BPL Ltd v Morgan Securities & Credits Pvt Ltd (2025 INSC 1380): Adoption of Cavendish Penalty Doctrine and Reinforcement of Party Autonomy in Contractual Interest under Section 31(7)(a)

1. Introduction

The decision of the Supreme Court of India in BPL Limited v. Morgan Securities and Credits Private Limited, 2025 INSC 1380 (4 December 2025), is a significant authority at the intersection of:

• Arbitration law – particularly Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”);
• Contract law – especially Section 74 of the Indian Contract Act, 1872 (“Contract Act”) and the law of penalties; and
• Financial/commercial practice – notably the treatment of high, compound interest in bill discounting transactions.

The case arose from a bill discounting facility granted by Morgan Securities (an NBFC) to BPL Display Devices Ltd (BDDL), with BPL Ltd (“BPL”) as drawee and jointly/severally liable. The sanction letters stipulated:

• a “normal” rate of 36% p.a. with monthly rests; and
• a concessional rate of 22.5% p.a. payable upfront, withdrawable on any default, whereupon 36% p.a. with monthly compounding would apply from the original due date.

BPL defaulted; arbitral proceedings followed; a sole arbitrator awarded the outstanding amounts with interest at 36% p.a. with monthly rests for the pre-award period and 10% p.a. post-award. Challenges under Sections 34 and 37 of the Arbitration Act failed before the Delhi High Court. BPL approached the Supreme Court under Article 136 of the Constitution.

The Supreme Court dismissed the appeals, upholding the award and the High Court’s orders. In doing so it:

• formally embraced the Cavendish Square Holding v Makdessi test on penalties (legitimate interest and proportionality) in the Indian commercial/arbitration context;
• clarified that Section 31(7)(a) of the Arbitration Act gives way to party autonomy – where parties “otherwise agree”, the arbitral tribunal has no discretion to substitute a “reasonable” rate of interest; and
• held that high contractual interest – including compounding and “penal on penal” interest – in a commercial bill discounting facility between sophisticated parties is not per se opposed to public policy or unconscionable.

2. Factual Background

2.1 The Transactions

BDDL supplied display devices to BPL. Because BPL had difficulty paying on time, both BPL and BDDL approached Morgan Securities for a bill discounting facility so that BDDL could receive immediate funds.

Two sanction letters were issued:

• 27.12.2002 – bill discounting limit of ₹6 crore;
• 11.06.2003 – bill discounting limit of ₹6.5 crore, with Electronic Research Pvt Ltd (ERPL) as guarantor/surety.

Key features of the sanction letters:

• BDDL as “Drawer”, BPL as “Drawee”;
• bills “with recourse to Drawer”; liability of Drawer and Drawee “joint and several”;
• bill discounting period: up to 150 days;
• Clause 4 – interest structure:
  • normal agreed rate: 36% p.a. (monthly rests);
  • concessional rate: 22.5% p.a. payable upfront as a “special case”;
  • on any delay or default in payment of bill amount or interest “on its due date”, the concessional rate stood withdrawn; thereafter 36% p.a. with monthly rests applied from the due date.
• ERPL gave “comfort letter” and post-dated cheques under second sanction letter.

2.2 Defaults and Acknowledgement

In 2004, a sum of ₹25.79 crore became due and remained unpaid despite reminders. BDDL and ERPL had given post-dated cheques but BPL requested Morgan not to present them, assuring payment later. Morgan indulged these requests but payment did not materialise.

BPL made two part-payments of ₹50 lakh each in August 2005 against specific bills. Later, on 02.02.2007, BPL issued a letter expressly acknowledging its debt and seeking time. Within six months, on 28.06.2007, Morgan invoked arbitration against BPL and BDDL (ERPL was subsequently impleaded as guarantor; claims against BDDL were dropped due to liquidation).

3. Arbitral Proceedings and Court Stages: A Brief Summary

3.1 Issues and Award

The sole arbitrator framed nine substantive issues, including:

• entitlement to the principal amounts under the two sanction letters;
• entitlement to interest and at what rate;
• limitation; and
• liability of BPL and ERPL.

