The Supreme Court has confirmed an arbitral award directing BPL to pay 36% annual interest with monthly compounding, ruling that parties are bound by the contract they sign. The Court said high interest in commercial deals is not “unconscionable” when agreed between equal parties.
New Delhi: The Supreme Court of India has rejected the appeals filed by BPL Limited against Morgan Securities and Credits Private Limited and confirmed an arbitral award that ordered BPL to pay interest at a rate of 36% per annum with monthly compounding.
In this important judgment on commercial arbitration, the Bench of Justice J.B. Pardiwala and Justice Sandeep Mehta made it clear that when parties themselves agree to an interest rate in a contract, that agreement controls the decision of the Arbitral Tribunal under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.
The Court explained that in voluntary business agreements between companies with equal bargaining power, a high rate of interest cannot automatically be called unfair, unconscionable, or against public policy.
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The main question before the Supreme Court was whether the Arbitrator and the High Court were right in granting 36% annual interest with monthly rests based on the contract’s terms, and whether this rate was so harsh that it should be treated as a penalty or against public policy.
The Court fully supported the findings of the Arbitrator and the High Court, stressing that “party autonomy” is the foundation of arbitration.
The dispute started when Morgan Securities provided a bill discounting facility to BPL Display Device Ltd (BDDL) and BPL Limited. BDDL had sold goods to BPL Limited and both approached Morgan Securities for financing.
The company approved facilities through letters dated December 27, 2002 and June 11, 2003. Their contract had three key elements. First, the “normal agreed rate” of interest was 36% per year.
Second, Morgan Securities offered a lower, concessional rate of 22.5% per year, which had to be paid upfront.
Third, the contract said that if there was any delay or default in repayment,
“the concessional rate will be withdrawn and the normal rate of bill discounting charges of 36% p.a. monthly rests, shall be payable by the Drawee/Drawer from its due date.”
After BPL defaulted on payment, Morgan Securities started arbitration. On 14 December 2016, the Sole Arbitrator directed BPL to pay the outstanding amounts with 36% annual interest from the due date onwards.
BPL challenged this award before the Delhi High Court under Section 34 of the Arbitration Act, but the petition was dismissed except for one bill of exchange.
BPL again went to the Division Bench under Section 37, but that appeal was also dismissed, with the Court holding that although the interest was high, it was not
“so unfair and unreasonable so as to shock the conscience of the Court.”
A later review petition also failed.
Before the Supreme Court, Senior Advocate Gopal Subramanium, representing BPL, argued that the contract required active communication before restoring the higher 36% interest rate. It was also argued that the high rate with monthly compounding was like “penal interest on penal interest” and violated Section 74 of the Contract Act, which deals with penalties in contracts.
According to BPL, the phrase “unless otherwise agreed” in Section 31(7)(a) of the Arbitration Act means that even if parties agree on interest, the Arbitrator still has the power to award only a reasonable rate.
BPL also claimed that the interest rate went against public policy under Section 34(2)(b)(ii) of the Act. Senior Advocate Shyam Divan, representing Morgan Securities, argued that party autonomy must be respected in commercial contracts between corporate entities.
He said that since there was a clear agreement, the Arbitrator’s discretion did not apply. He also pointed out that this was a bill discounting transaction, not a loan, and therefore the Usurious Loans Act, 1918 would not apply.
Morgan Securities also said that BPL never questioned the interest rate during the agreement or early arbitration stages.
The Supreme Court, while analysing the matter, said that bill discounting is different from a simple business loan because it carries more risk and offers quick unsecured funding.
The Court said that
“Contracts relating to a bill discounting facility typically contain high rates of interest primarily due to the higher risk profile for the lender, the unsecured and short-term nature of the financing, and the quick and hassle-free access to cash it provides.”
Because of this, the Court agreed that the Usurious Loans Act did not apply since this was a commercial transaction and not a traditional loan or debt. While interpreting Section 31(7)(a), the Court stated that
“The words ‘unless otherwise agreed by the parties’ at the beginning of clause (a) qualify the entire provision. Once the parties by mutual consent agreed to a particular rate of interest to be charged and the same is included in the terms of the contract there is no escape thereafter.”
Referring to earlier rulings like Delhi Airport Metro Express Pvt. Ltd. v. DMRC (2022), the Court said that when an agreement exists, the Arbitrator cannot reduce the interest rate based on reasonableness.
On the issue of public policy and penal interest, the Supreme Court relied on the principle laid down in the UK Supreme Court’s judgment in Cavendish Square Holding BV v. Talal El Makdessi (2015).
The Court adopted the “legitimate interest” test, concluding that a clause is not penal if it protects a genuine business interest.
The Court observed:
“The business model of the Respondent was posited on the grant of such unsecured facilities for very short periods of time… In the event of default, this cycle would stand disrupted for decades, as in the present case, thereby resulting in loss to the Respondent. Hence the compensatory contractual requirement of compounding, in the case of defaulters cannot be faulted or termed as penal.”
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The Court also said that BPL entered the contract freely and knowingly, stating:
“The Appellant was not in a position of disadvantage vis-à-vis the respondent… In such circumstances, the doctrine of unconscionable contract cannot be invoked for frustrating the action initiated by the respondent for recovery of its dues.”
The Court rejected BPL’s claim that the contract should be interpreted against the drafter, noting that
“The contra proferentem principle does not merit applicability in case of commercial contracts, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon.”
Finally, the Supreme Court concluded that the Arbitrator and the High Court were correct in refusing to interfere with the agreed rate of interest. The Court noted that the concessional rate of 22.5% was meant only for timely payments, and withdrawing it after default was reasonable and not punitive.
The Court dismissed the appeals and stated:
“The express use of ‘Unless otherwise agreed by the Parties…’ as the opening words of Section 31(7) (a) of the Act, 1996 is a clear instance of ‘Party Autonomy’ which forms the bedrock of the arbitral process and will prevail in all cases… The principle of unconscionability is inapplicable to voluntary commercial agreements between parties of equal bargaining strength.”
Case Title:
BPL Limited v. Morgan Securities and Credits Private Limited
Civil Appeal No. 14565-14566 of 2025
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