Arbitral Tribunal Imposing Exorbitant Interest Not Violative Of Fundamental Policy Of Indian Laws: Delhi High Court

Facts of the Case:

One M/s BPL Display Device Limited (BDDL) had been supplying electronic goods to the appellant for a long period of time, but issues regarding timely payments persisted. Both approached the respondent for extending a 'bill discounting facility' to BDDL. The respondent then sanctioned a 'bill discounting facility' vide letters dated 27.12.2002 and 11.06.2003. Per the mutual agreement executed between the parties, the sanction letters designated BDDL as the 'drawer' and the appellant as the 'drawee.' Regarding the repayment of the amount, it was mutually agreed upon to be the jointly and severally responsibility of the drawee, i.e. the appellant. The said facility was approved at a concessional interest rate of 22.5% p.a., payable upfront as against the normal agreed interest rate of 36% p.a. However, in case of default in making payment of dues, the concessional rate was stipulated to be withdrawn at a 36% p.a. interest rate. A dispute emerged between the parties in 2004 concerning an amount of ₹25,79,91,096/- that became due and payable to the respondent/claimant by BPL and BDDL against the relevant Bills of Exchange.

The respondent invoked the arbitration clause in the sanction letters. An award dated 14.12.2016 was passed in favour of the respondent, thereby directing the appellant to pay a sum amount to Rs. 7.27 cr plus Rs 20.62 cr with an interest rate of 36% p.a. from the date these amounts were due till the date of award, and additional interest of 10% p.a. from the date of award till realization. A section 34 petition raising objections against the legality of the impugned award was dismissed by the learned single judge, and subsequently, a section 37 petition also came to be dismissed. Therefore, the appellant filed this review petition.

Submissions:

The appellant made the following submissions:

• Concerning Section 31(7)(a) of the A&C Act, only reasonable pendente lite interest could have been claimed, not the contractual rate. The provision does not allow the contractual rates to be applicable. To buttress the argument, reliance was placed on Morgan Securities and Credits Pvt. Ltd. v. Videocon Industries Ltd. (2023) and Executive Engineer (R and B) v. Gokul Chandra Kanungo (2022). Furthermore, the interest rate of 36% per annum on monthly rests was usurious and against the fundamental policy of Indian law.
• Section 80 of the Negotiable Instruments Act overrides any contract regarding the awarding of interest.
• The bills of exchanges issued under the first sanction letter dated 27.12.2002 were barred by limitation as the last due date under these bills was 04.07.2003, and thereby, the limitation period expired on 04.07.2006 in light of the arbitration being invoked vide notice dated 28.06.2007.

Analysis of the Court:

The bench observed that the issue of 'unreasonableness' of the rate of interest claimed on the bills discounted concerning the two sanction letters was argued before the tribunal, then before the single judge u/s 34 petition, and lastly before the division u/s 37 petition, and was argument was rejected by all three forums. The plea challenging the stipulation of high interest at 36% as contrary to financial norms, practices, or usual conduct cannot be revisited during review proceedings if a substantive decision has already been made. Upholding the tribunal's findings and the learned single judge, the bench took a substantive view of the matter by concluding that the payment of interest on the basis of terms of the sanctions letters cannot be called unconscionable or excessive.

Charging a high interest rate in a purely commercial transaction is morally questionable and involves a complex interplay of considerations, dependent on various factors and differing perspectives. In the commercial world, the justification or reasonableness of high interest rates hinges on the clarity of the contractual terms agreed upon by the lender and borrower, along with the borrower's informed consent. Objections based on arbitrariness, unconscionability, or violation of public policy cannot be raised in cases where a business entity, having entered into a commercial contract, has accepted and acted upon its terms without raising such concerns either before or shortly after executing the agreement. In this case, the appellant did not take any steps to avoid the contract within the stipulated time and reaped the benefits arising out of the contract. At this instance, they cannot allege unfairness and unconscionability. The author of the letter did not testify before the tribunal, and consequently, no objection was raised regarding the interest clause in the sanction letter. It is a well-established principle that the sanctity of a contract is the fundamental principle underlying the stability and predictability of legal and commercial relationships.

The bench further observed that the expression “public policy” has been recently dealt with by the Supreme Court in OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited (2024). The Court held that for an award to be against the public policy of India, a mere infraction of the Indian laws is not sufficient; an infraction of the fundamental policy of Indian laws, including laws meant to serve the public interest or public good, must be there.

Lastly, the bench observed that after a plain and grammatical construction of clauses (ii) and (iii) of Explanation 1 to Section 34(2) of the A&C Act, imposing exorbitant interest in the background of contemporary commercial practices cannot be said to be violative of the fundamental policy of Indian laws. Consequently, the bench dismissed the review petition.

Case Title: M/s BPL Limited v. M/s Morgan Securities & Credits Pvt. Ltd.

Case Number: FAO(OS)(COMM) NO. 46/2019

Counsel for the appellant: Mr. Gopal Subramanium, Mr. Pinaki Mishra, Mr. Ashok Panigrahi, Senior. Advocates. with Ms. Aakanksha Kaul, Mr. Anmol Tayal, Mr. Dharmender Singh, Mr. Pavan Bhushan, Mr. Surajit Bhaduri, Mr. Saurabh Seth, Ms. Neelam Deol, Mr. Abhirup Rathore & Mr. Aman Sahani, Advocate.

Counsel for the Respondent: Mr. Simran Mehta with Mr. Amit Ranjan Singh & Mr. Girdhar Thakur, , Advocates.