Every arbitration has a quiet second dispute running beneath the first: who pays for the process while it lasts. The Arbitration and Conciliation Act, 1996 resolves it through Section 38, which lets the tribunal fix an advance deposit as security for its costs, direct the parties to pay it in equal shares, and respond to default — and through Section 39, which secures the tribunal's unpaid costs with a lien on the award itself. Parties who treat deposit directions as administrative noise discover that the Act attaches to them some of its sharpest procedural consequences, including the termination of claims.
The lifecycle of the deposit
Default as strategy — and why it backfires
A respondent who believes the arbitration should never have begun is sometimes tempted to starve it: refuse the deposit and let the reference stall. The Act anticipates the move. The claimant can pay the respondent's share and press on, with the outlay recoverable in the costs award; the arbitration proceeds, and the defaulting party has purchased nothing but a line item against itself. The reverse manoeuvre — a claimant who will not fund its own claim — meets the harder edge: suspension or termination of the claim. Counterclaims obey the same logic independently, so a respondent funding its counterclaim cannot ride on the claimant's deposit, and the tribunal can terminate one side's case while the other proceeds.
Where the deposit meets unequal parties: deposit calls can press hard on a smaller party locked in arbitration with a well-resourced opponent. The practical mitigations are unglamorous but real — seeking staged or supplementary deposits aligned to actual hearing phases, proposing institution-administered fee schedules at the appointment stage, and remembering that the equal-share rule is only an advance: a party confident on the merits is funding a recovery, not a loss. What a party should never do is ignore a call and assume the tribunal will carry on.
The lien, and the court's check on it
Section 39 closes the loop at the end of the case. The tribunal need not hand over the award while its costs are unpaid — the lien — and no party can force delivery except through the Section 39(2) mechanism: deposit the demanded costs in court, take the award, and let the court inquire into what the tribunal is properly owed, with any excess refunded. The design protects both interests: arbitrators are not left chasing fees after releasing the instrument that ends their mandate, and parties are not held hostage to a fee demand they dispute, because a judicial check exists. In practice, the provision matters most in ad hoc arbitrations without an institutional schedule; parties can largely design the problem away at the start by fixing the fee basis in the procedural order and keeping deposits current.
Checklist for parties
At commencement: get the fee and deposit framework recorded in the first procedural order, including the treatment of counterclaims and supplementary calls. During the reference: pay calls on time; if the opponent defaults, decide promptly whether to pay its share — delay suspends your own claim's progress. If cash-flow genuinely prevents payment, apply to the tribunal for staging before the due date rather than defaulting silently. At the end: demand the Section 38(3) accounting, and if a fee dispute blocks delivery of the award, use Section 39(2) rather than letting the limitation period for post-award remedies drift while the award sits undelivered.
Note: this explainer is for general information only and is not legal advice.
Frequently Asked Questions
How are deposits fixed and shared?
Section 38(1) lets the tribunal fix the deposit or supplementary deposit as an advance for the costs it expects to incur in respect of the claim, payable in equal shares by the parties. Where a counterclaim is on the record, the tribunal may fix a separate deposit for it — the counterclaim is costed like the claim it mirrors.
What happens if one party refuses to pay its share?
Section 38(2) gives the other party the option of paying the defaulter's share to keep the reference alive — a payment it can recover, since the tribunal's eventual costs award can reallocate every rupee. If the full deposit for the claim or the counterclaim remains unpaid, Section 38(2) permits the tribunal to suspend or terminate the arbitral proceedings in respect of that claim or counterclaim.
Is termination for non-deposit a decision on the merits?
No. It is a procedural termination of the proceedings in respect of the unpaid claim — the claim is not adjudicated and not rejected on merits. But its practical effect is severe: the claimant is out of the forum it contracted for, limitation keeps running in the background, and reviving the dispute raises difficult questions. Treat a deposit default as a crisis, not a negotiating posture.
What does the Section 39 lien allow?
Section 39(1) entitles the tribunal to a lien on the arbitral award for any unpaid costs of the arbitration — in effect, the award is withheld until costs are paid. Section 39(2) balances this: on an application, the court may order the tribunal to deliver the award on the applicant depositing the demanded costs into court, and the court then examines what is properly payable, returning any balance.