Supreme Court Of India Reaffirms Party Autonomy And The "Legitimate Interest" Test In Commercial Arbitrations

• Published date: 08 January 2026
• Law Firm: JSA
• Author: Harshavardhan Abburi and Phanindranath Chowdary Ponnegant

The Hon'ble Supreme Court of India ('Supreme Court'), in the matter of BPL Limited v. Morgan Securities and Credits Private Limited¹, has delivered a landmark judgment reinforcing the sanctity of commercial contracts and the doctrine of party autonomy. The Supreme Court held that in transactions between sophisticated commercial entities, a high rate of interest (36% p.a. with monthly rests) triggered by a default cannot be characterised as unconscionable or penal, provided it serves a legitimate business interest of the lender.

Brief Facts

BPL Limited ('Appellant') and its subsidiary entered into a bill discounting facility with Morgan Securities and Credits Private Limited ('Respondent'). The facility was governed by sanction letters issued in 2002 and 2003, which stipulated a concessional interest rate of 22.5% p.a., contingent upon timely repayment. Crucially, the agreement provided that in the event of default, the concession would be withdrawn, and a 'normal' rate of 36% p.a. with monthly rests would be applicable from the date of the default.

Following a default exceeding INR 25 crore (Indian Rupees twenty five crore), the Respondent initiated arbitral proceedings. The arbitral tribunal awarded the claims with interest at the agreed rate of 36% p.a. with monthly rests up to the date of the award. This award was subsequently upheld by the Delhi High Court. The Appellant challenged the rate before the Supreme Court, contending that the interest was 'penal', 'expropriatory', and 'opposed to public policy'.

Issues

The Supreme Court identified and adjudicated upon the following core legal questions arising for its consideration:

1. Whether a high rate of interest (36% p.a. with monthly rests) stipulated in a commercial contract between sophisticated parties is hit by the rule against 'penalties' under Section 74 of the Indian Contract Act, 1872?
2. Whether the arbitral tribunal's power to award interest under Section 31(7)(a) of the Arbitration and Conciliation Act 1996 is restricted by the express agreement of the parties, thereby making such agreement the 'bedrock' of the award?
3. Whether an arbitral award can be set aside as being 'opposed to the public policy of India' on the sole ground that the rate of interest awarded is allegedly high or unconscionable?
4. Whether the 'Legitimate Interest' test'evaluating if a detriment is out of all proportion to the innocent party's interest'is applicable to determine the validity of deterrent contractual clauses in the...