Delhi High Court Reaffirms Arbitral Award Allowing AIIMS To Encash 50% Of Contractor's Bank Guarantee

The Delhi High Court has upheld an arbitral award permitting the All India Institute of Medical Sciences, New Delhi, to encash 50% of a contractor's Performance Bank Guarantee after short payment of wages to sanitation workers was established.

A Division Bench of Justices Anil Kshetarpal and Amit Mahajan held that neither the arbitral award nor the district court's order dismissing objections to it suffered from perversity or patent illegality warranting interference.

The court noted that the contractor, Dusters Total Solutions Services Pvt. Ltd., failed to ensure full payment of wages to its workers. The sanitation workers were deployed at AIIMS under the outsourcing contract, though they were formally employed by the contractor.

This exposed AIIMS to statutory liability under Section 21(4) of the Contract Labour (Regulation and Abolition) Act, 1970. The provision makes the principal employer responsible for paying the full wages, or any unpaid balance, if the contractor fails to do so.

Upholding the arbitral tribunal's reasoning, the bench observed that permitting partial encashment of the performance security reflected an effort “to balance contractual consequences with the nature and gravity of the breaches established on record”.

AIIMS had issued a zone-wise tender in July 2020 for outsourcing sanitation services. Dusters Total Solutions Services Pvt.Dusters Total Solutions Services Pvt. Ltd. was awarded the contract for Zone II, with services commencing on May 1, 2021. As required under the contract, the company furnished a performance bank guarantee of Rs 95,47,841.

After noting certain discrepancies between the wages shown in payslips and the amounts actually paid to workers for the period from May to July 2021, AIIMS took this up with the contractor. It repeatedly asked the contractor to submit bank statements to verify salary payments.

By a letter dated May 26, 2022, AIIMS cancelled the contract with effect from June 1, 2022. It also debarred the contractor for two years and initiated steps to invoke the performance security.

The dispute was thereafter referred to arbitration. In an award dated April 24, 2023, the arbitral tribunal set aside the two-year debarment, finding it to be disproportionate, but upheld the termination of the contract. It also permitted encashment of 50% of the performance bank guarantee.

The contractor's challenge to the award under Section 34 of the Arbitration and Conciliation Act was dismissed by the district court. This led to the present appeal under Section 37.

Before the High Court, the contractor argued that the arbitrator had allowed encashment of the performance security without any proof or quantification of loss suffered by AIIMS.

AIIMS responded that the contractor had withheld key evidence and failed to show that workers were paid their full dues, which, according to AIIMS, amounted to a breach of contract and a fraudulent practice.

The bench noted that the contractor failed to produce the “best evidence,” namely bank statements, despite repeated opportunities. It observed that the arbitrator had not ordered full encashment but had restricted it to 50%, amounting to approximately Rs 47.73 lakh.

The Court recorded that “this conscious limitation reflects a calibrated and proportionate exercise of discretion rather than an arbitrary or mechanical forfeiture”.

It further held that the absence of “mathematical quantification of loss” does not, by itself, render an arbitral award vulnerable to interference under Section 34 of the Arbitration and Conciliation Act.

The bench concluded that “the decision to permit encashment of 50% of the Performance Bank guarantee cannot be said to be wholly devoid of basis, nor can it be characterized as arbitrary, perverse, or resulting in unjust enrichment”.

Finding that the arbitral award and the district court's order were reasoned and within the contractual framework, the High Court dismissed the appeal.

For the Appellant: Advocates Anupam Kishore Sinha, Pradeep K. Tiwari, Apoorv Jha and Sahitya Srivastava

For the Respondent (AIIMS): Advocates Satya Ranjan Swain, Kautilya Birat, Ankush Kapoor, and Vishwadeep, Advocates.