FAO(OS) (COMM)/369/2019 of SOUTH DELHI MUNICIPAL CORPORATION OF DELHI Vs M/S PKSS INFRASTRUCTURE PRIVATE LIMITED

IN THE HIGH COURT OF DELHI AT NEW DELHI

%Judgment delivered on: 14.07.2025

+FAO(OS)(COMM) 369/2019SOUTH DELHI MUNICIPAL CORPORATIONOF DELHI

..... Appellant

Versus

M/S PKSS INFRASTRUCTURE PRIVATELIMITED

..... Respondent

Advocates who appeared in this case:

For the Appellant: Ms. Malvika Trivedi, Sr. Adv. with Mr.Sanjay Vashishtha, Standing Counsel forMCDwithMr.ShailendraSlaria,Mr.Siddhartha Goswami, Mr. Sujal Gupta, Ms.Geetanjali Reddy, Advocates with Mr. SanjaySharma,Asst.CommissionerwithMr.Bijender Singh, JSA.

For the Respondent

: Mr. Sandeep Bajaj, Mr. Soayib Qureshi &Mrs. Chetna Alagh, Advocates.

CORAMHON’BLE MR. JUSTICE VIBHU BAKHRUHON’BLE MR. JUSTICE TEJAS KARIA

JUDGMENT

VIBHU BAKHRU, J.

Introduction

1.The Appellant [MCD] has filed the present appeal impugning ajudgment dated 08.01.2018 passed by the learned Single Judge in OMP715/2014 captioned South Delhi Municipal Corporation v. M/s PKSS

Infrastructure Private Limited. The said petition [OMP 715/2014] wasfiled by MCD under Section 34 of the Arbitration and Conciliation Act,1996 [the A&C Act] impugning an arbitral award dated 19.03.2014[the impugned award] passed by an Arbitral Tribunal comprising of aSole Arbitration [Arbitral Tribunal].

2.The impugned award was rendered in the context of the disputesthat had arisen between the parties in connection with the contract atborder points of entry for toll collection in respect of specifiedcommercial vehicles entering Delhi. The term of the contract was threecalendar years and contemplated the respondent [Contractor] payingthe agreed sum in 36 equal monthly instalments irrespective of theactual collection of toll.

PREFATORY FACTS

3.MCD was empowered under Section 103(2)(g) of the DelhiMunicipal Corporation Act, 1957 to levy and collect toll tax fromspecified motor vehicles and trailers drawn by such vehicles, frompoints of entry into Delhi. It is stated that the MCD was also empoweredto collect such tolls through contractors/agents.

4.MCD had issued notice inviting tenders [NIT] dated29.01.2008 inviting offers from various contractors for collection of tollat all entry points of Delhi at the rates as specified. MCD had also issueda Request for Proposal [RFP] comprising of three volumes, whichincluded,(i)InstructiontoBidders;(ii)ProjectInformation

Memorandum, (iii) Draft Agreement, setting out the terms andconditions of the contract.

5.Various bidders submitted their bids pursuant to the NIT. Thetechnical bids were opened on 11.03.2008 and the financial bids wereopened on 19.04.2008. The bid submitted by M/s P.K. HospitalityServices Pvt. Ltd. (JV) – consortium constituted by P.K. HospitalityServices Pvt. Ltd., M/s Shankar Agencies; and Sangam India Ltd. foran amount of ₹606,60,78,660/- (to be remitted to the MCD in 36 instalments) was found to be the highest.

6.MCD issued Provisional Letter of Award on 15.05.2008awarding the contract to collect toll tax and develop, upgrade, operateand maintain toll plazas, posts and barriers at various sites. MCD alsoinstructed successful bidders to commence the work with effect from16.05.2008 at 6 AM. The Contractor was incorporated by theaforementioned consortium members and on 13.05.2009, the partiesentered into the formal agreement [the Agreement]. Apparently,certain issues arose between the parties that remained unresolved. Theprincipal issue between the parties related to collection of toll byintegrated toll contractors (entities that were awarded the contract forconstruction of highways on Build-Operate-Toll [BoT] basis). M/sDGSC Ltd. was one such integrated toll contractor, who was collectingtoll at the Rajokri Border.

7.It was broadly agreed that the integrated toll tax collectors wouldcontinue to collect toll, but pay service fee, which would be

appropriated by the Contractor. The quantum of service fee would bedetermined mutually by executing Tripartite Agreement. It is one ofthe grievances of the Contractor that the integrated toll contractor atRajokri continued to collect toll without determination of the servicefees. Apart from the above, there were other disputes as well includingdisputes relating to handing over of land/space with clear title at variouslocationswheretheContractorwasrequiredtosetupnewinfrastructure; getting the toll plaza sites cleared by the erstwhilecontractor – M/s Banas Sand TTC-JV to enable the Contractor to set upits infrastructure at the site; and issues with regard to the rates whichmonthly passes were sold by the erstwhile contractor.

8.The disputes between the parties remained unresolved and werereferred to Arbitration.

9.The Contractor filed its statement of claim before the ArbitralTribunal raising various claims aggregating ₹163,64,34,003.50/- on account of losses suffered on various counts as well as the refund of₹29,74,321/-.

