Arbitral Award Upholding Interest Rate Not Against Fundamental Policy of Indian Law: Supreme Court

Introduction

In Sri Lakshmi Hotel Pvt. Ltd. & Anr. v. Sriram City Union Finance Ltd. & Anr.1, a ruling issued by the Supreme Court of India on 18 November 2025, the Court upheld a 24% pa interest awarded under an arbitral award flowing from a commercial loan transaction. The Court held that an acceptable contractual interest rate in a financial transaction does not breach the public policy of India by virtue of appearing to be high, unless it can be shown to be so unconscionable, or shocking to the conscience of the Court, as to justify review under Section 34(2)(b) of the Arbitration and Conciliation Act, 1996. With this ruling, the Court reaffirmed the principle of party autonomy in commercial arbitration and imposed the narrowest of interpretations of “public policy of India” in order to reinforce the finality of an arbitral award.

Issues

The primary legal question that moved up to the Supreme Court was if in light of the arbitral award of 24% interest by virtue of the loan agreements, the award was against the public policy of India, per Section 34(2)(b) of the Arbitration and Conciliation Act, 1996. There were secondary issues to consider with regards to whether the interest, which was claimed to be usurious, rendered the contract void for moral or fundamental public policy of Indian law reasons, or whether courts could intervene, even while enforcing a contract, by re-appreciating the evidence which formed opinions regarding such contracts.

Facts

The issue arose from two loan agreements executed in 2006 between the appellants, who were in the hotel business, and the respondent, a registered Non-Banking Financial Company. The loans were made for commercial purposes to pay off bank dues which together totalled to an amount of ₹ 1.57 crore. Both loan agreements had a clear stipulation for repayment, specifying a repayment period, and that the rate of interest was at 24% per annum on a monthly rest basis. The appellants paid approximately ₹44.6 lakh prior to defaulting completely from April 2007. There were several notices of demand sent by the lender that were either ignored by the appellants or were responded to with assurances that were not adequately met. In 2008, the appellants issued a cheque for ₹1.89 crores for the purported settlement, which was returned due to insufficient funds and led to Section 138 proceedings under the Negotiable Instruments Act, 1881.

As there was a substantial period of default, the lender invoked the arbitration clause which led to the appointment of a sole arbitrator, who after considering the evidence found in favour of the lender and awarded ₹2.21 crore with interest, at the agreed rate of 24%, from the date of the award and pre-award interest. Attempts to challenge the enforcement of the award were rejected in both Section 34 and Section 37 proceedings in the Madras High Court. Following the non-payment of the award, the creditor initiated insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 which subsequently led to the liquidation of the corporate borrower.

Arguments

The appellants claimed that the 24% interest was excessive, exploitative, and therefore contrary to public policy as per clauses (ii) and (iii) of Explanation 1 to Section 34(2)(b) of the Arbitration Act. With regard to the Reserve Bank of India’s Fair Practices Code, it was argued that the lender must not resort to charging a usurious rate and must keep in mind the welfare of the borrower, citing authority of such principal binding in Central Bank of India v. Ravindra. The appellants also cited the Usurious Loans Act, 1918 and they argued that courts must intervene where excessive interest is charged, creating inequitable enrichment. The appellants also disputed the legitimacy of the forms of the contract itself, asserting that their signatures on the blank papers were manipulated to equate to the forms that were later produced in the court process, and the respondents’ actions constituted fraud and vitiated the agreements.

In contrast, the respondent asserted that a tribunal of arbitration has very broad discretion in awarding interest under Section 31(7)(a) and (b) of the Act, and that, if contractual rates of interest are present, arbitrators must uphold party autonomy. The respondent noted that the appellants were in continuing default, noting that a cheque amounting to $50,000 to settle was returned for insufficient funds, along with the fact that the appellants , even in the context of bankruptcy insolvency proceedings did not even attempt to recover even the amount of the principal in full. Furthermore, there was no statutory limitation to usury laws in the appellants’ home State, with the additional argument of state law not applying to NBFCs which were governed under only the Reserve Bank of India Act under statutory law. Therefore, there was absolutely no basis on which to strike down the contractual obligation to pay interest.

Judgment

The Supreme Court dismissed the appeal and upheld both the arbitral award and High Court judgments. The Court reiterated established jurisprudence, especially in the Morgan Securities & Credits Pvt. Ltd. v. Videocon Industries Ltd. opinion, in stating that pre-award interest will depend on contractual terms, whereas post-award interest is an entitlement unless the arbitrator specifies otherwise. Here, since the agreements themselves provided for a 24% interest, and the arbitrator had exercised her discretion on the matter reasonably, it was concluded that the application of Section 31(7) was proper.

In relation to public policy, the Court reaffirmed its limited construction adhered to post 2015, which required a breach of a “fundamental principle of the law”, rather than a breach of statutory provisions or merely unfairness. The Court concluded that the issue relating to the interest rate fell outside the narrow scope of judicial review, except in supposedly extreme cases where the rate was so high as to offend the judicial sense of justice. In the commercial lending context that was before it, taking risks were priced under rationality and the claim was effectively dismissed. The Court also rejected the argument that the Usurious Loans Act applied to contemporary commercial arbitration.

Analysis

The judgment endorses the Indian judiciary’s continuing regard for arbitral autonomy, particularly with traditional finance issues. While it seemed to endorse terms of contract and agreed rates of interest that were, honestly, harsh, the Court did properly privilege respect for the sanctity of contract and commercial certainty. The Court disregarded high contracted interest rates as necessarily immoral, but only as aspects of reasonable commercial considerations and the acceptance of operating in a competitive and uncertain financial market.

This decision continues to affirm the limited head of public policy indictments after the 2015 amendments. By limiting review to systemic principles of justice, such as rules of natural justice, and view to courts or laws with a superior backdrop to the national interest, the Court adhered to the efficiency and finality of arbitration. The ruling framed economic morality in terms of context, with judges required to hesitate on paternalistic regulation unless exploitation was readily identifiable and incompatible with conscience.

The Court’s comment that it was reluctant to countenance re-litigation of factual adjudications particularly surrounding signature authentication conveys warning for litigants that arbitration is not a dress rehearsal for litigation.

Conclusion

The Sri Lakshmi Hotel Pvt. Ltd. case, in which the Supreme Court has found the 24% contractual interest rate constitutionally valid, illustrates its endorsement of party autonomy, limited judicial intervention, and reduced public policy grounds to challenge arbitral awards under Section 34 of the Arbitration Act.