(MENAFN- KNN India) New Delhi, Nov 19 (KNN) The Supreme Court has upheld an arbitral award imposing a 24 percent annual interest rate, ruling that such a rate agreed upon in a commercial loan contract does not violate the fundamental policy of Indian law.

A Bench of Justices JB Pardiwala and KV Viswanathan ruled that disagreements over interest rates cannot normally be challenged on public-policy grounds under Section 34 of the Arbitration and Conciliation Act, 1996.

They clarified that interference is justified only if the interest rate is 'so perverse and so unreasonable' that it shocks the conscience of the court.

The dispute stemmed from two 2006 loan agreements in which the borrowers took Rs 1.57 crore from a Non-Banking Financial Company (NBFC) at a 24 percent annual interest rate.

After they defaulted, the matter went to arbitration, which ruled in favour of the lender, prompting the borrowers to challenge the award.

Upholding the Madras High Court's decision, the Supreme Court noted that high interest rates in commercial lending often reflect market risks and cannot be invalidated simply on allegations of being excessive.

The court emphasised that under Section 31(7)(a), an arbitrator's decision on pre-award interest is bound by the parties' contract terms.

The Bench added that while a 24 percent interest rate may appear steep at first glance, it cannot be deemed contrary to public policy solely for being high, especially when aligned with contemporary commercial practices.

The judgment reinforces the principle of party autonomy in commercial contracts and is expected to provide greater certainty in arbitration-related disputes for businesses, lenders and MSMEs.
(KNN Bureau)

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