Courts have authority to determine appropriate interest rate considering totality of facts and date from which it is payable

The Hon’nle Supreme Court of India in I.K. Merchants Pvt. Ltd. & Ors. – Appellants Versus The State of Rajasthan & Ors. – Respondents, Civil Appeal Nos. 4560-4563 of 2025 (Arising out of SLP (C) Nos. 11779 – 11782 of 2022) Decided On : 01-04-2025 has held that Courts have authority to determine appropriate interest rate :

(1) Interest  Rate– Courts have authority to determine appropriate interest rate,

considering totality of facts and circumstances in accordance with law – Rate of

interest should be determined in a manner that balances both fairness and financial

impact.

(2) Government Contract – Public Interest denotes a wider concept with its genus

rooted to welfare of public at large, with different species attributable to individual

and specific impact, depending upon concept and subject under consideration.

 

It has been held by the bench consisting of J.B. PARDIWALA, R. MAHADEVAN, JJ that :-

 

(A) Civil Procedure Code, 1908 – Section 34 – Rate of interest – Courts have authority to determine

appropriate interest rate, considering totality of facts and circumstances in accordance with law –

That apart, Courts have discretion to decide whether interest is payable from date of institution of

suit, a period prior to that, or from date of decree, depending on specific facts of each case – Court

has full discretion to determine interest rate based on fairness, commercial usage and equity – In

present case, there was no agreement between parties relating to grant of interest for delayed

payment – Even exchange of communications between parties remains silent on this aspect – In

absence of any agreement or contract, provisions of Section 34 of Code of Civil Procedure dealing

with ‘interest’ would come into play – If claim arises from a commercial transaction, courts may

allow interest at a higher rate based on agreements between parties – In peculiar facts and

circumstances, it is fit, just and appropriate to award simple interest at the rate of 6% per annum

from 8th July 1975, on enhanced valuation of shares till date of decree and interest at the rate of 9%

per annum from date of decree till date of realisation. (Paras 13, 13.1 and 14)

 

(B) Civil Procedure Code, 1908 – Section 34 – Power of Court to award interest – While discretion

to award interest, whether pendente lite or post-decree, is well recognized, its exercise must be guided

by equitable considerations – Rate and period of interest cannot be applied mechanically or at an

unreasonably high rate without any rationale – Though it is not possible to arrive at actual value of

improvement or inflation on fair consideration, if paid at relevant point of time, it is just and

necessary that rate of interest must be a reparation for appellant – Court must ensure that while

claimant is fairly compensated, award does not become punitive or unduly burdensome on

Judgment Debtor – Rate of interest should be determined in a manner that balances both fairness

and financial impact, taking into account “loss of use” principle and economic prudence, in specific

facts of each case. (Para 16)

(C) Government Contract – Public Interest – Term “Public Interest” denotes a wider concept with

its genus rooted to welfare of public at large, with different species attributable to individual and

specific impact, depending upon concept and subject under consideration – It deals with impact of a

policy decision on society – Generally, public interest is anathema to commercial transactions –

However, by exception, when terms are oppressive or one-sided, they are to be termed as

unconscionable, arbitrary and by application of externalities, public interest will have to lean

towards individual who has been wronged, as such contracts are deemed to take away fairness,

affecting free consent required to culminate into a valid contract – Constitutional Courts, under

such circumstances will be armed with Article 14 to strike down such contracts or to pass

appropriate decrees or orders. (Para 12)

Facts of the case:

Genesis of case arises from a five-decade long litigation concerning valuation of shares of

Respondent No. 2 which were sold by appellants to Respondent No.1. Only issue remains to be

considered by Court in present round of litigation is the rate of interest on enhanced valuation of

shares as determined by High Court and affirmed by this court.

Findings of Court:

Interest shall be paid along with amount due towards enhanced value of shares, after adjusting

amount already paid, to appellants, within a period of two months.

Result : Appeal allowed.

Cases Referred:

Union of India v. Tata Chemicals Ltd, , (2014) 6 SCC 335 [Para 5] – Referred. – Referred

Fertilizer Corporation of India Ltd and others v. Coromandal Sacks Private Ltd, , (2024) 8 SCC 172

[Para 5] – Referred. – Referred

Bernard Francis Joseph Vaz and others v. Government of Karnataka and others, , Civil Appeal

No.17 of 2025 in SLP(C) No.10338 of 2023 [Para 5] – Referred. – Referred

Alok Shanker Pandey v. Union of India, , (2007) 3 SCC 545 [Para 5.5] – Referred. – Referred

Manalal Prabhudayal v. Oriental Insurance Co. Ltd., , (2009) 17 SCC 296 [Para 6.4] – Referred. –

Referred

Central Inland Water Transport Corporation Limited and another v. Brojo Nath Ganguly and

another, , (1986) 3 SCC 156 : MANU/SC/0439/1986 [Para 12] – Relied – Referred

Clariant International Limited and another v. Securities & Exchange Board of India, , 2004 (8) SCC

524 [Para 14] – Relied – Referred

Thazhathe Thazhathe Purayil Sarabi v. Union of India, , (2009) 7 SCC 372 [Para 14] – Relied –

Referred

Rampur Fertiliser Limited v. Vigyan Chemicals Industries, , (2009) 12 SCC 324 [Para 14] – Relied –

Referred

M/s. Tomorrowland Limited v. Housing and Urban Development Corporation Limited and

another, , 2025 LiveLaw (SC) 205 [Para 14] – Relied – Referred

Advocates Appeared:

For the Petitioner(s) : Mr. Ranjit Kumar , Sr. Adv. Mr. Gautam Narayan , Sr. Adv. Mr. Ashok

Kumar Jain , Adv. Mr. Pankaj Jain , Adv. Mrs. Meenakshi Jain , Adv. Mr. Bijoy Kumar Jain ,

AOR.

For the Respondent(s) : Mr. Shiv Mangal Sharma , A.A.G. Mr. Milind Kumar , AOR Mr. Dr.

Manish Singhvi , Sr. Adv. Mr. Deepak Goel , AOR Mr. Apurv Singhvi , Adv. Ms. Shalini Haldar ,

Adv.

JUDGMENT :

1. MAHADEVAN, J.

Leave granted.

2. These appeals are filed against the judgments and orders dated 26.04.2022 and 02.05.2022 both

passed by the Division Bench of Calcutta High Court,1[Hereinafter referred to as “the High Court”]

in G.A.No.6 of 2020 and A.P.D.No.63 of 2013 in C.S.No.467 of 1978. Vide order dated 26.04.2022,

the High Court, while upholding and reaffirming the valuation of shares done by M/s. Ray & Ray at

Rs.640/- per share, granted simple interest at 6% per annum on the enhanced valuation of shares,

however, rejected the prayer of the appellants for enhancement of interest rates, costs and damages,

and accordingly, disposed of the said cases. Subsequently, vide order dated 02.05.2022, the High

Court corrected the rate of interest from 6% to 5% per annum. Both the orders are assailed in these

appeals, at the instance of the appellants herein.

3. On 25.07.2022, when the appeals were taken up for consideration by this Court, the learned

counsel for the appellants confined the prayer made herein to the grant of an appropriate rate of

interest, which was also recorded in the proceedings. In view of the same, we proceed to deal with

these appeals only to the limited extent of grant of rate of interest for the difference in valuation of

shares of Respondent No.2 viz., Rajasthan State Mines and Mineral Ltd., formerly known as

Bikaner Gypsums Ltd.,2[For short, “the Company”], which shares were sold by the appellants to

Respondent No.1 viz., State of Rajasthan, in 1973.