Key findings of the arbitrator (later broadly upheld at every stage):

• Nature of transaction: bill discounting is a commercial transaction, not a “loan” or “debt” under the Usurious Loans Act / Punjab Relief of Indebtedness Act.
• Contract governs interest: interest at 36% p.a. with monthly rests, as per Clause 4, enforceable; not unconscionable or arbitrary between commercial entities.
• Compounding: permissible since contractually agreed; Central Bank of India v Ravindra did not preclude contractual monthly rests.
• Limitation: part-payments in August 2005 and BPL’s acknowledgement in February 2007 extended limitation; notice of arbitration in June 2007 was in time.
• ERPL: discharged due to non-presentation of its cheques and absence of acknowledgement; claim against ERPL barred by limitation.

Award (14.12.2016): BPL was directed to pay:

• ₹7,27,05,579 (under 27.12.2002 letter) and ₹20,62,28,681 (under 11.06.2003 letter);
• interest at contractual 36% p.a. with monthly rests from due dates till award; and
• post-award interest at 10% p.a. till realisation.

3.2 Section 34 Proceedings

BPL challenged the award; Morgan also challenged the exoneration of ERPL. The Single Judge of the Delhi High Court (18.12.2018):

• partly allowed BPL’s petition only to the extent of setting aside the award on one time-barred bill (OMR-35 for ₹75,39,304) and proportionate interest;
• dismissed Morgan’s Section 34 petition concerning ERPL; and
• upheld the contractual rate of interest and all other findings.

Key holdings of the Single Judge included:

• Claim was based on sanction letters (master contracts), not merely on individual bills; Section 80 NI Act (fixed 18% interest on bills) did not apply.
• Transaction was bill discounting, not a “loan”; usury statutes inapplicable.
• Interest awarded as per contract; arbitrator cannot re-write interest terms on vague notions of fairness.
• Drawer (BDDL) and Drawee (BPL) were jointly and severally liable under NI Act Section 37 and the sanction letters.

3.3 Section 37 Appeal and Review

The Division Bench (19.07.2024, FAO(OS)(COM) 46/2019) dismissed BPL’s appeal, emphasising:

• no “patent illegality” or perversity; award not opposed to public policy;
• Usurious Loans Act remedies must yield to the later Arbitration Act regime where parties have voluntarily agreed on commercial terms;
• though 36% p.a. was high, it did not “shock the conscience” in a commercial bill discounting transaction between corporates.

BPL then sought review. The Division Bench (18.11.2024) refused review, noting inter alia:

• BPL had never led evidence or cross-examined on alleged “nine-month” repayment pattern or limited liability (only seven payments against the second sanction letter).
• Joint and several liability and acknowledgement of debt by BPL made attempts to isolate liability unsustainable.
• Objections on interest, public policy and usury had been fully argued and decided in Section 34 and Section 37 proceedings; review cannot re-open merits.
• Charging 36% p.a. in a short-term commercial credit product to a sophisticated corporate was not, in itself, immoral or contrary to basic notions of justice.

3.4 Supreme Court’s Disposition

The Supreme Court:

• granted leave;
• rejected BPL’s new arguments (e.g. need for separate notice withdrawing concessional rate, contra proferentem, penal interest on penal interest); and
• dismissed the appeals, affirming all relevant findings of the arbitrator and the High Court.

