In an appeal filed before the Supreme Court to challenge a judgment dated 12-09-2025 by the Commercial Court, Gurugram whereby the appellant’s appeal under Section 37(2) of the Arbitration and Conciliation Act, 1996 (A&C Act), a Bench of Justice Manoj Misra and Justice Manmohan requested the Chief Justice of India to consider whether the issues formulated in the present matter warrant a reference to a larger bench.
The impugned judgment affirmed an order dated 01-08-2025 by a Sole Arbitrator, who had allowed the respondent’s application under Section 16 of the A&C Act, and dismissed the appellant’s claim in its entirety since the appellant failed to comply with Clause 25-A(vii) of their contract, which mandated a prior security deposit of 10% of the claim amount for claims exceeding Rs. 1,00,000/-.
The respondent, Haryana State Industrial and Infrastructure Development Corporation Ltd., invited e-tenders on 07-11-2016 for storm water drainage systems at Sector-35, Udyog Vihar, Phase-VII, Gurugram, and awarded the contract to the appellant on 17-05-2017 for Rs. 5,14,11,635/-. Due to site-related challenges, the contract value was later revised down to Rs. 2,40,93,059/- on 19-01-2021. Upon completion of the reduced scope, disputes arose regarding the final settlement of payments.
On 08-08-2024, the High Court of Punjab and Haryana appointed Justice (Retd.) Surender Gupta as Sole Arbitrator, who directed the appellant to deposit 10% of the claim within fifteen days, but upon the appellant’s refusal, the claim was dismissed. Aggrieved, the appellant filed an appeal under Section 37(2) of the Act before the Commercial Court and by an order dated 12-09-2025, the appeal was dismissed holding that the Arbitrator’s view was plausible and supported by S.K. Jain v. State of Haryana (2009) 4 SCC 357.
Upon reviewing the submissions and relevant judicial precedents, the Court found it appropriate to recapitulate the ratio decidendi of S.K. Jain (supra), ICOMM Tele Ltd. v. Punjab State Water Supply (2019) 4 SCC 401, Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd. (2024) 4 SCC 341, and Central Organisation for Railway Electrification (CORE) v. M/s ECI-SPIC-SMO-MCML (JV) (2025) 4 SCC 641. It was noted that in S.K. Jain (supra), a three-judge Bench of this Court rejected 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 7% of the amount claimed before dispute was referred to arbitration. The pre-deposit condition was held to be non-arbitrary, reasonable, and having nexus with the object sought to be achieved.
Further, the Court went on to peruse the holdings in all the above-mentioned decisions and while also being mindful of the bounds of judicial discipline and the enduring authority of precedents, observed that ICOMM Tele (supra) could not override the principle of law enunciated in S.K. Jain (supra) even though the Court was prima facie in agreement with the reasoning advanced in ICOMM Tele (supra). It was noted that in Lombardi Engineering (supra), it had been expressly held that there was no conflict between S.K. Jain (supra) and ICOMM Tele (supra). Hence, the Court found it difficult to hold that S.K. Jain (supra) is sub silientio or no longer good law.
The Court stated that the right to sue inheres in every individual except where expressly barred by Statute. It was stated that a litigant may, at his own peril, institute a suit of his choice. The Court said that Section 28 of the Indian Contract Act, 1872, declares any agreement that absolutely restrains a party from enforcing contractual rights ‘by the usual proceedings in ordinary tribunals’ void, with the sole statutory exception being the reference of disputes to arbitration. It was said that
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“Arbitration, under the framework of our Contract law, remains an exception to litigation in courts, not its substitute or alternative!”
It was held 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. The Court said that 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 defeat its very object.
As the Court had doubts about the legality and validity of the judgment in S.K. Jain (supra) as a binding precedent, it opined that the matter called for reference to a larger bench. Hence, the Court requested the Chief Justice of India to consider the desirability as to whether the issues formulated in the present matter or any other relevant issues warrant a reference to a larger bench. The issues were as follows:
● 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?
● Whether pre-deposit conditions in contracts having Arbitration clause discourages Alternative Dispute Resolution and undermine its objective of de-clogging the court system?
● 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?
● 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?
● Whether a pre-deposit condition is valid in an arbitration case where said deposit is refundable upon the conclusion of arbitration proceedings?
● Whether S.K. Jain (Supra) is a valid and binding precedent?
Thus, the Court directed the Registry to place the present appeal before the Chief Justice of India for appropriate directions.