4. The relevant facts giving rise to the controversy involved herein are as follows:

4.1. Originally, the appellants preferred a suit being C.S.No.467 of 1978 before the High Court of

Calcutta, and the same was subsequently amended, praying for a decree for Rs.4,34,21,553.00

against the Respondent No.1; in the alternative a decree for reasonable price of the shares of the

appellants, after determination of such price by the High Court; in the further alternative,

cancellation of the transfer of shares belonging to the appellants to the Respondent No.1 and

restitution of the original status and retransfer of those shares to the appellants on such terms to be

determined by the High Court, and also interest and costs. On 14.08.2012, the learned Single Judge

of the High Court, while rejecting the valuation reports produced by the parties, passed a

preliminary decree, the operative portion of which reads as follows:

“There shall be a preliminary decree directing the defendants in particular the first defendant

to appoint anyone of the following firms of Chartered Accountants, namely Price Water

House, Ray & Ray, Lodha and Company of its choice as the valuer for the purpose of

conducting an enquiry for ascertaining the fair and proper value of the said shares of the

plaintiffs at the time when such shares were transferred to the first defendant by the plaintiffs

and upon conclusion of such enquiry the plaintiffs shall be entitled to apply in this suit for

obtaining a final decree for the amount, if found, due upon such enquiry.

However, the remuneration of the valuer shall be borne entirely by the defendants or rather the

first defendant herein and the first defendant shall pay the remuneration of the valuer as and

when such remuneration is payable or rather is agreed to be paid by the first defendant and

accepted by the valuer. The plaintiffs shall be entitled to all the costs, charges and expenses of

the enquiry proceedings before the valuer, certified for two counsel. Let the report of the

valuer be made and published within a period of four months from the date of commencement

of the enquiry.

There will also be a decree for costs of the suit assessed at Rs.1,50,000/- and the plaintiffs will

be entitled to the costs over and above the court fees that the plaintiffs had to pay at the time

of institution of the suit.

Needless to mention that the plaintiffs will also be entitled to interests on the final decree to be

passed on the valuation to be made by the valuer appointed by the preliminary decree, if such

valuation, however, goes in favour of the plaintiffs.”

4.2. Aggrieved by the aforesaid preliminary decree, the respondents herein preferred A.P.D.No.63 of

2013, in which, the appellants filed their Cross Objection. During the pendency of the appeal, the

High Court, vide order dated 20.08.2019, noted that the dispute essentially was with regard to the

valuation of shares, and in order to arrive at a settlement, appointed M/s. Ray & Ray Co. as valuer

for the purpose of conducting an enquiry and ascertaining the proper value of the shares of the

appellants as on the date, when such shares were transferred to the State Government. It was further

directed that such valuation would be uninfluenced by previous valuation reports. Accordingly, the

valuer M/s. Ray & Ray valued the shares at Rs.640/- per share and filed its report. However, the

respondents refused to accept the said valuation. As a result of the same, the High Court proceeded

to hear the matter on merits and passed a final judgment and order on 28.04.2021. The operative

portion of the same reads as under:

“In those circumstances, this appeal and cross-objection are disposed of by declaring that the

respondents/plaintiffs are entitled to Rs.640/- per share sold by them to the appellant and

directing that each of the respondents/plaintiffs be paid by the appellant no.1 Rs.640/- per

share of Bikaner Gypsums Ltd. (subsequently Rajasthan State Mines and Minerals Ltd.) sold

by him to the appellant no.1 as valued by M/s. Ray and Ray less Rs.11.50/- per share already

received by him/her within eight weeks of communication of this order. Considering the

appellant is the government of Rajasthan, the respondents/plaintiffs shall only be entitled to

interest at the rate of 5% simple interest per annum without yearly rests on the said amount

from 8th July, 1975 till the date of payment.

The impugned preliminary judgment and decree dated 14th August, 2012 is modified to the

above extent. In the facts and circumstances, the modified preliminary judgment and decree

shall be treated as the final decree. The suit is decreed accordingly.

The application (GA 6 of 2020) is also disposed of by this order.”

4.3. Being dissatisfied with the aforesaid judgment and order dated 28.04.2021, both Respondent

Nos.1 & 2 filed two separate appeals viz., CA.Nos.6145 and 6144 of 2021 [SLP (Civil)

Nos.13905/2021 and 13606/2021] respectively, and the appellants filed C.A.No.6146 of 2021 [SLP

(Civil) No.14330/2021]. By a common order dated 01.10.2021, this Court allowed all the appeals by

setting aside the order dated 28.04.2021 and remanding the matter to the High Court to deal with

the objections and cross objections on the issue of valuation alone, as per the report of M/s. Ray &

Ray and to take a view on the same. Pursuant to the clarification application viz., M.A.No.1840 of

2021 in C.A. No.6146 of 2021 filed by the appellants, this Court vide order dated 26.11.2021 inter

alia observed as follows:

“…. On hearing learned counsel for parties, we are not inclined to open a pandora’s box once

again and are clear that we have remitted on the issue of the valuation report. However, the

consequences of the same would be that the applicant(s) before us would naturally have a right

to agitate the issue of interest and costs which is a sequitur arising from the delay in the

finalization of the amount payable to the respondent(s).”

4.4. In light of the aforesaid orders, the matter was reheard by the High Court and the impugned

judgment and order came to be passed on 26.04.2022, the operative portion of which, reads as

under:

“I am of the view that the valuer has given a very reasonable opinion.

I uphold and reaffirm the valuation.

With regard to the claim of the respondents for interest, because of the long pendency on the

matter, the interest burden on the Government of Rajasthan is for a period of about 50 years

on the above valuation. Taking this length of time and the total interest burden on the

appellant No.1, in my view, 6% per annum simple interest on the enhanced valuation of the

shares will more than adequately compensate the respondents. We reject the prayer for

enhancement of the interest rate.

The appeal is disposed of accordingly.

The judgment and decree of this Court dated 28th April 2021 is reaffirmed.”

Subsequently, the interest portion was corrected from 6% to 5% per annum, by order dated

02.05.2022.

4.5. With the above background, the appellants have come up with these appeals before us.

5. According to the learned counsel for the appellants, payment of interest owing to the delay in

remittance of the fair value of the shares to the appellants is a right recognized in law. Further, the

principle underlying the award of interest on the monies entitled to be recovered by a party is simply

compensation for the time value of money i.e., compensation for interdicting the investment of that

sum at the time when it was due to be paid. In support of the same, the learned counsel relied on the

following decisions of this court:

(i) Union of India v. Tata Chemicals Ltd, (2014) 6 SCC 335, wherein it was held that the

obligation to refund money received and retained without right implies and carried with it the

right to interest.

(ii) Fertilizer Corporation of India Ltd and others v. Coromandal Sacks Private Ltd, (2024) 8

SCC 172, in which, it was held that ‘neither a penalty nor a punishment but the normal

accretion on capital, due to the wilful withholding of the payment towards the claim, resulting

in continuous injury until such payment is made or in other words, until the claim is realized’;

and

(iii) Civil Appeal No.17 of 2025 in SLP(C) No.10338 of 2023 titled as ‘Bernard Francis Joseph

Vaz and others v. Government of Karnataka and others’, it was observed as follows:

“…it cannot be gainsaid that the appellants have been deprived of their legitimate dues for

almost 22 years ago. It can also not be controverted that money is what money buys. The value

of money is based on the idea that money can be invested to earn a return, and that the

purchasing power of money decreases over time due to inflation. What the appellants herein

could have bought with the compensation in 2003 cannot do in 2025. It is, therefore, of utmost

importance that the determination of the award and disbursal of compensation in case of

acquisition of land should be made with promptitude”.

