘰 𝘢𝘳𝘣𝘪𝘵𝘳𝘢𝘵𝘪𝘰𝘯, 𝘣𝘶𝘵 𝘣𝘦𝘧𝘰𝘳𝘦 𝘥𝘰𝘪𝘯𝘨 𝘴𝘰, 𝘩𝘦 𝘴𝘩𝘢𝘭𝘭 𝘣𝘦 𝘳𝘦𝘲𝘶𝘪𝘳𝘦𝘥 𝘵𝘰 𝘮𝘢𝘬𝘦 𝘢 𝘱𝘳𝘦-𝘥𝘦𝘱𝘰𝘴𝘪𝘵 𝘰𝘧 7% 𝘰𝘧 𝘵𝘩𝘦 𝘢𝘮𝘰𝘶𝘯𝘵 𝘤𝘭𝘢𝘪𝘮𝘦𝘥”. This Court was of the view that the requirement of pre-deposit was not unfair or unreasonable as it had “rational nexus” with the object of curbing “𝘶𝘯𝘫𝘶𝘴𝘵𝘪𝘧𝘪𝘦𝘥 𝘦𝘹𝘢𝘨𝘨𝘦𝘳𝘢𝘵𝘦𝘥 𝘤𝘭𝘢𝘪𝘮𝘴”. On the other hand, in 𝘐𝘊𝘖𝘔𝘔 𝘛𝘦𝘭𝘦 𝘤𝘢𝘴𝘦 [4] , a two-Judge Bench of this Court had held that a requirement of pre-deposit in a contract would deter parties from approaching arbitration and accordingly, such a contractual term was not “𝘧𝘢𝘪𝘳 𝘢𝘯𝘥 𝘳𝘦𝘢𝘴𝘰𝘯𝘢𝘣𝘭𝘦” and “was not in furtherance of the policy of speedy dispute resolution contemplated by Section 4 of the A&C Act”. In 𝘓𝘰𝘮𝘣𝘢𝘳𝘥𝘪 𝘌𝘯𝘨𝘪𝘯𝘦𝘦𝘳𝘪𝘯𝘨 𝘓𝘵𝘥. 𝘷. 𝘜𝘵𝘵𝘢𝘳𝘢𝘬𝘩𝘢𝘯𝘥 𝘑𝘢𝘭 𝘝𝘪𝘥𝘺𝘶𝘵 𝘕𝘪𝘨𝘢𝘮 𝘓𝘵𝘥. [5], the three-Judge Bench observed that it could not ignore the principle of judicial discipline and accordingly, declined to reconsider the law laid down in 𝘚.𝘒. 𝘑𝘢𝘪𝘯 judgement.
Nevertheless, the Hon’ble Supreme Court upholds the law laid down in 𝘚.𝘒. 𝘑𝘢𝘪𝘯 (𝘚𝘶𝘱𝘳𝘢). Notably, 𝘪𝘧 𝘢 𝘤𝘰𝘯𝘵𝘳𝘢𝘤𝘵 𝘵𝘦𝘳𝘮 𝘳𝘦𝘲𝘶𝘪𝘳𝘦𝘥 𝘢 𝘤𝘰𝘯𝘵𝘳𝘢𝘤𝘵𝘰𝘳 𝘵𝘰 𝘮𝘢𝘬𝘦 𝘢 𝘴𝘶𝘣𝘴𝘵𝘢𝘯𝘵𝘪𝘢𝘭 𝘱𝘳𝘦-𝘥𝘦𝘱𝘰𝘴𝘪𝘵 𝘣𝘦𝘧𝘰𝘳𝘦 𝘳𝘢𝘪𝘴𝘪𝘯𝘨 𝘢 𝘤𝘭𝘢𝘪𝘮 𝘵𝘩𝘳𝘰𝘶𝘨𝘩 𝘢𝘳𝘣𝘪𝘵𝘳𝘢𝘵𝘪𝘰𝘯, 𝘪𝘵 𝘸𝘰𝘶𝘭𝘥 𝘥𝘦𝘱𝘳𝘪𝘷𝘦 𝘵𝘩𝘦 𝘤𝘰𝘯𝘵𝘳𝘢𝘤𝘵𝘰𝘳 𝘰𝘧 𝘵𝘩𝘦 𝘳𝘪𝘨𝘩𝘵 𝘵𝘰 𝘢𝘱𝘱𝘳𝘰𝘢𝘤𝘩 𝘢𝘳𝘣𝘪𝘵𝘳𝘢𝘵𝘪𝘰𝘯. Consequently, the Hon’ble Supreme Court questioned the very basis of such a contract term as being violative of the principle of equality between the parties as provided under Section 18 of the A&C Act.
