The Delhi High Court has held that once the arbitral tribunal held that DDA had no right to invoke the performance bank guarantee, the interest earned on the fixed deposit created from the encashed amount could not be retained by Delhi Development Authority (DDA). The High Court therefore dismissed DDA’s appeal and upheld the Single Judge’s order directing release of FDR interest to the developer in Commonwealth Games hotel project dispute.
The arbitral tribunal had already ruled that DDA was not entitled to invoke or encash the Rs. 9.30 crore Performance Bank Guarantee (PBG). Therefore, permitting DDA to retain the interest earned on that amount was held to be inconsistent with the findings in the award itself, added the Court.
The Court clarified that the interest earned on the FDR was distinct from a claim for arbitral interest under Section 31(7) of the Arbitration and Conciliation Act. Further, the FDR interest was merely an accretion to the deposited amount and not a discretionary award of interest.
The Court observed that DDA’s counterclaims seeking entitlement to the PBG amount and interest were rejected by the arbitrator. In such circumstances, allowing DDA to keep the FDR interest would indirectly grant a benefit that had already been denied. The Court held that the portion of the award denying FDR interest was severable and could be set aside independently.
Briefly, the dispute arose from a hotel project allotted by the Delhi Development Authority (DDA) to Jaksons Developers (P) Ltd. (JDPL) for construction of a hotel at Rohini, Delhi, intended to provide accommodation during the 2010 Commonwealth Games. JDPL furnished a Performance Bank Guarantee (PBG) of Rs. 9.30 crore as security and proceeded with the project after obtaining various approvals. When the hotel was not completed within the stipulated period, DDA sought to invoke the PBG. JDPL challenged the action, and during arbitration the encashed PBG amount was directed to be kept in a Fixed Deposit Receipt (FDR), with the principal and accrued interest to abide by the final outcome of the proceedings.
The arbitral tribunal ultimately held that DDA was not entitled to invoke the PBG and directed release of the principal amount of Rs. 9.30 crore to JDPL. However, through an addendum, the arbitrator denied JDPL the interest earned on the FDR, reasoning that JDPL’s separate claim for interest had already been rejected. JDPL challenged this limited portion of the award under Section 34 of the Arbitration and Conciliation Act, and the Single Judge held that the accrued FDR interest also belonged to JDPL.
The Division Bench comprising Justice Dinesh Mehta and Dr. Justice Aditi Choudhary observed that the arbitrator’s interim order under Section 17 had expressly provided that the encashed PBG amount and the interest accrued thereon would abide by the final outcome of the dispute. The purpose of keeping the money in an FDR was to preserve the corpus and ensure that both the principal and the earnings on it would ultimately go to the party found entitled to the amount. Once the arbitrator himself held that DDA had no right to invoke or encash the PBG, there was no justification for permitting DDA to retain the benefit of the accrued interest.
The Court further noted that the arbitral tribunal had rejected DDA’s counterclaims seeking entitlement to the PBG and interest thereon. In such circumstances, allowing DDA to retain the FDR interest indirectly granted it a benefit that had already been refused through the counterclaims. The Court found this position internally inconsistent and unsupported by any reasoned finding in the award.
The Bench also clarified that the interest earned on the FDR was distinct from JDPL’s Claim No. 8 seeking interest on amounts awarded under Section 31(7) of the Arbitration Act. The FDR interest was merely an accretion to the money kept in deposit pursuant to an interim order and could not be treated as a discretionary grant of interest under Section 31(7). Therefore, rejection of Claim No. 8 could not justify withholding the FDR interest from JDPL.
While examining the original award, the Court also noted that the arbitrator had found Clause 3.14 of the tender document to be a penalty clause rather than a genuine pre-estimate of damages. Since DDA failed to prove any actual loss arising from the alleged delay and the hotel had become operational during the Commonwealth Games, DDA was held not entitled to invoke the PBG.