5.1. It is further submitted that the appellants were deprived of the fair value of their shares, which

were compulsorily acquired by the State Government for a period of more than 50 years due to the

faulty valuation commissioned by it. Therefore, payment of interest on the valuation which has been

upheld till this Court, follows as a matter of course.

5.2. The learned counsel also submitted that Section 34(1) of the Civil Procedure Code explicitly

provides that a rate higher than 6% can be granted in case of a money decree arising out of

commercial transactions. Explanation I to section 34(1) defines a “commercial transaction” as one

Page No. 5 of 19

connected with industry, trade or business of the party incurring the liability. In the present case, the

liability has arisen on account of compulsory acquisition by the state Government of the shares of

the appellants in Bikaner Gypsums, which was renamed as Respondent No.2 and has consistently

earned revenues for the State Government being a profit-making company between 1974 till 2020.

However, without any justification, the High Court awarded only simple interest at the rate of 5%

per annum, which will not compensate the appellants for the time value of the cost of shares, and is

hence, whimsical and arbitrary.

5.3. It is further submitted that despite giving assurance to the appellants that they will be allowed to

make a representation before the valuer by letters dated 27.04.1973 and 06.08.1973, the Respondent

No.1 rescinded on this assurance vide letter dated 03.07.1974 and that, a copy of the valuation

report dated 28.08.1974 was not supplied to the appellants and their objections thereto were not

invited. Though appellant no.1 requested to return the shares if a fair valuation was not possible

vide letter dated 10.04.1975, the respondents neither conducted a fair valuation nor returned the

shares. Further, the respondents failed to comply with the order dated 20.08.2019 of this Court, as a

result of which, the time granted by this court for submission of the report had to be extended on

two occasions. Even after dismissal of the appeals of the respondents by this Court, the appellants

have not been paid the principal sum, till date. Thus, the respondents have not only breached the

contract, but also caused delay at every stage of proceedings in making payment of sums legally due

to the appellants.

5.4. It is also submitted that had the money payable by the Respondent No. 1 been invested in any

other shares, gold, fixed deposit or land in the year 1973, the said money would have been enhanced

manifold. Since 1973-74 till 2020, the Respondent No. 2, which is a profit-making company, earned

several thousand rupees as gross profit and hence, they are not entitled to any sympathy on the

ground of being State. Thus, according to the learned counsel, there is no justification for award of a

rate of interest lower than commercial rates for the fair value of the share of the appellants.

5.5. Referring to the decision of this court in Alok Shanker Pandey v. Union of India,( 2007) 3 SCC

545, it is submitted that during the relevant point of time, the rate of interest was 15% and hence,

the appellants are entitled to receive interest at least @ 15%.

5.6. Thus, the learned counsel submitted that the appellants are entitled to receive the principal of

Rs.3,46,79,373/- with interest @ 15% on monthly rest basis; and interest @ 15% on monthly rest

basis on the aforesaid amount till the date of realization of the claim. In case, the respondents fail to

pay the principal amount and interest @ 15% on monthly rest basis, the Respondent No.1 may be

directed to pay a further interest at the rate of 15% as penal interest over and above the amounts to

be paid in terms of the above till the payment is made.

6. On the other hand, the learned counsel for the Respondent No. 1 / State of Rajasthan, submitted

that the facts would clearly indicate that the amount was neither in debt nor for any damages, which

normally entails interest. Due to gross mismanagement, the Respondent No. 2 (company) was going

down, and it ultimately got merged with the State Government. The shareholders, who were

responsible for the mismanagement of the Company, are now going to get a very handsome amount

in terms of the valuation on 31.03.1973 at a huge sum of Rs.640/- per share for a subscribed share

price of Rs.10/- per share against the original claim of Rs.70.50 per share.

6.1. Adding further, it is submitted that in the suit, the appellants initially claimed only for Rs.70.50

per share, in 1978. Subsequently, they sought amendment with regard to enhancement of valuation

of share, which was ordered in 2001, i.e., 23 years later. Thus, the exorbitant interest sought in 2001

cannot be said to be computed from the year 1973. It is also submitted that the appellants /

shareholders, who did not subscribe at Rs.10/- per share for fresh infusion of capital, have now got

the valuation of Rs.640/- per share, on the same date and therefore, they have not been prejudiced in

any manner.

6.2. Denying the allegation that the shares of the appellants had been compulsorily acquired by the

State Government, the learned counsel submitted that the events as unfolded during 1969 to 1973

would amply demonstrate that it is owing to mismanagement of the Company that the State had to

intervene and infuse further capital in the Company. The State had infused sufficient funds, but still

the company could not be revived or sustained by the then management. It is in this context that the

shares were acquired by the State. Therefore, it is not a case of compulsory acquisition of shares, but

a case of infusion of capital, and getting equity in return just to keep the company afloat; and the

rate of interest has to be determined in the said background only.

6.3. It is submitted that the second part of Section 34 states that the interest from the date of decree

till the date of payment cannot exceed 6%. The Explanation states that the rate of interest may

exceed 6% p.a. if it is a ‘Commercial transaction’. According to the learned counsel, the State was

not engaged in any industry, trade or business and there was complete absence of motive of profit in

the action taken by them. In fact, it was incurring losses, and the investment made to keep the lossmaking

Company unit afloat cannot be termed as a ‘Commercial transaction’. Therefore, the

interest rate should not exceed @ 5% as determined by the High Court.

6.4. Referring to the decision of this Court in Manalal Prabhudayal v. Oriental Insurance Co. Ltd.,

(2009) 17 SCC 296,

unless the same is arbitrary and capricious. Hence,

the High Court correctly exercised its jurisdiction to award simple interest at 5% per annum, which

does not suffer from any infirmity.

6.5. It is also submitted that the High Court has reaffirmed the judgment and decree dated

28.04.2021 which was set aside by this court by order dated 01.10.2021, without any modification

and the same does not have any legal sanctity. Thus, the High Court has not passed any specific

order with regard to the interest from the date of the institution of the suit till the date of decree, and

from the date of decree till the date of the payment. It has merely stated that 5% p.a. shall be

calculated. Therefore, the order of the High Court relating to rate of interest is reasonable and the

same need not be interfered with by this court.

7. In addition to the above submissions made on the side of the Respondent No.1, the learned

counsel for the Respondent No.2 / Rajasthan State Mines and Minerals Ltd., submitted that the

transfer of shares to the State by the company in the year 1973 was for the reason as the company

was facing financial difficulties to run its business and further, the shareholders were not possessing

faith in the company and therefore, the company decided to bring the public issue at Rs.10/- per

equity share, but the appellants were not ready to purchase the shares even at such rate. Thereafter,

the litigation to decide the fair price of the share was initiated by the appellants in 1978 by

demanding a sum of Rs.70.50 per equity share, but later, on the basis of valuation by a private

valuer M/s. Naresh Lakhotia & Company, amended their plaint and claimed Rs.874/- per share. It is

worth mentioning that the valuer M/s.Naresh Lakhotia & company and M/s.Ray and Ray are not

the valuer appointed by the ICAI. Thus, the appellants are only entitled to the fair price of the share

as on April 1973 and not the interest thereon.

