SC on Arbitral Award with 24% interest as per loan agreements – Valid
Judgment dated 18.11.2025 of the Supreme Court in Civil Appeal No.13785 of 2025 of Sri Lakshmi Hotel Pvt Limited and another Vs. Sriram City Union Finance Ltd and another
The appellant no.1 through appellant no.2 availed total loan of Rs.1,57,25,000/- from the respondent no.1
In 2008, the cheque given by the appellant no.2 was dishonoured. The respondent no.1 filed section 138 NI Act proceedings.
In the meanwhile, the respondent no.1 invoked arbitration and the respondent no.2 was appointed as the sole Arbitrator.
By the Award dated 27.12.2014, the claim of the respondent no.1 was partly allowed for Rs.2,21,08,244/-.
The Arbitrator granted interest at 24 p.a from the date of filing of the statement of claim till the date of its realization.
This was confirmed by the High Court and dismissed section 34 petition. Section 37 appeal was also dismissed.
The question was whether interest at 24% provided in the agreement is against public policy.
In that context, in para 49 of the judgment, the Supreme Court made the following salutary observations :-
“There is no gainsaying that the question as to whether the charging of a high rate of interest in the case of a purely commercial transaction is morally wrong entails a complex web of issues that would be contingent upon a variety of factors and perspectives. Although at first glance, the charging of interest at the rate of 24% could be considered as exploitative, unfair and morally blameworthy, high interest rates reflect the lenders risk of default due to highly competitive and uncertain market conditions, besides the fact that high interest rates might discourage borrowers from taking unnecessary risks. In the commercial world, justifiability or reasonability of high interest rates would depend on the transparency of the terms and conditions of the contract entered into between the lender and the borrower, as well as the informed consent of the borrower. Ultimately, morality is inherently dependent on context, shaped by a complex interplay of cultural norms, as well as individual values. The moral implications of high interest rates are not absolute, rather they must be assessed through a nuanced lens that considers the inter-relationship between economic, social, and regulatory factors.”
Thereafter, in para 53 of the judgment, it was held that “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.
It is well settled that fundamental policy of Indian law does not refer to violation of any Statute but fundamental principles on which Indian law is founded. 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 to perverse and so unreasonable so as to shock the conscience of the Court sans which no interference is warranted in the award, whereby the interest is awarded by the Arbitrator.
The Usurious Loans Act, 1918, as followed by the Punjab Relief of Indebtedness, 1934, was promulgated in a different era and the powers of the Court to adjudicate if the interest on a loan amount is excessive has to give way in view of the plenary powers of the Courts provided under the later enactment, i.e. the Act of 1996.
