2025 (11) TMI 1329 - SC - Indian Laws

Post-award interest under Section 31(7)(b) mandatory; 24% arbitral rate upheld, Section 34 and 37 challenge dismissed

Sri Lakshmi Hotel Pvt. Limited & Anr. Versus Sriram City Union Finance Ltd. & Anr.

SC upheld the HC's order dismissing the Section 34 challenge and affirmed rejection of the appellants' Section 37 appeal, holding that post-award interest ... Entitlement for post-award interest - Correctness in dismissal of Section 37 appeal filed by the appellants, affirming the order passed by the High Court in Section 34 proceedings - HELD THAT:- The law with regard to the power of an Arbitrator to award interest for pre-reference period, pendent lite period and post-award period is well settled. Section 31(7)(a) provides that the arbitrator has the power to award interest at such rate as it deems reasonable, on the whole or on any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. The grant of such interest during the pre-award period is subject to the agreement as regard the rate of interest or unpaid sum between the parties. 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. If such discretion is not exercised by the Arbitral Tribunal, then the statute steps in and mandates the payment of interest at the rate specified for the post-award period. While clause (a) gives parties an option to contract out of interest, no such option is available in regard to the post-award period. In R.P. Garg v. The General Manager, Telecom Department & Ors. [2024 (9) TMI 1742 - SUPREME COURT], this Court had the occasion to deal with the question as to whether the appellant was entitled to post-award interest on the sum awarded by the Arbitrator. In that case, the Arbitrator had denied payment of interest under a misplaced impression that the contract between the parties prohibited it. The executing court affirmed the finding of the arbitrator and rejected the prayer. However, allowing the appeal, the District Judge held that the appellant will be entitled to post-award interest. The High Court allowed the revision against the said order and set aside the District Court’s order while holding that the contract between the parties did not permit the grant of post-award interest. The interpretation of clause (b) of Section 31(7) of the Act, 1996 is no more res integra. The grant of post-award interest under Section 31(7)(b) is mandatory. The only discretion which the arbitral tribunal has is to decide the rate of interest to be awarded. Where the arbitrator does not fix any rate of interest, then the statutory rate, as provided in Section 31(7)(b), shall apply. In the present case the two agreements itself provided the rate of interest to be 24% p.a. It is now well established that unless there is an express bar contained in the agreement, the arbitrator possesses the discretion and has jurisdiction to award interest including the post-award interest. Whether interest at the rate of 24% as provided in the agreements between the parties could be said to be against public policy? - HELD THAT:- On a plain and grammatical construction of clauses (ii) and (iii) of Explanation 1 to Section 34(2)(b) of the Act, 1996 it cannot be said that the imposition of an exorbitant interest in the background of contemporary commercial practices, would be against the fundamental policy of Indian Law, or against the basic notions of morality or justice. It is well-settled that fundamental policy of Indian law does not refer to violation of any Statue but fundamental principles on which Indian law is founded. Any difference or controversy as to rate of interest clearly falls outside the scope of challenge on the ground of conflict with the public policy of India unless it is evident that the rate of interest awarded is so perverse and so unreasonable so as to shock the conscience of the Court sans which no interference is warranted in the award, whereby interest is awarded by the Arbitrator. Usurious Loans Act, 1918 - HELD THAT:- There are no hesitation in saying that there is no merit worth the name in the plea advanced by the learned counsel appearing for the appellants that the transaction in question falls foul of the Usurious Loans Act, 1918. The Usurious Loans Act, 1918 was followed by the Punjab Relief of Indebtedness, 1934. The said 1934 Act is applicable to the Union Territory of Delhi. Section 2(3) of the 1934 Act defines “loan” to mean “loan whether of money or kind” - The Usurious Loans Act, 1918 as followed by the 1934 Act were promulgated in a different era and the power of the Court to adjudicate if the interest on a loan amount is excessive has to give way in view of the plenary powers of the Courts provided under the later enactment, i.e., the Act, 1996. It is not required to interfere with the impugned order passed by the High Court - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the High Court erred in affirming the arbitral award and dismissing the petition under Section 34 and the appeal under Section 37 of the Arbitration and Conciliation Act, 1996. 2. Whether an interest rate of 24% stipulated in commercial loan agreements and awarded by the arbitrator (pre-award and post-award) is unconscionable/usurious or contrary to public policy so as to vitiate the award. 3. The scope of Section 31(7) of the Arbitration and Conciliation Act, 1996 - in particular, the arbitrator's power and the statutory incidence of post-award interest under clause (b) and the relationship between party autonomy and statutory post-award interest. 4. Whether the Usurious Loans Act, 1918 (and related pre-independence statutes) applies to the arbitration and can invalidate the award on grounds of excessive interest. