The Delhi High Court Division Bench has dismissed an appeal by the Delhi Development Authority challenging a Single Judge's modification of an arbitral award that directed release of interest accrued on a fixed deposit created from a wrongly encashed performance bank guarantee. The Court held that where an arbitrator finds a party not entitled to invoke a performance bank guarantee, the interest on the fixed deposit holding the encashed amount follows the principal as a natural corollary, and its retention by the defaulting party constitutes patent illegality under Section 34(2A) of the Arbitration and Conciliation Act, 1996.
Background & Facts
The Dispute
The appellant, Delhi Development Authority (DDA), invited bids for commercial plot No. 3B1, Twin District Towers, Rohini (admeasuring 11,130.40 sq. mtrs.) for construction of a hotel to provide accommodation for the Commonwealth Games 2010. The respondent, Jaksons Developers (P) Ltd. (JDPL), was the successful bidder. On 04.01.2008, a Demand-cum-Allotment Letter was issued to JDPL. The hotel project was required to be made operational within twenty-four months from the date of allotment.
Key Facts
- 09.06.2008: JDPL furnished a performance bank guarantee (PBG) of Rs. 9,30,00,000 (equivalent to 5% of the bid amount) valid for four years as per Clause 3.14 of the tender document.
- 08.09.2008: JDPL was given formal possession of the plot and the conveyance deed was executed.
- 15.05.2009: JDPL deposited "prior to sanction charges" with DDA as a condition for formal approval of building plans.
- May 2010: DDA intended to invoke the PBG for non-completion of work within twenty-four months. JDPL filed a petition under Section 9 of the Arbitration Act (OMP No. 360/2010) seeking stay.
- 09.06.2010: This Court restrained DDA from invoking and encashing the PBG.
- 21.10.2011: Court permitted JDPL to file an application under Section 17 and directed the interim order to continue.
- 15.09.2010: JDPL completed the hotel and made it operational before CWG 2010 and applied for completion/occupancy certificate.
- 21.09.2010: DDA rejected the application; 24.09.2010: JDPL rectified deficiencies; 29.09.2010: Limited term permission granted. The hotel was used during CWG 2010.
- 12.05.2011: Court appointed the Arbitrator and referred disputes to arbitration.
- 22.10.2013: Arbitrator decided JDPL's Section 17 application. The interim order restraining PBG invocation was vacated subject to the condition that DDA would encash the PBG but keep the amount in a fixed deposit (FDR) in a nationalized bank during arbitration proceedings, and that "the said amount along with interest accrued thereon, would abide the outcome of the matter."
- 25.04.2023: Arbitrator passed the award. DDA was held not entitled to invoke or encash the PBG and was directed to release the PBG amount of Rs. 9,30,00,000 to JDPL. Claim No. 8 of JDPL for interest @ 18% per annum on the awarded amount was rejected on the ground of mutual delay attributable to both parties, CFO, and DUAC. All counter claims of DDA (including for PBG invocation and interest thereon) were rejected.
- 21.05.2023: Addendum to the award clarified that since Claim No. 8 for interest was rejected, the interest accrued on the PBG (FDR) shall not be released to JDPL.
- 05.05.2026: Single Judge in OMP(COMM) 349/2023 modified the award, setting aside the direction that FDR interest not be released to JDPL, holding that the interest partook the character of the principal amount and its non-release was against statutory provision, vitiating the finding with patent illegality.
Procedural History
- 04.01.2008: Demand-cum-Allotment Letter issued to JDPL
- 09.06.2008: PBG of Rs. 9.3 crores furnished
- 08.09.2008: Formal possession and conveyance deed executed
- 15.05.2009: Prior to sanction charges deposited
- May 2010: DDA moves to invoke PBG
- 09.06.2010: Stay on PBG invocation granted
- 21.10.2011: Permission to file Section 17 application
- 15.09.2010: Hotel completed and operational
- 29.09.2010: Limited term permission granted
- 12.05.2011: Arbitrator appointed
- 22.10.2013: Section 17 order - PBG encashed, amount kept in FDR with interest to "abide outcome"
- 25.04.2023: Arbitral award passed
- 21.05.2023: Addendum to award
- 05.05.2026: Single Judge modifies award (OMP(COMM) 349/2023)
- 13.10.2026: Appeal reserved for judgment
- 06.11.2026: Division Bench judgment pronounced
Relief Sought
DDA sought setting aside of the Single Judge's judgment dated 05.05.2026, contending that the modification of the arbitral award was impermissible as there was no patent illegality, the arbitrator's discretion under Section 31(7) was wrongly interfered with, and the severability principle in Gayatri Balasamy did not apply since the FDR interest was part of Claim No. 8 which was specifically adjudicated.
