Default interest rate of one-month LIBOR plus 12% is no problem

In Cargill International Trading v Uttam Galva Steels, the High Court decided by summary judgment that a default interest rate of one-month LIBOR plus 12% was valid and enforceable. It did not amount to a penalty, it was validly incorporated into the contract and it was not illegal under Indian law.

In 2015, Cargill entered into two agreements to buy steel from Uttam. If Cargill made advance payments and Uttam then failed to either deliver the steel or pay back the money received, default compensation would accrue at a default interest rate of one-month LIBOR plus 12%. Uttam failed to fulfil its obligations and Cargill was granted summary judgment for both the advance payments and the default compensation.

On the default compensation, the High Court held as follows.

1. The default interest rate did not amount to a penalty because: (a) Cargill's advance payments were essentially unsecured lending, which attracts a higher interest rate due to the lack of security; (b) it was in line with the commercial norm for Indian companies comparable to Uttam; (c) it was not imposed as a deterrent because, by defaulting, Uttam became a significantly greater credit risk (see eg Lordsvale v Gambia); (d) there was no evidence of oppression; (e) higher default interest rates have been upheld by the English courts; and (f) Cargill and Uttam are sophisticated parties who freely negotiated at arm's length the two agreements.
2. The term was validly incorporated into the agreements and it was neither onerous nor unusual. Cargill and Uttam had conducted business on similar terms for the past 10 years and Uttam stamped and signed every page to signify acceptance.
3. The default interest rate was not illegal under Indian law, which only imposed a limit on non-default interest rates. Additionally, Cargill's bank account was in Singapore, not in India.