Interest agreements in construction contracts are binding if mutually agreed upon in accordance with existing laws.

ORDER

1. Leave granted.

2. The brief facts relevant for determination of the present appeals arising out of the same impugned order dated 23.02.2023 are produced as under:

i) The appellant – T.I. Raju in Civil Appeal arising out of SLP (C) No.24631/2023, who is a Government Contractor had entered into a preliminary agreement dated 30.04.2013 for the execution of a work contract pertaining to the construction of Sewage Treatment Plant at Medical College, Calicut with appellant No.1 in Civil Appeal arising out of SLP (C) No.17823/2023.

ii) On 07.07.2014, the construction work was completed and the principal sum of Rs.86,64,846/- was due to appellant – T.I. Raju. Thereafter, in 2015, the appellant-T.I. Raju preferred a Writ Petition before the High Court seeking disbursal of the principal sum due to him, which was allowed and resultantly, the funds were released in his favour by 02.03.2016.

iii) On 25.11.2017, the appellant-T.I. Raju filed a suit for recovery of interest for delayed payment between the completion of work till the date of disbursal of pending dues, i.e. between 09.07.2014 to 02.03.2016 at the rate of 14% per annum.

iv) The suit filed by the plaintiff/appellant-T.I. Raju was decreed holding that the defendants/appellants in Civil Appeal @ SLP (C) No17823/2023 are jointly and severally liable to pay a sum of Rs.21,48,411/-, with an interest of 14% from the date of filing the suit till the date of realization.

v) The High Court partly allowed the appeal filed by the defendant Nos.2, 3 and 7 against the decree for recovery of interest and reduced the rate of interest to 9% per annum, which amounts to a sum of Rs.12,90,469/-.

3. The present issue is one of the payment of interests. Clause (5) of the preliminary agreement dated 30.04.2013 states as under:

“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.”

4. 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. For this reason, clause (5) has been introduced at the first place in the preliminary agreement. 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. 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.

5. Previously, in the writ petition filed by the respondent – T. I. Raju, the High Court left the issue of the payment of interest open. Thereafter, the respondent filed the subject suit for recovery of interest on the principal amount. The decree was modified by the High Court in the impugned judgment to the effect of payment of interest at the rate of 9% per annum, on belated payment of the principal sum, and the pendente lite interest was reduced to 6% per annum.

6. Though the provision under Section 3 (1) of Interest Act, 1978 has been taken note o