4. Summary of the Supreme Court’s Judgment

4.1 Core Holdings

1. Nature of transaction: Bill discounting is a commercial facility; it is not a “loan” for purposes of the Usurious Loans Act, 1918 or Punjab Relief of Indebtedness Act, 1934. Those statutes did not apply.
2. Contractual interest under Section 31(7)(a): The phrase “unless otherwise agreed by the parties” in Section 31(7)(a) of the Arbitration Act qualifies the entire clause. Once parties have agreed to a rate and structure of pre-award interest, the arbitral tribunal has no discretion to substitute a different “reasonable” rate.
3. High interest and compounding not per se penal/unconscionable: A rate of 36% p.a. with monthly rests, coupled with a concessional rate withdrawn on default, in a commercial bill discounting facility between sophisticated entities, is not opposed to public policy or unconscionable. “Penal interest on penal interest” is not automatically invalid.
4. Adoption of the Cavendish test: The Court explicitly endorsed the Cavendish Square v Makdessi “legitimate interest + proportionality” test for penalty clauses over the older, rigid Dunlop Pneumatic Tyre “genuine pre-estimate of loss” dichotomy, especially in complex commercial contracts and arbitration.
5. Section 74 Contract Act and penalties: Withdrawal of a concession and imposition of a higher “normal” rate of interest on default is not a “penalty” within Section 74 if:
   • parties are of equal bargaining strength,
   • the clause is commercially justified, and
   • it protects a legitimate commercial interest (here, the financier’s ability to repeatedly redeploy short-term funds).
6. Contra proferentem inapplicable: The maxim verba chartarum fortius accipiuntur contra proferentem (ambiguous terms construed against the drafter) does not apply to mutually negotiated commercial contracts between sophisticated parties. It is primarily relevant to adhesion contracts like standard form insurance policies.
7. Central Bank of India v Ravindra confined: Central Bank of India v Ravindra was confined to Section 34 CPC contexts and does not control interest awards under Section 31(7) Arbitration Act. It in fact supports contractual compounding where expressly agreed.
8. Public policy challenge rejected: Invoking “public policy” to invalidate high contractual interest in a commercial arbitration is impermissible unless the stipulation is clearly illegal, shocks the conscience, or is rooted in demonstrable oppression. That threshold was not met.

5. Detailed Legal Analysis

5.1 Precedents and Their Use in the Judgment

5.1.1 Arbitration and Interest: S.L. Arora, Hyder Consulting, DAMEPL, NDMC v S.A. Builders, PAM Developments

The Court undertook a careful survey of Section 31(7) case law:

• State of Haryana v S.L. Arora & Co. (2010) 3 SCC 690 – Initially held that Section 31(7) envisaged only simple interest and that arbitrators could not award interest on interest in absence of contractual provision. This judgment strictly separated principal and interest for purposes of post-award interest.
• Hyder Consulting (UK) Ltd v State of Orissa (2015) 2 SCC 189 – A three-Judge Bench overruled S.L. Arora to the extent it limited the “sum” in Section 31(7)(b) to principal only. It held that:
  “The ‘sum’ directed to be paid by the award may include interest for the pre-award period; and post-award interest can be granted on this aggregate.”
• Delhi Airport Metro Express Pvt Ltd v DMRC (2022) 9 SCC 286 – Interpreted Section 31(7)(a): the phrase “unless otherwise agreed by the parties” exhaustively qualifies the arbitrator’s power. If parties contractually stipulate interest (or prohibit it), the tribunal must give effect to that stipulation and has no residual discretion to award or withhold interest contrary to the contract.
• North Delhi Municipal Corporation v S.A. Builders Ltd (2025) 7 SCC 132 – Clarified the structure of Section 31(7):
  • Clause (a) – discretionary pre-award interest, subject to party agreement;
  • Clause (b) – default rule for post-award interest (now 2% above “current rate”), again subject to what the award “otherwise directs”.
• PAM Developments (P) Ltd v State of West Bengal (2024) 10 SCC 715 – Emphasised that Section 31(7)(a) merges pre-reference and pendente lite interest into a single pre-award period, and that party autonomy restrains the arbitrator when the contract speaks on interest.

The present judgment synthesises these authorities to affirm:

5.1.2 Central Bank of India v Ravindra and Its Limits

BPL relied heavily on Central Bank of India v Ravindra, (2002) 1 SCC 367, where a Constitution Bench discussed:

• capitalisation of interest and the concept of “interest on interest”;
• distinction between penal interest and normal interest; and
• equitable limitations on banks charging compound interest, particularly on non-corporate borrowers.

The Supreme Court in BPL distinguished and limited this authority:

• Ravindra arose under Section 34 CPC and general banking practice, not under the Arbitration Act;
• its observations about penal interest and non-corporate borrowers were context-specific and explicitly confined; and
• it explicitly recognised that contractual compounding on periodical rests is valid where parties have voluntarily agreed.

