In BPL Limited v Morgan Securities and Credits Private Limited (2025), the Supreme Court upheld an arbitral award applying the contractually agreed interest rate of 36% per annum with monthly rests. India’s highest court held that a rate agreed between commercial parties cannot be attacked as penal, unconscionable or against public policy, reinforcing party autonomy in commercial arbitration.
BPL dispute upholds bill discounting
BPL and its group company availed a bill discounting facility from Morgan Securities and Credits (Morgan) for up to 150 days. The facility provided a normal rate of 36% per annum with monthly rests and a concessional rate of 22.5% per annum payable upfront. The concession was, in substance, a reward for prompt payment.
If payment was delayed, the concession ceased and the normal rate applied with monthly rests from the due date. BPL defaulted and Morgan invoked arbitration. The sole arbitrator awarded interest at the contractual rate as the award survived challenges under sections 34 and 37 of the Arbitration and Conciliation Act, 1996.
Supreme Court upholds contractual interest
On appeal before the Supreme Court, BPL argued that: the award granted penal interest on penal interest; section 74 of the Contract Act, 1872 confined recovery to reasonable compensation; and the arbitrator retained the discretion to award a reasonable rather than the contractual rate.
Relying on section 31(7)(a) of the above-mentioned arbitration act, the court held that the provision was subject to parties’ agreement on interest. When parties have agreed on interest rates, a court or tribunal must apply the bargain. The court also held that the award did not violate section 74 of the above-mentioned contract act and was not penal. The court examined the English Supreme Court’s decision, in Cavendish Square Holding v Talal El Makdessi (2015), when the court rejected the traditional distinction between deterrent clauses and genuine pre-estimate of damages aimed at compensating an innocent party.
Instead, the Cavendish case laid down a new test in England: that a clause is penal only where it is imposing an out of proportion detriment to the innocent party’s legitimate interest in performance.
The Indian Supreme Court noted that a clause which merely withdraws a concession on default, and reinstates the rate originally agreed, does not stipulate a liquidated sum payable on breach. The financier’s agreement to accept a lower rate in consideration of punctual payment does not render the original, higher rate penal. The court traced that distinction to the case of Banke Behari v Sundar Lal, and illustration (f) to section 74 of the contract act.
Referring to the Cavendish case, the Supreme Court recognised that between parties of comparable bargaining strength, unconscionability and penalties cannot be invoked merely because a tribunal or court considers other terms fairer or wiser. Such pleas require proof that one party could dominate the will of the other and use that position to obtain an unfair advantage.
BPL was legally advised, free to decline the facility and had not questioned the terms while enjoying the finance. Its objections surfaced only after default. Contra proferentem, the rule that an ambiguous term is read against the drafter, has no place in a negotiated commercial contract.
The court’s reasoning in the BPL case must be read in context of Kailash Nath Associates v Delhi Development Authority (2015), the leading law on liquidated damages: Where a contract names a sum payable on breach, only a genuine pre-estimate of loss is recoverable as reasonable compensation, with the sum named being the ceiling. Here, the clause named no such sum.
The court also recognised that bill discounting is short-term, unsecured finance, priced for the risk it carries and is not lending, falling outside the Usurious Loans Act, 1918.
Morgan’s business model depended on redeploying principal and interest quickly, and a default that stalls that cycle causes loss, making compounding compensatory rather than punitive.
Draft contracts with stipulations on coercion
Practically, it is good practice to ensure commercial contracts contain stipulations that parties have been legally advised and have entered into contracts freely, without coercion or undue influence. Such recitals make later challenges harder to sustain. It is also good practice to set out the commercial rationale for higher sums.
Equally, where a party is subjected to coercion or inequality of bargaining power, they must build a record because without hard evidence neither courts nor tribunals will disturb the bargain.