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Supreme Court Upholds High Interest Rate in Arbitration
The Supreme Court has clarified the scope of 'public policy' under the Arbitration and Conciliation Act, 1996. It ruled that an arbitral award granting 24% annual interest, as stipulated in loan agreements, cannot be set aside merely for being exorbitant or shocking the judicial conscience.
The case involved Sri Lakshmi Hotels Private Limited, which had borrowed ₹1.57 crores from Sriram City Union Finance Limited at a contractual interest rate of 24% per annum. After defaulting, an arbitral tribunal awarded the outstanding amount along with pre-reference and post-award interest at the same contractual rate.
Public Policy and Commercial Interest Rates
The apex court held that for pre-award interest, party autonomy governs the rate as per Section 31(7)(a) of the Act. Since the loan agreements clearly stipulated 24% interest, the award was deemed valid.
Regarding post-award interest under Section 31(7)(b), the Court affirmed that while tribunals have discretion, awarding 24% interest consistent with the loan contract was a valid exercise of that discretion. High-risk commercial lending, especially to defaulting borrowers, often necessitates higher interest rates that reflect inherent risks.
Limited Scope for Interference
The Court emphasized that after the 2015 amendments, judicial review under 'public policy' requires an award to be fundamentally in conflict with public policy. Merely imposing a high interest rate in a commercial context is insufficient unless it is so unreasonable as to fundamentally shock the conscience of the court. An interest rate of 24% in this high-risk scenario was not deemed unconscionable.
RBI Guidelines and Old Laws
The Supreme Court also dismissed arguments that RBI Fair Practice Guidelines or the colonial-era Usurious Loans Act, 1918, should override the contractual terms. It noted that these guidelines could not override arbitral proceedings without statutory violation, and the Usurious Loans Act was ill-suited to govern modern arbitration frameworks.
Author's View
This judgment aligns with the principle of minimal judicial interference in arbitration, reflecting a post-2015 trend. It reaffirms party autonomy for pre-award interest and tribunal discretion for post-award interest, while narrowly defining grounds for review where an interest award is exceptionally unreasonable.