Legal Review and Analysis of Sri Lakshmi Hotel Pvt Limited vs Sriram City Union Finance Ltd 2025 INSC 1327

In-Short

Case: Sri Lakshmi Hotel Pvt. Limited vs. Sriram City Union Finance Ltd. (2025 INSC 1327): The Supreme Court upheld an arbitral award granting 24% interest, ruling that in commercial transactions, a high contractual interest rate is not per se against public policy, and courts cannot reappreciate evidence under the limited grounds of challenge under the Arbitration Act.

1. Heading of the Judgment

Sri Lakshmi Hotel Pvt. Limited & Anr. vs. Sriram City Union Finance Ltd. & Anr.
Citation: 2025 INSC 1327 (Civil Appeal No. 13785 of 2025)

2. Related Laws and Sections

This judgment primarily interprets and applies provisions from the following statutes:

• The Arbitration and Conciliation Act, 1996:
  Section 31(7)(a): Grants the Arbitral Tribunal discretion to award pre-award interest, subject to the agreement between the parties.
  Section 31(7)(b): Mandates the award of post-award interest. The tribunal has the discretion to set the rate; if it does not, the statutory rate of 18% per annum applies.
  Section 34: Governs the setting aside of arbitral awards. The scope of judicial intervention is limited, and reappreciation of evidence is expressly prohibited.

• The Usurious Loans Act, 1918 & State Laws: The Court considered the applicability of laws that cap interest rates but held them inapplicable to the facts of this case.

• The Insolvency and Bankruptcy Code, 2016 (IBC): Mentioned in the factual background as recovery proceedings were initiated against the appellant company.

3. Basic Judgment Details

• Court: Supreme Court of India

• Bench: Justice J.B. Pardiwala and Justice K.V. Viswanathan

• Appellants: M/s Sri Lakshmi Hotels Pvt. Limited (Appellant No. 1) and its Managing Director, V.S. Palanivel (Appellant No. 2)

• Respondents: Sriram City Union Finance Ltd. (a Non-Banking Financial Company - NBFC) and the Sole Arbitrator.

• Origin: Appeal against the judgment of the Madras High Court, which had dismissed the Appellant's challenge under Section 37 of the Arbitration and Conciliation Act, 1996, to an arbitral award.

4. Core Principle of the Judgment

The Main Issue

The central issue before the Supreme Court was whether the High Court erred in upholding an arbitral award that granted interest at the contractual rate of 24% per annum, which the Appellants challenged as being usurious, unconscionable, and against public policy.

Analysis and Supreme Court's Address

A. The Arbitrator's Discretion on Interest under the Arbitration Act

The Court conducted an in-depth analysis of Section 31(7) of the Arbitration and Conciliation Act, 1996. It distinguished between pre-award and post-award interest, relying on precedents like Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd., (2023) 1 SCC 602 and R.P. Garg v. The General Manager, Telecom Department & Ors., 2024 INSC 743.

• Pre-Award Interest [S. 31(7)(a)]: The Court clarified that the arbitrator's power to grant interest for the period before the award is made is subject to the contract between the parties. If the agreement specifies an interest rate, the arbitrator is generally bound by it.

• Post-Award Interest [S. 31(7)(b)]: The Court emphatically ruled that the grant of post-award interest is mandatory. The arbitrator has the discretion to set the rate. However, if the award is silent on the rate, the statute automatically imposes a rate of 18% per annum. Critically, the Court held that parties cannot "contract out" of the entitlement to post-award interest. The phrase "unless the award otherwise directs" only allows the arbitrator to modify the rate, not the entitlement itself.

B. Challenge to the 24% Interest Rate: Public Policy and Usury

The Appellants argued that a 24% interest rate was usurious and violated public policy, rendering the award unenforceable under Section 34 of the Act.

• Public Policy is a Narrow Ground: The Court reiterated that the scope of "public policy" for challenging an arbitral award is very narrow, as defined in Explanation 1 to Section 34(2)(b). It refers to the "fundamental policy of Indian law" and not a mere violation of a statute. Citing OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited, 2024 SCC OnLine SC 2600, the Court stated that a high interest rate in a commercial transaction, by itself, does not qualify as a violation of the fundamental policy of Indian law unless it is "so perverse and so unreasonable so as to shock the conscience of the Court."

• Nature of the Transaction: The Court noted this was a purely commercial transaction where the Appellants, who were already defaulters to a bank, borrowed funds from an NBFC. This was a high-risk transaction for the lender, justifying a higher interest rate.

• Conduct of the Parties: The Court highlighted the Appellants' consistent default, a bounced cheque issued for settlement, and their failure to repay even after assurances, which prejudiced the Respondent.

• Usurious Loans Act Inapplicable: The Court rejected the plea under the Usurious Loans Act, 1918, noting that such archaic laws must give way to the plenary powers under the Arbitration Act, 1996. It also relied on Nedumpilli Finance Company Limited v. State of Kerala (2022) 7 SCC 394 to state that state laws governing interest rates do not typically apply to RBI-registered NBFCs.

C. Prohibition on Reappreciation of Evidence

The Supreme Court firmly refused to re-examine the factual findings of the arbitrator, which had been concurrently upheld by the Single Judge and Division Bench of the High Court. It invoked the proviso to Section 34(2A) of the Act, which explicitly states that an award shall not be set aside merely by "reappreciation of evidence." The Court's role was not to sit as an appellate body over the arbitrator's factual conclusions, including the finding that the loan agreements were genuine and binding.

5. Final Outcome

The Supreme Court found no error in the High Court's judgment. It held that the arbitrator had acted within his jurisdiction by awarding the contractual rate of interest, and such an award did not suffer from any patent illegality or contravention of public policy. Consequently, the appeal was dismissed.

6. MCQs Based on the Judgment

1. According to the Supreme Court's interpretation of Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, which of the following statements is correct?

(a) The parties to a contract can mutually agree to waive the entitlement to post-award interest.
(b) The grant of post-award interest by an arbitral tribunal is discretionary and not mandatory.
(c) The entitlement to post-award interest is mandatory, and the arbitrator's discretion is limited to setting the rate of interest.
(d) The statutory rate of post-award interest is 24% per annum if the arbitrator does not specify a rate.

2. In the case of Sri Lakshmi Hotel vs. Sriram City Union Finance, the Supreme Court dismissed the challenge to the 24% interest rate primarily because?

(a) The Usurious Loans Act, 1918, explicitly permits NBFCs to charge any rate of interest.
(b) The rate was not high enough to be considered usurious under any law.
(c) The challenge involved a reappreciation of evidence, which is prohibited under the limited scope of Section 34 of the Arbitration Act, and the rate was not so unconscionable as to shock the conscience of the court in a commercial transaction.
(d) The appellants had willingly paid the interest for several years before defaulting.