Section 34 CPC grants Courts discretionary power to reduce unconscionable contractual interest rates for pendente lite and future periods.

The Appellant/Plaintiff filed a suit under Order XXXVII of the CPC for the recovery of ₹5 Lakhs, claiming it was a loan granted to the Respondents for 24 months at a contractual interest rate of 3% per month (36% p.a.).

The loan was secured by property documents, though it was later alleged that the Respondents committed fraud as the property had already been transferred to a third party.

The District Judge, vide judgment dated 27.11.2025, decreed the suit for the principal sum and pre-suit interest (totaling ₹5.60 Lakhs) but reduced the pendente lite and future interest to 8% p.a., terming the contractual rate "unconscionable and extortionate".

The Appellant challenged this reduction, seeking the full 36% p.a.

1. Whether the Court has the discretionary power to reduce the pendente lite and future interest rate below the contractual rate under Section 34 of the CPC.

2. Whether a contractual interest rate of 3% per month is considered a penalty or unconscionable in a transaction described as a "friendly loan."

Section 34 of the Code of Civil Procedure, 1908, which grants courts discretionary power to award "reasonable" interest from the date of the suit to the date of payment, regardless of the contract.

Central Bank of India v. Ravindra, which established that courts may exercise discretion to award lower interest if the component of interest is disproportionate to the principal.

The "Dunlop Test" from Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. (adopted in Fateh Chand v. Balkishan Dass and BPL Limited v. Morgan Securities), which stipulates that a clause is a penalty if the sum is unconscionable, extravagant, or not a genuine pre-estimate of loss.

The Court observed that while Section 79 of the Negotiable Instruments Act may govern interest until the institution of a suit, pendente lite and future interest are strictly governed by the judicial discretion vested in Section 34 CPC.

The Court noted a material inconsistency in the Appellant's plea, as they characterized the advance as a "friendly loan" yet demanded a commercial interest rate of 36% p.a.

Applying the "penalty" doctrine, the Court found that such an exorbitant rate was not a genuine pre-estimate of loss but was in the nature of an extortionate penalty.

The Court reasoned that the District Judge’s decision to award 8% p.a. on the sum of ₹5.60 Lakhs (which already included pre-suit interest) was a fair and judicial exercise of discretion aimed at preventing undue enrichment and ensuring equity.

The Court held that 36% p.a. was unconscionable and that the award of 8% p.a. was neither arbitrary nor unjust. The Regular First Appeal was dismissed, and the Trial Court’s judgment dated 27.11.2025 was upheld.