Post-award Interest Is Mandatory; Arbitrator May Only Fix Rate, Supreme Court Holds
A bench of Justices J.B. Pardiwala and K.V. Viswanathan heard Civil Appeal No. 13785 of 2025 arising out of SLP(C) No. 12300 of 2020, challenging a Division Bench judgment of the Madras High Court which had dismissed an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 and affirmed the Single Judge’s dismissal of a Section 34 petition attacking an arbitral award. The primary issue concerned whether an arbitral tribunal could be denied post-award interest fixed by statute when an agreement provided for a higher contractual rate and whether the contractual rate of 24% p.a. was usurious or contrary to public policy.
The Court held that post-award interest under Section 31(7)(b) of the Arbitration Act was statutorily mandatory where the arbitral award did not otherwise direct a different rate, and that the arbitrator’s discretion extended only to determining the rate of post-award interest. The Court relied on precedents and statutory interpretation to observe that clause (b) of Section 31(7) “is not subject to party autonomy” and that “the expression 'unless the award otherwise directs' in Section 31(7)(b) relates to rate of interest and not entitlement of interest.” The Court, in its reasoning, observed: The Court therefore declined to interfere with concurrent findings on the merits and dismissed the appeal.
Background
The dispute arose from two loan agreements dated 3 April 2006 and 3 July 2006 under which the borrower, a hotel company and its managing director, borrowed a total of Rs. 1,57,25,000 from a non-banking financial company. The agreements provided for interest at 24% p.a. The borrower made partial payments until April 2007 and thereafter defaulted. The lender invoked arbitration and the sole arbitrator awarded Rs. 2,21,08,244 with interest at 24% p.a. from the date of the claim and post-award interest at 24% until realisation by an award dated 27 December 2014.
The borrowers challenged the award under Section 34 on grounds that the contractual interest was unconscionable/usurious, violated RBI guidelines and the Usurious Loans Act, 1918, and that some loan documents were manipulated. The Single Judge dismissed the Section 34 petition on 16 November 2017, holding that the arbitrator had conducted a thorough appreciation and that statutory interference was not warranted. The Division Bench of the Madras High Court affirmed on 7 January 2020. After partial recovery in insolvency and liquidation proceedings, the borrowers approached this Court.
On the submissions, counsel for the appellants argued that 24% was unconscionable and contrary to RBI fair practice guidelines and the Usurious Loans Act; counsel for the respondent contended that the loans were commercial, entered with full knowledge, the lender was an NBFC and the rate reflected commercial risk, relying on this Court’s precedents that state usury laws did not apply to NBFCs.
The Supreme Court examined Section 31(7)(a) and (b) and relevant precedents including Morgan Securities, R.P. Garg and other recent authorities, and reiterated that while clause (a) permitted party autonomy on pre-award interest, clause (b) mandated post-award interest unless the award itself fixed a different rate. The Court further held that allegations challenging the genuineness of documents and rate of interest had been concurrently adjudicated by the arbitrator and courts below, and that re-appreciation of evidence was barred by Section 34(2A). The Court found no contravention of fundamental policy of Indian law and dismissed the appeal, leaving the award and interest entitlements intact.
Case Details: Case No.: Civil Appeal No. 13785 of 2025 (Arising out of SLP(C) No. 12300 of 2020) Case Title: SRI LAKSHMI HOTEL PVT. LIMITED & ANR. v. SRIRAM CITY UNION FINANCE LTD. & ANR. Appearances: For the Petitioner(s): Ms. Nina Nariman, Advocate (appearing for Appellant No.2) For the Respondent(s): Mr. Krishnan Venugopal, Senior Counsel