Court Rules Interest Accrued on Fixed Deposit of Performance Bank Guarantee Must Be Paid to Developer After Arbitrator's Finding of Illegal Invocation; Clarifies Scope of Section 31(7) and Section 34 Interference in Arbitration Awards
In a significant judgment delivered on November 6, 2026, the Delhi High Court (Division Bench comprising Justice Dinesh Mehta and Justice Dr. Aditi Choudhary) dismissed an appeal filed by the Delhi Development Authority (DDA) challenging a Single Judge's modification of an arbitral award in the long-standing arbitration dispute with Jaksons Developers (P) Ltd (JDPL).
The dispute arose out of a contract for construction of a hotel on a commercial plot in Rohini, Delhi, for the Commonwealth Games 2010. JDPL was the successful bidder and furnished a performance bank guarantee (PBG) of Rs. 9.3 crore as security for timely completion of the project within 24 months. The DDA invoked the PBG alleging delay, and encashed it. JDPL challenged this invocation, and during arbitration, the encashed amount was kept in a fixed deposit receipt (FDR) under an interim order, with the direction that the principal amount along with accrued interest would abide the final arbitral outcome.
The arbitral tribunal ultimately held that DDA was not entitled to invoke or encash the PBG and directed its release to JDPL. However, the tribunal refused to release the interest accrued on the FDR to JDPL, linking it to the rejection of JDPL's separate claim for interest under Section 31(7) of the Arbitration and Conciliation Act, 1996 (the Act). JDPL challenged this aspect under Section 34 of the Act.
The Single Judge ruled in favor of JDPL, clarifying that the interest accrued on the FDR was distinct from the discretionary pre-award interest under Section 31(7). Since DDA's invocation was held illegal, it could not retain the interest indirectly. The Court found the denial of interest on the FDR to be a patent illegality and severable from other parts of the award, thereby modifying the award to allow payment of the interest to JDPL.
DDA appealed, contending that the Single Judge erred in modifying the award as the interest claim was rejected by the arbitrator after considering mutual delays, and that the entire award should stand. The appellant also argued that the Single Judge misread the Section 17 interim order and wrongly treated the interest as part of the principal.
After detailed analysis of the Arbitration and Conciliation Act, 1996, the Court reaffirmed the limited scope of judicial interference under Sections 34 and 37-interference is limited to grounds such as patent illegality or conflict with public policy and does not permit reappreciation of evidence.
The Court observed that the order under Section 17, directing the amount realized from encashment of the PBG to be kept in FDR along with interest, was an interim protective measure to preserve the corpus for the party ultimately entitled to it. Therefore, allowing DDA to retain the interest despite holding invocation illegal defeated the purpose.
The Court distinguished the interest accrued on the FDR from interest under Section 31(7), which applies only to sums awarded by the arbitral tribunal. Since the principal amount was not awarded but ordered released because invocation was illegal, Section 31(7) did not apply to the FDR interest.
Rejecting DDA's argument that interest on the FDR was part of JDPL's rejected claim for interest, the Court held that the two were separate issues and severable. The Court invoked the Supreme Court's ruling in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (2025) to uphold the power to modify awards partially when valid and invalid parts are not inseparably intertwined.
Thus, the Court upheld the Single Judge's order modifying the arbitral award to direct payment of both the principal amount of Rs. 9.3 crore and the interest accrued on the FDR to JDPL. The appeal was dismissed with pending applications disposed of.
This judgment underscores the judiciary's careful balancing of respecting arbitral awards while correcting patent illegality, especially in interim financial arrangements. It clarifies that protective interim deposits and their accrued interest belong to the party ultimately entitled to the principal, irrespective of the arbitral discretion over pre-award interest claims.
Bottom Line:
Arbitration - Scope of interference under Sections 34 and 37 of Arbitration and Conciliation Act - Where performance bank guarantee was encashed pursuant to interim order and amount was kept in FDR to abide final outcome, and arbitral tribunal finally held beneficiary not entitled to invoke bank guarantee, interest accrued on FDR also had to go to party entitled to principal amount - Denial of such FDR interest by linking it to rejection of claim for interest under Section 31(7) amounted to patent illegality - Severable portion of award could be set aside.
Statutory provision(s):
Arbitration and Conciliation Act, 1996 Sections 17, 31(7), 34, 37; Commercial Courts Act, 2015 Section 13(1A)
Delhi Development Authority v. Jaksons Developers (P) Ltd, (Delhi)(DB) : Law Finder Doc Id # 3014585