The Court also referred to Punjab Financial Corporation v Surya Auto Industries (2010) 1 SCC 297 and Hyder Consulting, which had already cautioned against extending Ravindra into the arbitration domain.

5.1.3 Section 74 & Earlier Indian Authorities on Interest and Penalty

The Court drew on a rich line of earlier Indian and Privy Council decisions addressing stepped-up interest and concession-withdrawal clauses:

• Privy Council – Lala Balla Mal v Ahad Shah (ILR 23 Cal WN 233) – Recognised that capitalisation of interest over long defaults can appear “oppressive” but is not inherently unconscionable where the borrower benefitted from the creditor’s forbearance. Conversely, a pattern of deliberately exploiting capitalisation to trap borrowers could be oppressive.
• Sheth Burjorji Shapurji v Dr Madhavlal Jesingbhai (Bombay HC) – Clarified distinction between:
  • a primary obligation with a conditional concession (e.g. lower interest if paid on time, otherwise higher normal rate); and
  • a true penalty (e.g. a larger sum only on default without any underlying concession structure).
• Kulada Prosad Chowdhury v Ramananda Pattanaik AIR 1921 Cal 109 – Held that a covenant to accept a reduced interest rate on punctual payment does not make the original higher rate a penalty. The higher rate is the primary bargain; the lower rate is a concession conditioned on strict performance.
• Banke Behari v Sundar Lal, ILR (1893) 15 All 232 (FB) – A seven-Judge Full Bench drew a crucial distinction:
  • higher interest applicable prospectively from default date: usually a valid alternative obligation, not a penalty; versus
  • higher interest retroactively from inception upon default: more readily seen as penal and susceptible to Section 74 scrutiny.
• K.P. Subbarama Sastri v K.S. Raghavan, (1987) 2 SCC 424 – Emphasised that “penalty” analysis depends on the nature of the transaction, relative positions of parties, and whether the clause operates “in terrorem”. Where parties are equals and the clause is commercially explicable, courts are slow to interfere.

The Supreme Court uses these authorities to support the proposition that:

• Higher interest on default, especially in the form of withdrawal of a concession, is not automatically a “penalty”; and
• Section 74 is engaged only where there is:
  • an actual stipulation for payment of a sum “by way of penalty”, and
  • elements of unfair advantage, oppression, or dominance of will.

5.1.4 Contract Interpretation and Contra Proferentem

The Court engaged with precedents such as:

• Haris Marine Products v ECGC, (2022) 20 SCC 776; Sushilaben Gandhi v New India Assurance Co., (2021) 7 SCC 151; and Export Credit Guarantee Corporation v Garg Sons International, (2014) 1 SCC 686, which apply the contra proferentem rule primarily to standard-form insurance policies where ambiguous clauses are drafted by the insurer and imposed on a weaker insured.
• Rashtriya Ispat Nigam Ltd v Dewan Chand Ram Saran, (2012) 5 SCC 306 – confirming that commercial contracts between equals are not to be rewritten by courts under the cloak of ambiguity unless language truly admits multiple meanings.
• Classic contract interpretation authorities such as Ganga Saran v Ram Charan, Ottoman Bank v Ohanes Chakarian, and North Eastern Railway Co v Lord Hastings, stressing that:
  • contracts must be read as a whole;
  • plain language prevails; and
  • subsequent conduct or ex post dissatisfaction cannot alter clear terms.

On this basis, the Court held that Clause 4 of the sanction letters is:

• plain, internally consistent and unambiguous; and
• not susceptible to contra proferentem construction, particularly in a corporate, negotiated, commercial context.

5.1.5 HSBC v Awaz: High Interest in Credit Card Context

The Court also referenced its recent decision in Hongkong and Shanghai Banking Corporation Ltd v Awaz, (2025) 3 SCC 52, where complaints alleged that credit card interest of 36–49% p.a. constituted an unfair trade practice.

