The Supreme Court found itself navigating a bitter dispute between the Appellant, who claimed they were saddled with unconscionable interest rates and forced paperwork, and the respondent, insisting that the Appellant’s repeated defaults justified a higher risk premium. As the case travelled from arbitration to insolvency proceedings, the Court examined whether such financial conflicts warrant judicial intervention under the Arbitration and Conciliation Act, 1996.
Brief Facts:
The case arose from a challenge to an arbitral award passed in a loan dispute. The Appellant had taken two loan facilities from a finance company, repaid only a part of the amount, and thereafter defaulted. Despite repeated demands, they did not regularise the account. A cheque issued by them towards settlement was dishonoured. Arbitration was invoked under the loan agreements, and the arbitrator awarded the outstanding principal with interest. The Appellants challenged the award before the Courts, but both the first court and the appellate court upheld it. Insolvency proceedings were thereafter initiated against the Appellant Company, and only a partial amount could be recovered through liquidation. The present appeal arose from the dismissal of the challenge to the arbitral award.
Contentions of the Appellant:
The counsel for the Appellant argued that the interest rate applied under the loan agreements was excessive, unconscionable, and violative of fair lending norms. The Counsel submitted that regulatory guidelines discourage charging such high rates and are binding. Reliance was placed on legislation dealing with usurious loans to contend that the court is empowered to scale down excessive interest, and that such principles should also apply in arbitration. The counsel was further claimed that the Appellant was made to sign blank documents and that the interest rate was later inserted, amounting to fraud. On these grounds, it was urged that the award deserved interference at least to the extent of the interest component.
Contentions of the Respondents:
The counsel for the Respondent maintained that the arbitral tribunal had exercised its statutory discretion correctly in awarding interest in accordance with the contract, and that the Courts below rightly refused to interfere. The Respondent contended that the loan was a high-risk commercial transaction taken to clear earlier defaults, justifying a higher rate of interest. The counsel further argued that state laws relating to exorbitant interest have no application to non-banking financial companies, which are governed by central legislation. The Appellant's persistent default, dishonoured cheque, and prolonged non-payment were emphasised to show that the award was just and that no ground existed for interference.
Observation of the Court:
The Court held that the arbitral award could not be interfered with because the arbitrator had correctly exercised his authority under Section 31(7) of the Arbitration Act. Relying on Morgan Securities & Credits Pvt. Ltd. v. Videocon Industries Ltd., the Court reiterated that “The grant of post-award interest under Section 31(7) (b) is mandatory. The only discretion which the arbitral tribunal has is to decide the rate of interest to be awarded.” and that the arbitrator’s discretion is “not subject to party autonomy.” This was reinforced through R.P. Garg v. General Manager, Telecom Department, where the Court had held that “the payment of interest at the rate specified for the post-award period. While clause (a) gives parties an option to contract out of interest, no such option is available in regard to the post-award period.” On this basis, the challenge to the 24% interest rate was rejected as legally untenable.
The Court further observed that a high rate of interest in a commercial loan cannot be treated as violating public policy. Referring to the principles laid down in OPG Power Generation Pvt. Ltd. v. Enexio Power Cooling Solutions Pvt. Ltd., the Court emphasised that “mere contravention of law is not enough to make an award vulnerable. To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country.” Since no such violation was established, and because the loan was a high-risk commercial transaction, the interest rate could not be disturbed. The Court also relied on Ferro Concrete Construction (India) Pvt. Ltd. Vs. State of Rajasthan, noting that “in the absence of an express bar… the arbitrator could award interest,” thereby upholding the contractual rate.
The Court then noted that the Appellant had been in continuous default, including issuing a cheque that was dishonoured and failing to comply even after the award, thereby depriving the lender of its money for many years. In line with North Delhi Municipal Corporation v. S.A. Builders Ltd., the Court reiterated that “grant of post-award interest also serves a salutary purpose. It primarily acts as a disincentive to the award debtor not to delay payment of the arbitral amount to the award-holder.” Given this conduct, the Court found that the Appellants were not entitled to any equitable reduction of interest.
Finally, the Court dismissed the argument based on usury laws, holding that such statutes cannot override the Arbitration Act and do not apply to non-banking financial entities, consistent with the position in Nedumpilli Finance Company Ltd. v. State of Kerala. The Court concluded that none of the grounds under Section 34 or 37 were made out, that re-appreciation of evidence was barred, and that the award deserved to be upheld in full.
The decision of the Court:
The Court dismissed the appeal and upheld the arbitral award in full. It held that the arbitrator rightly applied the contractual interest rate and that post-award interest is mandatory under the law. No ground of public policy, patent illegality, or excessiveness was made out, and re-appreciation of evidence was barred. The award therefore, required no interference.
Case Title: Sri Lakshmi Hotel Pvt. Limited & Anr. Vs. Sriram City Union Finance Ltd. & Anr.
Case No.: Civil Appeal No. 13785 Of 2025
Coram: Hon’ble Mr Justice J.B. Pardiwala and Hon’ble Mr Justice K.V. Viswanathan
Counsel for the Appellant: Adv. Nina Nariman, AOR S. Gowthaman, Adv. Samarth Suri, Adv. Selvam P, Adv. Abhisar Thakral, Adv. M Venmani, and Adv. Sameer Aslam
Counsel for the Respondent: Sr. Adv. Krishnan Venugopal, AOR Kaushik Poddar, Adv. Vivek Raja, Adv. Akash Dalal, and Adv. Ananya.
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