Post‑Award Interest under Section 31(7)(b) Is Mandatory; High Contractual Rates in Commercial Loans Are Not Per Se Against Public Policy; Usury Statutes Cannot Be Used to Dismantle Arbitral Awards

Introduction

In Sri Lakshmi Hotel Pvt. Limited & Anr. v. Sriram City Union Finance Ltd. & Anr., 2025 INSC 1327 (Supreme Court of India, 18 November 2025), a Division Bench (J.B. Pardiwala and K.V. Viswanathan, JJ.) dismissed a borrower’s challenge to an arbitral award that granted pre- and post‑award interest at 24% per annum in favour of an NBFC. The Court decisively clarified three intertwined issues: (i) post‑award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 (as it stood prior to the 2015 amendment) is mandatory in entitlement and not subject to “party autonomy”, with the arbitrator having discretion only over the rate; (ii) charging a high interest rate in a commercial loan (here, 24%) is not, without more, contrary to the “public policy of India” for the purposes of Sections 34 and 37; and (iii) older “usury” statutes cannot be leveraged to re‑write arbitral awards within the limited supervisory jurisdiction under Sections 34/37. The Court also reiterated the narrow compass of interference under Section 34, including the bar on re‑appreciation of evidence.

The dispute arose out of two bridging loan facilities (Rs. 1.5 crore and Rs. 7.25 lakh) availed in 2006, carrying 24% p.a. interest with monthly rests, for the purpose of clearing a pre‑existing bank liability. The borrowers made partial payments and then defaulted. Arbitration was invoked in 2009 and an award was passed in 2014 directing payment of Rs. 2.21 crore with interest at 24% p.a. till realization. A Section 34 challenge failed before a Single Judge; a Section 37 appeal failed before a Division Bench; insolvency proceedings against the borrower company were admitted and progressed to liquidation; and eventually a further appeal reached the Supreme Court.

Summary of the Judgment

The Supreme Court dismissed the appeal and affirmed the High Court’s refusal to interfere with the arbitral award. The principal holdings are:

• Section 31(7)(b) (pre‑2015) mandates post‑award interest on the “sum directed to be paid” — entitlement is compulsory; only the rate is for the arbitrator to direct, failing which the statutory default of 18% applies. Parties cannot “contract out” of post‑award interest (paras 33–44).
• Pre‑award interest (including pre‑reference and pendente lite interest) is subject to the parties’ agreement; absent an agreement to the contrary, the arbitrator has a broad discretion under Section 31(7)(a) (para 43, citing HLV Limited (2025)).
• High contractual rates in purely commercial transactions — without more — do not offend the “fundamental policy of Indian law” or the “basic notions of morality or justice” under the post‑2015, narrowed Section 34(2)(b)(ii) “public policy” ground (paras 49–53; referring to OPG Power Generation (2024) and Renusagar).
• Usury statutes (e.g., the Usurious Loans Act, 1918 and analogous debt‑relief enactments belonging to a different era) cannot be invoked within Section 34/37 proceedings to re‑determine the reasonableness of interest against the specific, later and self‑contained framework of the Arbitration Act, 1996 (paras 54–55). Additionally, State usury/prohibition statutes do not apply to RBI‑regulated NBFCs (relying on Nedumpilli Finance (2022)).
• Section 34(2A) (and its proviso) precludes re‑appreciation of evidence and interference for mere erroneous application of law. The arbitrator’s findings and the concurrent upholding by lower courts could not be revisited (paras 45–46).
• On the facts, repeated default, dishonour of a settlement cheque, and prolonged non‑payment leading to CIRP and liquidation justified the arbitrator’s award (including the rate of interest) and no ground for interference was made out (paras 47–48).