The Supreme Court in HSBC v Awaz held:

• Borrowers were educated and informed; they consented to known terms;
• National Commission could not “rewrite” the contract or cap interest free of statutory mandate; and
• RBI had neither prohibited such rates nor found violation of its circulars.

This reasoning is mirrored in BPL, reinforcing the principle that in absence of statutory caps or proven unfair trade practice, courts and tribunals do not sit in judgment over commercial interest rates agreed by informed parties.

5.2 Legal Reasoning: Step-by-Step

5.2.1 Nature of Bill Discounting vs Loan: Why Usury Law Did Not Apply

A central plank of BPL’s argument was the Usurious Loans Act, 1918 (as amended by Punjab Relief of Indebtedness Act, 1934) and Section 80 of the Negotiable Instruments Act, 1881 (NI Act).

The Court drew a sharp distinction between:

• Loan/advance: where a lender provides funds directly to a borrower, creating a debtor-creditor “loan” relationship; and
• Bill discounting facility: where a financier purchases/discounts trade bills drawn by a seller (Drawer) on a buyer (Drawee), taking over the seller’s receivable at a discount, usually for a very short tenure and often unsecured.

Key consequences:

• Bill discounting is a short-term, high-risk, high-cost commercial product, not simply a loan. The financier’s risk of non-payment and illiquidity justifies higher rates.
• Usury statutes conceived in an older agrarian-credit context are ill-suited to such modern commercial instruments; their application is restricted to “loans” and “debts” in a narrow sense.
• Section 80 NI Act (18% p.a. interest on dishonoured bills where no rate is specified) applies where claim is fundamentally “on the bill”. Here, Morgan’s claim was grounded on the sanction letters – the master contracts governing the entire bill discounting relationship – not on the bills alone.

Therefore, the Court agreed with the arbitral tribunal and High Court that:

5.2.2 Dissecting Clause 4: Concessional vs Normal Rate

Clause 4 of the sanction letters was central. It can be analytically split into three parts:

1. Agreement that the “normal agreed rate” is 36% p.a. for bill discounting;
2. Grant of a special concession: the facility will actually be provided at 22.5% p.a. payable upfront, if payments are made on due dates; and
3. Conditional withdrawal of the concession: on any delay or default in payment of bill amount or interest, the concessional rate “will be withdrawn” and the 36% p.a. with monthly rests becomes payable from the due date.

The Court emphasised that:

• 36% p.a. is the baseline commercial bargain – the financier’s standard pricing;
• 22.5% p.a. is a contractual benefit for punctual performance; and
• withdrawal of this benefit upon default merely restores the parties to their baseline bargain; it does not impose an extraneous punishment.

Thus, raising the rate to 36% p.a. with compounding on default is not a penalty within Section 74 but a conditional concession regime – conceptually identical to authorities like Kulada Prosad and Banke Behari.

5.2.3 Section 31(7)(a) Arbitration Act: Party Autonomy Prevails

Section 31(7) reads, in essence:

• 31(7)(a): Unless otherwise agreed by the parties, the arbitral tribunal may award pre-award interest at a reasonable rate for all or any part of the period from cause of action to award.
• 31(7)(b): the “sum” directed to be paid shall carry post-award interest (by default at 2% above current rate) unless the award otherwise directs.

The Court reaffirmed that:

• The opening words “unless otherwise agreed by the parties” qualify the entire Clause (a).
• Therefore:
  • Only when the contract is silent on pre-award interest does the arbitral tribunal have discretion to set a reasonable rate and period.
  • Where the contract stipulates interest (or prohibits it), the tribunal has no discretion to override that stipulation – even if it considers the agreed rate “high” or “unfair”.

Applied to this case:

• Clause 4 was a clear agreement on the rate (36% p.a. normal; 22.5% concessional) and its triggers.
• The arbitration clause was embedded in the same sanction letters – the arbitral tribunal both derived its jurisdiction and its constraints from this contract.
• Accordingly, the arbitrator rightly awarded interest at 36% p.a. with monthly rests; he could not substitute a lower figure under Section 31(7)(a).

