Supreme Court: Principle Of Unconscionability Inapplicable To Voluntary Commercial Agreements Between Parties Of Equal Bargaining Strength

The Supreme Court held that the Principle of Unconscionability is inapplicable to voluntary commercial agreements between parties of equal bargaining strength.

The Court held thus in Civil Appeals arising from the Judgment of the Delhi High Court, by which an Appeal under Section 37(1)(b) of the Arbitration and Conciliation Act, 1996 (A&C Act) read with Section 13 of the Commercial Courts Act, 2015 (CC Act), was dismissed.

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice Sandeep Mehta observed, “The express use of “Unless otherwise agreed by the Parties……” as the opening words of Section 31(7) (a) of the Act, 1996 is a clear instance of “Party Autonomy” which forms the bedrock of the arbitral process and will prevail in all cases, except where the legal provision is strictly non derogable in nature e.g. the bar of limitation. The principle of unconscionability is inapplicable to voluntary commercial agreements between parties of equal bargaining strength.”

The Bench said that the discretion to grant interest would be available to the Arbitral Tribunal under clause (a) of sub section (7) of the Section 31 of the A&C Act only when there is no agreement to the contrary between the parties.

Senior Advocates Gopal Subramanium, Pinaki Mishra, and Ashok Panigrahi represented the Appellant, while Senior Advocate Shyam Divan represented the Respondent.

Brief Facts

M/s BPL Display Device Ltd./BDDL had sold certain goods to the Appellant-BPL Limited over a period of time. As there arose some issues of timely payments, the buyer and seller companies viz., BPL and BDDL, together approached the Respondent-Morgan Securities and Credits Private Limited for extending a Bill Discounting facility to BDDL, to which the Respondent agreed. Accordingly, the Bill Discounting facility was sanctioned by the Respondent vide letters. However, dispute between the parties arose when a sum of Rs. 25,79,91,096/- against particular Bills of Exchange became due and payable to the Respondent/Claimant by BPL and BDDL in 2004, which amount they defaulted in repaying despite several reminders on behalf of the Respondent. During the subsistence of the contract, BDDL along with ERPL had issued postdated cheques (PDCs) to discharge their respective partial contractual liabilities towards the Respondent, however, BPL allegedly requested the Claimant to not encash the said cheques and assured that given some more time, they would make arrangements for the payments.

In good faith, the Respondent considered the requests and upon assurances of BDDL, did not present the cheques for encashment. After an extension of time to make the payments was sought, the Appellant made two payments to the Respondent vide Demand Drafts (DDs). However, despite the assurances extended by the Appellant and BDDL as well as the indulgence accorded by the Respondent, both failed to repay the amounts. Hence, the Respondent invoked arbitration against BPL and BDDL and thereafter, a Sole Arbitrator was appointed to preside over the matter. The Arbitrator directed the Appellant to pay Rs. 7,27,05,579/- as well as Rs. 20,62,28,681/- with interest. This was challenged before the High Court and the Single Judge partly allowed the Petition filed under Section 34 of A&C Act by the Appellant and dismissed that of the Respondent. An Appeal was preferred against the same and the Division Bench dismissed it. Thereafter, a Review Petition was filed, which was also rejected. Hence, the case was before the Apex Court.

Court’s Observations

The Supreme Court in view of the above facts, noted, “The crucial difference is that a bill discounting facility is a short-term financing option where a business sells its unpaid invoices to a financial institution for immediate cash, while a business loan is a traditional debt obligation where the business receives a lump sum and is responsible for repaying it with interest.”

The Court enunciated that when the parties agree with regard to any of the aspects covered under clause (a) of subsection (7) of Section 31, the Arbitral Tribunal would cease to have any discretion with regard to the aspects mentioned in the said provision.

“Only in the absence of such an agreement, the arbitral tribunal would have the discretion to exercise its powers under clause (a) of sub-section (7) of Section 31 of the Act, 1996”, it added.

The Court said that public policy is dictated by the law-making power the legislature, and is found in the general tenor of statutes, and in direct enactments and when the legislature, within the powers conferred by the Constitution, has declared the public policy, and fixed the rights of the people by statute, the Courts cannot declare a different policy or fix different rights.

“It is well settled that a contract is a commercial document between the parties, and it must be interpretated in such a manner so as to give efficacy to the contract rather than to invalidate it in the name of public policy, unconscionability etc. It is equally well settled principle that the terms of the contract executed between two parties, are not open to judicial scrutiny unless the same is arbitrary, discriminatory, mala fide or actuated by bias. The courts should not strike down the terms of a contract because it feels that some other terms would have been fair, wiser or logical”, it reiterated.

