Arbitration Act | Party Autonomy Prevails Over Arbitral Discretion on Interest: Supreme Court Binds Parties To Agreed Interest Rates, Even At 36%

“The words ‘unless otherwise agreed by the parties’ at the beginning of clause (a) qualify the entire provision. Once the parties by mutual consent agreed to a particular rate of interest... there is no escape thereafter.”— In a seminal ruling the Supreme Court of India, comprising Justice J.B. Pardiwala and Justice Sandeep Mehta, dismissed the appeals filed by BPL Limited, affirming that an Arbitral Tribunal has no discretion to alter the rate of interest agreed upon by parties in a commercial contract, even if the rate is as high as 36% with monthly rests.

Concessional vs. Default Interest

The dispute arose from a Bill Discounting Facility extended by the Respondent, Morgan Securities and Credits Pvt. Ltd., to BPL Display Devices Ltd. (BDDL) and the Appellant, BPL Limited. The sanction letters (dated 2002 and 2003) provided a concessional interest rate of 22.5% p.a. payable upfront. However, a specific clause stipulated that in the event of default, the concessional rate would be withdrawn, and a "normal rate" of 36% p.a. with monthly rests would apply.

Following defaults in payment, Morgan Securities invoked arbitration. The Sole Arbitrator awarded the claim in favour of Morgan Securities, applying the contractual interest rate of 36%. BPL Limited challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that the interest rate was penal, unconscionable, and opposed to public policy. Both the Single Judge and the Division Bench of the Delhi High Court upheld the award, leading to the present appeal before the Supreme Court.

The Core Legal Issue: Arbitral Discretion under Section 31(7)(a)

The primary contention raised by Mr. Gopal Subramanium, Senior Counsel for BPL, was that Section 31(7)(a) of the Arbitration Act confers discretion upon the Arbitrator to award "reasonable" interest, regardless of the contract terms. It was argued that the phrase "unless otherwise agreed" should not completely strip the Tribunal of its adjudicatory function to assess the reasonableness of interest.

The Supreme Court categorically rejected this interpretation. Analyzing the text of Section 31(7)(a), the Bench held that the legislative intent is to sanctify party autonomy.

The Court observed: "The words ‘unless otherwise agreed by the parties’ at the beginning of clause (a) qualify the entire provision... The Arbitral Tribunal would be bound by the terms of the agreement."

Relying on precedents like Delhi Airport Metro Express Pvt. Ltd. v. DMRC (2022) and Hyder Consulting (UK) Ltd. v. Governor, State of Orissa (2015), the Court clarified that the Arbitrator’s discretion to determine the rate of interest exists only in the absence of an agreement between the parties. Where a specific rate is enshrined in the contract, the Tribunal cannot override it on grounds of equity or reasonableness.

Adoption of the 'Cavendish' Test: A Shift from 'Dunlop'

In a significant jurisprudential shift regarding "Penal Interest," the Supreme Court moved away from the rigid "genuine pre-estimate of loss" test established in the English case Dunlop Pneumatic Tyre Co. Ltd. (1915). Instead, the Court expressed an inclination to adopt the modern test propounded by the UK Supreme Court in Cavendish Square Holding BV v. Talal El Makdessi (2015).

The Bench noted that in complex commercial contracts, the distinction between a penalty and a genuine pre-estimate of loss is often artificial. The Cavendish Test focuses on whether the impugned clause protects a "legitimate commercial interest" of the innocent party and whether the remedy is proportionate to that interest.

Applying this to the facts, the Court held that the stipulation of 36% interest was not merely to punish the defaulter but protected the legitimate commercial interest of the financier in a high-risk, unsecured, short-term bill discounting facility.

Commercial Reality: Bill Discounting is Not a Loan

The Court drew a sharp distinction between a traditional business loan and a bill discounting facility. It noted that bill discounting involves higher risk and provides immediate liquidity to the borrower. Consequently, the provisions of the Usurious Loans Act, 1918, which allow courts to reopen transactions with excessive interest, were held inapplicable to this commercial arrangement.

The Court remarked, "The borrower after availing the finance cannot turn around and question the rate on the ground of being unconscionable or opposed to Public Policy."

Contra Proferentem Inapplicable to Commercial Contracts

BPL Limited attempted to invoke the maxim verba chartarum fortius accipiuntur contra proferentem (ambiguity is resolved against the drafter). The Court dismissed this, ruling that the maxim applies primarily to standard-form contracts like insurance where bargaining power is unequal. In a negotiated commercial contract between two corporate entities of equal standing, this principle has no application.

The Supreme Court dismissed the appeals, upholding the Arbitral Award and the Delhi High Court's judgments. The ruling cements the principle that in Indian arbitration law, the sanctity of the contract is paramount, and sophisticated commercial entities will be held strictly to their financial bargains, including high default interest rates.

Date of Decision: 4th December, 2025