High Court upholds partial encashment of performance guarantee, reiterates narrow scope of appellate interference in arbitration

A Division Bench of Justice Anil Ksheterpal and Justice Amit Mahajan heard an appeal under Section 37(1)(c) of the Arbitration and Conciliation Act, 1996, in which the appellant contested the District Judge's dismissal of its Section 34 challenge to an arbitral award that permitted the respondent to encash 50% of the performance bank guarantee. The issue before the Court was whether the Arbitrator's findings were based on no evidence or suffered from patent illegality and perversity, thereby warranting interference under Section 37.

The Court dismissed the appeal and held that the Award dated 24.04.2023 and the Impugned Order dated 25.01.2024 did not suffer from illegality, perversity or jurisdictional error. The Bench emphasised that the scope of appellate interference under Section 37 was "extremely circumscribed" and was not akin to a re-appreciation of evidence. The Bench observed that the Arbitrator had found breach in relation to statutory wage obligations and, applying proportionality, curtailed full forfeiture by permitting only 50% encashment of the Performance Security. As the Court put it, "The absence of a precise mathematical quantification of loss, though a relevant consideration, does not, by itself, render the Award vulnerable to interference." The Court, in its reasoning, observed: “The Court is conscious of the settled legal position that an Arbitral award which is based on no evidence, or which ignores vital and material evidence, may fall within the limited ground of perversity and patent illegality, warranting interference even under Section 34 of the A&C Act, and, by extension, under Section 37 of the A&C Act. However, perversity must be of such a nature that no reasonable person, acting judicially and having due regard to the material on record, could have arrived at the impugned conclusion.” The Bench further noted that the Arbitrator's partial reduction of invocation reflected a "calibrated and proportionate exercise of discretion" rather than an arbitrary forfeiture.

Background The dispute arose after AIIMS issued a tender for outsourcing sanitation services for Zone‑II; the appellant was awarded the contract and furnished a Performance Bank Guarantee of Rs.95,47,841. Deployment commenced in May 2021, but AIIMS alleged discrepancies in salary payments for May–July 2021 and sought transaction details. The appellant explained a technical error and produced partial redress; AIIMS thereafter issued a letter dated 26.05.2022 terminating the contract effective 01.06.2022, debarred the appellant for two years, and sought encashment of the bank guarantee. The appellant obtained an ad interim stay from the High Court on 31.05.2022 and arbitration proceeded.

The Arbitrator set aside the two‑year debarment as disproportionate but found short‑payments (notably to 200 workers at JPNATC), accepted that the appellant paid Rs.10 lakhs against an identified shortfall, and invoked Clause 6.20 of the contract to justify termination. To avoid unjust enrichment, the Arbitrator restricted encashment to 50% of the guarantee. The District Judge dismissed the Section 34 petition, holding that the Arbitrator's reasoning was logical, based on the best evidence principle and that the appellant had failed to produce bank statements within its possession; the District Judge found no patent illegality.

On appeal, the appellant argued that there was no pleading or proof of loss, that the Arbitrator travelled beyond pleadings, and that Section 73/74 Indian Contract Act principles forbade forfeiture without nexus to loss. AIIMS defended the Award as reasoned and within contractual and statutory parameters, relying on the narrow grounds of interference under Sections 34 and 37. The High Court found the appellant's contentions to amount to re‑appreciation of evidence and, applying settled precedents, declined to interfere. The appeal stood dismissed; the Court recorded that the findings were founded on contract, correspondence and the appellant's failure to produce the best evidence.

Case Details: Case No.: FAO (COMM) 132/2024 Case Title: M/S DUSTERS TOTAL SOLUTIONS SERVICES PVT. LTD v. ALL INDIA INSTITUTE OF MEDICAL SCIENCES, NEW DELHI Appearances: For the Petitioner(s): Mr. Anupam Kishore Sinha, Mr. Pradeep K. Tiwari, Mr. Apoorv Jha, Mr. Sahitya Srivastava, Advs. For the Respondent(s): Mr. Satya Ranjan Swain, Panel Counsel with Mr. Kautilya Birat, Mr. Ankush Kapoor, Mr. Vishwadeep, Advs.