The Court expressly rejected the appellant’s attempt to reinterpret “unless otherwise agreed” as:

• merely allowing parties to exclude arbitral power altogether; or
• only partially influencing the tribunal’s discretion while leaving room for independent “reasonableness” assessment.

5.2.4 Is 36% p.a. with Monthly Rests “Penal on Penal Interest” and Against Public Policy?

BPL’s main public policy challenge hinged on the assertion that:

• 36% p.a. with monthly compounding is “penal interest on penal interest”; and
• this allegedly violates Section 74 Contract Act and is contrary to public policy under Section 34(2)(b)(ii) & Explanation 1 (A&C Act).

The Supreme Court addressed this in several layers:

1. No penalty without unequal bargaining or oppression Relying on Poosathurai, Ladli Prasad, Subhas Chandra, and P.K. Achuthan, the Court held:
   • Unconscionability arises where one party is in a position to dominate the will of another and uses that position to obtain an unfair advantage.
   • BPL was a sophisticated corporate, not an illiterate or vulnerable borrower. It consciously entered into the facility and reaped benefits for years without protest.
   • It never sought to avoid the contract or challenge interest terms at or soon after inception.
2. Commercial justification in bill discounting The Court explained why bill discounting routinely attracts higher rates:
   • short-term, high-risk, unsecured nature of the product;
   • financier’s need for rapid redeployment of funds and protection against prolonged lock-in; and
   • default may freeze large sums for years, destroying the financier’s business model.
   Hence, compounding at 36% p.a. over long default periods reflects not punishment but compensation for loss of liquidity, opportunity and redeployment.
3. Borrower cannot profit from its own breach Morgan indulged repeated requests not to encash cheques, relying on BPL’s assurances. BPL then remained in default for over a decade and actively diverted assets, attracting contempt findings. The Court was not inclined to allow such a party to invoke equity/public policy to escape a contractual rate it had agreed to and benefitted from.
4. Public policy is a “narrow gate” Citing arbitration jurisprudence, the Court reiterated that:
   • “Public policy” is an unruly and dynamic concept but in arbitration it must be applied narrowly.
   • Exploitative or shocking interest may be intervention-worthy when there is proven inequality, deception, or statutory violation, not merely because a rate appears “high”.
   • Here, the rate, although “humungous” in effect over time, was the foreseeable result of BPL’s prolonged default and was not contrary to any statute.

The Court also endorsed the caution expressed in Malhotra’s commentary on arbitration: courts must “expound, not expand” public policy; intervention should be reserved for “clear and incontestable” harm to the public.

5.2.5 Adoption of Cavendish: New Indian Test for Penalty in Commercial Contracts

A major jurisprudential contribution of this judgment is its explicit acceptance of the Cavendish Square Holding BV v Makdessi test from the UK Supreme Court (2015).

Under Dunlop Pneumatic Tyre v New Garage (1915), a clause was typically assessed by asking:

• Is the stipulated sum a “genuine pre-estimate of loss”? If yes – liquidated damages; if no – penalty.

The Supreme Court noted criticism of this rigid dichotomy:

• commercial reality often involves clauses serving both deterrent and compensatory functions
• in complex contracts, precise pre-estimation is impossible; business people legitimately price risk, not just direct loss; and
• Dunlop’s tests can produce artificial and inconsistent results.

Cavendish reoriented the inquiry:

1. Does the clause protect a legitimate business interest of the innocent party extending beyond mere compensation for breach?
2. Is the stipulated consequence out of all proportion to that legitimate interest (i.e. “exorbitant, extravagant or unconscionable”), or is it commercially justifiable?

The BPL judgment:

• explicitly endorses Cavendish;
• notes its adoption or influence in:
  • Australia – Paciocco v ANZ (2016 HCA 28);
  • New Zealand – 127 Hobson Street v Honey Bees Preschool (2020 NZSC 53);
  • Malaysia – Cubic Electronic v Mars Telecommunication (2019 FC);
  • Germany – BGB §343 (reduction of excessive penalties considering “every legitimate interest”).
• acknowledges that while Indian courts have cited Cavendish before, they generally continued to apply the Dunlop “genuine pre-estimate” approach; and
• declares that Cavendish’s “legitimate interest + proportionality” standard is better suited to complex commercial and arbitral contexts, and more consistent with party autonomy.

