Interest Act | Interest Can't Be Claimed On Delayed Payment If Contract Bars It : Supreme Court
The Supreme Court has observed that when the contract doesn't stipulate for payment of interest on a delayed payment, a party is not entitled to the same.
A bench of Justices MM Sundresh and N Kotiswar Singh set aside the Kerala High Court's decision, which had upheld the award of interest on delayed payments in favor of the Respondent.
The case arose from a contract executed in April 2013 between the Kerala Water Authority and the Respondent-contractor for the construction of a sewage treatment plant at the Government Medical College, Calicut. The work was completed in July 2014, but the principal amount of ₹86.64 lakh was released only in March 2016 following a writ petition.
Respondent subsequently filed a civil suit seeking interest at 14% per annum for the delay. The trial court allowed the claim and the High Court later reduced the interest to 9%, prompting the Kerala Water Authority to move to the Supreme Court, challenging the impugned finding in view of the express clause mentioned in the contract which stated that payments would be subject to availability of funds and seniority of bills, and that “no claims or interest for damages whatsoever shall be made for the belated settlement of claims.”
The High Court invoked Section 3(1) of the Interest Act, 1978, to grant interest on delayed payment; however, noting that the High Court ignored Section 3(3) of the Interest Act, the Suprem Court observed:
“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.”
The Court clarified that the Interest Act 1978 applies only where a contract is silent on interest or leaves a vacuum. Section 3(3) of the Act, the Court said, expressly bars the award of interest where a contract prohibits it, an aspect the High Court failed to consider.
It also rejected reliance on Section 34 of the Code of Civil Procedure, observing that the provision deals only with the rate of interest once entitlement is established and does not create a right to interest when barred under the contract.
Cause Title: THE KERALA WATER AUTHORITY & ORS. VERSUS T I RAJU & ORS. (with connected matter)
Citation : 2026 LiveLaw (SC) 172
Appearances:
For Petitioner(s) Mr. Bijo Mathew Joy, AOR Ms. Gifty Marium Joseph, Adv. Mr. Thomas. P. Joseph, Sr. Adv. Mr. M Gireesh Kumar, Adv. Mr. Ankur S. Kulkarni, AOR Mr. Sanjay Singh, Adv. Ms. Sneha Mathew, Adv.
For Respondent(s) Mr. Thomas. P. Joseph, Sr. Adv. Mr. M. Gireesh Kumar, Adv. Mr. Ankur S. Kulkarni, AOR Mr. Sanjay Singh, Adv. Ms. Sneha Mathew, Adv. Mr. Bijo Mathew Joy, AOR Ms. Gifty Marium Joseph, Adv. Mr. C. K. Sasi, AOR Ms. Meena K Poulose, Adv.