This Supreme Court judgment clarifies the limited scope of judicial interference with arbitral awards under the Arbitration and Conciliation Act, 1996. The Supreme Court held that an arbitrator’s discretion to award a contractual interest rate of 24% is not per se usurious or against public policy. It reaffirmed that courts cannot reappreciate evidence and may only set aside an award on the narrow, specified grounds under Section 34 of the Act, which were not met in this case.
Facts Of The Case:
The appellants, M/s Sri Lakshmi Hotels Pvt. Limited and its Managing Director, availed two loans totaling ₹1.57 Crore from the respondent Non-Banking Financial Company (NBFC) in 2006. The loan agreements stipulated an interest rate of 24% per annum. After making partial repayments until April 2007, the appellants defaulted. Despite repeated demand notices and a bounced settlement cheque in 2008, the outstanding dues remained unpaid. The respondent NBFC invoked arbitration as per the agreements. The sole arbitrator, in a 2014 award, directed the appellants to pay over ₹2.21 Crore with 24% interest. The appellants challenged this award under Section 34 of the Arbitration Act, primarily contending the 24% interest was usurious and unconscionable. Both the Single Judge and Division Bench of the Madras High Court dismissed their challenges, upholding the award. Concurrently, due to non-payment, the NBFC initiated insolvency proceedings against the appellant company, leading to its liquidation. The appellants then appealed to the Supreme Court, arguing the high interest rate violated public policy and the Usurious Loans Act, and that they were made to sign blank documents.
Procedural History:
The dispute originated with an arbitral award dated December 27, 2014, passed by the sole arbitrator in favor of the financial company. The borrowers challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996, before the learned Single Judge of the Madras High Court, which dismissed their petition on November 16, 2017. The borrowers then filed an appeal under Section 37 of the Act before the Division Bench of the same High Court, which was also dismissed, affirming the Single Judge’s order, on January 7, 2020. Following this, the borrowers sought and were granted special leave to appeal by the Supreme Court, leading to the present Civil Appeal. Concurrently, due to the borrowers’ continued default, the financial creditor had successfully initiated Corporate Insolvency Resolution Proceedings under the IBC against the corporate borrower, which ultimately culminated in a liquidation order by the NCLT.
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Court Observation:
The Supreme Court made several crucial legal observations. First, it emphasized the narrow scope of judicial interference under Section 34 of the Arbitration Act, reiterating that courts cannot reappreciate evidence or review the merits of an arbitral award. The arbitrator’s finding on facts and interpretation of the contract is final. Second, it clarified the law on interest under Section 31(7), holding that while pre-award interest is subject to party agreement, the grant of post-award interest is mandatory. The arbitrator has wide discretion to fix the rate, and a contractual rate of 24% per annum, especially in a high-risk commercial transaction, is not automatically usurious or unconscionable. Third, the Court held that a high rate of interest, by itself, does not contravene the “fundamental policy of Indian law” or “public policy” under the Act unless it is so perverse as to shock the conscience of the court. Finally, it observed that the Usurious Loans Act, being an older statute, must give way to the plenary provisions and scheme of the modern Arbitration Act, which provides a complete code for challenging awards. The appellants’ conduct of prolonged default and failed settlement attempts was also noted as a relevant factor.
Final Decision & Judgement:
The Supreme Court dismissed the appeal, upholding the impugned judgment of the Madras High Court and thereby confirming the arbitral award. The Court held that there was no valid ground to interfere with the arbitrator’s decision to award interest at the contractual rate of 24% per annum. It found that the rate was not unconscionable, usurious, or contrary to the fundamental policy of Indian law in the context of this high-risk commercial transaction. The Court reaffirmed the limited scope of judicial review under Section 34 of the Arbitration and Conciliation Act, 1996, and refused to reappreciate evidence or reassess the arbitrator’s findings on facts. Consequently, the award, as upheld by the lower courts, was left undisturbed.
Case Details:
Case Title: Sri Lakshmi Hotel Pvt. Limited & Anr. vs. Sri Ram City Union Finance Ltd. & Anr. Citation: 2025 INSC 1327 Appeal Number: Civil Appeal No. 13785 of 2025 Date of Judgment: 18th November, 2025 Judges/Justice Name: Justice J.B. Pardiwala
Download The Judgement Here