Arbitration | Agreed Interest Rate Can't Be Later Challenged As Exorbitant; Arbitrator Cannot Overrride Contractual Rate : Supreme Court

The Supreme Court on Wednesday dismissed appeals filed by BPL Limited against an arbitral award, upholding the enforcement of a 36% annual interest rate on outstanding dues owed to Morgan Securities and Credits Private Limited. The Court ruled that corporate entities cannot claim contractual terms are "unconscionable" after voluntarily agreeing to them ..“Once the parties by mutual consent agreed to a particular rate of interest to be charged and the same is included in the terms of the contract there is no escape thereafter. The party concerned would be bound by the rate of interest as prescribed in the agreement. The rate of interest once agreed and forms part of a written contract between the parties the borrower after availing the finance cannot turn around and question the rate on the ground of being unconscionable or opposed to Public policy”, the Court held.A bench Justice JB Pardiwala and Justice Sandeep Mehta added, “The arbitral tribunal and the High Court rightly rejected the contention of the appellant that interest could not have been added to the principal amount. It was rightly held that since the compounding of interest on monthly rest was provided in the mutually agreed terms of the contract entered into between the parties, the respondent herein was entitled to claim interest as per the terms of the contract, i.e., at the rate of 36% p.a. with monthly rest.”The case originated from a “Bill Discounting Facility” extended by the respondent, Morgan Securities and Credits Private Limited, to BPL Display Device Ltd (BDDL) and BPL Limited in 2002 and 2003.The sanction letters stipulated a “normal” interest rate of 36% p.a. However, a “concessional rate” of 22.5% p.a. was offered upfront. The contract explicitly stated that in case of delay or default, the concessional rate would be withdrawn, and the normal rate of 36% p.a. with monthly rests would apply.BPL Limited defaulted on repayments. Consequently, Morgan Securities invoked arbitration, leading to an award in 2016 granting the claim with the higher interest rate. BPL Limited challenged the award, arguing that the 36% interest rate was “penal interest on penal interest,” unconscionable, and opposed to public policy.The Apex Court rejected BPL's contentions, emphasizing that the Arbitral Tribunal has no discretion to alter interest rates when a specific agreement exists between the parties. The Court noted Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, highlighting the opening phrase – “Unless otherwise agreed by the parties.”The Court held that this provision sanctifies party autonomy. Once parties agree to a specific interest rate in their contract, the Arbitral Tribunal loses the discretion to determine a “reasonable” rate and must enforce the agreed terms.“The discretion to grant interest would be available to the Arbitral Tribunal under clause (a) of sub section (7) of the Section 31 of the Act, 1996 only when there is no agreement to the contrary between the parties. When the parties agree with regard to any of the aspects covered in clause (a) of sub section (7) of the Section 31 of the Act, 1996, the arbitral tribunal would seize to have any discretion with regard to the aspects mentioned in the said provision. Once there is an agreement between the parties which provides that interest shall be at a particular rate, the arbitral tribunal thereafter is left with no discretion. In such circumstances, the arbitral tribunal would be bound by the terms of the agreement”, the Court held.The Court ruled that the doctrine of unconscionability does not apply to voluntary commercial agreements between sophisticated corporate entities.The Court noted that BPL Limited entered the agreement with “open eyes” and was not in a disadvantaged position. Having availed the financial facilities, they could not later claim the terms were oppressive.The transaction was classified as a commercial bill discounting facility, not a standard loan. Therefore, the Usurious Loans Act, 1918, was inapplicable, the Court said. The Court clarified that the clause regarding the interest rate hike, provided a concessional rate (22.5%) as an incentive for punctual payment. The Court held that withdrawing this concession upon default and reverting to the normal rate (36%) constitutes a valid commercial stipulation and cannot be faulted as “penal”.The Court also rejected the appellant's attempt to invoke the maxim verba chartarum fortius accipiuntur contra proferentem (interpreting ambiguous terms against the drafter).“The maxim 'verba chartarum fortius accipiuntur contra proferentem' has no application at all to the case in hand. This principle would not apply in case of commercial contracts for the simple reason that a clause in a commercial contract is bilateral and has mutually been agreed upon”, the Court observed.The Court concluded that the compensatory requirement of compounding interest in cases of default was justified given the respondent's...

Arbitration | Agreed Interest Rate Can't Be Later Challenged As Exorbitant; Arbitrator Cannot Overrride Contractual Rate : Supreme Court

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Arbitration | Agreed Interest Rate Can't Be Later Challenged As Exorbitant; Arbitrator Cannot Overrride Contractual Rate : Supreme Court

Amisha Shrivastava

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Amisha Shrivastava

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