Courts Can Reduce Contractual Interest Rates to Prevent Unconscionable Gains: Delhi HC

The Delhi High Court affirmed that while contractual autonomy is a cornerstone of legal agreements, judicial discretion under Section 34 of the Code of Civil Procedure, 1908 permits courts to reduce interest rates if they are found to be extortionate or unconscionable. Justice Neena Bansal Krishna dismissed an appeal seeking to enhance interest from 8% per annum to 36% per annum, noting that pendente lite and future interest remain within the equitable discretion of the court.

In a single-judge bench ruling, Justice Neena Bansal Krishna deliberated on whether a trial court could rewrite a loan agreement to lower the interest rate from 3% per month to a nominal annual rate. The court concluded that such discretion must be exercised judiciously to ensure a balanced approach between party autonomy and the prevention of undue enrichment.

The Discretionary Power Under Section 34 CPC

The court emphasized that the power to award interest during the pendency of a suit is not bound strictly by the terms of a contract. Relying on Central Bank of India v. Ravindra & Ors. ( "MANU/SC/0663/2001": 2001 CaseBase(SC) 2408), the court noted that if a component of interest is disproportionate to the principal, the court may exercise its discretion to award lower interest fairly and judiciously. This principle was further supported by Tomorrowland Limited vs. Housing and Urban Development Corporation Limited and Ors. and Small Industries Development Bank of India v. M/s. Sibco Investment Private Limited, which highlight that interest remedies are steeped in equitable considerations.

The Court, in its reasoning, observed: "A bare reading of Section 34 CPC indicates that the power of Courts to award pendente lite and future interest in a Decree for payment of money, is a discretionary power, de hors the contract between the parties... the exercise of discretion by the learned District Judge in awarding pendente lite and future interest @ 8% p.a. cannot be said to be either arbitrary or contrary to Section 34 CPC, which vests the court with the discretion to award such interest as it deems reasonable."

Contractual Autonomy vs. Penal Interest

Addressing the appellant's argument that courts cannot rewrite contracts as per General Assurance Society Ltd. v. Chandumull Jain and Another. ( "AIR 1966 SC 1644": 1966 CaseBase(SC) 296), Rajasthan State Industrial Development & Investment Corporation v. Diamond & Gem Development Corporation Ltd. ( "(2013) 5 SCC 470": 2013 CaseBase(SC) 197), and Venkataraman Krishnamurthy and Another v. Lodha Crown Buildmart Pvt. Ltd., the High Court clarified the distinction between interpreting contract terms and awarding statutory interest. The court referred to BPL Limited vs. Morgan Securities and Credits Private Ltd. and Dunlop Pneumatic Tyre Co. Ltd. vs. New Garage and Motor Co. Ltd. to explain that stipulations in the nature of a penalty are unenforceable. Under Section 79 of the Negotiable Instruments Act, 1881, while pre-suit interest is generally governed by contract, the court retains the power to cut down the rate if it is found to be penal or exorbitant, as held in Bishan Das vs. Gurdasmal.

Inconsistency in Claim and Final Ruling

The court pointed out an inherent contradiction in the appellant's plea, where the loan was described as a "friendly loan" but the interest claimed was a commercial rate of 36% per annum. Given the 13-year litigation history and the fact that the decretal amount already included pre-suit interest, the court found no reason to interfere with the trial court's decision.

Background:

The appellant, M/S Sethi Leasing and Finance Co., had filed a suit under Order XXXVII of the Code of Civil Procedure, 1908 for the recovery of Rs. 5 Lakhs. They claimed that the loan was given for 24 months with a contractual interest rate of 3% per month (36% per annum). While the District Judge decreed the suit in favor of the appellant for Rs. 5.60 Lakhs, the interest rate was reduced to 8% per annum on the grounds that the original rate was "unconscionable and extortionate." The appellant challenged this reduction, citing precedents like Shree Ambica Medical Stores v. Surat People's Cooperative Bank Ltd. and GMR Warora Energy Ltd. v. Central Electricity Regulatory Commission ( "(2023) 10 SCC 401": 2023 CaseBase(SC) 564) to argue that the court must adhere to the words expressed in the contract. However, the High Court upheld the lower court's discretion, citing Ram Singh Narain Singh vs. Dewan Cand Nand Kishore, Laxmi Chand Gangaram vs. Brijbhushandas, K. Ramaswamy, Gomathi Bhawan vs. SBI, Madurai City Branch, State of A.P. vs. G. Damodar Naidu, Fateh Chand vs. Balkishan Dass ( "1963 SCC OnLine SC 49": 1963 CaseBase(SC) 9), Maula Bux vs. Union of India ( "(1969) 2 SCC 554": 1969 CaseBase(SC) 356), and Kailash Nath Associates vs. DDA ( "(2015) 4 SCC 136": 2015 CaseBase(SC) 937) to support the application of judicial fairness in interest awards.

Case Details:
Case No.: RFA 484/2026, CM APPL. 31525/2026 & 31526/2026
Case Title: M/S SETHI LEASING AND FINANCE CO. THROUGH ITS PROPRIETOR SH. DES RAJ SETHI v. SHIV KUMAR PASRIJA & ANR.
Appearances:
For the Petitioner(s): Mr. Harish Katyal, Mr. Kamal Singh & Ms. Deepshikha Naagar, Advocates

Source: 2026 CaseBase(DEL) 339