Interest Act | No Interest On Delayed Payments If Contract Bars It, Contractor Cannot Claim Through Litigation: Supreme Court
Kiran Raj
The Supreme Court of India's Division Bench of Justices M.M. Sundresh and N.Kotiswar Singh set aside the Kerala High Court's order that had directed payment of interest on delayed contractual dues, holding that where a contract expressly excludes any claim for interest arising out of belated payments, the contractor cannot subsequently seek such interest through litigation. The Court found that the contractual clause barring claims for interest was binding on both parties, and that the High Court had failed to adequately consider the relevant exception under the Interest Act, 1978 while awarding interest to the contractor.
The dispute arose out of a work contract executed pursuant to a preliminary agreement dated 30.04.2013 between a government contractor and a State authority for construction of a Sewage Treatment Plant at Medical College, Calicut. The contractor completed the work on 07.07.2014, and a principal sum of Rs.86,64,846/- became due. Upon non-release of payment, the contractor filed a writ petition before the High Court seeking disbursal of the principal amount, which was subsequently released by 02.03.2016.
Thereafter, the contractor instituted a suit on 25.11.2017 claiming interest at 14% per annum for the period between 09.07.2014 and 02.03.2016. The trial court decreed the suit and held the defendants jointly and severally liable to pay Rs.21,48,411/- with interest at 14% from the date of filing till realization. The High Court partly allowed the appeal of certain defendants and reduced the interest to 9% per annum, amounting to Rs.12,90,469/-, and pendente lite interest to 6% per annum.
The Court stated Clause (5) of the agreement which stated: “The contractor further assures that it is clearly understood that the settlement of claims either by part bill or by final bills will be made only accordingly to the availability of budget provisions allotment of funds made with the Divisional Officer in charge of the work under the respective heads of account in which the work is sanctioned and arranged and also subject to the seniority of such bills. No claims or interest for damages whatsoever shall be made for the belated settlement of claims of bill.”
On interpretation of the clause, the Court observed: “On a reading of the aforesaid clause, it is clear that at the time when the tender was floated for a public project, a conscious decision was taken to commence the same, notwithstanding the issue pertaining to the availability of necessary funds.”
The Court stated: “This clause not only deals with the issue pertaining to the belated payments, but also touches upon the consequential interest which is to be paid in the nature of damages.”
It further recorded: “This is a clause introduced on behalf of the contractor meaning thereby, that the contractor is not only aware of the said clause but he is the one who introduced the same, and hence, he is expected to quote the amount, while being conscious of a situation pertaining to belated payments followed by the consequential interest in the nature of damages.”
Regarding the statutory framework, the Court observed: “Though the provision under Section 3(1) of Interest Act, 1978 has been taken note of by the High Court, and the exception contained under Section 3(3) of the Interest Act, 1978 has been ignored.”
It stated: “The object of the Interest Act, 1978 is to mandate the payment of interest to the parties in the absence of, or any vacuum in the agreement, or where the interest so fixed is contrary to law, being in the nature of an exorbitant charge.”
The Court further observed: “In other words, when the parties have agreed upon by way of a contract executed between them, either to give away the interest so accrued or to receive belated payments, they are indeed governed by the terms mentioned thereunder.”
On the role of the State authority, it recorded: “The appellants in Civil Appeal arising out of SLP(C) No. 17823/2023 fall within the definition of ‘State’ under Article 12 of the Constitution of India, as the project was undertaken for public purposes.”
Finally, the Court stated: “Thus, looking from any perspective, we are not in a position to give an imprimatur to the decision of the High Court.”
The Court directed: “In such view of the matter, the impugned order(s) are set aside. Consequently, the appeal filed by the appellants in Civil Appeal arising out of SLP(C) 17823/2023 stands allowed and the appeal filed by the appellant in Civil Appeal arising out of SLP(C) No. 24631/2023 stands dismissed. Pending application(s), if any, shall stand disposed of.”
Advocates Representing the Parties
For the Petitioners: Mr. Bijo Mathew Joy, AOR; Ms. Gifty Marium Joseph, Adv.; Mr. Thomas P. Joseph, Senior Advocate; Mr. M. Gireesh Kumar, Adv.; Mr. Ankur S. Kulkarni, AOR; Mr. Sanjay Singh, Adv.; Ms. Sneha Mathew, Adv.
For the Respondents: Mr. Thomas P. Joseph, Senior Advocate; Mr. M. Gireesh Kumar, Adv.; Mr. Ankur S. Kulkarni, AOR; Mr. Sanjay Singh, Adv.; Ms. Sneha Mathew, Adv.; Mr. Bijo Mathew Joy, AOR; Ms. Gifty Marium Joseph, Adv.; Mr. C. K. Sasi, AOR; Ms. Meena K. Poulose, Adv.
Case Title: The Kerala Water Authority & Ors. v. T I Raju & Ors.
Case Number: Civil Appeal arising out of SLP(C) Nos. 17823/2023 and 24631/2023
Bench: Justice M.M. Sundresh and Justice N.Kotiswar Singh