Analysis

Precedents Cited and Their Influence

• Morgan Securities & Credits Pvt. Ltd. v. Videocon Industries Ltd., (2023) 1 SCC 602: Central to the Court’s analysis of Section 31(7). Morgan held that:
  • The phrase “unless the award otherwise directs” in Section 31(7)(b) qualifies only the rate of post‑award interest, not the entitlement, which is mandatory.
  • Clause (a) (pre‑award interest) is subject to party autonomy; Clause (b) (post‑award interest) is not.
  • Arbitrators have discretion to grant post‑award interest and to determine the rate; if they do not, the statutory default applies.
  The present judgment explicitly applies Morgan to confirm that courts cannot deny post‑award interest by relying on contractual bars or “party autonomy.”
• R.P. Garg v. GM, Telecom Department, 2024 INSC 743: Reinforced Morgan, emphasizing that post‑award interest must be granted (entitlement is not contract‑controlled) and clarifying that “unless the award otherwise directs” pertains to rate, not to the very right to such interest.
• North Delhi Municipal Corporation v. S.A. Builders Ltd., (2025) 7 SCC 132: Articulated the purpose of pre‑award and post‑award interest — compensation for delay, efficiency incentive for timely arbitration, and disincentivizing post‑award delay. This policy rationale underpins the Court’s affirmation of robust post‑award interest.
• State of Rajasthan v. Ferro Concrete Construction Pvt. Ltd., (2009) 12 SCC 1 (with references to G.C. Roy (1992), N.C. Budharaj (2001), and Bhagwati Oxygen (2005)): Established that, absent an express contractual bar, arbitrators may award interest for pre‑reference, pendente lite, and future periods.
• HLV Limited v. PBSAMP Projects Pvt. Ltd., 2025 INSC 1148: Clarified that for pre‑award interest under Section 31(7)(a), arbitrator discretion yields to any contrary agreement between the parties. The present Court cites this to reinforce the clause (a)/clause (b) dichotomy.
• Hyder Consulting (UK) Ltd. v. State of Orissa, (2015) 2 SCC 189: Addressed what constitutes the “sum” for interest computation. The present Court notes that Hyder Consulting’s interpretation of “sum” does not fetter the arbitrator’s discretion under Section 31(7)(b). Morgan already reconciled these strands.
• OPG Power Generation Pvt. Ltd. v. Enexio Power Cooling Solutions (India) Pvt. Ltd., 2024 SCC OnLine SC 2600 (with references to Renusagar and earlier cases): Restated that post‑2015, “public policy of India” is narrowed by Explanation 1 to Section 34(2)(b)(ii) — violations must implicate the fundamental policy of Indian law, the interests of India, or basic notions of morality/justice. Mere statutory contravention does not suffice. The Court relies on this framework to reject “public policy” attacks premised on high interest rates alone.
• Renusagar Power Co. Ltd. v. General Electric Co.: Distinguished between narrow public policy in international enforcement and broader municipal contexts; emphasized that more than mere contravention of law is required. The present Court echoes this threshold.
• Nedumpilli Finance Co. Ltd. v. State of Kerala, (2022) 7 SCC 394: Affirmed that State money‑lending/usury legislation does not apply to RBI‑regulated NBFCs governed by Chapter IIIB of the RBI Act, 1934. The present judgment deploys this to fend off state‑level “exorbitant interest” challenges in NBFC lending.
• Scope of Section 34 review: The Court cites Swan Gold Mining Ltd. v. Hindustan Copper Ltd. (2015), P.R. Shah v. B.H.H. Securities (2012), Ssangyong Engg. & Construction Co. Ltd. v. NHAI (2019), and PSA Sical Terminals Pvt. Ltd. v. V.O. Chidambranar Port Trust (2023) to reaffirm that Section 34/37 does not permit re‑appreciation of evidence or correction of mere legal errors; only patent illegality and limited public policy grounds are available.

Legal Reasoning

1. Statutory framework of Section 31(7):
   • Clause (a) (pre‑award interest): arbitrator may grant interest “at such rate as it deems reasonable” for any part of the principal and for any part of the period from accrual of cause of action to the award — but this is expressly “unless otherwise agreed by the parties.” Party autonomy governs.
   • Clause (b) (post‑award interest): “A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at [18% p.a. (pre‑2015)] from the date of award to the date of payment.” Entitlement is mandatory; arbitrator may vary only the rate by “otherwise directing.” Party autonomy does not apply here.
   The Court, aligning with Morgan and R.P. Garg, treats post‑award interest as a statutory discipline designed to deter non‑payment and delay, not a term that contracting parties can waive prospectively.
2. Application to the award:
   • The arbitrator awarded 24% p.a. pre‑award and post‑award, consonant with the loan instruments. There was no express contractual bar against interest. The award pre‑dated the 2015 amendment; thus the statutory default would have been 18% if the arbitrator had not specified a rate. Here, the arbitrator did specify 24% — and did so within a purely commercial, high‑risk bridging context.
   • Given the arbitrator’s express exercise of discretion and the commercial character of the transaction, the Court refused to interfere.
3. Public policy challenge fails:
   • Post‑2015 “public policy of India” under Section 34(2)(b)(ii) is narrowly confined by Explanation 1: violations must implicate the fundamental policy of Indian law, interests of India, or basic notions of morality/justice. High interest rates in a commercial loan — without more — do not satisfy this threshold.
   • The Court underscored that the morality of high rates is context‑dependent; transparency, informed consent, and the risk profile matter. Absent shocking perversity, a high rate is not ipso facto against public policy.
4. Usury legislation cannot re‑engineer arbitral interest:
   • The Court rejected reliance on the Usurious Loans Act, 1918 and analogous debt‑relief statutes, holding that such laws — conceived in a different era — cannot be used within Section 34/37 proceedings to re‑determine “excessiveness” of interest against the Arbitration Act’s later, specific scheme that grants arbitrators structured discretion over interest.
   • Further, by Nedumpilli, state‑level usury laws do not apply to RBI‑regulated NBFCs — a fortiori undermining the appellants’ state‑statute based attack.
5. Section 34/37’s narrow remit:
   • Allegations that signatures were taken on blank forms were litigated before the arbitrator; an application for expert verification was rejected and never challenged, attaining finality. Re‑opening such factual contests is barred by Section 34(2A)’s proviso against re‑appreciation.
   • The borrower’s correspondence acknowledged the debt; the 2008 “full and final” cheque was dishonoured. Continued default led to CIRP and liquidation. The award was within jurisdiction and reasoned; hence no patent illegality.

