Interest Accrued on Conditionally Encashed Performance Bank Guarantees Form Part of Principal and Belong to Successor Party

The Petitioner (Jaksons Developers) was the successful bidder for a commercial plot to construct a hotel for the Commonwealth Games 2010. Per the tender, the Petitioner furnished a Performance Bank Guarantee (PBG) of ₹9.30 Crores

Due to delays in project completion, the Respondent (DDA) attempted to invoke the PBG. In 2010, the High Court restrained the encashment

Subsequently, in 2013, a Section 17 interim order by the Arbitrator allowed the DDA to encash the PBG subject to the condition that the amount be kept in a Fixed Deposit (FDR) in a nationalized bank, with the principal and interest to "abide the outcome" of the arbitration

In the final award (2023), the Arbitrator held that the DDA was not entitled to invoke the PBG

However, in an addendum, the Arbitrator directed the return of the principal amount only, refusing the release of the accrued interest on the grounds that the Petitioner’s separate claim for interest under Section 31(7) had been rejected

1. Whether the interest accrued on a PBG amount kept in a court-ordered FDR partakes the character of the principal amount and must be released to the party entitled to the principal.

2. Whether the Arbitrator’s denial of FDR interest, by equating it with discretionary interest under Section 31(7) of the Act, constitutes a patent illegality.

The court applied Section 34 of the Arbitration and Conciliation Act, 1996, regarding the setting aside of awards for patent illegality

It relied on the principle from Central Bank of India v. Ravindra & Ors. [(2002) 1 SCC 367], which establishes that interest which has become part of the principal is treated as the "principal amount found due"

Furthermore, it applied the doctrine of severability as affirmed in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. [(2025) 7 SCC 1], which permits a court to set aside a severable "invalid" portion of an award while preserving the "valid" parts

The Court reasoned that once the Arbitrator determined that the DDA was never entitled to invoke or encash the PBG, the conditional interim arrangement under Section 17—to keep the money in an FDR—reached its natural end

The Court held that interest accrued on such a court-ordered FDR is not discretionary interest under Section 31(7) of the Act, but rather a part and parcel of the principal amount held in trust

The court found the Arbitrator's decision "mutually contradictory" because while the DDA’s counter-claims for delay were rejected, the DDA was effectively rewarded with the interest earned on the Petitioner's money

The Arbitrator’s failure to treat the FDR (Principal + Interest) as a single entity, despite the explicit mandate of the Section 17 order that the "amount along with interest... shall abide the outcome," was deemed a patent illegality

Applying the doctrine of severability, the Court set aside the specific portion of the award (item ‘b’ of the addendum) that denied the release of interest to the Petitioner. The petition was allowed, and the Respondent was directed to release the accrued interest on the FDR to the Petitioner