7.1. It is further submitted that there was no contract in respect of payment of interest between the

parties. In such circumstances, section 34 of the Civil Procedure Code would govern the field, which

does not provide for any compound interest of any kind. That apart, Section 34 clearly mandates

interest @6% per annum for the principal sum adjudged (both during pendency and till date of

payment). Therefore, the question of compound interest does not arise.

7.2. It is ultimately submitted that the appellants have already got the price of their share at Rs.11.50

per equity share and they are only entitled for the difference of amount as upheld by this Court and

therefore, the appellants are not entitled to higher rate of interest than 5% awarded by the High

Court.

8. As a riposte, the learned counsel for the appellants submitted that the Respondent No. 1 has

attempted to make out a new case for the first time through their reply, alleging that there was

mismanagement by the shareholders of the Respondent No. 2; that, the appellants after a period of

23 years, claimed an exorbitant sum towards value of shares, Respondent No. 2 was a loss-making

company, etc.

8.1. The learned counsel further submitted that the respondents never challenged the order dated

15.09.2001 granting leave to the appellants to amend their plaint in CS No.467 of 1978, but sought

to urge that the proceedings were delayed due to amendment. That apart, the contention that the

Respondent No. 2 was a loss making one, is utterly false and contrary to the record; and the

appellants have placed on record the profit made by Respondent No.2 between 1974 till 2000, which

comes to Rs.40,165,790,819. It is also an incorrect statement that the Government infused lots of

fund during management of the company by the shareholders including the appellants. According to

the appellants, other than giving one or two bank guarantees, the Respondent No.1 had never

funded the company. Thus, according to the learned counsel, such new allegations are not

maintainable. All the issues between the parties had attained finality except the issue of interest

payable to the appellants, which has been raised in the present appeals.

8.2. It is also submitted that the High Court vide order dated 28.04.2021 specifically directed that

interest will be paid from 08.07.1975 till the date of payment. Therefore, the learned counsel prayed

this court to allow these appeals and grant appropriate rate of interest to the appellants.

9. We have considered the submissions made by the learned counsel appearing for the parties and

perused the records carefully and meticulously.

10. The genesis of the case arises from a five-decade long litigation concerning the valuation of

shares of Respondent No. 2 which were sold by the appellants to Respondent No.1. The issue

relating to valuation of shares has become final in view of dismissal of SLP (C) Diary Nos.

27115/2022 and 24887/2022 filed by Respondent Nos. 1 and 2 respectively, vide orders dated

05.12.2022 and 12.12.2022 passed by this court.

11. As already stated, the only issue remains to be considered by us in the present round of litigation

is the rate of interest on the enhanced valuation of shares as determined by the High Court and

affirmed by this court.

12. Taking note of the interest burden on the State for 50 years on the valuation of shares, the High

Court had granted simple interest @ 5% per annum, by judgments and orders dated 26.04.2022 and

02.05.2022 which are impugned herein. According to the appellants, the transactions viz., transfer of

shares were commercial in nature. Whereas, the respondents stated that they were not engaged in

any industry, trade or business for profit purposes and the investment made was only to keep the

loss-making Company unit afloat, and hence, the transactions cannot be treated as commercial

transactions. Here, it cannot be disputed that there has been a transaction of trade, viz. sale and

purchase of goods, which clearly implies a commercial transaction between the parties. The term

“Public Interest” denotes a wider concept with its genus rooted to the welfare of the public at large,

with different species attributable to individual and specific impact, depending upon the concept and

the subject under consideration. It deals with the impact of a policy decision on the society.

Generally, public interest is anathema to commercial transactions. However, by exception, when the

terms are oppressive or one-sided, they are to be termed as unconscionable, arbitrary and by

application of externalities, public interest will have to lean towards the individual who has been

wronged, as such contracts are deemed to take away the fairness, affecting the free consent required

to culminate into a valid contract. The constitutional courts, under such circumstances will be armed

with Article 14 to strike down such contracts or to pass appropriate decrees or orders. It will be

useful to refer to the judgment of this court in Central Inland Water Transport Corporation Limited

and another v. Brojo Nath Ganguly and another, (1986) 3 SCC 156 : MANU/SC/0439/1986,

wherein, it was held as follows:

“82. The position under the American Law is stated in “Reinstatement of the Law- Second” as

adopted and promulgated by the American Law Institute, Volume II xx which deals with the

law of contracts, in Section 208 at page 107, as follows:

“Section 208. Unconscionable Contract or Term

If a contract or term thereof is unconscionable at the time the contract is made a court may

refuse to enforce the contract, or may enforce the remainder of the contract without the

unconscionable term, or may so limit the application of any unconscionable term as to avoid

any unconscionable result.”

In the Comments given under that section it is stated at page 107:

“Like the obligation of good faith and fair dealing (S 205), the policy against unconscionable

contracts or terms applies to a wide variety of types of conduct. The determination that a

contract or term is or is not unconscionable is made in the light of its setting, purpose and

effect. Relevant factors include weaknesses in the contracting process like those involved in

more specific rules as to contractual capacity, fraud and other invalidating causes; the policy

also overlaps with rules which render particular bargains or terms unenforceable on grounds of

public policy. Policing against unconscionable contracts or terms has sometimes been

accomplished by adverse construction of language, by manipulation of the rules of offer and

acceptance or by determinations that the clause is contrary to public policy or to the dominant

purpose of the contract’. Uniform Commercial Code $ 2-302 Comment 1…. A bargain is not

unconscionable merely because the parties to it are unequal in bargaining position, nor even

because the inequality results in an allocation of risks to the weaker party. But gross inequality

of bargaining power, together with terms unreasonably favourable to the stronger party, may

confirm indications that the transaction involved elements of deception or compulsion, or may

show that the weaker party had no meaningful choice, no real alternative, or did not in fact

assent or appear to assent to the unfair terms.”

There is a statute in the United States called the Universal Commercial Code which is

applicable to contracts relating to sales of goods. Though this statute is inapplicable to

contracts not involving sales of goods, it has proved very influential in, what are called in the

United States, “non-sales” cases. It has many times been used either by analogy or because it

was felt to embody a general accepted social attitude of fairness going beyond its statutory

application to sales of goods. In the Reporter’s Note to the said Section 208, it is stated at page

112:

“It is to be emphasized that a contract of adhesion is not unconscionable per se, and that all

unconscionable contracts are not contracts of adhesion. Nonetheless, the more standardized

the agreement and the less a party may bargain meaningfully, the more susceptible the

contract or a term will be to a claim of unconscionability.”

The position has been thus summed up by John R. Pedan in “The Law of Unjust Contracts”

published by Butterworths in 1982, at pages 28-29:

“…Unconscionability represents the end of a cycle commencing with the Aristotelian concept

of justice and the Roman law iaesio enormis, which in turn formed the basis for the medieval

church’s concept of a just price and condemnation of usury. These philosophies permeated the

exercise, during the seventeenth and eighteenth centuries, of the Chancery court’s discretionary

powers under which it upset all kinds of unfair transactions. Subsequently the movement

towards economic individualism in the nineteenth century hardened the exercise of these

powers by emphasizing the freedom of the parties to make their own contract. While the

principle of pacta sunt servanda held dominance, the consensual theory still recognized

exceptions where one party was overborne by a fiduciary, or entered a contract under duress or

as the result of fraud. However, these exceptions were limited and had to be strictly proved. It

is suggested that the judicial and legislative trend during the last 30 years in both civil and

common law jurisdictions has almost brought the wheel full circle. Both courts and

parliaments have provided greater protection for weaker parties from harsh contracts. In

several jurisdictions this included a general power to grant relief from unconscionable

contracts, thereby providing a launching point from which the courts have the opportunity to

develop a modern doctrine of unconscionability. American decisions on Article 2. 302 of the

UCC have already gone some distance into this new arena. The expression “laesio enormous

used in the above passage refers to “laesio ultra dimidium vel enormous which in Roman law

meant the injury sustained by one of the parties to an onerous contract when he had been

overreached by the other to the extent of more than one-half of the value of the subject-matter,

as for example, when a vendor had not received half the value of property sold, or the

purchaser had paid more then double value. The maxim “pacta sunt servanda” referred to in

the above passage means “contracts are to be kept”.

