In its recent judgement, the Supreme Court of India interpreted Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 (A&C Act), which deals with the grant of interest on the sum awarded by the tribunal. The Apex Court’s observations came while dealing with an appeal challenging the Madras High Court’s judgement dismissing an appeal under Section 37 of the A&C Act, which was filed against a Single Judge’s order dismissing a challenge under Section 34 of the Act.
Brief Facts:
Facts of the case were that Appellant No. 1, a hotel, and Appellant No. 2, the Managing Director of the hotel, borrowed ₹1,57,25,000 from Respondent No. 1, an NBFC, at an interest rate of 24% per annum.
The Appellants defaulted after paying ₹44,66,250. They later objected to the 24% interest rate and contended that only 12% p.a. was payable on the loan amount. Then they issued a cheque for full and final settlement, which got dishonoured due to insufficiency of funds. Arbitration was invoked by the NBFC. The appellants contended in their Statement of Defence that the interest rate of 24% was usurious.
The Arbitrator awarded the NBFC ₹2,21,08,244 with 24% p.a. interest from the date of filing the claim. The Appellants' challenges under Section 34 and Section 37 of the 1996 Act were dismissed by the Single Judge and the Division Bench of the High Court. Liquidation proceedings under the IBC were initiated against the Appellant company.
Supreme Court’s observations:
Explaining the intent behind Section 31 of the A&C Act, the Supreme Court stated, “What clause (b) provides for is that the arbitral tribunal may award interest on the sum adjudged under clause (a). But if no such interest is awarded, then there shall be interest at the rate of 18% on the sum awarded by the arbitral tribunal from the date of the award to the date of payment. The intent behind granting the pre-award interest is to compensate the claimant for the loss suffered from the time the cause of action arose till the passing of the arbitral award. This is also with a view to ensure that the arbitral proceedings are concluded expeditiously. Similarly, the intent behind grant of post-award interest is to discourage the award-debtor from delaying the payment of the arbitral amount to the award-holder.”
The Apex Court further explained how an arbitrator can exercise their discretion in deciding the interest rate at different stages of the case in the following words, “The grant of such interest during the pre-award period is subject to the agreement as regards the rate of interest or unpaid sum between the parties. Clause (b) of Section 31(7) of the Act, 1996 confers discretion upon the Arbitral Tribunal to award interest for the post-award period but that discretion is not subject to any contract. If such discretion is not exercised by the Arbitral Tribunal, then the statute steps in and mandates the payment of interest at the rate specified for the post-award period.”
The top court further explained 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. Where the arbitrator does not fix any rate of interest, then the statutory rate, as provided in Section 31(7)(b), shall apply.”
Coming back to the facts of the case, the bench noted that, “it is evident that the appellants were in a constant breach of the terms of the loan agreements and did not take adequate steps to repay the loan. The amount recovered from the liquidation process was much less than the amount actually due and payable to the respondent no.1, in terms of the award.”
Then Supreme Court examined whether the challenge on the ground of high interest rate falls within the scope of Section 34 of the A&C Act. “It cannot be said that the imposition of an exorbitant interest in the background of contemporary commercial practices, would be against the fundamental policy of Indian Law, or against the basic notions of morality or justice. 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.”
Supreme Court’s decision:
The Hon’ble Court observed that “both the courts below have concurrently held after a detailed analysis of the evidence as regards the genuineness of the loan agreement, thereby affirming the rate of interest at 24% p.a. To take a view contrary would amount to re-appreciation of evidence, which is prohibited under the scheme of the Act, 1996. We refrain from entering into the merits of the issue, particularly when the findings of the learned Arbitrator have been concurrently upheld.”
Hence, the Supreme Court decided not to interfere with the impugned order passed by the High Court and dismissed the appeal.
Bench: Justice J.B. Pardiwala, Justice K.V. Viswanathan
Case Title: Sri Lakshmi Hotel Pvt. Limited & Anr. v. Sriram City Union Finance Ltd. & Anr.
Judgement Date: 18th November 2025
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