Kiran Raj

The Supreme Court of India Division Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan held that the arbitral award imposing a 24% interest rate on a commercial loan must stand, concluding that an interest rate mutually agreed upon in such transactions does not offend the fundamental policy of Indian law. Addressing a challenge raised by the borrowers against the award, the Court noted that the dispute stemmed from unpaid loan facilities and the lender’s invocation of arbitration following persistent default. It further clarified that post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act is mandatory unless the award specifies otherwise. Finding no grounds to set aside the award, the Court dismissed the appeal.

The dispute arose from two loan agreements under which the borrower obtained funds from a non-banking financial company for commercial purposes. Repayments were made initially, after which the borrower ceased payment. The lender issued multiple demand notices, and in the borrower’s replies the principal loan amount was not disputed. A cheque later issued towards full settlement was dishonoured for insufficiency of funds, following which proceedings under the Negotiable Instruments Act were initiated. Owing to continued default, the lender invoked the arbitration clauses contained in both loan agreements, and a sole arbitrator was appointed.

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During the arbitration, the lender filed a claim seeking recovery of outstanding dues with interest at the contractual rate. The borrower disputed the rate of interest as excessive and sought verification of signatures and handwriting on the loan documents, which the arbitrator rejected. The borrower also invoked provisions of the Usurious Loans Act, 1918 and referred to Reserve Bank of India guidelines to contest the interest rate. The lender relied on the terms of the agreements, correspondence between the parties, and statutory discretion available to an arbitral tribunal under Section 31(7) of the Arbitration and Conciliation Act.

The arbitrator, after evaluating the evidence and the parties’ submissions, issued an award directing repayment with interest as per the agreements.

The Court began by identifying the central issue for determination, stating that “the only question that falls for our consideration is whether the High Court committed any error in dismissing the Section 37 appeal filed by the appellants herein, thereby affirming the order passed by the High Court in Section 34 proceedings?”

It first analysed the statutory framework governing interest in arbitral awards. Interpreting Section 31(7) of the Arbitration and Conciliation Act, the Court observed that “the grant of post-award interest under Section 31(7)(b) is mandatory” and that the arbitral tribunal’s discretion is confined to deciding the applicable rate. It recorded that “where the arbitrator does not fix any rate of interest, then the statutory rate… shall apply.”

With respect to pre-award interest, the Court stated that “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.” It further noted that “the arbitrator possesses the discretion and has jurisdiction to award interest including the post-award interest,” unless expressly barred by the contract.

Turning to the Court’s own authority to review arbitral findings, it recorded that the proviso to Section 34(2A) “explicitly prohibits re-appreciation of evidence.” The Court held that once factual determinations had been concurrently upheld, reopening them was impermissible.

Addressing the allegation that the award violated public policy, the Court stated: “It is well-settled that fundamental policy of Indian law does not refer to violation of any Statute 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.”

In discussing commercial lending practices, the Court added that “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 also reviewed the parties’ conduct, noting that the borrowers “were in a constant breach of the terms of the loan agreements and did not take adequate steps to repay the loan,” and that even a cheque issued in settlement “bounced on account of insufficient funds.”

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Finally, the Court rejected the argument based on the Usurious Loans Act, stating that “there is no merit worth the name in the plea… that the transaction in question falls foul of the Usurious Loans Act, 1918.”

The Court concluded the matter by stating that “we have reached the conclusion that we should not interfere with the impugned order passed by the High Court. In the result, this appeal fails and is hereby dismissed.”

Advocates Representing the Parties

For the Petitioners: 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 the Respondents: Mr. Krishnan Venugopal, Sr. Adv. Mr. Kaushik Poddar, AOR Mr. Vivek Raja, Adv. Mr. Akash Dalal, Adv. Ms. Ananya, Adv.

Case Title: Sri Lakshmi Hotel Pvt. Limited & Anr. v. Sriram City Union Finance Ltd. & Anr.
Neutral Citation: 2025 INSC 1327
Case Number: Civil Appeal No. 13785 of 2025 (arising out of SLP(C) No.12300 of 2020)
Bench: Justice J.B. Pardiwala, Justice K.V. Viswanathan