83. It would appear from certain recent English cases that the courts in that country have also

begun to recognize the possibility of an unconscionable bargain which could be brought about

by economic duress even between parties who may not in economic terms be situate differently

(see, for instance, Occidental Worldwide Investment Corpn. v. Skibs A/S Avanti 1976 (1) L

Rep. 293, North Ocean Shipping Co. Ltd. v. Hyundai Construction Co. Ltd. 1979 Q.B. 705,

Pao On v. Lau Yin Long 1980 A.C. 614 and Universe Tankships of Monrovia v. International

Transport Workers Federation 1981 (1) C.R. 129, reversed in 1981 (2) W.L.R. 803and the

commentary on these cases in Chitty on Contracts, Twenty- fifth Edition, Volume I, paragraph

486).

84. Another jurisprudential concept of comparatively modern origin which has affected the law

of contracts is the theory of “distributive justice”. According to this doctrine, distributive

fairness and justice in the possession of wealth and property can be achieved not only by

taxation but also by regulatory control of private and contractual transactions even though

this might involve some sacrifice of individual liberty. In Lingappa Pochanna Appelwar v.

State of Maharashtra and Anr. MANU/SC/0236/1984 : [1985]2 SCR 224 this Court, while

upholding the constitutionality of the Maharashtra Restoration of Lands to Scheduled Tribes

Act, 1974, said (at page 493):

“The present legislation is a typical illustration of the concept of distributive justice, as modern

jurisprudence know it. Legislators, Judges and administrators are now familiar with the

concept of distributive justice. Our Constitution permits and even directs the State to

administer what may be termed ‘distributive justice’. The concept of distributive justice in the

sphere of law-making connotes, inter alia, the removal of economic inequalities and rectifying

the injustice resulting from dealings or transactions between unequals in society. Law should

be used as an instrument of distributive justice to achieve a fair division of wealth among the

members of society based upon the principle: ‘From each according to his capacity, to each

according to his needs’. Distributive justice comprehends more than achieving lessening of

inequalities by differential taxation, giving debt relief or distribution of property owned by one

to many who have none by imposing ceiling on holdings, both agricultural and urban, or by

direct regulation of contractual transactions by forbidding certain transactions and, perhaps,

by requiring others. It also means that those who have been deprived of their properties by

unconscionable bargains should be restored their property. All such laws may take the form of

forced redistribution of wealth as a means of achieving a fair division of material resources

among the members of society or there may be legislative control of unfair agreements.”

85. When our Constitution states that it is being enacted in order to give to all the citizens of

India “JUSTICE, social, economic and political”, when Clause (1) of Article 38 of the

Constitution directs the State to strive to promote the welfare of the people by securing and

protecting as effectively as it may a social order in which social, economic and political justice

shall inform all the institutions of the national life, when Clause (2) of Article 38 directs the

State, in particular, to minimize the inequalities in income, not only amongst individuals but

also amongst groups of people residing in different areas or engaged in different vocations, and

when Article 39 directs the State that it shall, in particular, direct its policy towards securing

that the citizens, men and women equally, have the right to an adequate means of livelihood

and that the operation of the economic system does not result in the concentration of wealth

and means of production to the common detriment and that there should be equal pay for

equal work for both men and women, it is the doctrine of distributive justice which is speaking

through these words of the Constitution.

86. Yet another theory which has made its emergence in recent years in the sphere of the law of

contracts is the test of reasonableness or fairness of a clause in a contract where there is

inequality of bargaining power. Lord Denning, M.R., appears to have been the propounder,

and perhaps the originator – at least in England, of this theory. In Gillespie Brothers & Co.

Ltd. v. Roy Bowles Transport Ltd. 1973 (1) Q.B. 400 where the question was whether an

indemnity clause in a contract, on its true construction, relieved the indemnifier from liability

arising to the indemnified from his own negligence, Lord Denning said (at pages 415-6):

“The time may come when this process of ‘construing’ the contract can be pursued no further.

The words are too clear to permit of it. Are the courts then powerless? Are they to permit the

party to enforce his unreasonable clause, even when it is so unreasonable, or applied so

unreasonably, as to be unconscionable? When it gets to this point, I would say, as I said many

years ago:

there is the vigilance of the common law which, while allowing freedom of contract, watches to

see that it is not abused’: John lee & Son (Grantham) Ltd. v. Railway Executive 1949 (2) All.

E.R. 581, 584. It will not allow a party to exempt himself from his liability at common law

when it would be quite unconscionable for him to do so.”

In the above case the Court of Appeal negatived the defence of the indemnifier that the

indemnity clause did not cover the negligence of the indemnified. It was in Lloyds Bank Ltd. v.

Bundy 1974 (3) All E.R. 757 that Lord Denning first clearly enunciated his theory of

“inequality of bargaining power”. He began his discussion on this part of the case by stating (at

page 763):

“There are cases in our books in which the courts will set aside a contract, or a transfer of

property, when the parties have not met on equal terms, when the one is so strong in

bargaining power and the other so weak that, as a matter of common fairness, it is not right

that the strong should be allowed to push the weak to the wall. Hitherto those exceptional

cases have been treated each as a separate category in itself. But I think the time has come

when we should seek to find a principle to unite them. I put on one side contracts or

transactions which are voidable for fraud or misrepresentation or mistake. All those are

governed by settled principles. I go only to those where there has been inequality of bargaining

power, such as to merit and intervention of the court.”

He then referred to various categories of cases and ultimately deduced therefrom a general

principle in these words (at page 765):

“Gathering all together, I would suggest that through all these instances there runs a single

thread. They rest on ‘inequality of bargaining power’. By virtue of it, the English law gives

relief to one who, without independent advice, enters into a contract on terms which are very

unfair or transfers property for a consideration which is grossly inadequate, when his

bargaining power is grievously impaired by reason of his own needs or desires, or by his own

ignorance or infirmity, coupled with undue influences or pressures brought- to bear on him by

or for the benefit of the other. When 1 use the word ‘undue’ 1 do not mean to suggest that the

principle depends on proof of any wrongdoing. The one who stipulates for an unfair advantage

may be moved solely by his own self-interest, unconscious of the distress he is bringing to the

other. I have also avoided any reference to the will of the one being ‘dominated’ or ‘overcome’

by the other. One who is in extreme need may knowingly consent to a most improvident

bargain, solely to relieve the straits in which he finds himself. Again, I do not mean to suggest

that every transaction is saved by independent advice. But the absence of it may be fatal. With

these explanations, 1 hope this principle will be found to reconcile the cases.”