It is noteworthy that the Hon’ble Supreme Court questioned the applicability of the right to sue under Section 28 of the Indian Contract Act, 1872. In particular, the Court had to consider if a contract term which imposed a pre-condition on a party to avail itself of the arbitration process would vitiate the right to sue. In this regard, the pre-condition of substantial deposit made by one party appears to restrict the exercise of the right to claim as the right to claim as the right to claim would be illusory or at best, nugatory. It may even thwart the exercise of a legitimate claim. The Court questioned whether a contract term requiring a pre-deposit of substantial portion of the claimed amount had “𝘳𝘦𝘢𝘭 𝘢𝘯𝘥 𝘳𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘯𝘦𝘹𝘶𝘴” with the object of curbing abusive claims. By raising these questions, the Hon’ble Supreme Court appeared to indicate that the law laid down in 𝘚.𝘒. 𝘑𝘢𝘪𝘯 was not sacrosanct.
The Hon’ble Supreme Court appears to indicate that the rights of the parties, including, the right to claim and the equality between the parties, cannot be sacrificed at the altar of preventing abusive claims. By referring the matter to Larger Bench, the Hon’ble Supreme Court has kept open the door for reconsidering the law laid down in S.K. Jain and, consequently, for changing the same. It will now be interesting to watch out for the Larger Bench’s take on the arbitration law, particularly, on the pre-deposit in arbitration awards.
In my view, the pre-deposit requirement ought not to have been treated as an absolute pre-condition to invoking arbitration, particularly where the deposit constitutes a substantial portion of the amount claimed. While such a condition may ostensibly seek to deter frivolous or exaggerated claims, it may, in effect, operate as a barrier to a legitimate claimant’s access to the arbitral process and render the right to claim illusory and nugatory. The approach adopted in 𝘚.𝘒. 𝘑𝘢𝘪𝘯 (𝘚𝘶𝘱𝘳𝘢) should therefore be reconsidered by the lager Bench in light of the subsequent jurisprudence, particularly the concerns expressed in 𝘐𝘊𝘖𝘔𝘔 𝘛𝘦𝘭𝘦 (𝘚𝘶𝘱𝘳𝘢) and the statutory principles of equality under Section 18 of the A&C Act and the right to sue under Section 28 of the Indian Contract Act, 1872. In my opinion, the appropriate course would have been to permit the arbitration to proceed without insisting upon the pre-deposit as a condition precedent, while leaving it open to the Arbitral Tribunal to address frivolous or exaggerated claims through appropriate orders as to costs or other permissible measures.
𝑨𝒖𝒕𝒉𝒐𝒓: 𝑨𝒌𝒂𝒓𝒔𝒉 𝑷𝒂𝒏𝒅𝒆𝒚, 𝑺𝒆𝒏𝒊𝒐𝒓 𝑨𝒔𝒔𝒐𝒄𝒊𝒂𝒕𝒆, 𝑵𝒖𝒎𝒆𝒏 𝑳𝒂𝒘 𝑶𝒇𝒇𝒊𝒄𝒆𝒔
𝐑𝐞𝐟𝐫𝐞𝐧𝐜𝐞𝐬: [1] 2026 INSC 872 [2] 4 SCC 357 [3] 4 SCC 401 [4] 4 SCC 401 [5] 4 SCC 341