The Legal Issue
The central questions were: (1) Whether the arbitral award's denial of interest accrued on the FDR (created from the encashed PBG) to JDPL suffered from patent illegality warranting interference under Section 34(2A) of the Arbitration Act; (2) Whether Section 31(7) of the Act, governing interest on money awards, applies to interest accrued on an FDR created pursuant to a Section 17 corpus-preservation order; and (3) Whether the award was severable under the proviso to Section 34(2)(a)(iv) as interpreted in Gayatri Balasamy v. ISG Novasoft Technologies Ltd., permitting partial modification.
Arguments Presented
For the Appellant (DDA)
Learned counsel for DDA argued that the Single Judge erred in modifying the award as there was no patent illegality. The reliance on Central Bank of India v. Ravindra was misplaced as it concerned bank-borrower loan accounts and capitalisation of interest under banking regulations, not FDR interest under a Section 17 order. The Section 17 order directing that FDR amount "along with interests accrued thereon shall abide the outcome of the matter" was an interim measure, not a substantive determination of entitlement. The arbitrator's rejection of Claim No. 8 for 18% interest on the awarded amount was a conscious decision based on detailed findings of mutual delay, falling within the arbitrator's discretion under Section 31(7)(a). The direction to release Rs. 9.3 crores constituted a money award, making Section 31(7) applicable. The severability principle in Gayatri Balasamy applies only to matters not submitted to arbitration, whereas FDR interest was part of Claim No. 8 specifically adjudicated.
For the Respondent (JDPL)
Learned counsel for JDPL contended that the Section 17 order contemplated that the PBG would be encashed and kept in FDR so that interest accrued thereon could be given to the party succeeding on the PBG issue. Since the arbitrator held DDA not entitled to invoke the PBG, JDPL was entitled to the FDR interest. The arbitrator misdirected himself by conflating Claim No. 8 (interest on awarded claims) with FDR interest (interest on PBG amount), which are distinct. Where DDA's counter claims for PBG invocation and interest thereon were rejected, allowing DDA to retain FDR interest would let it benefit from its own wrong. The non-release of FDR interest lacked any reasoned finding and was patently illegal.
The Court's Analysis
The Division Bench, per Justice Aditi Choudhary, first restated the scope of judicial intervention under Section 34 as crystallized by the Supreme Court in MMTC Ltd. v. Vedanta Ltd. and Somdatt Builders-NCC-NEC (JV) v. NHAI. The Court does not sit in appeal over arbitral awards; interference is limited to grounds under Section 34(2)(b)(ii) (public policy) and, for domestic arbitrations, patent illegality appearing on the face of the award under Section 34(2A). Patent illegality means contravention of substantive law, the Act, or the contract - not mere erroneous application of law or reappreciation of evidence. An award may not be interfered with if the arbitrator's view is a possible one based on facts.
"An arbitral award may not be interfered with if the view taken by the arbitrator is a possible view based on facts."
The Court then examined the Section 17 order dated 22.10.2013. Despite finding no exceptions for non-invocation of the PBG, the arbitrator permitted encashment but directed the amount be kept in FDR so that "the principal sum in the interregnum earns interest, as the purpose was to ensure that the FDR i.e. the principal sum and interest is released to the party found 'entitled' to the PBG." The Single Judge correctly held that this condition was defeated by permitting DDA to retain FDR interest despite finally holding DDA not entitled to invoke the PBG.
