Supreme Court of India: Validity of 24% Interest in Arbitral Award
In Sri Lakshmi Hotel Pvt. Limited & Anr. v. Sriram City Union Finance Ltd. & Anr., 2025 INSC 132, the Supreme Court decided the issue of Whether the arbitral award granting interest at 24% per annum under the loan agreements was valid and enforceable, or liable to be set aside as unconscionable, usurious, or contrary to public policy under the Indian Arbitration and Conciliation Act, 1996.
Factual Matrix
The appellants, M/s Sri Lakshmi Hotels Pvt. Ltd. and its Managing Director, availed two loan facilities from Sriram City Union Finance Ltd., an Non-Banking Financial Company (NBFC), totaling Rs.1,57,25,000 under agreements carrying an interest rate of 24% per annum. They repaid Rs.44,66,250 and then defaulted, despite repeated demand notices and assurances.
Subsequently, a settlement cheque of Rs.1.89 crore issued by the appellants was dishonored, leading to proceedings under the Negotiable Instruments Act. The lender invoked arbitration, and the sole arbitrator awarded Rs.2,21,08,244 with 24% interest from the claim date until realization.
The appellants challenged the award under Sections 34 and 37 of the Indian Arbitration and Conciliation Act, 1996, (Arbitration Act) but both petitions were dismissed by the High Court. Meanwhile, insolvency proceedings under the IBC were initiated against the appellant company, resulting in liquidation. The appellants then approached the Supreme Court in the present proceedings.
Parties Contentions
The appellants argued that the interest rate of 24% per annum stipulated in the loan agreements was unconscionable, usurious, and contrary to Reserve Bank of India guidelines on fair lending practices. They contended that such a high rate violated public policy and provisions of the Usurious Loans Act, 1918, which empowers courts to relieve borrowers from excessive interest.
Further, they alleged that the agreements were signed on blank documents and later manipulated by the lender to insert the disputed interest rate, amounting to fraud that vitiates the entire transaction. The appellants maintained that the arbitrator failed to consider these aspects and prayed for setting aside the award.
Per contra, the respondents asserted that the arbitral award was passed after due consideration of facts and contractual terms, and no error of law or jurisdiction was committed. They emphasized that the loan agreements expressly provided for 24% interest, which was justified given the high-risk nature of the transaction, as the loans were taken to clear a prior defaulted bank loan.
The respondents argued that NBFCs are governed by RBI regulations and not by state statutes on exorbitant interest, citing judicial precedents. They further contended that the arbitrator acted within his discretion under Section 31(7) of the Arbitration Act, and the appellants’ persistent defaults and failure to honor even a settlement cheque demonstrated deliberate non-compliance. Accordingly, they urged that the appeal lacked merit and should be dismissed.
Issues
The primary issue before the Supreme Court was whether the High Court erred in dismissing the appellants’ challenge under Section 37 of the Arbitration Act, thereby affirming the arbitral award granting interest at 24% per annum. This raised ancillary questions:
- Whether the stipulated interest rate of 24% was unconscionable, usurious, or contrary to public policy under Section 34(2)(b)(ii) of the Arbitration Act;
- Whether the Usurious Loans Act, 1918 and related statutes could apply to arbitration proceedings involving NBFCs;
- Whether allegations of fraud in execution of loan agreements—such as signing blank documents—vitiated the award; and
- Whether the arbitrator’s discretion under Section 31(7) to award pre-award and post-award interest was exercised in accordance with law.
The Court also considered whether interference was permissible under the limited scope of judicial review under Sections 34 and 37, given the statutory bar on reappreciation of evidence and the principle that arbitrators are the final judges of fact.
Conclusion
The Court concluded that there was no ground to interfere with the arbitral award or the High Court’s orders under Sections 34 and 37 of the Arbitration Act. It held that the arbitrator acted within his jurisdiction in awarding interest at 24% per annum, as the loan agreements expressly stipulated this rate and there was no contractual bar.
The Court emphasized that the loan agreements expressly stipulated an interest rate of 24% per annum. Since the transaction was purely commercial and involved a high-risk borrower (the appellants had already defaulted on a prior bank loan), the agreed rate reflected the lender’s risk exposure. The Court noted that in commercial dealings, parties are free to negotiate terms, and courts should uphold contractual autonomy unless the terms are shockingly unconscionable.
The Court clarified that post-award interest under Section 31(7)(b) is mandatory, and the arbitrator has discretion to fix the rate, which in this case was consistent with the agreements. In this case, the arbitrator awarded interest at the contractual rate of 24%, which is permissible under law. The Court clarified that party autonomy governs pre-award interest, while post-award interest is statutorily mandated unless otherwise directed by the award.
The Court rejected the argument that 24% interest was against public policy. It held that high interest rates in commercial transactions are not per se illegal or immoral; they depend on risk factors and informed consent. The Court observed that unless the rate is so exorbitant as to shock the conscience, it cannot be interfered with under Section 34(2)(b)(ii).
Allegations of fraud and claims under the Usurious Loans Act, 1918 were rejected as meritless, noting that such statutes have limited applicability in modern commercial transactions and cannot override the Arbitration Act.
The Court further observed that the scope of judicial review under Sections 34 and 37 is narrow and does not permit reappreciation of evidence or interference merely on the ground of high interest rates unless they shock the conscience, which was not the case here. The court also noted that arbitrator’s findings on the genuineness of agreements and agreed interest rate were upheld by both lower courts and interference would amount to rewriting the contract, which is impermissible.
Emphasizing the appellants’ persistent defaults and failure to honor even a settlement cheque, the Court found their conduct unjustifiable and upheld the award. The Court held that the 24% interest was justified as per the agreements, statutory provisions, and commercial realities, and interference was unwarranted. Consequently, the appeal was dismissed.