Whether condition of pre-deposit prior to reference to Arbitration is arbitrary & violative of right to sue?

Whether condition of pre-deposit prior to reference to Arbitration is arbitrary and violative of the right to sue – Division Bench seeks reference to a larger Bench.

In a recent judgment, a Division Bench of the Hon’ble Supreme Court has referred the issue of condition of pre-deposit prior to reference to Arbitration to the Chief Justice of India for reference to a larger Bench.

ABCAUS Case Law Citation:
5209 (2026) (08) abacus.in SC

Important Case Laws relied upon by Parties:
S. K. Jain vs. State of Haryana

A full Bench of Hon’ble Supreme Court had dealt with the plea of unequal bargaining power of the parties and unconscionability of the arbitration clause to the extent it required the contractor alone to make a pre-deposit of the amount claimed prior to reference of disputes to arbitration.

The three Judge Bench held that there is logic in the arbitration clause to the extent it prescribes higher amount of security deposit/fees commensurate with the magnitude of the claim. It was held that such a pre-deposit condition in the arbitration clause is the balancing factor to prevent frivolous and inflated claims. Accordingly, it held the pre-deposit condition to be non-arbitrary, reasonable and having nexus with the object sought to be achieved.

In the instant case, the appellant contractor was required to pre-deposit ten per cent of the claim amount. Upon refusal, the appellant’s claim was dismissed by the Sole Arbitrator in entirety. Aggrieved by the same, the appellant filed an appeal under Section 37(2) of the Act before the Commercial Court which dismissed the appeal, holding that the Arbitrator’s view was plausible and supported by the precedent of the Division bench of the Hon’ble Supreme Court.

Before the Hon’ble Supreme Court, the appellant relied upon the judgment of the two judges bench wherein the Court struck down a similar clause as arbitrary under Article 14. The Court held that unless litigation was shown to be frivolous, neither exemplary costs nor pre-deposit could be imposed. It also observed that pre-deposit clauses discourage arbitration and undermine its objective of declogging the court system.

The appellant also relied upon a three judges bench decision wherein it was held that the concept of “party autonomy” as pressed into service by the respondent cannot be stretched to an extent where it violates the fundamental rights under the Constitution. For an arbitration clause to be legally binding it has to be in consonance with the “operation of law” which includes the Grundnorm i.e. the Constitution.

The appellant also relied upon a Constitution Bench decision which reiterated that principles of non-arbitrariness apply even when government instrumentalities contract with private parties and that equal treatment of parties must be ensured at all stages of arbitration.

The appellant submitted that the Full bench did not constitute a binding precedent as it was sub silentio on Article 14 and Sections 18 and 38 of the Act, which issues were later considered in subsequent judgments.

The Hon’ble Supreme Court observed that an argument not considered in the earlier judgments is that the right to sue inheres in every individual, save where expressly barred by statute. It is settled law that a litigant may, at his own peril, institute a suit of his choice. It was further noted that Section 28 of the Indian Contract Act, 1872 declares void any agreement that absolutely restrains a party from enforcing contractual rights ‘by the usual proceedings in ordinary tribunals’

Their Lordships opined that an arbitration clause cannot impose pre-deposit conditions so onerous as to render the right to sue, at the very threshold, illusory or nugatory. A stipulation mandating the 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.

Consequently, their Lordships made a request to the Chief Justice of India for a reference to a larger Bench including the following issue:-

A. Whether a stipulation requiring the contractor alone to make a pre-deposit of security/fees prior to reference of disputes to arbitration is contrary to Section 18 of the Act which mandates equal treatment of parties at all stages of arbitration?

B. Whether pre-deposit conditions in contracts having Arbitration clause discourages Alternative Dispute Resolution and undermine its objective of declogging the court system?

C. Whether a condition of pre-deposit of security/fees prior to reference to Arbitration is arbitrary and violative of the right to sue as well as Article 14 of the Constitution and Section 28 of the Indian Contract Act, 1872?

D. Whether requirement of pre-deposit of security/fees has any rational relation to the object of curbing frivolous claims as at that stage it cannot be said that the claims are frivolous and moreover such frivolous claims may adequately be addressed under Section 31(8) of the Act through imposition of costs at the conclusion of the arbitration proceedings?

E. Whether a pre-deposit condition is valid in an arbitration case where said deposit is refundable upon the conclusion of arbitration proceedings?

F. Whether S.K. Jain is a valid and binding precedent?

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