Supreme Court Enforces Contractual Bar Against Interest in Government Contracts

“Interest Act Cannot Override an Express Waiver Between Parties…No Claims or Interest for Belated Settlement”, In a significant reportable judgment Supreme Court of India comprising Justice M.M. Sundresh and Justice Nongmeikapam Kotiswar Singh allowed the appeal filed by the Kerala Water Authority and set aside the High Court’s direction awarding interest to a contractor for delayed payment.

Supreme Court held that where a public works contract expressly bars claims for interest on delayed settlement of bills, such stipulation is binding on the parties and cannot be overridden by Section 3 of the Interest Act, 1978 or Section 34 of the Code of Civil Procedure, 1908.

The ruling reinforces the primacy of contractual autonomy in commercial dealings with the State, even where the State falls within the ambit of Article 12 of the Constitution.

Contractor Seeks Interest on Delayed Payment

The respondent-contractor had entered into a preliminary agreement dated 30.04.2013 with the Kerala Water Authority for construction of a Sewage Treatment Plant at Medical College, Calicut. The work was completed on 07.07.2014, and a principal sum of Rs. 86,64,846/- became payable.

Due to delay in release of funds, the contractor approached the High Court through a writ petition and eventually received payment by 02.03.2016. Thereafter, the contractor instituted a suit seeking interest at 14% per annum for the period of delay between completion of work and actual disbursal.

The trial court decreed the suit. The High Court reduced the rate of interest to 9% per annum but upheld the entitlement to interest. Aggrieved, both sides approached the Supreme Court.

“No Claims or Interest for Damages Whatsoever Shall Be Made” – The Contractual Clause

The Supreme Court’s analysis centred on Clause (5) of the preliminary agreement, which categorically stated:

“No claims or interest for damages whatsoever shall be made for the belated settlement of claims of bill.”

The clause further clarified that settlement of bills would depend on availability of budget provisions and allotment of funds.

The Court observed that the project was initiated for public purposes notwithstanding possible delays in fund availability, and the contractor consciously entered into the agreement with full awareness of the risk of delayed payments.

Justice Sundresh noted that the 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.” The contractor, having accepted such terms, could not later claim interest contrary to the express stipulation.

Section 3 of the Interest Act, 1978 – Exception Under Sub-Section (3)

The High Court had relied upon Section 3(1) of the Interest Act, 1978 to award interest. However, the Supreme Court found that the exception under Section 3(3) had been ignored.

The Court clarified that the object of the Interest Act is to mandate payment of interest “in the absence of, or any vacuum in the agreement,” or where agreed interest is contrary to law. It does not override a conscious contractual waiver.

The Bench held:

“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.”

Thus, Section 3(3) recognises contractual freedom and precludes statutory imposition of interest where parties have agreed otherwise.

Section 34 CPC – No Overriding Effect

The contractor relied heavily on Section 34 CPC to justify award of interest. The Supreme Court rejected this submission, observing that Section 34 “merely speaks about the rate of interest to be applied” and cannot override Section 3(3) of the Interest Act or nullify a valid contractual bar.

The Court made it clear that Section 34 does not create an independent right to interest contrary to agreed contractual terms.

State as Contracting Party – No Coercion or Unfairness

The Kerala Water Authority, being an instrumentality of the State under Article 12, was acting in furtherance of a public infrastructure project. The Court noted that the clause was introduced in the context of fund-dependent public works and that there was no element of coercion or unconscionability demonstrated.

The contractor was aware of possible delays and factored the risk into his bid. The Court emphasised that “any profits in favour of the contractor is also a governing factor to the said clause.”

High Court’s Error and Appellate Outcome

The Supreme Court held that the High Court failed to properly appreciate Section 3(3) of the Interest Act and the binding nature of Clause (5).

Concluding that the impugned judgment could not be sustained “from any perspective,” the Court set aside the High Court’s decision.

The appeal filed by the Kerala Water Authority was allowed, and the contractor’s appeal was dismissed. Consequently, the contractor was held not entitled to any interest on delayed payment.

Contractual Waiver of Interest Upheld

The Supreme Court’s ruling sends a clear signal that courts will enforce express contractual bars on interest, even in cases involving delayed payments by State entities.

The Interest Act, 1978 operates in the absence of agreement or where the agreement is unlawful. It does not empower courts to rewrite commercial bargains. Likewise, Section 34 CPC cannot be invoked to override a consciously accepted contractual stipulation.

The decision reaffirms that in public works contracts, parties are bound by the risk allocation agreed upon, and courts will not substitute statutory discretion for contractual intent.

Date of Decision: 09/02/2026