10.In addition to the said amount, the Contractor also claimed lossesdue to withholding of the cash security deposit amounting to₹47,00,00,000/- (Rupees forty seven crores) and the contract performance guarantee of value of ₹46,90,00,000/- (Rupees forty six crores ninety lacs only) as well as the costs.

11.The MCD also preferred counter claims.

12.The arbitral proceedings culminated in the impugned award,which was rendered on 19.03.2014.

13.The amounts awarded by the Arbitral Tribunal in favour of theparties as summarized in paragraph 3 of the present appeal, are set outbelow:

“(i) Rs. 15,00,000 (Rupees Fifteen Lakhs) was allowedin favour of the Respondent herein with interest at9% per annum from the date of the filing of theamended statement of claim, i.e. 05.08.2011 tillpayment (under Issue No. 4).in favour of the Respondent herein with interest at9% per annum from the date of the filing of theamended statement of claim, i.e. 05.08.2011 tillpayment (under Issue No. 4).

(ii) Rs. 15,00,000 (Rupees Fifteen Lakhs) was allowedin favour of the Respondent with interest at 9% perannum from the date of the filing of the amendedstatement of claim, i.e. 05.08.2011 till payment(under Issue No. 5).in favour of the Respondent with interest at 9% perannum from the date of the filing of the amendedstatement of claim, i.e. 05.08.2011 till payment(under Issue No. 5).

(iii) Rs. 47,00,00,000/- (Rupees Forty Seven Crores)was allowed in favour of the Respondent withinterest at the rate of 15% per annum from16.07.2011 till the date of payment towards therefund of the cash security deposit.was allowed in favour of the Respondent withinterest at the rate of 15% per annum from16.07.2011 till the date of payment towards therefund of the cash security deposit.

(iv) Return of the Bank Guarantee of Rs. 46,96,00,000/-(Rupees Forty Six Crores Ninety Six Lakhs) wasallowed in favour of the Respondent alongwithinterest on the said amount at the rate of 15% perannum from 16.07.2011 till the expiry of the BankGuarantee, i.e. 12.02.2012 within 4 weeks from thedate of this Award. In case the said amount is notpaid within 4 weeks, it shall carry interest at the rateof 15% per annum for the period thereafter.(Rupees Forty Six Crores Ninety Six Lakhs) wasallowed in favour of the Respondent alongwithinterest on the said amount at the rate of 15% perannum from 16.07.2011 till the expiry of the BankGuarantee, i.e. 12.02.2012 within 4 weeks from thedate of this Award. In case the said amount is notpaid within 4 weeks, it shall carry interest at the rateof 15% per annum for the period thereafter.

(v) Bank charges of Rs. 44,71,286/- allowed in favourof the Respondent with interest at the rate of 15%per annum from 16.07.2011 till payment.of the Respondent with interest at the rate of 15%per annum from 16.07.2011 till payment.

(vi) Rs.24,33,178.00/- was allowed in favour of theAppellant on account of interest on the delayedpayment with further interest at the rate of 15% perannum from the date of filing of the counter claim,i.e. 15.11.2011 till payment.Appellant on account of interest on the delayedpayment with further interest at the rate of 15% perannum from the date of filing of the counter claim,i.e. 15.11.2011 till payment.

(vii) 50% of the costs incurred by the Respondent, i.e.Rs.32,00,000/- (Thirty Lakhs Only), was allowedin favour of the Respondent as cost of theproceedings.”Rs.32,00,000/- (Thirty Lakhs Only), was allowedin favour of the Respondent as cost of theproceedings.”

14.MCD filed an application under Section 34 of the A&C Act(OMP 715/2014) to set aside the impugned award to the extent of theamounts awarded to the Contractor and to the extent its counter claimswere rejected.

15.The learned Single Judge did not accept that there were anygrounds for setting aside the impugned award and, accordingly,dismissed the application filed by the MCD.

16.MCD has filed the present appeal impugning the said decision.

REASONS AND CONCLUSION

17.At the outset, it is material to note that the MCD has accepted theimpugned award to substantial extent and has confined its challengeto the impugned award to two issues. First, grant of interest at the rateof 15% on refund of cash security as well as contract performance

guarantee [Bank Guarantee] furnished by the Contractor; and second,award of ₹32 lacs as costs.

18.Ms Trivedi, learned senior counsel appearing for MCDcontended that the grant of interest on cash security deposit as well asBank Guarantee furnished by the Contractor was in teeth of Clause6.4(a) of the conditions of contract as applicable to the Agreement.Thus, the Arbitral Tribunal had no jurisdiction to award the same. Shealso referred to various decisions of the Supreme Court including inPam Developments (P.) Ltd. v. State of West Bengal: (2024) 10 SCC715; Union of India v. Manraj Enterprises: (2022) 2 SCC 331, GargBuilders v. Bharat Heavy Electronics Ltd.: (2022) 11 SCC 697;Jaiprakash Associated Ltd. v. Tehri Hydro Development Corpn.(India) Ltd.; Sri Chittaranjan Maity v. Union of India: 2017 SCCOnLine SC 1181; and Union of India v. Bright Power Projects (India)Pvt. Ltd.: (2015) 9 SCC 695. She also referred to the decision of aCoordinate Bench of this Court in Pujnab National Bank v. PrimeEngineers Consultants: 2018 SCC OnLine Del 10516 in support of hercontention.

