The Supreme Court has referred to a larger Bench the question of whether contractual clauses requiring contractors to deposit a percentage of their claim amount before invoking arbitration are legally valid.

A Bench comprising Justice Manoj Misra and Justice Manmohan expressed doubts over the continued binding effect of the three-judge Bench judgment in S.K. Jain v. State of Haryana, (2009) 4 SCC 357, which had upheld the validity of such pre-deposit conditions.

The Court noted that a two-judge Bench in ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board (2019) had taken a contrary view, holding that such clauses discourage parties from pursuing arbitration and make the arbitral process expensive. However, since a two-judge Bench cannot overrule a three-judge Bench precedent, the Court considered it appropriate for the issue to be examined by a larger Bench.

The Court has requested the Chief Justice of India to consider whether the following questions, or other relevant questions, warrant reference to a larger Bench:

1. Equality of parties: Whether a condition requiring only the contractor to make a pre-deposit of security or fees before referring disputes to arbitration violates Section 18 of the Arbitration and Conciliation Act, 1996, which requires equal treatment of parties.

2. Purpose of arbitration: Whether such pre-deposit conditions discourage Alternative Dispute Resolution and undermine the objective of reducing the burden on courts.

3. Article 14 and right to sue: Whether requiring a pre-deposit before arbitration is arbitrary and violates Article 14 of the Constitution, the right to sue and Section 28 of the Indian Contract Act, 1872.

4. Frivolous claims: Whether such a condition has any rational connection with preventing frivolous claims when, at the stage of invoking arbitration, it cannot ordinarily be determined whether a claim is frivolous, particularly when costs can subsequently be imposed under Section 31(8) of the Arbitration Act.

5. Refundable deposit: Whether a pre-deposit condition can be considered valid where the deposited amount is refundable after conclusion of the arbitration proceedings.

6. Validity of S.K. Jain: Whether the judgment in S.K. Jain v. State of Haryana remains a valid and binding precedent.

Background of the Dispute

The issue arose from a contract awarded by Haryana State Industrial and Infrastructure Development Corporation Ltd. (HSIIDC) to the appellant, M/s Santosh Associate Private Limited, for execution of storm-water drainage systems.

The contract contained a clause requiring the contractor, where claims exceeded ₹1 lakh, to deposit 10% of the claim amount as security before the dispute could be referred to arbitration.

After disputes arose, the appellant invoked arbitration. HSIIDC challenged the maintainability of the reference under Section 16 of the Arbitration and Conciliation Act, contending that the contractor had failed to make the mandatory 10% deposit.

The Sole Arbitrator accepted the objection and dismissed the appellant's claim. The Commercial Court subsequently affirmed the decision, relying on the Supreme Court's judgment in S.K. Jain.

The appellant then approached the Supreme Court, arguing that the pre-deposit requirement was arbitrary, violated Article 14 and was contrary to the principle of equal treatment under Section 18 of the Arbitration Act.

The Supreme Court, while expressing agreement with the reasoning adopted in ICOMM Tele, noted the conflict between the two decisions and held that the issue requires consideration by a larger Bench.

The reference in M/s Santosh Associate Private Limited v. Haryana State Industrial and Infrastructure Development Corporation Ltd. could potentially settle the legal position on whether contractual pre-deposit requirements can act as a condition precedent for invoking arbitration.

Representation:-

For Petitioner(s) :Mr. Shreeyash U Lalit Adv., Mr. Angad Pahel Adv., Mr. Azad Bansala Adv., Mr. Arun Choken Adv., Mr. Shailendra Baisla Adv., Mr. Aviral Mishra Adv., Mr. Rishi Kapoor AOR

For Respondent(s) :Mr. Alok Sangwan Sr. A.A.G., Mr. Samar Vijay Singh AOR, Mr. Sumit Kumar Sharma Adv., Mr. Rajat Sangwan Adv., Mr. Vaibhav Yadav Adv., Mr. Harsh Mehla Adv., Ms. Divya Sharma Adv., Ms. Sabarni Som Adv., Mr. Aman Dev Sharma Adv., Mr. Rajmani Mohanty Adv., Mr. Itbar Singh Adv., Mr. Ayush Kumar Shukla Adv.,