Background of the dispute
BPL Limited purchased goods from BPL Display Device Ltd. (BDDL), but cash flow issues led both to seek a bill discounting facility from Morgan Securities via two sanction letters in 2002 and 2003, totalling about ₹12.5 crore. Under these, Morgan paid BDDL upfront against bills of exchange drawn on BPL, with BPL and BDDL jointly and severally liable, and a concessional interest of 22.5% p.a. that would revert to 36% p.a. with monthly rests on default. When defaults occurred and around ₹25.8 crore became due, Morgan invoked arbitration, and the sole arbitrator awarded the dues with interest at 36% p.a. till award and 10% p.a. thereafter.
What happened in court
BPL challenged the award under Sections 34 and 37 of the Arbitration Act, arguing that 36% p.a. with compounding was penal, unconscionable, hit by the Usurious Loans Act, and contrary to public policy and Section 80 of the Negotiable Instruments Act. The Delhi High Court (single judge, division bench, and on review) rejected these contentions, upholding the award save for one time‑barred bill, and emphasised the commercial nature of the transaction and BPL’s status as a sophisticated corporate.
The Supreme Court dismissed BPL’s appeals, affirming that the facility was a commercial bill discounting arrangement, not a “loan” to which the Usurious Loans Act framework would apply. It held that where parties have expressly agreed on interest, Section 31(7)(a) of the Arbitration Act leaves no discretion to dilute that rate, and 36% p.a. with monthly rests was not so shocking as to violate public policy in a B2B context.
Key takeaways for readers
- Party autonomy is paramount: Once commercial parties freely fix an interest rate, arbitrators and courts are bound by that bargain; “unless otherwise agreed” in Section 31(7)(a) means contractual terms on interest prevail over abstract ideas of “reasonableness”.
- High interest is not automatically penal: A default interest of 36% p.a. with monthly rests in a negotiated bill discounting contract was treated as commercially justified, not as “penal interest on penal interest”, especially where a lower concessional rate existed for timely payers.
- Usurious Loans Act has a narrow role: Protective “usury” legislation was held inapplicable to a sophisticated corporate bill discounting facility, signalling that such statutes cannot be casually invoked to rewrite hard commercial bargains.
- Public policy and unconscionability are tightly confined: Corporate borrowers cannot later cry “unconscionable” or “against public policy” after having enjoyed the benefits of a contract, unless there is clear imbalance, exploitation, or violation of fundamental legal principles.
- Arbitration remains strongly pro‑contract: The judgment reinforces a pro‑arbitration stance: concurrent findings upholding an award will rarely be disturbed, and courts will not recalibrate commercial interest merely because it looks high in hindsight.
Read Full Case Judgment
