M/S Santosh Associate Private Limited v. Haryana State Industrial and Infrastructure Development Corporation Limited | 2026 INSC 872 (17 August 2026)
What the case was about
This appeal raises a fundamental question about the price of seeking justice outside the courtroom. Can a government contract force a contractor to deposit a substantial percentage of the disputed amount simply to trigger arbitration? M/S Santosh Associate Private Limited challenged just such a requirement after its claim over a drainage project was thrown out at the threshold for non-payment. The Supreme Court was asked to decide whether the clause is an unconstitutional barrier to arbitration and whether earlier precedents upholding similar conditions still hold good. Because the case pitted a two-Judge Bench’s strong misgivings against a binding three-Judge precedent, the Court refrained from a final answer and instead referred the matter to a larger Bench.
The key facts
In November 2016, the Haryana State Industrial and Infrastructure Development Corporation invited e-tenders for storm-water drainage works at Sector-35, Udyog Vihar, Gurugram. Santosh Associate won the contract in May 2017 for ₹5,14,11,635. Buried in the agreement was Clause 25-A(vii): any contractor invoking arbitration for a claim above ₹1,00,000 had to first furnish a security deposit equal to ten per cent of the claim. The sum was to be refunded after the award, adjusted only for any costs awarded against the claimant (para 3).
As the work progressed, the project scope was significantly scaled back, and the contract value was revised downward to ₹2,40,93,059 by January 2021. After the reduced work was completed, the parties clashed over the final settlement. In August 2024, the High Court of Punjab and Haryana appointed a Sole Arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996. The Corporation immediately objected that the arbitration could not proceed because Santosh Associate had not paid the mandatory deposit. The Arbitrator upheld the objection and dismissed the entire claim. The Commercial Court in Gurugram affirmed that dismissal under Section 37(2) of the Act.
The questions before the Court
Santosh Associate framed four broad issues for the Supreme Court’s consideration:
- Whether Clause 25-A(vii)—which burdens only the contractor with a ten per cent pre-deposit—is arbitrary and offends Article 14 of the Constitution, Section 18 of the Arbitration Act (which guarantees equal treatment), and Section 28 of the Contract Act (which voids restraints on legal rights).
- Whether the clause lacks any rational connection to the stated aim of preventing frivolous claims, and instead undermines the very purpose of alternative dispute resolution.
- Whether the three-Judge Bench decision in S.K. Jain remains good law in light of the subsequent rulings in ICOMM Tele Ltd. (2019), Lombardi Engineering Ltd. (2024), and the Constitution Bench decision in Central Organisation for Railway Electrification (CORE) (2025).
- Whether a refundable deposit clause, such as the one in the present contract, is materially different from the forfeitable clauses struck down in ICOMM Tele and Lombardi.
What the Court decided and why
The two-Judge Bench of Justice Manoj Misra and Justice Manmohan expressed clear prima facie unease with the enforcement of Clause 25-A(vii). It 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” (para 29). A requirement to deposit a substantial slice of the claim before any determination of frivolousness, the Court reasoned, would inevitably “suppress claims, deter recourse to alternative dispute resolution, and thereby defeat its very object” (para 29). The judgment also underscored that contractual freedom has constitutional limits. Party autonomy, it noted, “cannot be stretched to an extent where it violates the fundamental rights under the Constitution,” for “it is the rule of law which is supreme and forms parts of the basic structure” (para 12).
Yet the Court stopped short of striking the clause down. It emphasised that a Division Bench is bound by the doctrine of precedent. In S.K. Jain, a three-Judge Bench had rejected pleas of unequal bargaining power and unconscionability and held that the pre-deposit condition was a “balancing factor to prevent frivolous and inflated claims” bearing a nexus to its object (para 21). The Court observed that ICOMM Tele Ltd., being a two-Judge decision, could not override that three-Judge principle (para 25). It further noted that neither Lombardi Engineering Ltd. nor the Constitution Bench in CORE had expressly overruled S.K. Jain (para 26). “Mindful of the bounds of judicial discipline,” the Bench stated that although it was “prima facie in agreement with the reasoning advanced in ICOMM Tele Ltd.,” it could not simply treat the 2009 precedent as sub silentio or no longer good law (para 25). In view of these substantial questions of law, the Court concluded that the matter “calls for reference to a larger Bench” (para 30). Alongside the referral, it framed six specific questions for the larger Bench to consider, including whether a refundable deposit is materially distinguishable from the forfeitable clauses struck down in later decisions, and whether S.K. Jain continues to govern such clauses (para 32). The Registry was directed to place the appeal before the Chief Justice of India for the constitution of a Bench of greater strength.
Why it matters
For contractors across India who face comparable pre-deposit conditions in government tenders, the larger Bench’s eventual decision could be transformative. If the Supreme Court rules that such clauses are arbitrary or unconstitutional, parties will no longer see their claims dismissed at the outset for failure to furnish a percentage of the disputed value.
The order is also a notable exercise in judicial restraint and institutional discipline. By referring the constitutional challenge upward rather than bending precedent, the two-Judge Bench reaffirmed that smaller combinations cannot override larger ones, no matter how compelling the contrary reasoning may seem. The Court balanced its acute concern for access to justice—rooted in Article 14 and the statutory equality mandate of Section 18 of the Arbitration Act—against the requirements of judicial hierarchy. It also flagged that threshold deposits might run afoul of Section 28 of the Indian Contract Act, which invalidates agreements that stifle the enforcement of rights in ordinary tribunals. By ensuring that any change to the law will carry the full authority of a larger Bench, the Court has preserved doctrinal stability while opening the door for a definitive ruling on whether contracts can charge a fee at the gates of arbitration.