87. Though the House of Lords does not yet appear to have unanimously accepted this theory,

the observations of Lord Dip lock in A. Schroeder Music Publishing Co. Ltd. v. Macaulay

(Formerly Instone) 1974 (1) W.L.R. 1308 are a clear pointer towards this direction. In that case

a song writer had entered into an agreement with a music publisher in the standard form

whereby the publishers engaged the song writer’s exclusive services during the term of the

agreement, which was five years. Under the said agreement, the song writer assigned to the

publisher the full copyright for the whole world in his musical compositions during the said

term. By another term of the said agreement, if the total royalties during the term of the

agreement exceeded 5,000 the agreement was to stand automatically extended by a further

period of five years. Under the said agreement, the publisher could determine the agreement at

any time by one month’s written notice but no corresponding right was given to the song

writer. Further, while the publisher had the right to assign the agreement, the song writer

agreed not to assign his rights without the publisher’s prior written consent. The song writer

brought an action claiming, inter alia, a declaration that the agreement was contrary to public

policy and void. Plowman, J., who heard the action granted the declaration which was sought

and the Court of Appeal affirmed his judgment. An appeal filed by the publishers against the

judgment of the Court of Appeal was dismissed by the House of Lords. The Law Lords held

that the said agreement was void as it was in restraint of trade and thus contrary to public

policy. In his speech Lord Diplock however, outlined the theory of reasonableness or fairness

of a bargain. The following observations of his on this part of the case require to be

reproduced in extenso (at pages 1315-16):

“My Lords, the contract under consideration in this appeal is one whereby the respondent

accepted restrictions upon the way in which he would exploit his earning power as a song

writer for the next ten years. Because this can be classified as a contract in restraint of trade the

restrictions that the respondent accepted fell within one of those limited categories of

contractual promises in respect of which the courts still retain the power to relieve the

promisor of his legal duty to fulfil them. In order to determine whether this case is one in which

that power ought to be exercised, what your Lordships have in fact been doing has been to

assess the relative bargaining power of the publisher and the song writer at the time the

contract was made and to decide whether the publisher had used his superior bargaining

power to exact from the song writer promises that were unfairly onerous to him. Your

Lordships have not been concerned to inquire whether the public have in fact been deprived of

the fruit of the song writer’s talents by reason of the restrictions, nor to assess the likelihood

that they would be so deprived in the future if the contract were permitted to run its full

course.

It is, in my view, salutary to acknowledge that in refusing to enforce provisions of a contract

whereby one party agrees for the benefit of the other party to exploit or to refrain from

exploiting his own earning power, the public policy which the court is implementing is not

some 19th-century economic theory about the benefit to the general public of freedom of trade,

but the protection of those whose bargaining power is weak against being forced by those

whose bargaining power is stronger to enter into bargains that are unconscionable. Under the

influence of Bentham and of laissez-faire the courts in the 19th century abandoned the practice

of applying the public policy against unconscionable bargains to contracts generally, as they

had Formerly done to any contract considered to be usurious; but the policy survived in its

application to penalty clauses and to relief against forfeiture and also to the special category of

contracts in restraint of trade. If one looks at the reasoning of 19th-century judges in cases

about contracts in restraint of trade one finds lip service paid to current economic theories, but

if one looks at what they said in the light of what they did, one finds that they struck down a

bargain if they thought it was unconscionable as between the parties to it and upheld it if they

thought that it was not.

So I would hold that the question to be answered as respects a contract in restraint of trade of

the kind with which this appeal is concerned is: “Was the bargain fair?” The test of fairness is,

no doubt, whether the restrictions are both reasonably necessary for the protection of the

legitimate interests of the promisee and commensurate with the benefits secured to the

promisor under the contract. For the purpose of this test all the provisions of the contract

must be taken into consideration.”

Lord Diplock then proceeded to point out that there are two kinds of standard forms of

contracts. The first is of contracts which contain standard clauses which “have been settled

over the years by negotiation by representatives of the commercial interests involved and have

been widely adopted because experience has shown that they facilitate the conduct of trade”.

He then proceeded to state, “If fairness or reasonableness were relevant to their enforceability

the fact that they are widely used by parties whose bargaining power is fairly matched would

raise a strong presumption that their terms are fair and reasonable.” Referring to the other

kind of standard form of contract Lord Diplock said (at page 1316):

“The same presumption, however, does not apply to the other kind of standard form of

contract. This is of comparatively modern origin. It is the result of the concentration of

particular kinds of business in relatively few hands. The ticket cases in the 19th century provide

what are probably the first examples. The terms of this kind of standard form of contract have

not been the subject of negotiation between the parties to it, or approved by any organisation

representing the interests of the weaker party. They have been dictated by that party whose

bargaining power, either exercised alone or in conjunction with others providing similar goods

or services, enables him to say: ‘If you want these goods or services at all, these are the only

terms on which they are obtainable. Take it or leave it’.

To be in a position to adopt this attitude towards a party desirous of entering into a contract

to obtain goods of services provides a classic instance of superior bargaining power.”

88. The observations of Lord Denning, M.R., in Levison and Anr. v. Patent Steam Carpet Co.

Ltd. 1978 (1) Q.B. 69 are also useful and require to be quoted. These observations are as

follows (at page 79):

“In such circumstances as here the Law Commission in 1975 recommended that a term which

exempts the stronger party from his ordinary common law liability should not be given effect

except when it is reasonable: see The Law Commission and the Scottish Law Commission

Report, Exemption Clauses, Second Report (1975) (August 5, 1975), Law Com. No. 69 (H.C.

605), pp. 62, 174; and there is a bill now before Parliament which gives effect to the test of

reasonableness. This is a gratifying piece of law reform: but 1 do not think we need wait for

that bill to be passed into law. You never know what may happen to a bill. Meanwhile the

common law has its own principles ready to hand. In Gillespie Bros. & Co. Ltd. v. Roy Bowles

Transport Ltd. 1973 Q.B. 400, I suggested that an exemption or limitation clause should not be

given effect if it was unreasonable, or if it would be unreasonable to apply it in the

circumstances of the case. I see no reason why this should not be applied today, at any rate in

contracts in standard forms where there is inequality of bargaining power.”

89. The Bill referred to by Lord Denning in the above passage, when enacted, became the

Unfair Contract Terms Act, 1977. This statute does not apply to all contracts but only to

certain classes of them. It also does not apply to contracts entered into before the date on

which it came into force, namely, February 1, 1978; but subject to this it applies to liability for

any loss or damage which is suffered on or after that date. It strikes at clauses excluding or

restricting liability in certain classes of contracts and torts and introduces in respect of clauses

of this type the test of reasonableness and prescribes the guidelines for determining their

reasonableness. The detailed provisions of this statute do not concern us but they are worth a

study.

90. In Photo Production Ltd. v. Securicor Transport Ltd. 1980 A.C. 827 a case before the

Unfair Contract Terms Act, 1977, was enacted, the House of Lords upheld an exemption

clause in a contract on the defendants’ printed form containing standard conditions. The

decision appears to proceed on the ground that the parties were businessmen and did not

possess unequal bargaining power. The House of Lords did not in that case reject the test of

reasonableness or fairness of a clause in a contract where the parties are not equal in

bargaining position. On the contrary, the speeches of Lord Wilberforce, Lord Diplock and

Lord Scarman would seem to show that the House of Lords in a fit case would accept that test.

Lord Wilberforce in his speech, after referring to the Unfair Contract Terms Act, 1977, said (at

page 843):

“This Act applies to consumer contracts and those based on standard terms and enables

exception clauses to be applied with regard to what is just and reasonable. It is significant that

Parliament refrained from legislating over the whole field of contract. After this Act, in

commercial matters generally, when the parties are not of unequal bargaining power, and

when risks are normally borne by insurance, not only is the case for judicial intervention

undemonstrated, but there is everything to be said, and this seems to have been Parliament’s

intention, for leaving the parties free to apportion the risks as they think fit and for respecting

their decisions.”

