Arbitration | Dispute On Interest Rate Doesn't Fall Under Public Policy Ground To Set Aside Award Ordinarily: Supreme Court
The Supreme Court on Tuesday (November 18) upheld the charging of a 24% interest rate in an arbitral award, stating that an interest rate agreed upon in a commercial loan agreement did not violate the fundamental policy of Indian law. “It is well-settled that fundamental policy of Indian law does not refer to violation of any Statue but fundamental principles on which Indian law is...
The Supreme Court on Tuesday (November 18) upheld the charging of a 24% interest rate in an arbitral award, stating that an interest rate agreed upon in a commercial loan agreement did not violate the fundamental policy of Indian law.
“It is well-settled that fundamental policy of Indian law does not refer to violation of any Statue but fundamental principles on which Indian law is founded. Any difference or controversy as to rate of interest clearly falls outside the scope of challenge on the ground of conflict with the public policy of India unless it is evident that the rate of interest awarded is so perverse and so unreasonable so as to shock the conscience of the Court sans which no interference is warranted in the award, whereby interest is awarded by the Arbitrator.” observed a bench of Justices JB Pardiwala and KV Viswanathan pointing that the imposition of a high interest in the background of contemporary commercial practices wouldn't be per se against the fundamental policy of Indian Law, or against the basic notions of morality or justice as per clauses (ii) and (iii) of Explanation 1 to Section 34(2)(b) of the Arbitration and Conciliation Act, 1996.
The case arose from two loan agreements from 2006, under which the appellants borrowed a total of ₹1.57 crore from the respondent, a Non-Banking Financial Company (NBFC). The agreements stipulated an interest rate of 24% per annum. After the appellants defaulted on repayment, arbitration was initiated, resulting in an award in favour of the NBFC.
Affirming the High Court's decision, the judgment authored by Justice Pardiwala justified the charging of a 24% interest rate, stating that the rate of interest agreed upon between the parties cannot be later disputed as exorbitant, being contrary to public policy.
“Section 31(7)(a) of the Act, 1996 stipulates that the arbitrator's discretion while awarding pre-award interest is subject to the agreement between the parties.”, the court said.
“Although at first glance, the charging of interest at the rate of 24% could be considered as exploitative, unfair and morally blameworthy, high interest rates reflect the lenders' risk of default due to highly competitive and uncertain market conditions, besides the fact that high interest rates might discourage borrowers from taking unnecessary risks.”, the court added.
Accordingly, the appeal was dismissed.
Cause Title: SRI LAKSHMI HOTEL PVT. LIMITED & ANR. VERSUS SRIRAM CITY UNION FINANCE LTD. & ANR.
Citation : 2025 LiveLaw (SC) 1118
Appearance:
For Petitioner(s) :Ms. Nina Nariman, Adv. Mr. S. Gowthaman, AOR Mr. Samarth Suri, Adv. Mr. Selvam P, Adv. Mr. Abhisar Thakral, Adv. Ms. M Venmani, Adv. Mr. Sameer Aslam, Adv.
For Respondent(s) :Mr. Krishnan Venugopal, Sr. Adv. Mr. Kaushik Poddar, AOR Mr. Vivek Raja, Adv. Mr. Akash Dalal, Adv. Ms. Ananya, Adv.