19.Insofar as the award of costs is concerned, she submitted that theaward of costs was exorbitant and without evidence as the parties hadnot led evidence as to the cost incurred.

20.It would be relevant to refer to the relevant contractual terms inorder to address the issue whether award of interest on security deposits

and contract performance guarantee, is liable to be set aside as contraryto the terms of the Contract.

21.In terms of Clause 4 of the Tender Documents, the successfulbidder was required to pay performance security and furnishperformance security by way of (i) ‘Cash Security’ equal to threemonths of the contract fee calculated on the basis of the financial bidand average on pro-rata basis for 36 months; and (ii) contractperformance guarantee for an amount equal to three months instalmentscalculated on the basis of the bid document. The Cash Security wasrequired to be deposited in the form of cash/demand draft/banker’scheque. And, the performance security was required to be provided inthe form of an unconditional and irrevocable bank guarantee. Therelevant Clauses as set out under the heading ‘Award Criteria’, asstipulated in the Tender Documents are reproduced below:

“4.0. Performance security and payment of remittanceto the MCD: The successful applicant/bidderwhose proposal has been accepted will have topay performance security referred to as “CashSecurity” and “Contract Performance Guarantee”in the Volume III, - “Draft Contract Agreement”of the RFP;to the MCD: The successful applicant/bidderwhose proposal has been accepted will have topay performance security referred to as “CashSecurity” and “Contract Performance Guarantee”in the Volume III, - “Draft Contract Agreement”of the RFP;

4.1.1 “Cash Security” equal to three months contractfee, calculated from the amount contained infinancial bid and averaged on pro rate basis for 36months, in form of cash/demand draft/banker’scheque.fee, calculated from the amount contained infinancial bid and averaged on pro rate basis for 36months, in form of cash/demand draft/banker’scheque.

4.1.2 “Contract Performance Guarantee” equal threemonths instalments calculated from the amountmonths instalments calculated from the amount

contained in the financial bid and averaged on prorata basis for 36 months. The Performancesecurity shall be an unconditional and irrevocablebankguaranteefromandIndianNationalized/scheduledbankThisshallbeacceptable to MCD maximum within 10 (ten)days from the date of issue of the letter ofAcceptance (LOA) as per the draft of the bankguarantee proforma (appended at Annexure 12)

4.1.3Theperformancesecurityshallbevalidthroughout the contract Agreement period of 3years and over and above this period for aminimum period of 180 days, which may beendedonlyatthenotificationoftheCommissioner, MCD.throughout the contract Agreement period of 3years and over and above this period for aminimum period of 180 days, which may beendedonlyatthenotificationoftheCommissioner, MCD.

4.1.4 In addition to the above, monthly remittance shallbe paid to the MCD. This shall be paid as 36 postdated cheques equivalent to one month’s amountcalculated from the cumulative and lump-sumfigure contained in the financial bid for threeyears, averaged and equated on pro-rata basis for36 months. These cheques will be deposited withthe MCD covering the total period of the contractmaximum within 10 (ten days) from the date ofissue of the Letter of Acceptance (LOA).”be paid to the MCD. This shall be paid as 36 postdated cheques equivalent to one month’s amountcalculated from the cumulative and lump-sumfigure contained in the financial bid for threeyears, averaged and equated on pro-rata basis for36 months. These cheques will be deposited withthe MCD covering the total period of the contractmaximum within 10 (ten days) from the date ofissue of the Letter of Acceptance (LOA).”

22.Clause 6 of the terms and conditions of the Agreement alsocontain provisions regarding the furnishing of performance securities.The said Clause is reproduced below:

“6. PERFORMANCE SECURITIES

6.1. Earnest Money Deposit

(a)The Contractor had submitted, along with histechnical and financial offer as quoted in thetechnical and financial offer as quoted in the

Proposal,anearnestmoneydepositofRs.6,00,00,000(RupeesSixCrores)bybankdraft/banker’s cheque of scheduled / nationalizedbank in favour of the Commissioner, MunicipalCorporation of Delhi (“EMD”), payable in Delhi.

(b) After issuance of Letter of Acceptance (LOA) videletter dated 02.05.2008 to the Contractor, the EMDhas been adjusted towards Cash Security.letter dated 02.05.2008 to the Contractor, the EMDhas been adjusted towards Cash Security.

6.2. Cash Security

(a)Consequently, the Contractor has furnished asSecurity for the fulfillment of its obligations duringthe Term, deposit Rs.47 Crores (Rs. Forty SevenCrores only) being the equivalent of the threemonthsContractFee,incash/bankercheque/demand draft into the MCD’s bank accountin the Specified Bank (“Cash Security”)Security for the fulfillment of its obligations duringthe Term, deposit Rs.47 Crores (Rs. Forty SevenCrores only) being the equivalent of the threemonthsContractFee,incash/bankercheque/demand draft into the MCD’s bank accountin the Specified Bank (“Cash Security”)

(b) Subject to Clause 6.4, the Cash Security shall beliable to be set off against any amounts owed to theMCD by the Contractor at the end of the Term. Theremaining amount, if any shall be refunded withoutany interest to the Contractor within [2] months ofthe expiry of the Agreement and upon the fullcompliance by the Contractor in discharging all itsobligations and requirements hereunder.liable to be set off against any amounts owed to theMCD by the Contractor at the end of the Term. Theremaining amount, if any shall be refunded withoutany interest to the Contractor within [2] months ofthe expiry of the Agreement and upon the fullcompliance by the Contractor in discharging all itsobligations and requirements hereunder.

