Supreme Court Upholds Arbitral Award Granting 36 percent Compound Interest

Top court affirms party autonomy in commercial contracts and rejects challenge to high interest rate, clarifying that penal interest on penal interest is not opposed to public policy in context of agreed terms

In a significant judgment delivered on December 4, 2025, the Supreme Court of India dismissed appeals filed by BPL Limited challenging an arbitral award in favor of Morgan Securities and Credits Private Limited. The Court upheld the award which directed payment of Rs. 7.27 crores and Rs. 20.62 crores with interest at 36% per annum compounded monthly, arising from a bill discounting facility contract between the parties.

The dispute originated from two Bill Discounting facility sanction letters dated December 27, 2002, and June 11, 2003, under which Morgan Securities extended credit limits of Rs. 6 crores and Rs. 6.5 crores respectively to BPL and its associate BPL Display Devices Ltd (BDDL). The facility was granted at a concessional rate of 22.5% p.a., payable upfront, with a clause stipulating that in case of default or delay, the concessional rate would be withdrawn and the normal rate of 36% p.a. with monthly rests would apply.

BPL and BDDL defaulted on repayment of bills of exchange, leading Morgan Securities to invoke arbitration under the Arbitration and Conciliation Act, 1996. The sole arbitrator rejected BPL’s contention that the transaction was a usurious loan governed by the Usurious Loans Act, 1918, and instead held it to be a commercial transaction involving bill discounting. The arbitrator awarded the principal sums with interest as per the agreed terms, including compounding at the penal rate of 36%, and also recognized the joint and several liability of BPL and BDDL.

BPL challenged the award before the Delhi High Court, arguing that the interest rate was unconscionable, penal, and contrary to public policy under Section 34 of the Arbitration Act. The High Court dismissed the challenge, affirming that the parties freely agreed to the terms, the transaction was commercial and not a loan, and the interest rate reflected the risk profile of short-term unsecured financing. The Court also held that the arbitrator’s discretion to award interest under Section 31(7)(a) of the Arbitration Act is subject to party autonomy, and where parties have expressly agreed on the rate, the tribunal has no discretion to alter it.

On appeal to the Supreme Court, BPL reiterated its challenge against the compound interest and high rate, contending it amounted to penal interest on penal interest, which should be void as per public policy. The Court, however, extensively analyzed the contractual terms, the nature of bill discounting vis-à-vis loans, and the settled principles of party autonomy in arbitration. It referred to landmark foreign judgments including Cavendish Square Holding BV v. Talal El Makdessi (UK Supreme Court, 2015), which refined the test for penalty clauses by focusing on “legitimate business interest” and “commercial justification” rather than rigid pre-estimate of loss.

The Court also examined the Indian Contract Act, 1872 (Section 74) and held that clauses providing for enhanced interest rates on default are not necessarily penalties if they reflect the commercial realities and agreed terms. It rejected the applicability of the Usurious Loans Act as the transaction involved bill discounting, a commercial financing mechanism with inherently higher risk and interest rates.

Further, the Court clarified that the principle of contra proferentem (interpreting ambiguous terms against the drafter) did not apply since the contract was mutually negotiated between sophisticated parties. It reaffirmed that the arbitrator’s power to award interest under Section 31(7)(a) is limited by the parties’ agreement, and once a rate is agreed, the tribunal cannot substitute its discretion.

The Court emphasized that the appellant, having accepted the benefits of the contract for years, could not later challenge the terms on grounds of unconscionability or public policy. It underscored that the doctrine of public policy should be invoked only in clear cases of harm to the public interest, which was not present here.

In conclusion, the Supreme Court dismissed the appeals, upholding the arbitral award including the high rate of compound interest. The judgment robustly supports party autonomy in commercial arbitration and clarifies the contemporary approach to penalty clauses in Indian contract and arbitration law.

Bottom Line:

Contractual rate of interest agreed upon in a commercial bill discounting facility, including compounding interest and withdrawal of concessional rates upon default, is not unconscionable or opposed to public policy; Arbitral Tribunal’s discretion to award interest under Section 31(7)(a) of the Arbitration Act, is excluded when parties have agreed otherwise.

BPL Limited v. Morgan Securities and Credits Private Limited, (SC) : Law Finder Doc id # 2817594