Interest earned on funds held in a fixed deposit account during arbitration constitutes an accretion to the principal sum. A court exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996, can sever and set aside an invalid part of an arbitral award while sustaining the remainder.

Headnote:(A) Arbitration and Conciliation Act, 1996 - Sections 17, 31(7), 33, and 34 - Performance Bank Guarantee - Conditional encashment - Interest accrued on Fixed Deposit - Whether interest on fixed deposit can be segregated from principal amount when the principal is ordered to be released - Held, no. Interest earned on funds held in a fixed deposit, maintained pursuant to an interim court order during arbitration, is an accessory to the principal. Upon a finding that the bank guarantee could not have been invoked, the entire deposit, including the principal and the accrued interest, must be released to the entitled party. Denying such interest under the guise of discretionary interest provisions constitutes patent illegality. (Paras 10, 11, 13)

(B) Arbitral Award - Scope of Interference - Severability - Whether court can partially set aside an award - An arbitral award that is found to be partially perverse or contrary to statutory law can be severed under Section 34. The authority to set aside an award encompasses the power to set aside only the invalid portions while preserving the valid determinations. This aligns with the doctrine that the greater power includes the lesser. (Paras 17, 18)

Facts of the case:
The petitioner contested an arbitral award that directed the return of the principal amount of a bank guarantee but denied the interest accrued on the fixed deposit account where the funds were held throughout the pendency of the arbitration. The respondent argued that the arbitrator exercised discretion under the relevant Act by denying interest, and thus, the interest remained with the respondent.

Findings of Court:
The court determined that the interest accrued on the fixed deposit was not a discretionary award under the relevant Act, but an inextricable component of the principal amount held under an interim arrangement. The court held that segregating the principal from its accrued interest was legally unsustainable and perverse. Given that the main finding regarding the wrongful invocation of the guarantee had attained finality, the interest earned on the deposit was also due to the petitioner.

Issues: The central issues were whether interest accrued on a bank guarantee amount held in a fixed deposit per a court-mandated interim arrangement can be withheld by the respondent when the invocation of the guarantee was found to be unjustified, and whether such an award can be partially set aside.

Ratio Decidendi: Interest earned on funds held in a fixed deposit pending the outcome of proceedings partakes in the character of the principal amount. An arbitral tribunal cannot arbitrarily separate the principal from its accretion. Furthermore, consistent with the doctrine of severability, a portion of an award found to be contrary to law may be set aside independently of the rest, provided it is not intricately connected to the valid findings.

Result: Petition allowed; the portion of the award denying interest accrued on the fixed deposit is set aside.

Table of Content
1. factual overview of project delay, arbitration commencement, and interim orders regarding bank guarantees. (Para 1 , 2 , 6 , 7 , 8 , 9)
2. contentions regarding the applicability of interest under section 31(7) of the arbitration act. (Para 3 , 4)
3. nature of interest accrued on conditional fdr deposits as part of the principal. (Para 5 , 10 , 11)
4. inapplicability of arbitrary discretion under section 31(7) to funds held in security deposits. (Para 12 , 13 , 14 , 15)
5. court authority to sever invalid portions of an arbitral award under section 34. (Para 16 , 17 , 18)
6. final order granting the petition and releasing accrued interest to the petitioner. (Para 19)

JUDGMENT :

AVNEESH JHINGAN, J.

1. This petition is filed under Section 34 of the Arbitration and Conciliation Act, 1996 (for short 'the Act') seeking setting aside/modification of the arbitral award dated 25.04.2023 (for brevity 'the award') alongwith addendum dated 21.05.2023.

2. The facts shorn of unnecessary details are that the respondent/Delhi Development Authority (DDA) invited bids for commercial plot No. 3B1, Twin District Towers, Rohini (admeasuring 11130.40 sq. mtrs.) for construction of a hotel to provide accommodation for the Commonwealth Games 2010 (CWG). The petitioner/ Jakson Developers (P) Ltd. was the successful bidder and on 04.01.2008 a Demand-cum-Allotment Letter was issued. The hotel project was required to be made operational within twenty four months from the date of allotment. The petitioner company was obligated to furnish a performance security equivalent to five percent of the bid amount in the form of a bank guarantee, valid for a period of four years. The petitioner submitted building plans in March 2008, however the Chief Fire Officer approved them only in November 2008 and Delhi Urban Arts Commission in December 2008. In the meanwhile, the petitioner submitted a Performance Bank Guarantee (PBG) of Rs.9,30,00,000/- (Rupees Nine Crores and Thirty Lakhs) under clause Clause 3.14 of the tender document and was given formal possession of the plot on 08.09.2008. The petitioner continued construction above plinth level in anticipation of plan approval and the DDA levied "Prior to Sanction Charges" against the petitioner, which were deposited by the petitioner in May 2009 being a condition for formal approval of the building plans.

2.1 The respondent/DDA intended to invoke the PBG in May 2010 for non-completion of the work within twenty four months of the allotment letter. The petitioner filed a petition under Section 9 of the Act and this Court on 09.06.2010 restrained DDA from encashing the PBG. The relevant part of the order dated 09.06.2010 is as under:

“In view of the submission made by the petitioner in the petition as well as from the documents placed on record, I am of the view that the petitioner has made a prima facie case in its favour for grant of ex parte ad interim injunction. Till the next date of hearing, the respondent is restrained from invoking and encashing the bank guarantee as furnished by the petitioner in pursuance of the performance security as per Clause 3 .14 of the general terms and conditions of the tender document with the respondent for allotment of hotel plot 3B 1, Twin District Centre, Sector 10, Rohini, Delhi.”

2.2 The petitioner completed the hotel and made it operational in September 2010 before the start of CWG 2010 and applied for the completion certificate on 15.09.2010 but the respondent rejected the request on 21.09.2010. The petitioner rectified the issues on 24.09.2010 and sought Limited Term Permission, which was granted on 29.09.2010 subject to conditions. The hotel was used during the CWG 2010 and the permission was extended from time to time. Thereafter, disputes between the parties were referred to arbitration. The court appointed a sole arbitrator vide order dated 12.05.2011. The application under Section 17 of the Act was decided on 22.10.2013 and the arbitrator directed that responden

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2026 Supreme(Del) 964

Cases Referred (2)