6.3 Contract Performance Guarantee by the Contractor

(a)Simultaneously with the signing of the Agreement,the Contractor has, as further security for thefulfillment of its obligations during the Term,furnished the MCD with an irrevocable andunconditionalbankguaranteesaggregatingtoRs.46.96 Crores (Rupees Forty Six Crores & NinetySix lacs only) from scheduled/nationalized banks inthe format provided in Schedule 6.2 (“ContractPerformance Guarantee”).the Contractor has, as further security for thefulfillment of its obligations during the Term,furnished the MCD with an irrevocable andunconditionalbankguaranteesaggregatingtoRs.46.96 Crores (Rupees Forty Six Crores & NinetySix lacs only) from scheduled/nationalized banks inthe format provided in Schedule 6.2 (“ContractPerformance Guarantee”).

(b) The Contractor shall ensure that the ContractPerformance Guarantee remains in full force andeffect of period of 6 months immediatelyfollowing the Expiry date.Performance Guarantee remains in full force andeffect of period of 6 months immediatelyfollowing the Expiry date.

(c) The Contract Performance Guarantee shall be for anamount equal to three months Contract Fee and theMCD shall have the right to encash and appropriateproceed of the Contract Performance Guaranteewithout notice to the Contractor in the event that theContractcommits abreachofitsobligationhereunder including where:amount equal to three months Contract Fee and theMCD shall have the right to encash and appropriateproceed of the Contract Performance Guaranteewithout notice to the Contractor in the event that theContractcommits abreachofitsobligationhereunder including where:

(i)this Agreement is terminated for reason otherthan the MCD’s Event of Default or ForceMajeure; orthan the MCD’s Event of Default or ForceMajeure; or

(ii)any amount due and payable (includinginterest) by the Contractor to the MCD inaccordance with this Agreement remainsunpaid by the Contractor on its due date; orinterest) by the Contractor to the MCD inaccordance with this Agreement remainsunpaid by the Contractor on its due date; or

(iii) there is failure of the Contractor to renew orextend or replace the Contract PerformanceGuarantee at least [15] days prior to its expiry,unless such expiry is due to the termination orexpiry of this Agreement.extend or replace the Contract PerformanceGuarantee at least [15] days prior to its expiry,unless such expiry is due to the termination orexpiry of this Agreement.

(d)The Contract Performance Guarantee shall berefunded without any interest to the Contractorwithin [2] months of the expiry or termination of theAgreement and upon the full compliance by theContractor in discharging all its obligations andrequirements hereunder.refunded without any interest to the Contractorwithin [2] months of the expiry or termination of theAgreement and upon the full compliance by theContractor in discharging all its obligations andrequirements hereunder.

6.4 Interest and Maintenance

(a)TheEMD,CashSecurityandtheContractPerformance Guarantee shall not carry any interestwhatsoever in any circumstances.Performance Guarantee shall not carry any interestwhatsoever in any circumstances.

(b) The Contractor shall always maintain the originalamount of said Performance Guarantee and shallforthwith deposit such further amount as may benecessary to make up the original amount of the saidPerformance Guarantees. In case demand noticeby the MCD is returned as failed by the bank thatgave the said Performance Guarantee on behalf ofthe Contractor, the MCD shall be entitled toterminate the Agreement and encash the saidPerformance Guarantees for whatever amount isavailable.amount of said Performance Guarantee and shallforthwith deposit such further amount as may benecessary to make up the original amount of the saidPerformance Guarantees. In case demand noticeby the MCD is returned as failed by the bank thatgave the said Performance Guarantee on behalf ofthe Contractor, the MCD shall be entitled toterminate the Agreement and encash the saidPerformance Guarantees for whatever amount isavailable.(c)In the event of said Contract Performance Guaranteebeing found insufficient or if the said ContractPerformance Guarantees has been wholly forfeited,the balance or the total sum recoverable as the casemay be shall be deducted from the Cash Securityand any other sum due to the Contractor or which atanytime thereafter may become due to Contractorunder this or any other contract, with the MCD,should that sum also be not sufficient to cover thefull amount recoverable, the Contractor shallforthwith pay to the MCD on demand the remainingbalance due or the same can be recovered as arrearsof Taxes under the provision of the DMC Act andany other Applicable Laws.”being found insufficient or if the said ContractPerformance Guarantees has been wholly forfeited,the balance or the total sum recoverable as the casemay be shall be deducted from the Cash Securityand any other sum due to the Contractor or which atanytime thereafter may become due to Contractorunder this or any other contract, with the MCD,should that sum also be not sufficient to cover thefull amount recoverable, the Contractor shallforthwith pay to the MCD on demand the remainingbalance due or the same can be recovered as arrearsof Taxes under the provision of the DMC Act andany other Applicable Laws.”

