36% Interest and Still Enforceable A Game-Changing Judgment for Commercial Arbitration

“36% Interest and Still Enforceable — A Game-Changing Judgment for Commercial Arbitration.”

Introduction

The award of interest in arbitration continues to be one of the most litigated aspects under the Arbitration and Conciliation Act, 1996. The recent Supreme Court decision in BPL Ltd. v. Morgan Securities & Credits Pvt. Ltd. (2025 INSC 1380) provides one of the most elaborate judicial analyses on:

• The extent to which arbitral tribunals must honour contractual rates of interest
• Whether high or “exorbitant” interest rates violate public policy
• The meaning of “unless otherwise agreed by the parties” under Section 31(7)(a)
• Whether penal or compound interest in commercial contracts is enforceable
• Whether the Usurious Loans Act or Section 74 of the Contract Act can invalidate such stipulations

The judgment offers clarity for lenders, commercial entities, arbitrators, and courts reviewing arbitral awards.

1. Background of the Dispute

Morgan Securities extended bill discounting facilities to BPL and BPL Display Devices Ltd. through sanction letters containing a concessional interest rate of 22.5%, but with a default clause restoring the normal contractual rate of 36% per annum with monthly rests.

BPL defaulted. Arbitration was invoked, and the sole arbitrator awarded:

• The principal amounts
• 36% p.a. compound interest (monthly rests) from due dates till award
• 10% p.a. post-award interest

The Section 34 petition was rejected, the Section 37 appeal was dismissed, and even the review was rejected by the High Court.

BPL approached the Supreme Court alleging that awarding 36% compound interest:

• Violates public policy
• Is penal in nature
• Contravenes Section 31(7)(a)
• Offends Section 74 of the Contract Act

1. Nature of Bill Discounting: Why High Interest Rates Are Not Unconscionable

A central part of the Supreme Court’s reasoning lies in the commercial nature of bill discounting. The Court explained:

• Bill discounting is not a loan, but a short-term, high-risk financing mechanism
• It provides immediate liquidity to suppliers
• Due to higher risk, lack of security, and short-term tenure, high rates of interest are commercially justified

The Court noted that the Usurious Loans Act, 1918 does not apply because the transaction is not a loan but a commercial bill discounting facility.

This classification became decisive in determining the validity of the 36% rate.

III. Section 31(7)(a) — “Unless Otherwise Agreed”: The Heart of the Decision

Section 31(7)(a) permits arbitrators to award interest at a reasonable rate “unless otherwise agreed by the parties.”

The Court clarified:

1. Party autonomy dominates

If the contract stipulates a rate of interest—whether concessional or default—the arbitral tribunal cannot ignore it unless:

• It is expressly excluded, or
• The clause is vitiated by fraud, coercion, or illegality

2. “Unless otherwise agreed” is a complete bar

The contractual rate binds the arbitrator fully during the pre-award period, removing discretion to determine a “reasonable” rate.

This harmonises earlier judgments such as S.L. Arora, Delhi Airport Metro, and the more recent HLV Ltd. decision discussed in the judgment.

3. Courts cannot rewrite commercial contracts

The Supreme Court emphasised that courts cannot reduce interest rates merely because they appear high, especially when both sides are sophisticated entities with equal bargaining power.

1. Is 36% Compound Interest Opposed to Public Policy?

The appellant argued that compound interest at such a high rate is unconscionable, shocks the conscience, and violates public policy under Section 34.

The Court disagreed.

Key findings:

1. Public policy arguments cannot be used to escape contractual liabilities

The Court held that moral or subjective notions of what is “fair” cannot override voluntarily agreed contract terms between corporations.

2. “High” interest ≠ “unconscionable”

The Court observed:

• High interest by itself does not violate public policy
• Especially not in commercial arrangements where the borrower is a sophisticated business entity
• The borrower benefitted from the facility and defaulted for years

3. Penal interest vs. commercial risk-based pricing

The Court distinguished:

• Penalty clauses (unenforceable without proof of damage)
• Commercial interest clauses (enforceable when risk-based)

It held that 36% monthly rest interest was not penal but an integral part of a commercial bargain.

1. Section 74: No Application to a Contractual Interest Clause

The appellant relied on Central Bank v. Ravindra and illustration (d) under Section 74 of the Contract Act to argue that compounding interest is penal.

The Court rejected this:

• Section 74 governs stipulated damages, not interest
• Interest—especially in commercial discounting—is compensation for the time value of money, not a penalty
• Parties were free to set rates reflecting risk, liquidity, and market dynamics

The Court reiterated Renusagar that courts do not interfere in commercial bargains unless illegality is shown.

1. Limitations and Acknowledgement of Debt

The Court upheld the concurrent findings that:

• Part payments in 2005 extended limitation
• Acknowledgment of liability in 2007 reset the limitation clock
• Arbitration was invoked within six months of acknowledgment

These findings were factual and not open to interference under Article 136.

VII. No Grounds to Disturb Concurrent Findings

The Supreme Court emphasised that:

• Arbitrator, Single Judge, Division Bench, and Review Bench all reached consistent conclusions
• Under Article 136, the Supreme Court does not reappreciate evidence or rewrite contracts

The Court therefore upheld the award in full, including the interest component.

VIII. Key Takeaways for Arbitration in India

1. Party autonomy over interest clauses is supreme

Section 31(7)(a) ensures that if parties agree on a rate of interest, the arbitrator must follow it.

2. Courts cannot modify contractual interest rates

Even if a rate appears high, courts cannot rewrite the bargain unless illegality or coercion is shown.

3. High or compound interest is valid in commercial contracts

The judgment strengthens enforceability of commercial credit agreements, especially bill discounting, factoring, and supply-chain finance.

4. Public policy is not a safe harbour against contractual default clauses

Public policy challenges require a violation of fundamental principles—not merely high interest.

5. Section 74 does not apply to agreed interest clauses

Interest is not liquidated damages.

Conclusion

The Supreme Court’s decision in BPL v. Morgan Securities reinforces a clear message:

Courts and arbitrators must respect commercial bargains, including agreed rates of interest, unless clear illegality or coercion is established.

In the context of rapidly evolving commercial financing, the judgment strengthens certainty and predictability in arbitration, ensuring that contractual interest rates—however high—remain enforceable when voluntarily agreed between sophisticated parties.

This ruling will have far-reaching impacts across:

• Arbitration involving financial instruments
• Corporate debt recovery
• Pendente lite and pre-award interest jurisprudence
• Drafting of commercial agreements

By placing contractual autonomy at the forefront, the Supreme Court has reaffirmed India’s commitment to a pro-arbitration, commercially sound legal framework.