Lord Diplock said (at page 850-51):

“Since the obligations implied by law in a commercial contract are those which, by judicial

consensus over the years or by Parliament in passing a statute, have been regarded as

obligations which a reasonable businessman would realise that he was accepting when he

entered into a contract of a particular kind, the court’s view of the reasonableness of any

departure from the implied obligations which would be involved in construing the express

words of an exclusion clause in one sense that they are capable of bearing rather than another,

is a relevant consideration in deciding what meaning the words were intended by the parties to

bear.”

Lord Scarman, while agreeing with Lord Wilberforce, described (at page 853) the action out of

which the appeal before the House had arisen as “a commercial dispute between parties well

able to look after themselves” and then added, “In such a situation what the parties agreed

(expressly or impliedly) is what matters; and the duty of the courts is to construe their contract

according to its tenor.

91. As seen above, apart from judicial decisions, the United States and the United Kingdom

have statutorily recognized, at least in certain areas of the law of contracts, that there can be

unreasonableness (or lack of fairness, if one prefers that phrase) in a contract or a clause in a

contract where there is inequality of bargaining power between the parties although arising out

of circumstances not within their control or as a result of situations not of their creation. Other

legal systems also permit judicial review of a contractual transaction entered into in similar

circumstances. For example, Section 138(2) of the German Civil Code provides that a

transaction is void “when a person” exploits “the distressed situation, inexperience, lack of

judgmental ability, or grave weakness of will of another to obtain the grant or promise of

pecuniary advantages . . . which are obviously disproportionate to the performance given in

return.” The position according to the French law is very much the same.

92. Should then our courts not advance with the times? Should they still continue to cling to

outmoded concepts and outworn ideologies? Should we not adjust our thinking caps to match

the fashion of the day? Should all jurisprudential development pass us by, leaving us

floundering in the sloughs of nineteenth- century theories? Should the strong be permitted to

push the weak to the wall? Should they be allowed to ride roughshod over the weak? Should

the courts sit back and watch supinely while the strong trample under foot the rights of the

weak? We have a Constitution for our country. Our judges are bound by their oath to “uphold

the Constitution and the laws”. The Constitution was enacted to secure to all the citizens of

this country social and economic justice. Article 14 of the Constitution guarantees to all

persons equality before the law and the equal protection of the laws. The principle deducible

from the above discussions on this part of the case is in consonance with right and reason,

intended to secure social and economic justice and conforms to the mandate of the great

equality clause in Article 14. This principle is that the courts will not enforce and will, when

called upon to do so, strike down an unfair and unreasonable contract, or an unfair and

unreasonable clause in a contract, entered into between parties who are not equal in

bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court

can visualize the different situations which can arise in the affairs of men. One can only

attempt to give some illustrations. For instance, the above principle will apply where the

inequality of bargaining power is the result of the great disparity in the economic strength of

the contracting parties. It will apply where the inequality is the result of circumstances, whether

of the creation of the parties or not. It will apply to situations in which the weaker party is in a

position in which he can obtain goods or services or means of livelihood only upon the terms

imposed by the stronger party or go without them. It will also apply where a man has no

choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the

dotted line in a prescribed or standard form or to accept a set of rules as part of the contract,

however unfair, unreasonable and unconscionable a clause in that contract or form or rules

may be. This principle, however, will not apply where the bargaining power of the contracting

parties is equal or almost equal. This principle may not apply where both parties are

businessmen and the contract is a commercial transaction. In today’s complex world of giant

corporations with their vast infra-structural organizations and with the State through its

instrumentalities and agencies entering into almost every branch of industry and commerce,

there can be myriad situations which result in unfair and unreasonable bargains between

parties possessing wholly disproportionate and unequal bargaining power. These cases can

neither be enumerated nor fully illustrated. The court must judge each case on its own facts

and circumstances.”

In the present case, the transaction, though commercial, is not between two businessmen or entities;

the State and its instrumentality are parties to the contract with better bargaining or imposing

authority; and from the records, we find that there was no public interest in offering a lesser sum.

Further, with the price fixed found to be unconscionable, this Court affirmed the enhanced price

fixed by the High Court.

13. Pertinently, it is to be pointed out at this juncture that there was no agreement between the

parties relating to grant of interest for the delayed payment. Even the exchange of communications

between the parties remains silent on this aspect. In the absence of any agreement or contract, the

provisions of Section 34 of the Code of Civil Procedure dealing with ‘interest’ would come into play,

and the same is extracted below, for ready reference:

“34. Interest.—(1) Where and insofar as a decree is for the payment of money, the court may,

in the decree, order interest at such rate as the court deems reasonable to be paid on the

principal sum adjudged, from the date of the suit to the date of the decree, in addition to any

interest adjudged on such principal sum for any period prior to the institution of the suit, with

further interest at such rate not exceeding six per cent per annum as the court deems

reasonable on such principal sum, from the date of the decree to the date of payment, or to

such earlier date as the court thinks fit.

Provided that where the liability in relation to the sum so adjudged had arisen out of a

commercial transaction, the rate of such further interest may exceed six per cent per annum,

but shall not exceed the contractual rate of interest or where there is no contractual rate, the

rate at which moneys are lent or advanced by nationalised banks in relation to commercial

transactions.

(2) Where such a decree is silent with respect to the payment of further interest on such

principal sum from the date of the decree to the date of payment or other earlier date, the

court shall be deemed to have refused such interest, and a separate suit therefor shall not lie.”

13.1. The above provision empowers the court to grant interest at three different stages of a money

decree viz., (i) the court may award interest on the principal sum claimed at a rate it deems

reasonable, for the period before the suit was filed. Such interest is generally governed by

agreements between the parties; (ii) The court may award interest on the principal amount from the

date of filing the suit until the date of the decree, at a reasonable rate. Here, the court has full

discretion to determine the interest rate based on fairness, commercial usage and equity; and (iii)the

court may grant interest on the total decretal amount (principal + interest before decree) from the

date of the decree until payment, at a rate not exceeding 6% per annum unless otherwise specified in

contractual agreements or statutory provisions. However, if the claim arises from a commercial

transaction, courts may allow interest at a higher rate based on agreements between the parties.

14. Furthermore, it is noteworthy to refer to the following case laws and the observations made

therein concerning the issue involved herein:

(i) Clariant International Limited and another v. Securities & Exchange Board of India, 2004 (8)

SCC 524

“Interest can be awarded in terms of an agreement or statutory provisions. It can also be

awarded by reason of usage or trade having the force of law or on equitable considerations.

Interest cannot be awarded by way of damages except in cases where money due is wrongfully

withheld and there are equitable grounds therefor, for which a written demand is mandatory.

In absence of any agreement or statutory provision or a mercantile usage, interest payable

can be only at the market rate. Such interest is payable upon establishment of totality of

circumstances justifying exercise of such equitable jurisdiction.”

(ii) Alok Shanker Pandey (supra)

“We are of the opinion that there is no hard-and-fast rule about how much interest should be

granted and it all depends on the facts and circumstances of each case. We are of the opinion

that the grant of interest of 12% per annum is appropriate in the facts of this particular case.