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the High Court erred in affirming the arbitral award. Legal framework: Section 34 (challenge to award) and Section 37 (appeal) of the Arbitration and Conciliation Act, 1996; proviso to Section 34(2A) prohibiting setting aside an award merely for erroneous application of law or re-appreciation of evidence. Precedent treatment: Reliance on established line of decisions restricting interference with arbitrator's factual findings and concurrent upholding of awards by appellate courts (citing Swan Gold, P.R. Shah, Ssangyong, PSA Sical). The Court follows, not departs from, this restriction. Interpretation and reasoning: The Court held that the courts below conducted detailed analysis and concurrently affirmed the arbitrator's findings, including genuineness of agreements and admissibility of claim. Interference would require demonstration of a ground under Section 34 (statutory bases) or patent illegality; mere reassessment of evidence is forbidden. Ratio vs. Obiter: Ratio - concurrence that re-appreciation of evidence is barred and that courts must not disturb concurrent factual findings of arbitrator/Higher Courts absent statutory grounds. Obiter - none significant on this point beyond application to facts. Conclusion: No error by the High Court; Section 34 challenge properly dismissed and Section 37 appeal rightly affirmed. Issue 2 - Whether 24% interest is unconscionable/usurious or against public policy. Legal framework: Concept of 'public policy' in arbitral award challenges post-2015 amendments (Explanation 1 to Section 34(2)(b)); public policy requires contravention of fundamental policy of Indian law, public interest, or justice/morality - more than mere illegality. Precedent treatment: The Court applies the established narrow approach to public policy (Gherulal Parakh, Central Inland Water Transport, Renusagar, OPG Power), holding that contravention of municipal law alone is insufficient; only contravention of fundamental policy or shocking the conscience suffices. Interpretation and reasoning: The Court examined commercial context, transparency of terms, and the high-risk nature of the loan (bridge loan to repay a defaulted bank indebtedness). It held that in commercial transactions high rates may reflect market risk and are not per se contrary to public policy unless so perverse as to shock conscience. The arbitrator's and courts' concurrent findings on agreement terms and risk factors preclude interference. Ratio vs. Obiter: Ratio - an award of high contractual interest in a commercial transaction does not automatically violate public policy; only extreme perversity or shock to conscience qualifies. Obiter - reflections on morality of interest rates as contextual and not absolute. Conclusion: 24% interest was not contrary to public policy in the factual context; challenge on this ground fails. Issue 3 - Interpretation and application of Section 31(7) (pre-award and post-award interest). Legal framework: Section 31(7)(a) permits arbitrator to award pre-award interest subject to agreement between parties; Section 31(7)(b) provides that sums directed by an award carry interest at 18% p.a. from date of award to date of payment unless the award otherwise directs (text as applicable pre-2015 amendment relevant to this award). Precedent treatment: The Court follows recent authoritative precedents (Morgan Securities, R.P. Garg, North Delhi Municipal Corp., and other cited decisions) holding that clause (b) mandates entitlement to post-award interest and that party autonomy cannot contract out of statutory post-award interest; the arbitrator has discretion as to rate but not to deny post-award interest where silent. Interpretation and reasoning: The Court parsed clause (b) grammatically to conclude the phrase 'unless the award otherwise directs' qualifies only the rate and not entitlement. Clause (a) is party-autonomous; clause (b) is statutory and operates where award is silent on post-award interest. The arbitrator may set a different rate in the award, and if done, that rate governs; if not, statutory rate applies. The Court applied this to the facts noting that the agreements themselves stipulated 24% and the arbitrator awarded interest accordingly. Ratio vs. Obiter: Ratio - post-award interest under Section 31(7)(b) is mandatory in entitlement; arbitrator's discretion is limited to rate (unless award expressly directs otherwise). Obiter - contextual policy considerations behind pre-award vs post-award interest distinctions. Conclusion: Section 31(7)(b) requires post-award interest unless the award specifies a different rate; arbitrator's award of 24% (reflecting agreement) was within jurisdiction and not vitiating the award. Issue 4 - Applicability of Usurious Loans Act, 1918 and related archaic statutes to invalidate the award. Legal framework: Usurious Loans Act, 1918 and later provincial enactments (e.g., 1934 Act) historically empowered courts to adjudicate excessive interest; modern arbitration regime under the 1996 Act governs setting aside of awards. Precedent treatment: The Court distinguishes historical statutes from the present statutory arbitration regime and follows the principle that plenary powers under the 1996 Act supersede such older remedial provisions in the arbitration context. Interpretation and reasoning: The Court held that the Usurious Loans Act of 1918 and related enactments belong to a different era and cannot be used to circumvent the statutory scheme and limited grounds for challenging arbitral awards under the 1996 Act; invoking those statutes to set aside an arbitration award is impermissible where the Act provides the governing remedial code. Ratio vs. Obiter: Ratio - older usury statutes do not displace the arbitration code's exclusive and limited grounds for interference; they do not operate to invalidate an arbitral award outside the statutory Section 34 grounds. Obiter - historical context and inapplicability to contemporary NBFC lending governed by RBI/modern law. Conclusion: The plea invoking the Usurious Loans Act, 1918 lacks merit and cannot invalidate the arbitral award. Ancillary findings relevant to relief and equities. Interpretation and reasoning: The Court considered practical realities - partial recovery, lengthy delay, insolvency/liquidation of debtor - and observed that depriving the creditor of post-award interest entitlement at this stage would be manifestly unjust given prolonged default and unsuccessful recovery attempts. This equitable context reinforced legal conclusion against interference. Ratio vs. Obiter: Obiter in part - equitable considerations informed the assessment but do not supplant statutory interpretation; nevertheless they supported refusal to set aside the award. Final Conclusion: The Court dismissed the appeal, upholding the High Court's affirmation of the arbitral award; award of interest at the contractual rate (24%) was not contrary to public policy, Section 31(7) was properly interpreted and applied, and historic usury statutes do not furnish a ground to set aside the award under the 1996 Act.