The Court emphasises that:

This marks a substantive shift in Indian contract/arbitration law away from a formulaic Dunlop assessment to a more contextual, autonomy-respecting Cavendish methodology.

5.2.6 Contra Proferentem and Commercial Contracts

BPL attempted to deploy the maxim verba chartarum fortius accipiuntur contra proferentem to narrow or reinterpret Clause 4, arguing ambiguity should be resolved against Morgan as the drafter.

The Court rejected this, clarifying:

• Contra proferentem is a fallback rule applicable only where language is genuinely ambiguous, i.e., genuinely admits more than one reasonable construction.
• It is primarily relevant to:
  • standard form, “take it or leave it” contracts; and
  • insurance or consumer contracts where bargaining power is unequal.
• In bilateral, negotiated commercial contracts between corporates, clauses are “mutually agreed” and not unilaterally imposed; contra proferentem has limited, if any, role.
• Clause 4, read as a whole, is clear: normal rate 36%, concession 22.5% conditioned on punctuality, concession withdrawable on default.

The Court also reiterated that courts cannot:

• use contra proferentem to create ambiguity where none exists; nor
• substitute new terms under the guise of interpretation.

5.2.7 Limitation and Acknowledgement

Although not the focal doctrinal innovation in this case, the Court confirmed:

• Part-payments by BPL in August 2005 within the original limitation period extended limitation under Section 19 of the Limitation Act; and
• BPL’s acknowledgement letter dated 02.02.2007 further extended limitation (Section 18), and arbitration commenced within six months thereafter was in time.

Claims against ERPL (guarantor), however, were barred due to lack of acknowledgement and failure to present its cheques, and that finding was left undisturbed.

6. Complex Concepts Simplified

6.1 What Is Bill Discounting (vs a Loan)?

• Loan: Bank/NBFC gives you money; you promise to return it with interest over a period. The money is fungible and often secured (mortgage, security interest) or unsecured.
• Bill Discounting:
  • Seller (BDDL) sells goods to Buyer (BPL) and raises a bill of exchange (a negotiable instrument) payable at a future date.
  • Financier (Morgan) “discounts” this bill – it pays the seller now (less a discount), and waits to collect the full amount from the buyer when due.
  • It is short-term, high-risk, and often unsecured.

Because of the nature and risk of bill discounting, financiers usually charge much higher rates than typical term loans; that is commercially accepted practice and not automatically exploitative.

6.2 Section 31(7) Arbitration Act – In Plain Terms

• Pre-award interest (31(7)(a)):
  • Default rule: Tribunal may award interest for the period from when the cause of action arose until the award, at a rate it thinks reasonable.
  • But this is overridden if the parties have “otherwise agreed” – if contract specifies interest, the tribunal must follow that.
• Post-award interest (31(7)(b)):
  • Default: the awarded “sum” carries interest at 2% above the prevailing “current rate” from award date until payment.
  • But the tribunal can set a different post-award rate in the award itself.

6.3 “Penalty” Clauses vs Legitimate Risk Pricing

A clause is penal when its real function is to punish a breach, not to protect any legitimate interest. Indicators include:

• the consequence is grossly out of proportion to any harm or risk; and
• no rational commercial justification can be given other than to intimidate or coerce the other party.

Under Cavendish (adopted here), in commercial contracts, courts will generally uphold a clause if:

• the affected party can show it protects a legitimate business interest (e.g. liquidity, reputational risk, market stability); and
• the severity of the clause is not out of all proportion to that interest.

6.4 Public Policy in Arbitration Challenges

Under Section 34(2)(b)(ii) of the Arbitration Act, an award may be set aside if it is in conflict with the “public policy of India”. After multiple Supreme Court decisions, this ground is:

• very narrow – it does not allow rehearing on merits;
• confined to:
  • fraud or corruption;
  • contravention of fundamental policy of Indian law;
  • conflict with basic notions of morality or justice; or
  • patent illegality on the face of the award (in domestic awards).