Impact and Prospective Significance

• Arbitration practice:
  • Arbitrators retain wide discretion to determine post‑award interest rates, including by adopting the contractual rate in appropriate commercial settings. Awards should articulate considerations (risk, delay, contractual allocation) to demonstrate judicious exercise of discretion.
  • If an award is silent on the post‑award rate, statutory default (pre‑2015: 18%) applies automatically. After the 2015 amendment (not directly in issue here), while the default formula has changed, the principle that entitlement is mandatory and parties cannot contract out remains clear.
• Public policy challenges narrowed further:
  • Borrowers cannot successfully argue that a high rate is per se contrary to “fundamental policy” or “morality/justice.” Only rates that are so egregious as to “shock the conscience,” coupled with other vitiating factors, might cross the threshold.
  • RBI circulars/guidelines on fair practices, while binding on regulated entities, do not by themselves translate into Section 34 grounds unless a violation also amounts to a contravention of fundamental policy or the award is otherwise patently illegal.
• Usury legislation and NBFC lending:
  • Debtors will find it difficult to invoke colonial‑era usury laws to revisit arbitral interest. For NBFCs, Nedumpilli’s demarcation of RBI’s exclusive field strengthens the enforceability of commercial lending terms in arbitration.
  • State‑level “exorbitant interest” statutes are unlikely to disturb arbitral awards involving NBFCs governed by RBI’s Chapter IIIB framework.
• Execution and insolvency interfaces:
  • Post‑award interest bolsters the economic rationale for early settlement and disincentivizes award‑debtors from tactical delays, including during insolvency processes. Award creditors can rely on the award (including the interest component) in Section 7 IBC filings; the award’s recognition of interest will influence the admitted claim size.

Complex Concepts Simplified

• Pre‑award vs. pendente lite vs. post‑award interest:
  • Pre‑award: From accrual of the cause of action until the date of the award (includes “pre‑reference” and “pendente lite”). Under Section 31(7)(a), arbitrator discretion applies unless the parties agreed otherwise; the contract can limit or guide the rate/period.
  • Post‑award: From the date of the award until payment. Under Section 31(7)(b), entitlement is mandatory; the arbitrator may “otherwise direct” the rate. If the award is silent, the statutory default applies (18% under the pre‑2015 version).
• Party autonomy vs. statutory mandate:
  • Party autonomy governs Clause (a) — the agreement can control whether, how much, and for what period interest is awarded pre‑award.
  • Clause (b) is a statutory command for post‑award interest; parties cannot pre‑emptively opt out by contract. The arbitrator may vary the rate (including by setting it at the contractual rate), but cannot deny entitlement altogether.
• Public Policy after the 2015 Amendment:
  • “Public policy of India” is narrowed by Explanation 1 to Section 34(2)(b)(ii). Examples of “fundamental policy” contraventions include violations of natural justice, disregard of binding superior court judgments, or contraventions of laws that protect public interest. High commercial interest rates alone do not meet this standard.
  • Explanation 2 curtails merits review: courts cannot re‑try the case under the guise of public policy.
• Usury statutes vs. Arbitration Act:
  • Usury statutes were enacted in a different economic milieu to curb exploitative money‑lending. They are not designed to operate as supra‑regulators of arbitrators’ interest awards within Section 34/37’s narrow framework.
  • NBFCs, being under RBI’s Chapter IIIB regime, are insulated from state usury enactments that otherwise regulate unorganized money‑lending.
• RBI “fair practices” guidelines:
  • Such guidelines guide regulated lenders’ conduct and can lead to regulatory consequences. But an arbitral award will not be set aside merely for alleged guideline non‑compliance unless the award simultaneously violates Section 34’s exacting standards (e.g., fundamental policy, patent illegality).

Conclusion

Sri Lakshmi Hotel represents a firm consolidation of three lines of doctrine. First, it cements the Morgan–R.P. Garg understanding that post‑award interest under Section 31(7)(b) is an entitlement mandated by statute; “unless the award otherwise directs” refers only to the rate, not the existence of entitlement, and party autonomy has no role here. Second, it applies the post‑2015 calibration of “public policy” to hold that high interest rates, even at 24% in a bridging loan context, are not by themselves contrary to “fundamental policy” or “morality/justice,” especially where the borrower is a commercial actor and the transaction is high‑risk. Third, it makes clear that colonial‑era usury enactments (and analogous state statutes) cannot be marshalled, within the tightly confined review under Sections 34/37, to re‑price arbitral awards; for NBFCs, the RBI’s comprehensive regime further insulates the lending terms from state interference.

For arbitral tribunals, the judgment is an invitation to continue exercising discretion over interest with reasoned attention to commercial risk and delay. For courts, it is a reminder that Section 34/37 do not permit re‑determining the bargain or the facts. For lenders and borrowers, the message is practical: commercial rates agreed and awarded — appropriately reasoned and not conscience‑shocking — will be enforced; delaying payment post‑award invites the statutory discipline of post‑award interest. In the broader arc of Indian arbitration law, the decision marks a steady move towards predictability, deference to arbitral discretion, and a restrained, principle‑driven understanding of “public policy.”