23.The term of the Agreement was three years, which expired on16.05.2011. It was the Contractor’s case that on completion of thecontract, the ‘Cash Security’ was required to be returned and the BankGuarantee was required to be discharged. The Contractor stated that ithad prior to the termination of the Agreement requested MCD to makearrangement to refund of the security deposits and discharge of the BankGuarantee which were furnished as ‘Cash Security’ and ‘ContractPerformance Guarantee’ in terms of the Agreement. However, MCD

failed to refund the deposits and the performance security withoutpointing out any claim, which could be adjusted against the securitydeposits. The Contractor also filed an application under Section 9 of theA&C Act seeking refund of the security deposits and the BankGuarantee. However, the Court relegated the Contractor to agitate suchclaims before the Arbitral Tribunal.

24.The Contractor claimed that since in terms of Clause 6.4 of theAgreement, no interest would accrue on the amount of Cash Depositsor the amount blocked under the Contract Performance Guarantee, therespondent was liable to refund the same on the expiry of the term ofthe Agreement and in any event within period of two months from thesaid date. The Contractor claimed that it had suffered substantial losson account of the MCD continuing to withhold the amount of cashdeposits and Bank Guarantee, without any justifiable grounds. Itclaimed that withholding of the amount had prevented the Contractorfrom participating in any other high value tender on account of thepaucity of funds resulting in loss of business opportunities. Thecontractor also claimed that acts of MCD precluded it from using itsfunds and investing the same in other businesses. It also claimed thatthe concerned bank had furnished the Bank Guarantee against theassets, which were furnished as collateral. Thus, the assets of value ofapproximately ₹150 crores were blocked for keeping the Bank Guarantee alive. On the basis of the aforesaid averments, the Contractorclaimed that he was entitled to interest at the rate of 24% per annum onthe securities (₹47,00,00,000/-) furnished as Cash Security and

₹46,96,00,000/- as Contract Performance Guarantee. Additionally, the Contractor also claimed bank charges for keeping the Bank Guaranteealive with effect from 16.05.2001 till its discharge as well as damagesto the extent of ₹1 crore per month.

25.The Arbitral Tribunal accepted the Contractor’s claim for intereston the Cash Security and the Contract Performance Guarantee.However, the Arbitral Tribunal reduced the rate of interest from 24% to15%. The Arbitral Tribunal found that MCD was liable to return thecash deposits as well as the Bank Guarantee, but had failed to do so.The Arbitral Tribunal was of the view that this case was gross casewhere MCD had raised false claims in order to cover its own breaches.And, had retained the cash deposits of ₹47,00,00,000/- and Bank Guarantee of value of ₹46,96,00,000/- resulting in losses and prejudice to the Contractor. The Arbitral Tribunal’s conclusions inrespect of the aforesaid claims are set out below:

“397. In view of the findings rendered earlier, theRespondent is clearly liable to return the cashdeposit of Rs.47,00,00,000/- and the ContractPerformanceGuaranteeofRs.46,96,00,000/-which was renewed once, to the Claimant.Respondent is clearly liable to return the cashdeposit of Rs.47,00,00,000/- and the ContractPerformanceGuaranteeofRs.46,96,00,000/-which was renewed once, to the Claimant.398.The Tribunal is of the considered opinion that thisa gross case where Respondent, which is apublic body raised false claims in order to coverits own breaches of contract and retained the CashDeposit of Rs.47,00,00,000/- and the ContractPerformanceGuaranteeofRs.46,96,00,000/-even after the expiry of the agreement. The saida gross case where Respondent, which is apublic body raised false claims in order to coverits own breaches of contract and retained the CashDeposit of Rs.47,00,00,000/- and the ContractPerformanceGuaranteeofRs.46,96,00,000/-even after the expiry of the agreement. The said

conduct of the Respondent has caused severelosses and prejudice to the Claimant herein.losses and prejudice to the Claimant herein.

399.In view of the above, it cannot be denied that theClaimant has suffered substantial financial losseson account of the unreasonable withholding of thetotalamountofRs.93,96,00,000/-from16/5/2011.Claimant has suffered substantial financial losseson account of the unreasonable withholding of thetotalamountofRs.93,96,00,000/-from16/5/2011.

