Penal Interest and Contractual Interest Under Arbitration Law: Supreme Court Upholds 36% Interest in Commercial Bill Discounting Contracts
Case Name: BPL Limited v. Morgan Securities and Credits Private Limited
Citation: 2025 INSC 1380
Date of Judgment/Order: 04 December 2025
Bench: J.B. Pardiwala, Sandeep Mehta
Held: The Supreme Court held that contractual interest at the rate of 36% per annum with monthly rests stipulated in commercial bill discounting agreements is enforceable, does not amount to impermissible penal interest, and is not opposed to public policy under Section 34 of the Arbitration and Conciliation Act, 1996.
Summary: The dispute arose out of two bill discounting sanction letters executed between BPL Limited and Morgan Securities and Credits Pvt. Ltd., under which a concessional interest rate of 22.5% per annum was granted, subject to withdrawal upon default, reverting to the normal contractual rate of 36% per annum with monthly rests. Upon persistent default by BPL, arbitration was invoked, and the sole arbitrator awarded the principal amounts along with interest at the contractual rate.
The arbitral award was upheld under Section 34 by the Single Judge, affirmed in appeal under Section 37, and the review petition was also dismissed. Before the Supreme Court, BPL challenged the award primarily on the ground that the interest awarded was penal, unconscionable, contrary to Section 74 of the Contract Act, and opposed to public policy.
The Supreme Court undertook a detailed analysis of the nature of bill discounting transactions, distinguishing them from loans, and held that high interest rates in such commercial arrangements reflect risk allocation and liquidity considerations. The Court reiterated that Section 31(7)(a) of the Arbitration Act gives primacy to party autonomy and that an arbitral tribunal is bound by the agreed contractual rate unless expressly prohibited.
The Court further held that withdrawal of a concessional rate upon default does not constitute a penalty, and that sophisticated commercial entities cannot invoke doctrines of unconscionability or morality after having enjoyed contractual benefits. The maxim contra proferentem and Section 74 of the Contract Act were held inapplicable in the absence of a genuine penalty clause divorced from actual contractual intent.
Decision: The appeals were dismissed. The Supreme Court upheld the arbitral award, the Section 34 and Section 37 orders, and the rejection of the review petition. The contractual interest at 36% per annum with monthly rests was held enforceable, and no interference was warranted under Article 136 of the Constitution.