The Supreme Court of India has dismissed the appeals filed by BPL Limited against Morgan Securities and Credits Private Limited, upholding an arbitral award that granted interest at the rate of 36% per annum with monthly rests.
In a significant ruling concerning commercial arbitration, the Bench comprising Justice J.B. Pardiwala and Justice Sandeep Mehta held that under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 (the “Act, 1996”), the discretion of an Arbitral Tribunal to award interest is subject to the agreement between the parties. The Court ruled that in voluntary commercial agreements between parties of equal bargaining strength, a high contractual rate of interest cannot be termed “unconscionable” or “opposed to public policy.”
The central legal issue before the Court was whether the Arbitral Tribunal and the High Court were justified in awarding interest at the rate of 36% per annum with monthly rests based on the contract, and whether such a stipulation amounted to a penalty or was opposed to public policy. The Supreme Court affirmed the concurrent findings of the lower forums, emphasising that “party autonomy” forms the bedrock of the arbitral process.
Background of the Case
The dispute arose from a “Bill Discounting” facility extended by the Respondent, Morgan Securities, to M/s BPL Display Device Ltd (BDDL) and the Appellant, BPL Limited. BDDL (the Drawer) had sold goods to BPL Limited (the Drawee). To facilitate payments, they approached Morgan Securities, which sanctioned facilities vide letters dated December 27, 2002, and June 11, 2003.
Key Terms of the Agreement (Clause 4):
- Normal Rate: The parties agreed that the “normal agreed rate” for the facility was 36% p.a.
- Concessional Rate: As a special case, the facility was provided at a concessional rate of 22.5% p.a. payable upfront.
- Default Clause: In case of delay or default, “the concessional rate will be withdrawn and the normal rate of bill discounting charges of 36% p.a. monthly rests, shall be payable by the Drawee/Drawer from its due date.”
The Appellant defaulted on payments. Consequently, Morgan Securities invoked arbitration. The Sole Arbitrator, in an award dated December 14, 2016, directed BPL Limited to pay the principal amounts along with interest at 36% per annum from the due date till the date of the award, and 10% per annum thereafter.
BPL Limited challenged the award under Section 34 of the Act, 1996, which was dismissed by a Single Judge of the Delhi High Court (except for setting aside one specific Bill of Exchange). A subsequent appeal under Section 37 was also dismissed by the Division Bench, which held that while the rate was high, it was not “so unfair and unreasonable so as to shock the conscience of the Court.” A review petition was also rejected.
Arguments of the Parties
The Appellant’s Submissions: Represented by Senior Advocate Mr. Gopal Subramanium, BPL Limited argued:
- Interpretation of Clause 4: The clause implied that upon default, the parties would revert to the normal rate only through active notification.
- Penal Nature: The rate of 36% with monthly rests was “penal interest on penal interest” and violated Section 74 of the Indian Contract Act, 1872.
- Section 31(7)(a) of the Act, 1996: The phrase “unless otherwise agreed” in Section 31(7)(a) should be interpreted to mean that while parties can agree on interest, the Arbitrator still retains the jurisdiction to determine a “reasonable” rate. It was argued that the agreement does not exclude the adjudicatory function of the Tribunal.
- Public Policy: Granting such interest is opposed to public policy under Section 34(2)(b)(ii) of the Act, 1996.
The Respondent’s Submissions: Represented by Senior Advocate Mr. Shyam Divan, Morgan Securities argued:
- Party Autonomy: In a commercial contract between two large corporates, the agreed rate must prevail.
- Statutory Mandate: Under Section 31(7)(a), the Arbitrator’s discretion applies only in the absence of an agreement.
- Nature of Transaction: This was a bill discounting facility, not a simple loan. The Usurious Loans Act, 1918, was inapplicable.
- Waiver: The Appellant never questioned the interest rate during the contract or arbitration proceedings until a late stage.
The Court’s Analysis
1. Nature of the Commercial Contract The Court distinguished between a “business loan” and “bill discounting.” It observed that bill discounting involves a higher risk profile and short-term unsecured funding.
“Contracts relating to a bill discounting facility typically contain high rates of interest primarily due to the higher risk profile for the lender, the unsecured and short-term nature of the financing, and the quick and hassle-free access to cash it provides.”
Consequently, the Court upheld the finding that the Usurious Loans Act, 1918, was not applicable as the transaction was neither a loan nor a debt but a commercial transaction between traders.
2. Interpretation of Section 31(7)(a) of the Act, 1996 The Court provided a definitive interpretation of Section 31(7)(a), which begins with the words “Unless otherwise agreed by the parties.”
“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 to be charged and the same is included in the terms of the contract there is no escape thereafter.”
Citing precedent, including Delhi Airport Metro Express Private Limited v. DMRC (2022), the Court held that the Arbitral Tribunal loses its discretion to award “reasonable” interest if an agreement to the contrary exists.
3. Public Policy and Penal Interest Addressing the argument that 36% interest is penal and opposed to public policy, the Court referred to the United Kingdom Supreme Court decision in Cavendish Square Holding BV v. Talal El Makdessi (2015). The Court adopted the “legitimate interest” test, noting that a clause is not penal if it protects a legitimate business interest of the innocent party.
The Court observed:
“The business model of the Respondent was posited on the grant of such unsecured facilities for very short periods of time… In the event of default, this cycle would stand disrupted for decades, as in the present case, thereby resulting in loss to the Respondent. Hence the compensatory contractual requirement of compounding, in the case of defaulters cannot be faulted or termed as penal.”
The Court further stated that the Appellant, a commercial entity, entered the contract with open eyes.
“The Appellant was not in a position of disadvantage vis-à-vis the respondent… In such circumstances, the doctrine of unconscionable contract cannot be invoked for frustrating the action initiated by the respondent for recovery of its dues.”
4. Contra Proferentem Inapplicable The Court rejected the Appellant’s reliance on the maxim verba chartarum fortius accipiuntur contra proferentem (ambiguity resolved against the drafter).
“The contra proferentem principle does not merit applicability in case of commercial contracts, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon.”
Decision
The Supreme Court concluded that the Arbitral Tribunal and the High Court correctly rejected the contention that the interest rate was unconscionable. The Court held:
- The transaction was a commercial transaction, not a loan governed by the Usurious Loans Act.
- The interest rate of 36% p.a. with monthly rests was mutually agreed upon and binding.
- Section 31(7)(a) of the Act, 1996, sanctifies party autonomy; the Arbitrator is bound by the agreement.
- The withdrawal of the concessional rate (22.5%) upon default and the levy of the normal rate (36%) acts as an incentive for punctual repayment and is not penal.
The Court dismissed the appeals, stating:
“The express use of ‘Unless otherwise agreed by the Parties…’ as the opening words of Section 31(7) (a) of the Act, 1996 is a clear instance of ‘Party Autonomy’ which forms the bedrock of the arbitral process and will prevail in all cases… The principle of unconscionability is inapplicable to voluntary commercial agreements between parties of equal bargaining strength.”
Case Summary
- Case Title: BPL Limited v. Morgan Securities and Credits Private Limited
- Case No: Civil Appeal No. 14565-14566 of 2025
- Coram: Justice J.B. Pardiwala and Justice Sandeep Mehta
