Summary
| Category | Data |
|---|---|
| Court | Supreme Court of India |
| Case Number | C.A. No.-014565-014566 – 2025 |
| Diary Number | 56596/2024 |
| 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 |
| Overrules / Affirms | Affirms existing precedents under Section 31(7)(a) |
| Type of Law | Arbitration law / Commercial contract interpretation |
| Questions of Law | Can an arbitral tribunal override a contractual compound interest clause as unconscionable or against public policy under Section 31(7)(a)? |
| Ratio Decidendi |
The court held that “unless otherwise agreed by the parties” in Section 31(7)(a) grants party autonomy over pre-award interest. Once a compound interest rate is contractually agreed, the tribunal has no discretion to alter it. High, compound rates in commercial bill‐discounting agreements are not penalties if freely negotiated by parties of equal bargaining power. Clauses penalizing default with higher interest do not attract Section 74 (penalty) or public policy. |
| Judgments Relied Upon |
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| Logic / Jurisprudence / Authorities Relied Upon by the Court |
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| Facts as Summarised by the Court | BPL and BDDL availed a bill discounting facility from Morgan at 22.5% p.a., with a contractual fallback to 36% p.a. (compound) on default. They defaulted on ₹25.79 crore. Morgan invoked arbitration. The sole arbitrator awarded principal plus compound interest. High Court dismissed challenges under Sections 34 and 37. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts and arbitral tribunals |
| Persuasive For | High Courts |
| Follows |
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What’s New / What Lawyers Should Note
- Section 31(7)(a)’s opening words “unless otherwise agreed by the parties” give full effect to pre-award interest agreements, negating tribunal discretion once interest is contractually set.
- Commercial agreements for compound interest rates (36% p.a. with monthly rests) are enforceable if freely negotiated by parties of equal bargaining power.
- Penal-interest analysis under Section 74 of the Contract Act does not apply to clauses that increase rates on default; these are contractual adjustments, not penalties.
- The contra proferentem rule does not apply to bilateral commercial contracts where both parties negotiated the terms.
- Cavendish’s “legitimate interest” test supports enforcement of high-interest clauses in commercial transactions, aligning with global arbitration trends.
Summary of Legal Reasoning
- Nature of transaction: Bill discounting is a short-term commercial facility, not a loan under the Usurious Loans Act, 1918.
- Section 31(7)(a) autonomy: “Unless otherwise agreed” negates arbitral discretion to adjust pre-award interest when parties have specified a rate.
- Penalty doctrine inapplicable: Section 74 (Contract Act) and public‐policy challenges fail where compound interest clauses are part of freely negotiated commercial agreements.
- Contract interpretation: Court applies plain meaning, reads contracts as a whole, and refuses equitable rewriting under the guise of unconscionability.
- Party autonomy: Upholds globally embraced Cavendish approach—courts respect negotiated commercial interests beyond mere compensation.
Arguments by the Parties
Petitioner (Appellant – BPL Limited)
- Clause 4’s fallback to 36% p.a. on default requires active notice; lack of notice invalidates its enforcement.
- Compound interest (“penal interest on penal interest”) exceeds a genuine pre-estimate of loss and breaches Section 74 of the Contract Act.
- Section 31(7)(a) empowers tribunals to award only reasonable pendente-lite interest, not contractual rates.
- The rate is in terrorem, unconscionable, and against public policy.
Respondent (Morgan Securities & Credits)
- Parties freely and repeatedly negotiated high-risk bill discounting at agreed rates; no imbalance of bargaining power.
- Interest rates reflect market risk and unsecured, short-term nature of finance.
- No procedural or substantive challenge was raised before the tribunal or on Sections 34/37.
- Section 31(7)(a) preserves party autonomy; tribunal had no basis to alter agreed rates.
- Commercial justification (per Cavendish) validates compound rates on default.
Factual Background
BPL Ltd and BDDL sold goods and availed two bill discounting facilities from Morgan at concessional 22.5% p.a., reverting to 36% p.a. (compound) on default. They defaulted on ₹25.79 crore due in 2004–05. Morgan invoked arbitration, and a sole arbitrator awarded the principal plus interest as per contract—36% p.a. with monthly rests. The Delhi High Court upheld the award under Sections 34 and 37, rejecting penalty and public-policy challenges.
Statutory Analysis
- Section 31(7)(a), Arbitration Act, 1996: “Unless otherwise agreed by the parties … Arbitral Tribunal may include … interest at such rate … it deems reasonable …” Party autonomy over pre-award interest prevails when agreed.
- Section 31(7)(b), Arbitration Act, 1996: Post-award interest applies at 2% above prevailing rates, subject to award’s direction.
- Section 74, Contract Act, 1872: Liquidated damages vs. penalty; does not bar compound-interest fallbacks in freely made commercial contracts.
- Usurious Loans Act, 1918 and Section 80, NI Act: Inapplicable to bill discounting.
Alert Indicators
- ✔ Precedent Followed — Readers may rely on established Section 31(7) precedents
- 🚨 Public Policy Test Narrowly Applied — Commercial autonomy upheld
- 📅 Commercial Lending — High-interest facility context