Challenge To Arbitral Award Cannot Be Sustained Merely Due To High Interest Rate Unless It Shocks Judicial Conscience: Supreme Court
The Apex Court held that disputes relating to the rate of interest awarded by an arbitrator do not fall within the narrow scope of interference under Section 34 of the Arbitration and Conciliation Act unless the interest is so perverse or unreasonable as to shock the conscience of the Court.
Justice J.B. Pardiwala, Justice K.V. Viswanathan, Supreme Court
The Supreme Court has held that a challenge to an arbitral award cannot be sustained merely because a party disputes the rate of interest awarded, unless the interest component is shown to be so unreasonable as to shock the judicial conscience.
The Court emphasised that the 'public policy' ground under Section 34 is narrowly construed and does not extend to disagreements over commercial interest rates.
The Apex Court was hearing an appeal by borrowers seeking to set aside an arbitral award on the ground that the interest stipulated in the loan agreements and upheld by the arbitrator was exorbitant and contrary to public policy. The concurrent decisions of the arbitral tribunal, the Section 34 court, and the Section 37 appellate court had rejected the challenge.
A Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan, while adjudicating the matter, observed that “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.”
Advocate Nina Nariman represented the appellants, while Senior Advocate Krishnan Venugopal represented the respondents.
Background
The dispute arose from two loan agreements under which the appellants had borrowed amounts from a non-banking financial company. The agreements stipulated repayment within short tenures along with interest at a specified rate. After partial repayment, the appellants defaulted.
A cheque subsequently issued towards full and final settlement was dishonoured, leading to proceedings under the Negotiable Instruments Act.
Upon further default, arbitration was invoked. The arbitral tribunal allowed the lender’s claim and awarded the outstanding sums with interest at the contractual rate. The appellants challenged the award under Section 34 of the Arbitration Act, contending primarily that the rate of interest was exorbitant, unconscionable, and violative of public policy.
The Section 34 court rejected the challenge, holding that none of the statutory grounds for interference were made out. A Section 37 appeal was also dismissed, affirming the tribunal’s findings.
The present appeal before the Supreme Court challenged these concurrent determinations.
Court’s Observation
The Supreme Court began by examining the statutory architecture of Section 34, reiterating that post-amendment, the expression “public policy of India” has been assigned a restricted meaning. The Bench noted that the statutory scheme mandates interference only where the award contravenes fundamental principles forming the foundation of the legal system, and not merely because one party considers the outcome harsh.
Referring to its previous judgments in OPG Power Generation Private Limited, Central Inland Water Transport Corporation, and subsequent decisions interpreting ‘public policy’ in the context of arbitration, the Court held that mere disagreement with the interest rate does not fall within the category of harm contemplated by the provision.
While making these observations, the Court remarked that “…on a plain and grammatical construction of clauses (ii) and (iii) of Explanation 1 to Section 34(2)(b) of the Act, 1996 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".
The Court reviewed the principles governing pre-award and post-award interest under Section 31(7) and reiterated that the arbitrator possesses discretion to determine reasonable interest unless the contract provides otherwise. Precedents, including Morgan Securities, North Delhi Municipal Corporation v. S.A. Builders, and R.P. Garg, were cited to affirm that post-award interest is mandatory unless a different rate is specified.
The Bench further underscored the statutory prohibition against re-appreciation of evidence under the proviso to Section 34(2A). Since both the Section 34 and Section 37 courts had concurrently upheld the arbitral findings regarding the commercial nature of the transaction, the execution of agreements, and the agreed rate of interest, the Supreme Court held that it was impermissible to revisit those factual conclusions.
The Court also examined the conduct of the appellants, noting continuing defaults, non-payment despite assurances, and the dishonour of the cheque issued towards settlement. It was observed that failure to honour the contractual obligations had significant financial repercussions for the lender, and that commercial risks justified higher interest rates in such transactions.
On the plea relating to the Usurious Loans Act, 1918 and related statutes, the Court held that such enactments, framed in a different era, could not override the later and complete statutory regime under the Arbitration Act. It held that the statutory power to scrutinise excessive interest under older laws must give way to the plenary scheme of the Arbitration Act.
Conclusion
Upholding the concurrent findings of the arbitral tribunal and the courts below, the Supreme Court held that the award did not violate the public policy of India and that high interest in commercial lending cannot, by itself, ground a challenge under Section 34(2)(b) of the Arbitration Act.
Accordingly, the appeal was dismissed, and the award confirmed.
Cause Title: Sri Lakshmi Hotel Pvt. Limited & Another v. Sriram City Union Finance Ltd. & Another (Neutral Citation: 2025 INSC 1327)
Appearances
Appellants: Advocates Nina Nariman, S. Gowthaman, AOR, Samarth Suri, Selvam P, Abhisar Thakral, M Venmani, Sameer Aslam
Respondents: Senior Advocate Krishnan Venugopal with Advocates Kaushik Poddar, AOR, Vivek Raja, Akash Dalal, and Ananya