Arbitral interest rate challenge fails where steep commercial interest does not by itself breach public policy or Indian law

A challenge to arbitral interest at 24% per annum in a commercial lending dispute failed because a high rate, by itself, does not violate public policy or the fundamental policy of Indian law. The SC held that Section 31(7) of the Arbitration and Conciliation Act permits tribunal discretion on pre-award interest and a statutory default regime for post-award interest, while Section 34 review remains narrow and does not allow re-appreciation of evidence. The Court also rejected reliance on the Usurious Loans Act, 1918, holding that the older usury framework could not displace the arbitral regime in this commercial transaction. The award and its High Court affirmation were left undisturbed.

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Issues: (i) Whether interest at 24% per annum stipulated in the loan agreements and awarded in arbitration was contrary to public policy or fundamental policy of Indian law; (ii) Whether the challenge based on the Usurious Loans Act, 1918 could succeed against the arbitral award.

Issue (i): Whether interest at 24% per annum stipulated in the loan agreements and awarded in arbitration was contrary to public policy or fundamental policy of Indian law.

Analysis: The dispute arose from a commercial lending transaction in which the borrowers had defaulted on loans taken to clear an earlier bank liability. The Court held that a challenge to the interest rate could not succeed merely because the rate was high. Under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, the tribunal has discretion to award pre-award interest at a reasonable rate, while Section 31(7)(b) contemplates post-award interest and provides a statutory default rate unless the award directs otherwise. The Court reiterated that interference under Section 34 is limited and that re-appreciation of evidence is barred. It further held that an exorbitant rate in a commercial context does not, by itself, amount to a violation of public policy or fundamental policy of Indian law unless it is so unreasonable as to shock the conscience of the Court.

Conclusion: The challenge to the 24% interest rate on public policy grounds failed and was against the appellants.

Issue (ii): Whether the challenge based on the Usurious Loans Act, 1918 could succeed against the arbitral award.

Analysis: The Court rejected the plea that the transaction fell foul of the Usurious Loans Act, 1918. It held that the older usury-based framework could not override the later arbitral regime governing award of interest, and that the transaction was a commercial lending arrangement involving a high-risk borrower. The Court found no basis to treat the award of interest as legally excessive in a manner warranting interference.

Conclusion: The plea under the Usurious Loans Act, 1918 failed and was against the appellants.

Final Conclusion: The arbitral award and its affirmation by the High Court were left undisturbed, and no ground for judicial interference was made out.

Ratio Decidendi: In a commercial arbitration, a high contractual or awarded rate of interest does not violate public policy merely because it is steep; interference is warranted only where the award transgresses the limited grounds under the Arbitration and Conciliation Act, 1996, or is so unreasonable as to shock the conscience of the Court, and re-appreciation of evidence is impermissible.

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