In BPL Limited v Morgan Securities and Credits Private Limited (2025), the Supreme Court upheld an arbitral award that applied the interest rate parties had contractually agreed upon. BPL challenged the award arguing the rate was penal and unconscionable. The Court rejected this, reaffirming that courts and arbitral tribunals cannot substitute their judgment for the freely negotiated terms of a commercial contract between sophisticated parties, absent fraud, coercion, or statutory prohibition.

This judgment restates a foundational principle of Indian contract law: freedom of contract. Under Section 10 of the Indian Contract Act, 1872, agreements freely entered into between competent parties are valid. Section 74 deals with liquidated damages and penalty clauses, but the Supreme Court has consistently held — since Fateh Chand v Balkishan Das (1963) — that courts may grant reasonable compensation, not exceeding the stipulated amount, but cannot increase or wholly rewrite agreed terms.

The BPL case extends this logic to interest rate clauses. Where parties of equal bargaining power agree to a specific rate of interest, a court or arbitrator cannot simply replace it with what they consider 'reasonable.' This is especially significant under the Arbitration and Conciliation Act, 1996: an arbitral award can be set aside under Section 34 only on narrow grounds — patent illegality, public policy violation, or fraud. Disagreement with the commercial logic of a contract does not qualify.

The doctrine being tested here is contractual sanctity versus judicial repricing. The examiner frequently frames this as: can a court reduce an agreed interest rate citing 'equity'? The answer under Indian law is no — equity cannot override a freely negotiated commercial term between sophisticated parties. This distinguishes consumer contracts (where unconscionability may apply) from commercial contracts (where it generally does not).