Delhi High Court Clarifies Difference Between Award Interest and FDR Interest

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 11.11.2026

Delhi High Court Clarifies Difference Between Award Interest and FDR Interest

The Delhi High Court has dismissed the Delhi Development Authority’s appeal and confirmed that Jaksons Developers is entitled not only to the Rs. 9.30 crore performance bank guarantee amount, but also to the interest earned on the fixed deposit in which that amount was kept during arbitration.

Background: Hotel Project for the Commonwealth Games

The dispute arose from a commercial plot in Rohini allotted by the Delhi Development Authority (DDA) to Jaksons Developers (P) Ltd. for construction of a hotel intended to support accommodation requirements for the 2010 Commonwealth Games.

Jaksons received the demand-cum-allotment letter on 4 January 2008 and furnished a performance bank guarantee (PBG) of Rs. 9.30 crore, equivalent to 5% of the bid amount. The tender required the hotel to be completed and operational within 24 months. Although the developer pursued approvals and continued construction, delays occurred in the approval process involving DDA, the Chief Fire Officer and the Delhi Urban Art Commission.

The hotel became operational before the Commonwealth Games. After deficiencies were rectified, DDA granted limited-term permission on 29 September 2010, and the property was used during the event.

Bank Guarantee Was Encased but Ring-Fenced During Arbitration

DDA sought to invoke the performance bank guarantee in 2010, alleging that the hotel had not been completed within the stipulated period. Jaksons challenged the proposed invocation under the Arbitration and Conciliation Act, 1996.

Initially, the High Court restrained encashment. Later, the arbitral tribunal permitted DDA to encash the guarantee but required the Rs. 9.30 crore to be placed in a fixed deposit with a nationalised bank. Crucially, the tribunal directed that the principal amount and the interest accrued on it would “abide the outcome” of the arbitration.

This arrangement preserved the disputed funds while ensuring that neither side could use the money during the proceedings.

Arbitral Award: DDA Could Not Retain the Guarantee Amount

In its 2023 award, the arbitral tribunal held that DDA was not entitled to invoke or encash the PBG. The tribunal found that the relevant tender provision operated as a penalty clause, rather than as a valid liquidated-damages clause.

The tribunal noted that:

• The hotel had been completed sufficiently to operate during the Commonwealth Games.
• DDA had granted limited-term permission for its operation.
• DDA had not proved any actual loss resulting from the absence of an occupancy certificate at the relevant time.
• The penalty scale was linked to the bid amount, without establishing a genuine pre-estimate of loss.

Accordingly, DDA was directed to return the Rs. 9.30 crore received on encashment of the bank guarantee.

However, an addendum to the award denied Jaksons the interest earned on the fixed deposit. The tribunal linked that denial to its rejection of Jaksons’ separate claim for interest on the amounts awarded in arbitration.

Single Judge Sets Aside Denial of Fixed-Deposit Interest

Jaksons challenged only the withholding of fixed-deposit interest. The Single Judge held that the interest earned on the protected funds could not be treated as the same as a claim for pre-award or post-award interest under Section 31(7) of the Arbitration and Conciliation Act.

The Court found that once DDA was held not entitled to invoke the guarantee, the entire fixed deposit—principal plus accrued interest—had to go to Jaksons. Permitting DDA to keep the interest would effectively allow it to benefit from an invocation found to be unjustified.

The Single Judge also held that this part of the award was severable from the rest of the arbitral award and could therefore be set aside without disturbing the remaining findings.

Division Bench: Interest Is the “Fruit” of the Principal Amount

On appeal, DDA argued that the tribunal had discretion under Section 31(7) to refuse interest, particularly because both parties had contributed to delays. It also contended that a court hearing a challenge under Sections 34 and 37 should not modify an arbitral award except within narrow limits.

The Division Bench rejected these arguments. It distinguished between two separate forms of interest:

• Interest claimed on arbitration awards: This is governed by Section 31(7) and may be awarded or declined by the arbitral tribunal.
• Interest earned on the fixed deposit: This arose because the encashed PBG was preserved under an interim order pending the arbitration outcome.

The Court held that the PBG amount was not a monetary award to which Section 31(7) applied. It was money that had to be restored because DDA had no entitlement to invoke the guarantee in the first place.

The Bench found a contradiction in the arbitral outcome: DDA’s counterclaims for the PBG amount and interest were rejected, yet DDA was effectively allowed to retain the interest earned on the deposited funds. Since no independent reasoning justified that result, the denial of the FDR interest amounted to patent illegality.

The Court described the interest as the natural “fruit” of the principal deposit. Because Jaksons was entitled to the Rs. 9.30 crore principal, it was also entitled to the interest generated by that sum.

Legal Significance of the Ruling

The decision reinforces several important arbitration principles:

• Limited court intervention remains the rule. Courts cannot reassess arbitral evidence or substitute their own view merely because another interpretation is possible.
• Patent illegality must go to the root of the award. A contradiction that allows a party to obtain indirectly what its rejected counterclaim sought may justify intervention.
• Interim preservation orders protect both principal and accruals. Where funds are held in a fixed deposit pending the outcome, the accrued interest ordinarily follows the party ultimately entitled to the principal.
• Severable defects can be corrected without nullifying an entire award. The Court upheld the limited modification because the defective direction on FDR interest was independent of the rest of the arbitral award.

Outcome

The Delhi High Court dismissed DDA’s appeal and upheld the Single Judge’s decision. Jaksons Developers is entitled to receive both the Rs. 9.30 crore PBG amount and the interest accrued on the fixed deposit during the arbitration proceedings.

The ruling makes clear that a party found not entitled to invoke a bank guarantee cannot retain the financial benefit generated from the wrongfully encashed amount while it was held in protected deposit.

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Source: Delhi High Court

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