400.The Claimant has made threefold claim fordamages/compensationonaccountofwithholding of the cash security and performancebank guarantee, i.e (1) interest at the rate of 24%per annum on the amount of Rs. 93,96,00,000/-,viz. cash security of Rs. 47,00,00,000/- andcontractperformanceguaranteeofRs.46,96,00,000/-; (2) bank charges incurred by theClaimant to keep the bank guarantee alive afterthe contract period; and (3) damages to the extentof Rs. 1,00,00,000/- per month from 16/05.2011till the date of return of the aforesaid cash securitydeposit and contract performance guarantee.damages/compensationonaccountofwithholding of the cash security and performancebank guarantee, i.e (1) interest at the rate of 24%per annum on the amount of Rs. 93,96,00,000/-,viz. cash security of Rs. 47,00,00,000/- andcontractperformanceguaranteeofRs.46,96,00,000/-; (2) bank charges incurred by theClaimant to keep the bank guarantee alive afterthe contract period; and (3) damages to the extentof Rs. 1,00,00,000/- per month from 16/05.2011till the date of return of the aforesaid cash securitydeposit and contract performance guarantee.401.Inviewofthefindingshereinbefore,theRespondent is liable to forthwith return the cashdepositsandtheoriginalBankGuaranteefurnished by the Claimant. In so far as the claimfor damages/compensation is concerned, theClaimant has not adduced any justification forarriving at the claim of damages of Rs. 1 croresper month. This is however, according to theTribunal, fit case to grant the interest at 15% perannum as damages on account of the wrongfulwithholding of the cash security deposit and thecontract performance guarantee. The interest of15% per annum shall be payable on the cashsecurity deposit, with effect from 16.07.2011 tillthe date of payment. As regards the contractRespondent is liable to forthwith return the cashdepositsandtheoriginalBankGuaranteefurnished by the Claimant. In so far as the claimfor damages/compensation is concerned, theClaimant has not adduced any justification forarriving at the claim of damages of Rs. 1 croresper month. This is however, according to theTribunal, fit case to grant the interest at 15% perannum as damages on account of the wrongfulwithholding of the cash security deposit and thecontract performance guarantee. The interest of15% per annum shall be payable on the cashsecurity deposit, with effect from 16.07.2011 tillthe date of payment. As regards the contract

performance guarantee in the form of bankguarantee, the interest at the rate of 15% shall bepayable from 16.07.2011 till the date of expiry ofthe bank guarantee, i.e. 12.02.2012 (the bankguarantee was renewed only upto 12.02.2012). Inaddition to this, the Respondent under the saidcircumstances is also liable to pay to theClaimant, the bank charges of Rs. 44,71,286/-with interest at the rate of 15% per annum from16.07.2011 till payment. The CW-2 has provedthe payment of bank charges and certificate ofthe Chartered Accountants in that regard is alsoplaced at Annexure-CW-2/5.”

26.The learned Single Judge rejected the contention that theArbitrator could not award any interest on the securities furnished bythe Contractor in the following words:

“20. The submissions of the learned senior counsel forthe Petitioner cannot be accepted as the Arbitrator hasnot awarded interest on the refund of the security amountfor the period of the contract but only after the expiry ofthe same. The agreement does not forbid grant of interestafter the expiry of the contract, on the other hand, Clause6.3 (d) states that the security amount shall be refundedwithin two months of the expiry of the agreement. Theagreement expired on 16[th]May, 2011 and therefore, cashsecurity should have been refunded by 16[th]July, 2011,having been not refunded, the Arbitrator was within itspower to award interest on the same with effect from 16[th]July, 2011 till the date of payment.”

27.Insofar as the ground of interest on Bank Guarantee is concerned,the learned Single Judge accepted MCD’s contention that the bankguarantee had not been encashed and therefore, granting interest on the

said amount would not arise. However, the court rejected the contentionthat interest could not be awarded on the said amount for the reason thatthe same was awarded as damages for wrongfully withholding the BankGuarantee. The Arbitral Tribunal had found that the Contractor hadsuffered losses on the said count. The learned Single Judge also referredto Section 31(7)(a) of the A&C Act and observed that the sameempowered the Arbitral Tribunal to award interest at such rate as itdeems reasonable.

28.It is material to note that neither the Arbitral Tribunal nor thelearned Single Judge considered the import of Clause 6.4(a) of theAgreement, which specifically stipulates that “the EMD, Cash Securityand the Contract Performance Guarantee shall not carry any interestwhatsoever in any circumstances.” In our view, there is no ambiguityin the said clause and it expressly proscribes accrual of any interest inany circumstances. It is now well settled that where contract betweenthe parties expressly limits the liability to pay interest, the same cannotbe awarded contrary to the agreement. This question is no longer resintegra.

29.In Pam Developments (P) Ltd. v. State of W.B. (supra), theSupreme Court had explained as under:

“23. The power of the arbitrator to grant pre-referenceinterest, pendente lite interest, and post-award interestunder Section 31(7) of the Act is fairly well-settled. Thejudicial determinations also highlight the difference inthe position of law under the Arbitration Act, 1940. The

following propositions can be summarised from surveyof these cases:

23.1. Under the Arbitration Act, 1940, there was nospecific provision that empowered an arbitrator to grantinterest. However, through judicial pronouncements, thisCourt has affirmed the power of the arbitrator to grantpre-reference, pendente lite, and post-award interest onthe rationale that person who has been deprived of theuse of money to which he is legitimately entitled has aright to be compensated for the same. [State ofOrissa v. G.C. Roy, (1992) 1 SCC 508, para 43(i). Alsosee State of Orissa v. N.C. Budharaj, (2001) 2 SCC721; Union of India v. Krafters Engg. & Leasing (P)Ltd., (2011) 7 SCC 279 : (2011) 3 SCC (Civ) 533] Whenthe agreement does not prohibit the grant of interest anda party claims interest, it is presumed that interest is animplied term of the agreement, and therefore, thearbitrator has the power to decide the same. [State ofOrissa v. G.C. Roy, (1992) 1 SCC 508, paras 43 (iv) &44]

