Arbitrator’s Discretion To Award 24% Interest Cannot Be Curtailed By Contract Or Public Policy: Supreme Court Reaffirms Limited Scope Under Section 34 Arbitration Act

 “Parties Cannot Contract Out Of Post-Award Interest”, Supreme Court of India delivered a significant judgment in Sri Lakshmi Hotel Pvt. Limited & Anr. v. Sriram City Union Finance Ltd. & Anr. (Civil Appeal No. 13785 of 2025), reiterating the limited scope of interference with arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, especially when the award deals with interest in commercial loan disputes.

The Court, comprising Justices J.B. Pardiwala and K.V. Viswanathan, dismissed the appeal filed by borrowers challenging an arbitral award granting 24% post-award interest, holding that such a rate, even if high, does not ipso facto violate public policy, nor does it qualify as “usurious” under outdated laws like the Usurious Loans Act, 1918. The Court emphasized that arbitrators have full discretion under Section 31(7)(b) to grant post-award interest at a rate they deem fit, and parties cannot “contract out” of that discretion.

Commercial Loan Defaults, Arbitral Award, and Insolvency Proceedings

The dispute arose from two high-interest commercial loans taken by the appellants, Sri Lakshmi Hotels Pvt. Ltd. and its managing director, amounting to ₹1.57 crore, granted by Sriram City Union Finance Ltd., a registered NBFC. Both agreements stipulated an interest rate of 24% per annum on monthly rests. After partial payments totaling ₹44.66 lakhs, the borrowers defaulted.

Despite repeated demands, no further repayments were made, and a cheque issued by the borrower for ₹1.89 crore in 2008 bounced. Arbitration was invoked, and an award was passed on 27.12.2014 by a retired district judge directing payment of ₹2.21 crore with 24% post-award interest.

The borrowers unsuccessfully challenged the award before the Madras High Court under Section 34, and subsequently under Section 37. Meanwhile, their failure to pay led to initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC, which culminated in liquidation, with the NBFC recovering only a fraction of the total dues.

Usurious Interest, Fraud, and Public Policy

The borrowers, represented by Ms. Nina Nariman, assailed the award primarily on three grounds:

1. Unconscionable Interest Rate (24%): Alleged to be “usurious” and contrary to RBI Guidelines on Fair Lending Practices and public policy under Section 34(2)(b) of the Arbitration Act.
2. Fraudulent Execution of Loan Agreements: It was claimed that blank documents were signed and interest rates were later inserted.
3. Applicability of the Usurious Loans Act, 1918: Invoked to contend that the interest rate was excessive and unenforceable.

Supreme Court's Observations: Discretion to Grant Post-Award Interest Is Unfettered

Rejecting all three contentions, the Court delivered a reasoned analysis rooted in statutory interpretation and consistent precedent:

“Clause (b) of Section 31(7) of the Act, 1996 confers discretion upon the Arbitral Tribunal to award interest for the post-award period but that discretion is not subject to any contract.” [Para 37]

The Court clarified that Section 31(7)(b) is distinct from clause (a) which covers pre-award interest. While clause (a) is controlled by party autonomy, clause (b) gives the arbitrator independent discretion to fix post-award interest. If no such rate is fixed, the statutory default rate of 18% applies.

Quoting from R.P. Garg v. GM, Telecom Dept., 2024 INSC 743 and Morgan Securities v. Videocon, (2023) 1 SCC 602, the Court noted:

“The assumption of the High Court that payment of the interest for the post award period is subject to the contract is a clear error.” [Para 38]

And further:

“Clause (b) does not fetter the discretion of the arbitrator to grant post-award interest. It only contemplates a situation in which the discretion is not exercised.” [Para 44]

High Interest Rate Not Against Public Policy In Commercial Context

On the issue of public policy, the Court adopted a restrictive interpretation, citing the well-settled doctrine in Renusagar Power Co. v. General Electric Co. and reaffirmed in OPG Power v. Enexio Power Cooling, 2024 SCC OnLine SC 2600:

“To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country.” [Para 52]

Applying this test, the Court held:

“The imposition of an exorbitant interest in the background of contemporary commercial practices would not be against the fundamental policy of Indian law.” [Para 53]

It emphasized that the transaction was purely commercial, with clear documentation, and the risk premium justified the high interest rate given the borrower’s prior default with another bank.

Usurious Loans Act Inapplicable To NBFCs

Regarding the Usurious Loans Act, 1918, the Court summarily rejected its applicability:

“We have no hesitation in saying that there is no merit worth the name in the plea advanced... that the transaction in question falls foul of the Usurious Loans Act, 1918.” [Para 54]

Relying on Nedumpilli Finance Co. Ltd. v. State of Kerala, (2022) 7 SCC 394, the Court reiterated that state interest control laws do not apply to NBFCs, which are regulated by Chapter IIIB of the RBI Act, 1934.

Re-Appreciation Of Evidence Barred Under Section 34

The Court strongly reaffirmed the statutory bar against re-evaluation of facts and evidence under Section 34(2A):

“To take a view contrary would amount to re-appreciation of evidence, which is prohibited under the scheme of the Act, 1996.” [Para 45]

Citing Ssangyong Engineering v. NHAI, (2019) 15 SCC 131 and PSA Sical Terminals, (2023) 15 SCC 781, it held that courts cannot re-weigh evidence or reassess the arbitrator's factual findings unless there is patent illegality on the face of the award, which was clearly absent here.

Borrower Conduct & Long Litigation Justify Interest Award

The Court further considered the borrowers’ repeated defaults, non-compliance with the award, and protracted litigation, which ultimately yielded only partial recovery via liquidation:

“Having undergone numerous hardships and going through several round of litigations, it will be manifestly unjust to deprive the respondent no.1 from its rightful entitlements of post-award interest at this stage.” [Para 48]

No Interference Warranted—Appeal Dismissed

The Court dismissed the appeal, affirming the arbitrator's award in full:

“We have reached the conclusion that we should not interfere with the impugned order passed by the High Court.” [Para 56]

The judgment reaffirms key principles in Indian arbitration law—particularly the wide discretion of arbitrators to grant interest under Section 31(7)(b), the limited role of courts under Section 34, and the narrow scope of public policy as a ground to annul awards.

Date of Decision: 18 November 2025