Interest Act | Notice Demanding Interest Cannot Be Issued After Principal Debt Is Already Paid: Bombay High Court

"If the principal amount has already been paid, though with a delay, the creditor cannot unilaterally bring about a cause of action for recovery of interest by issuing a notice under the Interest Act." Bombay High Court has held that a notice of demand under Section 3(1)(b) of the Interest Act, 1978 cannot be issued after the principal amount has already been paid, ruling that the debt must necessarily remain outstanding on the date such notice is issued.

A division bench comprising Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla observed that a creditor cannot unilaterally create a fresh cause of action to claim interest on delayed payments once concluded payments of the principal sum have already been accepted without a prior statutory notice of demand.

The dispute arose out of a commercial contract awarded in November 1996 to Ajay Deep Construction Pvt. Ltd. by the Maharashtra State Police Housing and Welfare Corporation Ltd. for constructing 650 police quarters at Amravati. While the contractor completed the project within the contractual timeline, disputes arose over delayed payments of running account bills, non-payment of extra works, and claims for pre-suit, pendente lite, and post-decree interest. A Single Judge of the High Court partially decreed the contractor's suit in 2021, prompting both the employer and the contractor to prefer cross-appeals before the Division Bench.

The primary questions before the Court were whether a statutory notice demanding interest under Section 3(1)(b) of the Interest Act can be validly issued after the principal amount has already been cleared, and whether an employer can deny payment for verified extra works on the ground of non-compliance with contractual pre-conditions. The Bench was also called upon to determine whether the trial court erred under Section 34 CPC by omitting to grant pendente lite and post-decree interest on decreed sums arising out of a commercial contract.

Notice Under Section 3 Interest Act Impermissible Post-Payment Of Principal

Addressing the contractor's claim for pre-suit interest on running bills that were paid belatedly, the Court interpreted the statutory scheme of Section 3 of the Interest Act, 1978. The bench rejected the contention that Section 3(1)(b) permits a creditor to issue a demand notice after full payment of the principal debt has already been received. The bench stressed that the fundamental purpose of the statutory notice is to caution the debtor that interest will accrue if the outstanding liability is not cleared immediately.

"The purpose of a notice under Section 3 of the Interest Act is to caution the debtor that interest will be charged if the principal amount is not paid and that such charge will be made from a date mentioned in that behalf in the notice. If the principal amount has already been paid, though with a delay, the creditor cannot unilaterally bring about a cause of action for recovery of interest by issuing a notice under the Interest Act."

Principal Sum Must Be Outstanding On Date Of Statutory Notice

The Court highlighted that a statutory notice of demand serves a twin objective: re-asserting the underlying claim for the principal debt and notifying the creditor’s intent to charge interest. Allowing a creditor to issue a notice after receiving the principal sum would upset the statutory framework governing interest claims. Consequently, interest under Section 3(1)(b) could only be awarded for those specific bills in respect of which the debt was actively outstanding when the demand notice was served.

"In our view, it is imperative that the claim for principal amount should be outstanding as on the date of the notice of demand of interest. It could not be that the principal amount had already been paid and a fresh claim for interest was made thereafter under Section 3 of the Interest Act. This would turn the law of interest proposed by the legislature on its head."

Technical Timelines In Contracts Cannot Defeat Legitimate Extra Work Claims

Examining the employer's challenge against payments awarded for additional depth of foundation and extra items, the Bench held that contractual stipulations requiring intimation within 30 days cannot be equated to statutory bars of limitation. Once the factual execution of the extra work is established and verified on site inspections, the employer cannot avoid liability by raising procedural objections as an afterthought.

Relying on the Supreme Court ruling in Chandigarh Construction Company Pvt. Ltd. v. State of Punjab (2020), the bench reiterated that the core objective of such clauses is merely to verify that work was actually done. The Court also held that the Project Management Consultant acted as an authorized representative of the Engineer-in-Charge under Clause 5.6 of the contract, and approvals granted during site visits bound the employer in the absence of any contemporaneous disapproval.

"A contractual clause... which stipulates the time and manner within which the contractor has to intimate the employer about extra or additional work, has never been considered as a statutory limitation or bar for a claim for extra/additional work. The purpose of such stipulation is to ensure that extra/additional work has actually been done. Once it is established that the work has indeed been done, payment for it cannot be denied on a technical ground."

Stipulation To Pay Bills 'If Possible' Within 15 Days Imposes Definite Timeline

The Court rejected the employer's argument that the contractual phrase requiring running bills to be cleared in 15 days "if possible" gave the employer unfettered discretion. The Bench clarified that commercial contracts cannot be read as incorporating open-ended or tentative payment obligations. The words "if possible" operate only as an exception, requiring the employer to specifically plead and prove why timely payment was rendered impossible in a given instance.

Grant Of Interest Under Section 34 CPC Is The Rule In Commercial Suits

Turning to the contractor's cross-appeal regarding the omission of pendente lite and post-decree interest by the Single Judge, the Court held that the trial court failed to exercise its discretion in line with settled principles. Citing the Supreme Court decisions in M/s Tomorrowland Ltd. v. HUDCO (2025) and Jagdish Rai & Brothers v. Union of India (1999), along with the Bombay High Court's ruling in Satish Solvent Extractions Pvt. Ltd. v. New India Assurance Co. Ltd. (1996), the bench underscored that awarding interest pendente lite and future interest under Section 34 CPC in commercial transactions is the rule, while refusal is an exception requiring recorded reasons.

"The present case discloses no circumstance which would justify departure from the settled rule that pendente lite and post-decree interest ought ordinarily to follow a money decree. In these circumstances, in our view, the Plaintiff is entitled to pendente lite and post-decree interest under Section 34 of the CPC and that the impugned Decree, to the extent it denies such relief, warrants interference."

The Division Bench dismissed the employer's appeal and partly allowed the contractor's appeal, modifying the decree to include simple interest at 9% per annum pendente lite and post-decree on the amounts awarded. The ruling settles significant propositions on the strict temporal pre-requisites for triggering Section 3 of the Interest Act, 1978 and reinforces the mandatory commercial application of Section 34 CPC.

Date of Decision: October 19, 2026