Court’s decision
The Delhi High Court dismissed an appeal filed by the Delhi Development Authority under Section 37 of the Arbitration and Conciliation Act, affirming the dismissal of its challenge under Section 34 and upholding the arbitral award in favour of a contractor. The Court held that the arbitrator had taken a plausible and legally sustainable view in allowing claims relating to wrongful encashment of a bank guarantee and payment of watch and ward charges. It ruled that where possession of completed flats was not taken over by the authority, the contractor’s obligation to safeguard the property was not gratuitous, and unilateral encashment of security without conducting the contractually mandated audit was impermissible. Finding no perversity, patent illegality, or violation of public policy, the Court refused interference .
Facts
The dispute arose from a construction contract awarded by the Delhi Development Authority for construction of 103 dwelling units in Dwarka, New Delhi. The agreement was executed in August 1994, with a stipulated completion period of 18 months. While the stipulated date of completion was March 1996, the actual completion was recorded in May 1997, evidenced by a completion certificate issued by the Engineer-in-Charge.
After completion of the main works, certain finishing items such as final whitewashing, fixing of fittings, and allied works were required to be executed at the time of handing over possession of the flats to allottees. Since allotment was delayed, a supplementary agreement was executed in March 2000, incorporating departmental circulars governing finishing works and watch and ward services. Under this arrangement, the contractor was required to maintain watch and ward for the completed flats until possession was taken over, at agreed monthly rates.
Despite the contractor maintaining watch and ward services and executing works under the supplementary agreement, payments were allegedly withheld. A bank guarantee of ₹1,55,829, originally furnished as security under the main contract and treated as security for the supplementary agreement, was encashed unilaterally by the Authority in September 2002, without prior notice or specification of any quantified loss. The contractor instituted recovery proceedings, which were later referred to arbitration by consent of parties.
The arbitrator passed an award in August 2011 in favour of the contractor. The Authority’s challenge under Section 34 was dismissed by the District Court in August 2013, leading to the present appeal under Section 37.
Issues
The primary issues before the High Court were whether the arbitral award allowing claims towards watch and ward charges and holding encashment of the bank guarantee to be illegal suffered from perversity or patent illegality, and whether the Section 34 court had exceeded or failed to exercise its limited jurisdiction. The Court also examined whether the award could be said to be contrary to public policy of India under the pre-amendment regime of Section 34.
Appellant’s arguments
The Authority argued that the contractor had failed to complete all works under the main agreement and that the completion certificate was conditional, subject to rectification of defects. It was contended that under departmental circulars, watch and ward charges were payable only after all obligations under the main agreement, including the defect liability period, were fulfilled and certified. The Authority further submitted that a sum had been inadvertently paid towards watch and ward, entitling it to recover the same by encashing the bank guarantee under Clause 29 of the contract.
It was argued that the arbitrator misapplied the circulars, ignored the contractor’s alleged defaults, and granted relief without proof of actual expenditure. The Authority urged that the award was against the terms of the contract and therefore hit by public policy.
Respondent’s arguments
There was no representation on behalf of the contractor at the stage of appeal. However, from the arbitral record and findings, the contractor’s consistent case was that possession of flats was never taken over by the Authority despite completion, compelling it to maintain watch and ward services. It was contended that such services were rendered at the Authority’s behest and could not be treated as gratuitous. The contractor also maintained that encashment of the bank guarantee without notice, audit, or determination of loss was contrary to contractual terms.
Analysis of the law
The High Court reiterated that the scope of interference under Section 37 is extremely narrow, being confined to examining whether the Section 34 court acted within its jurisdiction. It emphasised that courts cannot reappreciate evidence or substitute their own interpretation merely because another view is possible.
Applying settled jurisprudence on public policy prior to the 2015 amendments, the Court noted that interference is warranted only where an award is perverse, shocks the conscience, violates fundamental policy of Indian law, or contravenes the contract. A reasonable and possible interpretation adopted by the arbitrator is immune from judicial correction.
Precedent analysis
The Court relied on Supreme Court authority explaining the limited scope of Sections 34 and 37, including decisions holding that appellate courts exercise a supervisory, not appellate, role over arbitral awards. It reiterated principles laid down in cases interpreting “public policy of India” and patent illegality, particularly that errors of fact or an alternative contractual interpretation do not justify interference if the arbitrator’s view is plausible.
Court’s reasoning
The Court noted that although the original and supplementary agreements were not formally exhibited, their execution and relevant clauses were undisputed. Examining the circulars forming part of the supplementary agreement, the Court found that watch and ward was expressly contemplated and payable, especially where possession was delayed.
The Court accepted the arbitrator’s factual finding that there was inordinate delay in allotment and that possession was never taken over by the Authority. In such circumstances, the contractor’s obligation to safeguard completed flats was real and necessary. Invoking Section 70 of the Contract Act, the arbitrator rightly held that services rendered were not gratuitous.
On encashment of the bank guarantee, the Court held that Clause 29 required an audit to ascertain overpayment, which was admittedly not conducted. Encashment without notice, audit, or quantification of loss was therefore contrary to contract. The arbitrator’s conclusion that the encashment was unjustified was held to be legally sound.
Finding no perversity, illegality, or violation of public policy, the Court held that the Section 34 court correctly refused to set aside the award.
Conclusion
The Delhi High Court dismissed the appeal, affirming the arbitral award and the order of the Section 34 court. It held that the arbitrator’s findings on watch and ward charges and wrongful encashment of the bank guarantee were based on contractual provisions and evidence, and did not warrant interference. All pending applications were closed accordingly .
Implications
This judgment reinforces the finality of arbitral awards and the judiciary’s reluctance to interfere where the arbitrator adopts a plausible contractual interpretation. It is significant for government contracts, clarifying that authorities cannot avoid liability for watch and ward services when possession is delayed, nor encash bank guarantees mechanically without following contractual safeguards such as audit and notice. The ruling strengthens contractor confidence in arbitration as an effective dispute resolution mechanism against public bodies.
Case law references
- Punjab State Civil Supplies Corporation v. Sanman Rice Mills – Clarified the narrow scope of interference under Sections 34 and 37.
- ONGC v. Western GECO International – Explained “fundamental policy of Indian law” prior to 2015 amendments.
- Associate Builders v. DDA – Laid down tests for perversity, patent illegality, and public policy in arbitral awards.
- Hindustan Zinc v. Friends Coal Carbonisation – Held that awards contrary to contract may attract interference, subject to strict limits.
FAQs
1. Can courts re-examine facts in a Section 37 appeal?
No. Courts cannot reappreciate evidence or substitute their view if the arbitrator’s interpretation is plausible.
2. Are watch and ward charges payable if possession is delayed by the authority?
Yes. If the contractor is required to safeguard completed works due to delayed takeover, such services are not gratuitous.
3. Can a bank guarantee be encashed without audit or notice?
No. Where the contract mandates audit and determination of loss, unilateral encashment violates contractual terms.