The Court remarked that the fact of the matter is that the Appellant had signed the agreement with open eyes and agreed to abide by the terms on which the Bill discounting facility was offered by the Respondent and in such circumstances, the doctrine of unconscionable contract cannot be invoked for frustrating the action initiated by the Respondent for recovery of its dues.

“The grant of pendente lite interest depends upon the phraseology used in the agreement, clauses conferring power relating to arbitration, the nature of claim and dispute referred to the arbitrator, and on what items the power to award interest has been taken away and for which period. Also, the position under Section 31(7) of the 1996 Act, is wholly different, inasmuch as Section 31(7) of the 1996 Act sanctifies agreements between the parties and states that the moment the agreement says otherwise, no interest becomes payable right from the date of the cause of action until the award is delivered”, it observed.

The Court further reiterated that contracts are to be interpreted based on their plain meaning, as a whole and in accordance with the language used and in case of any ambiguity, a contract will have to be interpreted taking into consideration the surrounding facts and circumstances.

Rule of Contra Proferentem

“However, where there are ambiguities, especially in cases of insurance contracts, the principle of contra proferentem steps in to aid the interpretation … The principle of contra proferentem is etymologically traceable to the maxim verba chartarum fortius accipiuntur contra proferentem, which means the words of deeds are to be taken most strongly against he who uses them”, it also said.

The Court elucidated that the rule of contra proferentem protects the insured from the vagaries of an unfavourable interpretation of an ambiguous term to which it did not agree and the rule assumes special significance in standard form insurance policies, called contract d’ adhesion or boilerplate contracts, in which the insured has little to no countervailing bargaining power.

“Contra proferentem is not a principle of universal application. Where the terms of the contract are clear, there will be no occasion to apply the contra proferentem rule. … Further, the principle must certainly not be extended to the extent of substituting words that were never intended to form a part of the agreement”, it noted.

Moreover, the Court said that the contra proferentem principle does not merit applicability in case of commercial contracts, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon as held in a number of Judgments.

“The true construction of a commercial contract must depend upon the import of the words used and not upon what the parties choose to say afterwards. Nor does subsequent conduct of the parties in the performance of the contract affect the true effect of the clear and unambiguous words used in the contract. The intention of the parties must be ascertained from the language they have used, considered in the light of the surrounding circumstances and the object of the contract. The nature and purpose of the contract is an important guide in ascertaining the intention of the parties”, it emphasised.

Conclusion

The Court, therefore, concluded the following points –

• The Arbitral Tribunal and the High Court rightly returned a finding that the transaction between the parties was neither a loan nor a debt, rather it was simply in the nature of a commercial transaction.

• When the parties agree with regard to any of the aspects covered in clause (a) of sub section (7) of the Section 31 of the A&C Act, the Arbitral Tribunal would cease to have any discretion with regard to the aspects mentioned in the said provision. Once there is an agreement between the parties which provides that interest shall be at a particular rate, the Arbitral Tribunal thereafter is left with no discretion. In such circumstances, the Arbitral Tribunal would be bound by the terms of the agreement.

• The maxim “verba chartarum fortius accipiuntur contra proferentem’ has no application at all to the case in hand. This principle would not apply in case of commercial contracts for the simple reason that a clause in a commercial contract is bilateral and has mutually been agreed upon.

• The business model of the Respondent was posited on the grant of such unsecured facilities for very short periods of time, thereby enabling the Respondent to repeatedly redeploy the principal plus interest in its business. In the event of default, this cycle would stand disrupted for decades, as in the present case, thereby resulting in loss to the Respondent. Hence the compensatory contractual requirement of compounding, in the case of defaulters cannot be faulted or termed as penal.

• Significantly, the contractual clause for interest, in the present case provides for the levy of a concessional rate of interest, as an incentive for punctual repayment. The withdrawal of such concession for failure to abide by the terms thereof and the consequential levy of a higher rate, with compounding, cannot be faulted as being penal.

Accordingly, the Apex Court dismissed the Appeals.

Cause Title- BPL Limited v. Morgan Securities and Credits Private Limited (Neutral Citation: 2025 INSC 1380)

Appearance:

Appellant: Senior Advocates Gopal Subramanium, Pinaki Mishra, and Ashok Panigrahi, AOR S. S. Shroff, Advocates Manu Nair, Arjun Perikal, Neelabh Shreesh, Pavan Bhushan, Jayavardhan Singh, R. Chandrachud, Gauri Subramanium, Shashank Jwalakumar, Aishwarya Prasad, Aryan Roy, Samridhi Shukla, Siddhant Juyal, Ankit Malhotra, Surajit Bhaduri, J.S. George, Pranav Diesh, Dharmendar Singh, and Anmol Tayal.

Respondent: Senior Advocate Shyam Divan, AOR Aruna Gupta, Advocates Simran Mehta, and Ramesh Allanki.

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