23.2. Under the 1940 Act, this Court has adopted strictconstruction of contractual clauses that prohibit the grantof interest and has held that the arbitrator has the powerto award interest unless there is an express, specificprovision that excludes the jurisdiction of the arbitrator[Port of Calcutta v. Engineers-De-Space-Age, (1996) 1SCC 516, paras 4 and 5; Madnani Construction Corpn.(P) Ltd. v. Union of India, (2010) 1 SCC 549 : (2010) 1SCC (Civ) 168; Tehri Hydro Development Corpn.Ltd. v. Jai Prakash Associates Ltd., (2012) 12 SCC 10 :(2013) 2 SCC (Civ) 122, paras 18-20; Union ofIndia v. Ambica Construction, (2016) 6 SCC 36 : (2016)3SCC(Civ)36(FirstAmbicaConstructionCase); Ambica Construction v. Union of India, (2017)14 SCC 323 : (2018) 1 SCC (Civ) 257 (Second AmbicaConstruction Case); Raveechee & Co. v. Union of India,

(2018) 7 SCC 664 : (2018) 3 SCC (Civ) 711; RelianceCellulose Products Ltd. v. ONGC Ltd., (2018) 9 SCC266 : (2018) 4 SCC (Civ) 351] from awarding interestfor the dispute in question [State of U.P. v. HarishChandra, (1999) 1 SCC 63].

23.3. Under the 1996 Act, the power of the arbitrator togrant interest is governed by the statutory provision inSection 31(7). This provision has two parts. Under clause(a), the arbitrator can award interest for the periodbetween the date of cause of action to the date of theaward, unless otherwise agreed by the parties. Clause(b) provides that unless the award directs otherwise, thesum directed to be paid by an arbitral award shall carryinterest @ 2% higher than the current rate of interest,from the date of the award to the date of payment.

23.4. The wording of Section 31(7)(a) marks departurefrom the Arbitration Act, 1940 in two ways : first, it doesnot make an explicit distinction between pre-referenceand pendente lite interest as both of them are providedfor under this sub-section; second, it sanctifies partyautonomy and restricts the power to grant pre-referenceand pendente lite interest the moment the agreement barspayment of interest, even if it is not specific bar againstthe arbitrator. [Sayeed Ahmed & Co. v. State of U.P.,(2009) 12 SCC 26, paras 14, 23, 24 : (2009) 4 SCC (Civ)629; Union of India v. Saraswat Trading Agency, (2009)16 SCC 504 : (2011) 3 SCC (Civ) 499; Sree KamatchiAmman Constructions v. Railways, (2010) 8 SCC 767,para19:(2010)3SCC(Civ)575; UnionofIndia v. Bright Power Projects (India) (P) Ltd., (2015) 9SCC 695, para 13 : (2015) 4 SCC (Civ) 702; RelianceCellulose Products Ltd. v. ONGC Ltd., (2018) 9 SCC266, para 24 : (2018) 4 SCC (Civ) 351; JaiprakashAssociates Ltd. v. Tehri Hydro Development Corpn.(India) Ltd., (2019) 17 SCC 786, paras 13-15 : (2020) 3SCC (Civ) 605; Delhi Airport Metro Express (P)

Ltd. v. DMRC, (2022) 9 SCC 286, paras 16-20, 24 :(2022) 4 SCC (Civ) 623]

23.5. The power of the arbitrator to award pre-referenceand pendente lite interest is not restricted when theagreement is silent on whether interest can be awarded[JaiprakashAssociatesLtd. v. TehriHydroDevelopment Corpn. (India) Ltd., (2019) 17 SCC 786,para 13.2 : (2020) 3 SCC (Civ) 605.] or does not containa specific term that prohibits the same [OrientalStructural Engineers (P) Ltd. v. State of Kerala, (2021)6 SCC 150, paras 15-18 : (2021) 3 SCC (Civ) 548.]23.6. While pendente lite interest is matter ofprocedural law, pre-reference interest is governed bysubstantive law. [Central Bank of India v. Ravindra,(2002)1SCC367,para39following StateofOrissa v. G.C. Roy, (1992) 1 SCC 508, para 43(v)]Therefore, the grant of pre-reference interest cannot besourced solely in Section 31(7)(a) (which is procedurallaw), but must be based on an agreement between theparties (express or implied), statutory provision (such asSection 3 of the Interest Act, 1978), or proof ofmercantile usage [Central Bank of India v. Ravindra,(2002) 1 SCC 367, para 39; Central Coop. BankLtd. v. S. Kamalaveni Sundaram, (2011) 1 SCC 790,para 13 : (2011) 1 SCC (Civ) 331].”

30.In view of the above, the Contractor can draw no support fromthe provisions to Section 31(7)(a) of the A&C Act for sustaining theaward of interest. Clearly, if the parties had agreed that the contractsecurities“shallnotcarryanyinterestwhatsoeverinanycircumstances”, the Arbitral Tribunal would have no power to awardinterest by virtue of Section 31(7)(a) of the A&C Act. As is apparentfrom the plain language of the said clause, the power to award interest

under the said clause would arise only if the parties had not agreedotherwise.

31.In Garg Builders v. Bharat Heavy Electronics Ltd. (supra), theSupreme Court considered the question regarding the power of thearbitrator to award interest in the backdrop of Clause 17 of theAgreement between the concerned parties. The said clause expresslyprovided that “no interest shall be payable by BHEL on earnest moneydeposit, security deposit or on any moneys due to the contractor.”