However, we are also of the opinion that since interest was not granted to the appellant along

with the principal amount, the respondent should then in addition to the interest at the rate of

12% per annum also pay to the appellant interest at the same rate on the aforesaid interest

from the date of payment of instalments by the appellant to the respondent till the date of

refund of this amount, and the entire amount mentioned above must be paid to the appellant

within two months from the date of this judgment.’

(iii) Thazhathe Thazhathe Purayil Sarabi v. Union of India, (2009) 7 SCC 372

“25. It is, therefore, clear that the court, while making a decree for payment of money is

entitled to grant interest at the current rate of interest or contractual rate as it deems

reasonable to be paid on the principal sum adjudged to be payable and/or awarded, from the

date of claim or from the date of the order or decree for recovery of the outstanding dues.

There is also hardly any room for doubt that interest may be claimed on any amount decreed

or awarded for the period during which the money was due and yet remained unpaid to the

claimants.

26. The courts are consistent in their view that normally when a money decree is passed, it is

most essential that interest be granted for the period during which the money was due, but

could not be utilised by the person in whose favour an order of recovery of money was passed.

…

30. As we have indicated hereinbefore, when there is no specific provision for grant of interest

on any amount due, the court and even tribunals have been held to be entitled to award

interest in their discretion, under the provisions of Section 3 of the Interest Act and Section 34

of the Civil Procedure Code.”

(iv) Rampur Fertiliser Limited v. Vigyan Chemicals Industries, (2009) 12 SCC 324

“19. It was further held in Clariant International case [(2004) 8 SCC 524] that in the absence of

any agreement or statutory provision or a mercantile usage, interest payable can be only at the

market rate and such interest is payable upon establishment of totality of circumstances

justifying exercise of such equitable jurisdiction. It was also held that in ascertaining the rate of

interest the courts of law can take judicial notice of both inflation as also fall in bank rate of

interest. The bank rate of interest both for commercial purposes and other purposes has been

the subject-matter of statutory provisions as also the judge-made laws. In the said case

reference was made to the decisions in Kaushnuma Begum v. New India Assurance Co. Ltd.

[(2001) 2 SCC 9 : 2001 SCC (Cri) 268], H.S. Ahammed Hussain v. Irfan Ahammed [(2002) 6

SCC 52 : 2002 SCC (Cri) 1263] and United India Insurance Co. Ltd. v. PatriciaJean Mahajan

[(2002) 6 SCC 281 : 2002 SCC (Cri) 1294] and it was observed that: (Clariant International

case [(2004) 8 SCC 524], SCC p. 541, para 36)

“36. … Even in cases of victims of motor vehicle accidents, the courts have upon taking note of

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the fall in the rate of interest held 9% interest to be reasonable.”

20. In Assam Small Scale Industries Development Corpn. Ltd. [(2005) 13 SCC 19] also in terms

of Section 34 of the Code, in relation to the transactions made prior to coming into force of the

Act, simple interest at the rate of 9% per annum was granted taking the same to be bank rate

at the relevant time.

21. Therefore, in view of the foregoing legal proposition, we hold that the High Court was not

justified in granting interest at the rate of 18% per annum with monthly rests. Considering the

facts and circumstances of the present case we direct that pendente lite and future interest at

the rate of 9% shall be paid.”

(v) M/s. Tomorrowland Limited v. Housing and Urban Development Corporation Limited and

another, 2025 LiveLaw (SC) 205

“48. “The Appellant, of course, can seek award of interest under Section 34 of the CPC, which

inter alia provides that “the court may, in the decree, order interest at such rate as the Court

deems reasonable to be paid on the principal sum adjudged from the date of the suit to the

date of the decree.”

49. “It is trite law that under Section 34 of the CPC, the award of interest is a discretionary

exercise steeped in equitable considerations. The law in this regard has been succinctly

discussed in the Constitution Bench judgment of this Court in Central Bank of India v.

Ravindra & Ors.; (2002) 1 SCC 367, which states:

“Award of interest pendente lite or post-decree is discretionary with the Court as it is

essentially governed by Section 34 of the CPC de hors the contract between the parties. In a

given case if the Court finds that in the principal sum adjudged on the date of the suit, the

component of interest is disproportionate with the component of the principal sum actually

advanced, the Court may exercise its discretion in awarding interest pendente lite and postdecree

interest at a lower rate or may even decline to award such interest. The discretion shall

be exercised fairly, judiciously, and for not arbitrary or fanciful reasons.”

58. “We are conscious of the fact that as a general principle, in commercial disputes, the award

of interest pendente lite or post-decree is typically granted as a matter of course. This is

because such interest serves to compensate the aggrieved party for the time value of money

that was due but withheld during the legal process.”

Thus, it is abundantly clear that the Courts have the authority to determine the appropriate interest

rate, considering the totality of the facts and circumstances in accordance with law. That apart, the

Courts have the discretion to decide whether the interest is payable from the date of institution of

the suit, a period prior to that, or from the date of the decree, depending on the specific facts of each

case.

15. Admittedly, the shares belonging to the appellants were transferred to the State Government in
16. In 1978, the appellants instituted the suit claiming a valuation of Rs.70.50 per share.

Thereafter, they sought an amendment increasing the valuation to Rs.874/- per share, based on the

report of a private valuer M/s. Naresh Lakhotia & Co. The amendment sought was allowed on

12.09.2001. Subsequently, the appellants accepted the valuation of Rs.640/- per share as determined

by M/s Ray & Ray, which was also ordered by the High Court and affirmed by this Court. It is also

an admitted fact that the Respondent No. 1 agreed to pay a fair valuation for the shares to the

appellants, but is yet to make the payment. Such being the scenario, wherein, the appellants having

suffered a delay of five decades in receiving the payment, are entitled to be reasonably compensated

by way of interest. However, their claim of interest at 18% with quarterly rest or 15% with monthly

rest, in the opinion of this court, is unreasonable and cannot be accepted as such quarterly or

monthly rest is beyond the scope of Section 34.

16. Be it noted, while the discretion to award interest, whether pendente lite or post-decree, is well

recognized, its exercise must be guided by equitable considerations. The rate and period of interest

cannot be applied mechanically or at an unreasonably high rate without any rationale. Though it is

not possible to arrive at the actual value of improvement or the inflation on the fair consideration, if

paid at the relevant point of time, it is just and necessary that the rate of interest must be a

reparation for the appellant. The Court must ensure that while the claimant is fairly compensated,

the award does not become punitive or unduly burdensome on the Judgement Debtor. Therefore,

the rate of interest should be determined in a manner that balances both fairness and financial

impact, taking into account the “loss of use” principle and economic prudence, in the specific facts

of each case.

17. Considering the prolonged pendency of the dispute regarding the valuation of shares, which has

only been determined recently, and the substantial share amount involved, and also keeping in mind

that this is a commercial transaction, and the entire burden of interest along with principal value

falls upon the Government, it is necessary in the present case to award reasonable interest, in order

to strike a balance between the parties. Thus, in these peculiar facts and circumstances, we deem it

fit, just and appropriate to award simple interest at the rate of 6% per annum from 8th July 1975, on

the enhanced valuation of shares till the date of decree and interest at the rate of 9% per annum

from the date of decree till the date of realisation. The interest shall be paid along with the amount

due towards the enhanced value of the shares, after adjusting the amount already paid, to the

appellants, within a period of two months from today.

18. Accordingly, all the appeals stand disposed of. The impugned judgments and orders passed by

the High Court are modified to the extent indicated above. No costs. Connected Miscellaneous

Application(s), if any, shall stand disposed of.