New Delhi: The Supreme Court of India has held that where a contract between parties expressly prohibits claims for interest on delayed payments, the contractor is not entitled to seek such interest, even under the provisions of the Interest Act, 1978.
A Division Bench comprising Justice M.M. Sundresh and Justice Nongmeikapam Kotiswar Singh delivered the ruling, setting aside the judgment of the Kerala High Court that had sustained an award of interest in favour of the respondent-contractor.
The dispute arose from a work contract entered into on April 30, 2013, between T.I. Raju, a government contractor, and the Kerala Water Authority for the construction of a sewage treatment plant at Medical College, Calicut. Upon completion of the construction work on July 7, 2014, a principal sum of ₹86,64,846 became due and payable to the contractor.
As the dues were not released, T.I. Raju filed a writ petition before the Kerala High Court in 2015 seeking disbursal of the principal amount. The High Court allowed the petition, and the funds were accordingly released by March 2, 2016. Subsequently, on November 25, 2017, the contractor instituted a suit for recovery of interest for the period of delayed payment between July 9, 2014, and March 2, 2016, at the rate of 14% per annum.
The Trial Court decreed the suit, holding the defendants jointly and severally liable to pay ₹21,48,411 along with interest at 14% per annum from the date of filing of the suit till realization. On appeal, the High Court of Kerala partly modified the decree, reducing the rate of interest to 9% per annum (amounting to ₹12,90,469) and the pendente lite interest to 6% per annum.
At the heart of the dispute was Clause 5 of the preliminary agreement dated April 30, 2013, which stipulated that settlement of claims would be subject to the availability of budgetary provisions and the seniority of bills, and explicitly provided that no claims for interest or damages whatsoever shall be made for the belated settlement of bills.
The Supreme Court found that the High Court had erred in failing to give due effect to Section 3(3) of the Interest Act, 1978, which carves out an exception to the general power of courts to award interest where the parties have contractually agreed otherwise. The Bench observed that the object of the Interest Act is to mandate payment of interest in the absence of, or vacuum in, an agreement, or where the stipulated interest is contrary to law as an exorbitant charge. Where parties have expressly contracted to forgo interest or to accept delayed payments without any claim for damages, they are bound by the terms of their agreement.
The Court further noted that Clause 5 was introduced in the contract by the contractor himself, thereby indicating his awareness and acceptance of a situation involving delayed payments and the consequential waiver of interest. The contractor was therefore expected to have factored this contingency into his quoted rates at the time of bidding. The Court also clarified that Section 34 of the Code of Civil Procedure, 1908, which governs the rate of interest to be applied, cannot be read so as to override the exception under Section 3(3) of the Interest Act, 1978.
Additionally, the Court noted that the appellants, the Kerala Water Authority and others, fall within the definition of “State” under Article 12 of the Constitution of India, as the project was undertaken for public purposes. The public welfare rationale underlying the project was also taken into consideration in upholding the contractual bar on interest claims.
Accordingly, the Supreme Court set aside the impugned orders of the High Court. The appeal filed by the Kerala Water Authority (SLP(C) No. 17823/2023) was allowed, and the appeal filed by T.I. Raju (SLP(C) No. 24631/2023) was dismissed.
Appearances:
For the Petitioner/Appellant (Kerala Water Authority & Ors.):
Mr. Thomas P. Joseph, Senior Advocate; Mr. Bijo Mathew Joy, AOR; Ms. Gifty Marium Joseph, Advocate; Mr. M. Gireesh Kumar, Advocate; Mr. Ankur S. Kulkarni, AOR; Mr. Sanjay Singh, Advocate; Ms. Sneha Mathew, Advocate.
For the Respondent/Appellant (T.I. Raju & Ors.):
Mr. C.K. Sasi, AOR; Ms. Meena K. Poulose, Advocate; Mr. Bijo Mathew Joy, AOR; Ms. Gifty Marium Joseph, Advocate.
Case Title:
The Kerala Water Authority & Ors. v. T.I. Raju & Ors.
