Summary
| Category | Data |
|---|---|
| Court | Supreme Court of India |
| Case Number | C.A. No.-013785-013785 – 2025 |
| Diary Number | 21416/2020 |
| Judge Name | HON’BLE MR. JUSTICE J.B. PARDIWALA |
| Bench | HON’BLE MR. JUSTICE J.B. PARDIWALA and HON’BLE MR. JUSTICE K.V. VISWANATHAN |
| Precedent Value | Binding Authority |
| Affirms / Overrules | Affirms existing precedent on Section 31(7)(b) |
| Type of Law | Arbitration & Conciliation Act, 1996 (Civil Procedure) |
| Questions of Law |
|
| Ratio Decidendi | The Court held that clause (b) of Section 31(7) of the Arbitration Act unconditionally requires post-award interest at 18% p.a. unless the award itself fixes a different rate. Parties may contract on pre-award interest (clause (a)) but cannot “contract out” post-award interest. Challenges to interest rates on public-policy or usury grounds fail absent breach of fundamental law. |
| Judgments Relied Upon |
|
| Logic / Jurisprudence / Authorities Relied Upon by the Court | The Court distinguished clauses (a) (pre-award interest subject to party autonomy) and (b) (post-award interest mandatory). It followed precedents interpreting “unless the award otherwise directs” to qualify only the rate, not entitlement. It refused re-appreciation of evidence under Section 34(2A) and applied a restrictive public-policy test per Explanation 1. |
| Facts as Summarised by the Court | Borrowers took two secured loans totalling ₹1.57 crore at 24% p.a., defaulted, and paid ₹44.66 lakh. NBFC invoked arbitration, and the tribunal awarded ₹2.21 crore plus 24% interest pre- and post-award. High Court dismissed challenges under Sections 34 and 37; SC appeal focused on interest and statutory interpretation. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts and arbitral tribunals interpreting Section 31(7)(b) |
| Persuasive For | High Courts deciding challenges under Sections 34/48 and practitioners advising on interest awards |
| Distinguishes | Parties cannot contract out post-award interest even if pre-award terms are agreed; public-policy/usury statutes do not apply to arbitration awards of commercial NBFC loans |
| Follows | R.P. Garg; Morgan Securities & Credits; North Delhi Municipal Corpn.; State of Rajasthan v. Ferro Concrete Constr. |
What’s New / What Lawyers Should Note
- Confirms that Section 31(7)(b) interest is mandatory—the arbitrator’s discretion extends only to the rate, not entitlement.
- Parties may agree on pre-award interest (Section 31(7)(a)) but cannot exclude post-award interest.
- Agreed commercial rate (24%) may govern post-award interest if fixed in the award; otherwise statutory 18% applies.
- Challenges under public-policy or usury laws fail absent contravention of fundamental policy per Explanation 1 to Section 34(2)(b)(ii).
- Section 34(2A) prohibits re-appreciation of evidence—a concurrent finding on loan genuineness and rate survives scrutiny.
Summary of Legal Reasoning
- Textual Divide Between Clauses (a) and (b)
- Clause (a): Arbitrator may award pre-award interest “unless agreed otherwise.”
- Clause (b): Mandatory post-award interest at 18% if award is silent on rate; parties cannot contract out.
- Precedent Analysis
- R.P. Garg: interpreted “unless the award otherwise directs” as qualifying rate only.
- Morgan Securities: affirmed unfettered arbitrator discretion on post-award interest.
- North Delhi Municipal: post-award interest discourages delay in payment.
- Public-Policy and Usury Challenges
- Explanation 1 to Section 34(2)(b)(ii): only fundamental policy violations warrant setting aside.
- High commercial rate alone does not shock conscience or breach fundamental policy.
- Usurious Loans Act, 1918 inapplicable to arbitration under 1996 Act and NBFC transactions.
- Procedural Bar on Re-Appreciation
- Section 34(2A) prohibits resetting awards based on factual re-appraisal.
- Concurrent findings on loan authenticity and 24% rate upheld by both HC benches.
Arguments by the Parties
Petitioner
- 24% interest is unconscionable and usurious, breaching RBI fair-practice guidelines and the Usurious Loans Act, 1918.
- Parties signed blank documents; rate interpolation amounts to fraud and vitiates contract.
Respondent
- Section 31(7)(b) empowers arbitrator to apply agreed rate; statutory 18% fills gap only if award is silent.
- High-risk subtype of loan to defaulting borrower justified 24% rate; State usury laws don’t bind NBFCs (Nedumpilli Finance).
- No error in concurrent HC findings; challenge merely re-appreciates evidence, barred under Section 34(2A).
Factual Background
Sri Lakshmi Hotel Pvt. Ltd. and its MD borrowed ₹1.50 crore and ₹7.25 lakh from a NBFC at 24% p.a. Expecting 12 and 6-month tenures, they defaulted after paying ₹44.66 lakh. The NBFC invoked arbitration; award in 2014 directed payment of ₹2.21 crore plus 24% interest. High Court dismissed Section 34 and Section 37 challenges. The SC appeal centered on the arbitrator’s power over post-award interest and viability of usury/public-policy objections.
Statutory Analysis
- Section 31(7)(a) (pre-award interest): party autonomy; arbitrator’s discretionary power can be contracted out.
- Section 31(7)(b) (post-award interest): mandate to “carry interest at 18% p.a.” unless award stipulates otherwise; no party autonomy.
- Section 34(2A): bars setting aside awards on re-appreciation of evidence or mere erroneous law application.
- Explanation 1, Section 34(2)(b)(ii): “public policy” limited to breach of fundamental policy of Indian law, justice or morality—mere high rate insufficient.
- Usurious Loans Act, 1918: not invoked in arbitration—later 1996 Act governs, NBFCs exempt from state usury statutes.
Alert Indicators
- ✔ Precedent Followed