Delhi High Court Partly Sets Aside Award Denying FDR Interest Despite Invalid PBG Invocation

The Delhi High Court has held that the Delhi Development Authority (DDA) cannot retain interest accrued on a fixed deposit created from a Performance Bank Guarantee (PBG) amount after an arbitral tribunal held that DDA was not entitled to invoke the PBG.

The PBG had been furnished by Jaksons Developers in connection with allotment of a commercial plot by DDA for construction of a hotel project for the 2010 Commonwealth Games.

Justice Avneesh Jhingan said:

“The realised amount along with interest accrued on FDR was subject to outcome of the arbitration proceedings.”

The court observed that the arbitrator, after holding that DDA could not have invoked or encashed the PBG, had no basis to segregate the principal amount from the interest accrued on the FDR.

“The arbitrator after holding that the respondent could not have invoked/encashed the PBG had no basis to segregate the principle amount and the interest accrued thereon.”

The dispute arose after DDA allotted a commercial plot to Jaksons Developers for construction of a hotel project for the 2010 Commonwealth Games. Under the tender conditions, the developer furnished a Performance Bank Guarantee of ₹9.30 crore.

DDA later sought to invoke the bank guarantee alleging delay in completion of the project. Jaksons Developers approached the Delhi High Court, which restrained invocation and encashment of the PBG.

Subsequently, the arbitral tribunal permitted encashment of the PBG on the condition that the amount be kept in a fixed deposit and that the amount along with accrued interest would abide by the outcome of the arbitration proceedings.

The arbitral tribunal later held that DDA was not entitled to invoke or encash the PBG and directed release of the principal amount to the developer. However, it denied release of the accrued interest on the FDR.

Challenging this part of the award, Jaksons Developers approached the High Court.

Allowing the plea, the Court held that once the arbitral tribunal concluded that DDA was not entitled to invoke the PBG, the entire FDR amount, including accrued interest, had to be returned.

The Court observed,

“The condition imposed under Section 17 of the Act that the respondent shall not use the amount realised by encashing PBG was to ensure that the FDR be released to the party found entitled to it.”

The court added:

“The interim arrangement of keeping the PBG amount in the FDR to ensure that the principal amount in the intervening period earns interest and ultimately the entitled party gets the principal amount along interest accrued is negated.”

The court further held that the arbitral tribunal's decision to separate the principal amount from the accrued interest was “not a plausible view” and suffered from patent illegality.

It also noted that while the arbitral tribunal rejected DDA's counterclaims seeking invocation of the PBG and interest for delay, it effectively allowed DDA to retain the benefit of accrued interest.

The court therefore set aside the portion of the award denying release of the accrued interest while upholding the remaining award