A high contractual interest rate, by itself, rarely meets this threshold in commercial disputes, especially where parties are sophisticated corporates.

7. Impact and Future Significance

7.1 Strengthening Party Autonomy in Arbitrations

The judgment firmly establishes that:

• Pre-award interest is primarily a matter of party autonomy; arbitrators are constrained by agreed contractual rates or exclusions.
• Court interference under Sections 34/37 to “moderate” high interest is limited to truly outrageous or unlawful cases.

For drafters and arbitrators, this means:

• Interest clauses should be drafted with care; once agreed, they are very likely to be enforced as written.
• Parties who want flexibility should reserve discretion or cap rates expressly; failing which, they will be held to the bargain.

7.2 Clarifying Penalties, Section 74 and Commercial Rates

By adopting Cavendish and rejecting an over-expansive reading of Section 74, the Court has:

• signalled strong deference to commercially justified clauses, including stepped-up interest, in arm’s length corporate transactions;
• reduced the scope for borrowers to challenge commercial interest clauses as “penalties” absent clear oppression; and
• aligned Indian law with leading common law jurisdictions on penalties.

This will:

• provide greater certainty to NBFCs, banks, and corporates structuring high-risk, short-term credit (like bill discounting, trade finance, and structured products);
• discourage opportunistic post-facto challenges by defaulters; and
• encourage careful ex ante negotiation on interest and default consequences.

7.3 Limited Role for Usury and NI Act in Complex Commercial Finance

By categorically treating bill discounting as a distinct commercial species (not a “loan”), the Court has:

• circumscribed the relevance of pre-independence usury legislation in modern trade finance;
• clarified that Section 80 NI Act cannot be used to read down interest where claims are grounded on master sanction letters; and
• favoured modern arbitration-based regulation over antiquated usury doctrines in corporate finance disputes.

7.4 Limiting Contra Proferentem in Corporate Contracting

The judgment’s approach to contra proferentem reduces the risk that:

• corporates may later claim “ambiguity” in carefully negotiated contracts to escape harsh consequences; and
• courts may, under the guise of interpretation, rewrite core commercial terms in non-adhesion contracts.

This reinforces predictability in commercial drafting and discourages litigation strategies that try to recharacterise clear texts as ambiguous.

7.5 Arbitral Deference and Finality

Finally, the Court underscored that:

• where an award is upheld by a Section 34 court and further affirmed under Section 37, the Supreme Court under Article 136 will be “slow and loath” to disturb concurrent findings; and
• Section 34/37 are not appellate forums on merits; they are supervisory mechanisms confined to limited grounds.

This judgment therefore continues the trend of pro-enforcement, arbitration-friendly jurisprudence.

8. Conclusion

BPL Ltd v Morgan Securities is a landmark in Indian arbitration and contract law, for at least three reasons:

1. It solidifies the primacy of party autonomy in matters of contractual interest under Section 31(7)(a). Once parties specify the rate and structure of pre-award interest, arbitrators and courts must respect that choice, barring exceptional illegality or egregious unconscionability.
2. It modernises the law of penalties in commercial contracts by embracing the Cavendish “legitimate interest and proportionality” test, moving beyond the rigid Dunlop “genuine pre-estimate of loss” dichotomy and aligning India with global common law developments.
3. It clarifies that high and compounded interest in short-term commercial finance (such as bill discounting) is not per se penal or against public policy where:
   • the parties are sophisticated corporates;
   • the interest serves genuine commercial purposes (risk, liquidity, redeployment); and
   • the clause reflects a structured concession rather than naked punishment.

The Court’s refusal to relieve BPL from a harsh but consciously assumed bargain emphasises that:

For practitioners, financiers, and corporates, this judgment is a clear signal: in sophisticated commercial arbitrations, especially involving financial instruments like bill discounting, Indian courts will enforce agreed rates and default consequences rigorously, intervening only in cases of clear statutory violation, demonstrated oppression, or genuine public policy concerns.