The Court distinguished Central Bank of India v. Ravindra on facts, noting it concerned the meaning of "principal sum adjudged" under Section 34 CPC in bank recovery suits, not FDR interest under a Section 17 corpus-preservation order in arbitration.
On the applicability of Section 31(7), the Court held that the encashed PBG amount (Rs. 9.3 crores) was not "the sum for which the award is made" within Section 31(7). It was released to JDPL because the PBG was not to be invoked by DDA (Counter Claim No. 1 rejected). Thus, Section 31(7) could not be extended to FDR interest. The non-release of FDR interest relying on rejection of Claim No. 8 was against the statutory provision, vitiating the finding with patent illegality.
"The non-release of FDR interest to JDPL relying upon rejection of grant of interest under Section 31(7) of the Act on the claimed amount, was against the statutory provision, vitiating the finding with patent illegality."
On severability, the Court applied Gayatri Balasamy. The proviso to Section 34(2)(a)(iv) permits severance where valid and invalid portions are not interdependent. The Court rejected DDA's argument that FDR interest was part of Claim No. 8. Claim No. 8 sought 18% interest on the awarded amount till payment; FDR interest was interest on the PBG amount kept in FDR pursuant to the Section 17 order - a distinct issue. The portion directing release of Rs. 9.3 crores and the direction denying FDR interest were severable and not interdependent.
The Court concluded: "The interest of the FDR is nothing but the fruit of the principal amount of the FDR. Since the principal amount, being the amount of PBG, was ordered to be given to the claimant/JDPL, the interest as a natural corollary should also go to JDPL."
The Verdict
The Division Bench dismissed the appeal (FAO(OS) (COMM) 192/2026) and upheld the Single Judge's judgment dated 05.05.2026. The arbitral award was modified to the extent that the direction denying release of FDR interest to JDPL was set aside. JDPL is entitled to the interest accrued on the FDR (created from the encashed PBG of Rs. 9,30,00,000) in addition to the principal amount. Pending applications (CM APPL. 49274/2026, 49275/2026, 49276/2026) stand disposed of.
What This Means For Similar Cases
FDR Interest Follows Principal in Corpus-Preservation Orders
When a Section 17 order directs encashment of a bank guarantee and placement of proceeds in an FDR with interest to "abide the outcome," the interest component follows the principal. If the arbitrator ultimately holds the encashment was wrongful, the successful party is entitled to both principal and accrued interest. Retaining interest by the defaulting party constitutes patent illegality.
- Practitioners should ensure Section 17 orders explicitly state that both principal and interest "abide the outcome" to avoid ambiguity.
- Where an arbitrator denies FDR interest by conflating it with a rejected claim for interest on awarded sums, the distinction must be sharply drawn in Section 34 proceedings.
Section 31(7) Does Not Govern FDR Interest from Wrongly Encashed Guarantees
Section 31(7) applies only to interest on "the sum for which the award is made" - i.e., the substantive monetary relief adjudicated. It does not extend to interest accrued on an FDR created as an interim corpus-preservation measure under Section 17. Arbitrators cannot use rejection of a Section 31(7) claim to justify withholding FDR interest that logically belongs to the party vindicated on the underlying guarantee.
- In drafting claims, separate "interest on awarded claims" (Section 31(7)) from "interest on FDR holding encashed guarantee proceeds" (Section 17 corpus).
- Challenge any arbitral order that denies FDR interest by cross-referencing a rejected Section 31(7) claim as patent illegality.
Severability Under Section 34(2)(a)(iv) Proviso Is Fact-Specific
Gayatri Balasamy permits partial setting aside only where the valid and invalid portions are legally and practically separable. The Court will examine whether the impugned direction is intrinsically intertwined with other findings. Here, the FDR interest direction was severable because it arose from a distinct procedural order (Section 17) and was not dependent on the merits of Claim No. 8.
- When seeking modification, identify the specific award paragraph that is patently illegal and demonstrate its independence from the award's core determinations.
- Avoid arguments that require the Court to re-evaluate factual findings or exercise appellate review over the arbitrator's discretionary choices.