32.The Court rejected the contention that the arbitrator could awardinterest on the amounts due notwithstanding the said clause. TheSupreme Court further observed as under:

“10. We have carefully considered the submissions ofthe learned counsel for both the parties made at the Bar.The law relating to award of pendente lite interest byarbitrator under the 1996 Act is no longer res integra.The provisions of the 1996 Act give paramountimportance to the contract entered into between theparties and categorically restricts the power of anarbitrator to award pre-reference and pendente liteinterest when the parties themselves have agreed to thecontrary.”

33.It is also relevant to refer to recent decision of the SupremeCourt in Union of India v. Manraj Enterprises (supra). The SupremeCourt had set aside the decision of this Court declining to interfere withan arbitral award whereby an arbitral tribunal had awarded pendente liteand future interest on the entire awarded amount except earnest money

deposit and security deposit. The application preferred by the Union ofIndia for setting aside the award on the ground that award of interestwas contrary to the terms of the contract was rejected by the learnedSingle Judge of this Court. The appeal preferred against the said orderunder Section 37 of the A&C Act was also rejected by the DivisionBench of this Court. On further appeal preferred by the Union of India,the Supreme Court examined Clause 16(2) of the General Conditions ofContract in that case, which is reproduced below:

“(2) No interest will be payable upon the earnest moneyor the security deposit or amounts payable to thecontractor under the contract, but government securitiesdeposited in terms of sub-clause (1) of this clause will berepayable with interest accrued thereon.”

34.The Supreme Court referred to the earlier decisions and held asunder:

“… in view of Clause 16(2) of the GCC, the arbitratorcould not have awarded the interest, pendente lite orfuture interest on the amount due and payable to thecontractor under the contract in the instant case.”

35.We also consider it relevant to refer to the decision of theCoordinate Bench of this Court in Punjab National Bank v. PrimeEngineering Consultants: 2018 SCC OnLine Del 10516. In that case,the relevant clause expressly provided as under:

“No interest is allowed on initial security deposit.Earnest money and retention money.”

36.The Agreement also provided that “the initial security depositincluding earnest money shall be refunded to the contractor after 14days of issue of virtual completion certification by the Employer”.

37.Notwithstanding the aforesaid stipulation, the Arbitral Tribunalhad awarded interest. The learned Single Judge of this Court rejectedthe application under Section 34 of the A&C Act to set aside the arbitralaward. In an appeal preferred under Section 37 of the A&C Act, theDivision Bench of this Court referred to the decision of the SupremeCourt in Union of India v. Bright Power Projects (India) (P) (Ltd.):(2015) 9 SCC 695 and had observed that the interest to the extent it wasgranted in excess of the stipulated and agreed amount was inadmissible“inasmuch as it proceeds beyond the contractual condition.”

38.In the present case, we find there is clear bar, which proscribesaward of interest on the security deposit and the performance securities.

39.In view of the above, the impugned award to the extent that itawards interest on cash securities and performance bank guaranteecannot be sustained. The impugned award is, accordingly, set aside tothe aforesaid extent.

40.Insofar as the bank charges on keeping the Bank Guarantee aliveis concerned, we find no ground to interfere with the impugned award.The Arbitral Tribunal had concluded that withholding of BankGuarantee was unjustified and the Contractor was compelled to keep

the same alive. The Contractor had also placed material/led evidenceto establish the quantum of bank charges incurred by it.

41.We are also unable to accept the contention that the award of costby the Arbitral Tribunal suffers from any patent illegality. It is wellsettled that the Indian Evidence Act, 1872 does not apply to arbitralproceedings. Undisputedly, the Contractor had placed material beforethe Arbitral Tribunal to substantiate its claim for the cost incurredtowards cost of arbitration and legal expenses. The Arbitral Tribunalhad accepted the same and awarded 50% of cost incurred by theContractor. The relevant extract of the impugned award reads as under:

“Cost of the Arbitration

405. Both the Parties have claimed costs from theopposite side and have accordingly submitted theirrespective bills of expenses. This is case where theTribunal has been inclined to grant the claims of theClaimant partially. On the other hand, only smallamount of the counter claim has been granted. Thecounter claim raised by the Respondent is clearly false,imaginary and without any basis. The Claimant is put toseverelossesandhardshipsonaccountofthehighhanded and unreasonable conduct of the Respondentby withholding the cash security deposit and contractperformance guarantee. Therefore, the Tribunal isinclined to direct the Respondent to pay 50% of the costsincurred by the Claimant and bear its own costs. TheClaimant has claimed sum of Rs. 64,15,142/- (roundedoff to Rs. 64 Lakhs) towards the cost of arbitral tribunaland legal expenses. Accordingly, the Tribunal directs theRespondent to pay sum of Rs. 32 Lakhs to the Claimantby way of costs of the arbitration and legal expenses.”

42.We are unable to accept that the said award of cost is vitiated onthe ground of patent illegality or is conflict with the public policy ofIndia.

43.In view of the above, the present appeal is partly allowed to thelimited extent that the award of interest on cash security and contractperformance security is set aside. The parties are left to bear their owncosts.

VIBHU BAKHRU, J

JULY 14, 2025RK

TEJAS KARIA, J