The Supreme Court has refused to interfere with an arbitral award directing Sri Lakshmi Hotel Pvt. Ltd. and its Managing Director to pay over ₹2.21 crore with 24% interest to Sriram City Union Finance Ltd., holding that the rate was contractually agreed and not unconscionable in the context of a high-risk commercial loan.
The Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan observed that, in a commercial lending arrangement, it cannot be said that the imposition of an exorbitant rate of interest, viewed against contemporary commercial practices, violates the fundamental policy of Indian law or offends basic notions of morality or justice.
The dispute arose out of two loan facilities totalling ₹1.57 crore, availed in 2006 at an agreed interest rate of 24% per annum. After making repayments of only ₹44.66 lakh, the borrowers defaulted and later issued a cheque of ₹1.89 crore claiming ‘full and final settlement,’ which was dishonoured. Arbitration was invoked, resulting in an award for the principal amount and continued interest at the agreed rate. Challenges under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, were dismissed by the Madras High Court.
Before the Supreme Court, the borrowers argued that the interest rate was excessive, contrary to RBI directions, and was hit by the Usurious Loans Act, 1918. They further submitted that the loan documents were signed in blank. The respondent countered that the transaction was purely commercial, the borrower was already a defaulter with another bank, and NBFC lending practices justified the rate.
The Court held that Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 gives arbitrators wide discretion to award post-award interest, and parties cannot contract out of this statutory mandate. Referring to Morgan Securities v. Videocon Industries, 2022 INSC 898, RP Garg, and NDMC v. S.A. Builders, 2024 INSC 743, the Court reiterated that interference is warranted only if the rate is so arbitrary as to “shock the conscience,” which was not the case here.
The Court also refused to revisit factual findings regarding alleged fraud or blank documents, emphasising that Section 34(2A) of the Act bars reappreciation of evidence. It further held that neither the Usurious Loans Act nor state relief statutes applied once parties were governed by the 1996 Act.
Finding no infirmity in the arbitral award or the High Court’s reasoning, the Supreme Court dismissed the appeal, effectively affirming the borrower’s liability for the full amount along with 24% interest per annum.
Appearances
Appellants- Ms. Nina Nariman
Respondents- Mr. Krishnan Venugopal
