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 on all arbitration tribunals and subordinate courts |
| Overrules / Affirms | Affirms existing precedents on mandatory post-award interest |
| Type of Law | Arbitration and contract law |
| Questions of Law |
|
| Ratio Decidendi | The Court held that Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 mandates post-award interest on the sum awarded, unless the award itself specifies a different rate. Unlike clause (a), which is subject to party agreement on pre-award interest, clause (b) cannot be contracted out. The only discretion of the tribunal lies in choosing the rate; in its absence the statutory 18% applies. This interpretation follows precedents such as Morgan Securities & Credits v. Videocon and R.P. Garg v. Telecom Dept., and reflects legislative intent to discourage delay in payment of awards. |
| Judgments Relied Upon |
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| Logic / Jurisprudence / Authorities Relied Upon by the Court |
|
| Facts as Summarised by the Court | Borrowers (Sri Lakshmi Hotel Pvt. Ltd. and its MD) took two loans totalling INR 1.57 crore at 24% p.a. interest and defaulted. The NBFC invoked arbitration, and the sole arbitrator awarded principal plus interest at 24% pre-award and directed post-award interest. The High Court dismissed the Section 34 challenge; this appeal under Section 37 followed. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts and arbitration tribunals |
| Persuasive For | Other High Courts and commercial parties |
| Follows | Morgan Securities & Credits (2022 INSC 898), R.P. Garg (2024 INSC 743), North Delhi MUNIC. Corpn. (2025) |
What’s New / What Lawyers Should Note
- Post-award interest under Section 31(7)(b) is mandatory and cannot be contracted out.
- The arbitrator’s sole discretion is to fix the rate; absent fixation, the statutory 18% p.a. applies.
- A contractual rate (here, 24% p.a.) governs post-award interest if the award is silent on rate.
- Challenges under public policy or usury statutes will fail unless the rate “shocks the conscience.”
- Re-appreciation of evidence is barred under Section 34(2A) – patent illegality only.
Summary of Legal Reasoning
- Section 31(7)(a) vs. (b): clause (a) allows party autonomy on pre-award interest; clause (b) mandates post-award interest.
- Legislative purpose: compensate claimant for delay and deter debtor from postponing payment.
- Precedents (Morgan Securities & Credits; R.P. Garg; North Delhi Municipal) confirm mandatory nature of post-award interest.
- Discretion of arbitral tribunal under clause (b) limited to choosing rate; if none, statutory 18% applies.
- High contractual rate does not violate public policy absent extreme unreasonableness; usury statutes inapplicable to NBFC loans.
- Evidence re-appreciation barred by Section 34(2A); concurrent factual findings upheld.
Arguments by the Parties
Petitioners (Appellants)
- 24% interest is unconscionable and usurious; RBI fair-practice guidelines binding.
- Usurious Loans Act, 1918 empowers courts to reduce excessive rates.
- Contract documents were signed on blank papers, amounting to fraud.
Respondents (NBFC)
- Arbitrator legitimately exercised discretion under Section 31(7)(b); contractual rate applies.
- Even statutory rate (18%) yields lower recovery than contractual rate.
- Tamil Nadu usury law does not bind NBFCs governed by RBI Act.
Factual Background
Sri Lakshmi Hotel Pvt. Ltd. and its MD borrowed INR 1.57 crore from an NBFC at 24% p.a. and defaulted after partial payments. The NBFC invoked arbitration; award dated 27.12.2014 directed repayment of principal plus interest and mandated post-award interest. Section 34 petition and Section 37 appeal in Madras High Court were dismissed. Appellant’s insolvency proceedings led to partial recovery. Appeal to Supreme Court challenged mandatory interest provision.
Statutory Analysis
- Section 31(7)(a), Act 1996: arbitrator may award pre-award interest subject to party agreement.
- Section 31(7)(b), Act 1996: sum awarded “shall…carry interest at 18% p.a.” unless award directs otherwise—no party autonomy.
- Section 34(2A), Act 1996: arbitral awards may be set aside only for patent illegality; no re-appreciation of evidence.
- Public policy under Section 34(2)(b)(ii): requires contravention of fundamental policy, not mere contract terms.
- Usurious Loans Act, 1918: held inapplicable to arbitration under Act 1996 and NBFC transactions.
Alert Indicators
- ✔ Precedent Followed – Existing law on post-award interest under Section 31(7)(b) upheld.