Supreme Court Shields Govt Contracts from Interest Claims on Delays, Prioritizes Agreed Terms

In a significant ruling for public infrastructure projects, the Supreme Court of India has overturned a Kerala High Court decision awarding interest to a contractor for delayed payments. A bench comprising Justice M.M. Sundresh and Justice Nongmeikapam Kotiswar Singh emphasized that explicit contractual clauses barring interest claims are binding, even against statutes like the Interest Act, 1978. The verdict resolves cross-appeals between the Kerala Water Authority and contractor T.I. Raju, reinforcing fiscal discipline in government tenders.

From Sewage Plant to Payment Dispute: The Project That Tested Contract Limits

The saga began in 2013 when T.I. Raju, a government contractor, signed a preliminary agreement on April 30 with the Kerala Water Authority for building a Sewage Treatment Plant at Medical College, Calicut. Raju completed the work by July 7, 2014, leaving a principal sum of Rs. 86,64,846 due.

Payments dragged on due to budget issues—a common hurdle in public works. Raju filed a writ petition in 2015, securing release of the principal by March 2, 2016. Undeterred, he sued in 2017 for interest at 14% per annum on the delay from July 2014 to March 2016. A trial court decreed Rs. 21,48,411 plus 14% interest from suit filing.

The Kerala High Court reduced it to 9% (Rs. 12,90,469) plus 6% pendente lite interest, prompting appeals: Kerala Water Authority challenged the award entirely (SLP 17823/2023), while Raju sought restoration (SLP 24631/2023).

Central questions: Does Clause 5 of the agreement, waiving interest on delayed bills due to budget shortages, bind the parties? Can courts impose interest under the Interest Act, 1978, overriding such terms, especially in public contracts?

Contractor's Push for Compensation vs. Authority's Contractual Shield

Raju argued that delayed payments warranted interest under Section 3(1) of the Interest Act, 1978 , which mandates compensation for money claims. He invoked Section 34 CPC for court-discretion on interest rates, claiming the delay caused financial hardship despite his awareness of risks.

The Kerala Water Authority countered with Clause 5 of the April 2013 agreement:

“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. ”

They stressed this as a mutual understanding for public projects, where tenders proceed sans guaranteed funds to avoid infrastructure delays. As a 'State' under Article 12, the Authority prioritized public welfare over contractor profits.

Decoding the Fine Print: Why Contracts Trump Statutory Interest

The Supreme Court dissected Clause 5, noting it was "introduced on behalf of the contractor," reflecting awareness of payment delays in public works. It bars not just delays but "consequential interest... in the nature of damages."

Key to the ruling: Section 3(3) of the Interest Act, 1978 , an exception ignored by the High Court. The Act fills contractual vacuums or curbs exorbitant rates, but bows to bargained terms:

"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."

Section 34 CPC only sets rates, not overriding agreed waivers. No precedents were directly cited, but the Court distinguished writ proceedings (where interest was left open) from this suit. Public purpose—ensuring projects like sewage plants proceed despite fiscal hiccups—tilted the balance.

Key Observations Straight from the Bench

  • "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..." (Para 4)

  • "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." (Para 6)

  • "Therefore clause (5) of the agreement is settled between the parties and thus binding upon them." (Para 7)

  • "The High Court did not take into consideration Section 3(3) of the Interest Act, 1978, and thereafter, only read the clause 5 of the preliminary agreement, contextually." (Para 9)

Final Verdict: Appeals Resolved, No Interest Awarded

The Court granted leave and ruled:

"the impugned order(s) are set aside. Consequently, the appeal filed by the appellants in Civil Appeal arising out of SLP(C) No. 17823/2023 stands allowed and the appeal filed by the appellant in Civil Appeal arising out of SLP(C) No. 24631/2023 stands dismissed. "

This clears the Kerala Water Authority, voiding all interest awards. For future cases, it signals that contractors bidding on public tenders must price in payment risks—no statutory bailout via interest if waived contractually. Public bodies gain leverage against claims, potentially stabilizing project costs amid budget volatility, but contractors may demand higher bids upfront.