The Supreme Court of India on February 9, 2026 overturned the Kerala High Court’s judgment dated 23.02.2023 in RFA No. 56 of 2020 and upheld the enforceability of a contractual clause barring interest for delayed settlement of bills in a public works contract.
A Bench comprising Justice M.M. Sundresh and Justice Nongmeikapam Kotiswar Singh allowed Civil Appeal arising out of SLP (C) No. 17823/2023 filed by The Kerala Water Authority & Ors., while dismissing the connected Civil Appeal arising out of SLP (C) No. 24631/2023 filed by T.I. Raju.
The Court heard the matter on 09.02.2026. Mr. Bijo Mathew Joy, Advocate-on-Record, assisted by Ms. Gifty Marium Joseph, appeared for the Kerala Water Authority.
Notably, Mr. Bijo Mathew Joy’s submissions on the statutory exception under Section 3(3) of the Interest Act, 1978 found favour with the Bench. His structured argument on contractual autonomy and binding precedent significantly shaped the Court’s reasoning in allowing the appeal.
The Kerala Water Authority was represented by Mr. Bijo Mathew Joy, Advocate-on-Record, whose effective advocacy played a pivotal role in securing the favourable outcome before the Supreme Court. His clear articulation of the statutory exception under Section 3(3) of the Interest Act, 1978, coupled with reliance on binding precedents on contractual waiver of interest, found acceptance with the Bench. The judgment reflects the strength of the legal submissions advanced on behalf of the appellants and underscores the importance of precise contractual interpretation in public infrastructure disputes.
Origin of the Dispute: Execution of a Public Infrastructure Project
The dispute arose from a preliminary agreement dated 30.04.2013 executed between T.I. Raju, a Government Contractor, and the Kerala Water Authority for construction of a Sewage Treatment Plant at Medical College, Calicut.
The contractor completed the work on 07.07.2014. A principal amount of Rs. 86,64,846/- became payable.
However, the Authority did not immediately release the payment. Consequently, the contractor approached the High Court in 2015 by filing a writ petition seeking disbursal of the principal sum. The High Court allowed the petition, and the Authority released the funds on 02.03.2016.
Thereafter, on 25.11.2017, the contractor instituted O.S. No. 143 of 2017 before the Subordinate Judge’s Court, Kozhikode. He claimed interest at 14% per annum for the period between 09.07.2014 and 02.03.2016.
Trial Court and High Court Findings
The Trial Court framed issues regarding:
- Entitlement to interest,
- Responsibility for delay,
- Reliefs and costs.
The Trial Court decreed the suit and directed the defendants to pay:
- Rs. 21,48,411/-,
- Interest at 14% from the date of suit till realization,
- Joint and several liability on the defendants.
Subsequently, in RFA No. 56 of 2020, the Kerala High Court partly modified the decree. The High Court:
- Reduced the interest rate to 9% per annum,
- Quantified it at Rs. 12,90,469/-,
- Granted 6% pendente lite interest.
Nevertheless, the High Court upheld the liability of the Kerala Water Authority and its officers.
Aggrieved, the Authority approached the Supreme Court under Article 136 of the Constitution.
Core Legal Issue: Validity of Clause (5)
The controversy centered on Clause (5) of the preliminary agreement dated 30.04.2013, which 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 claims would depend on availability of budget provisions and allotment of funds.
The High Court had held that the clause offended Section 23 of the Indian Contract Act and public policy.
Questions Raised in the Special Leave Petition
The Kerala Water Authority raised several substantial questions of law, including:
- Can courts award interest despite an express contractual prohibition?
- Did the High Court ignore Section 3(3) of the Interest Act, 1978?
- Could Clause (5) be invalidated under Section 23 of the Contract Act?
- Was joint and several liability justified?
- Could delay be attributed to the Authority when fund release depended on Government sanction?
- Did the High Court disregard binding Supreme Court precedents?
Defence of the Kerala Water Authority
1. Section 3(3) of the Interest Act
The Authority argued that Section 3(3) expressly excludes cases where parties have barred interest by agreement. Therefore, courts cannot award interest contrary to contractual terms.
2. Conscious Acceptance of Risk
The contractor entered the agreement with full awareness that:
- Payment depended on budget allocation.
- Interest would not accrue for delayed settlement.
Accordingly, the Authority contended that the contractor could not resile from agreed terms.
3. Public Project Considerations
The project served a public purpose. The Authority, as “State” under Article 12, initiated the project to prevent infrastructure delays affecting the public.
4. Section 34 CPC Cannot Override Contract
Section 34 CPC governs rate of interest only where interest is otherwise legally payable. It does not override statutory exceptions under Section 3(3).
5. Executing Agency Position
The Authority emphasized that it functioned as an executing agency and depended on Government sanction for release of funds.
6. Reliance on Precedents
The Authority relied on:
- Garg Builders v. BHEL (2022) 11 SCC 697
- State of Rajasthan v. Ferro Concrete Construction (2009) 12 SCC 1
- Union of India v. Bright Power Projects (2015) 9 SCC 695
- Union of India v. Manraj Enterprises (2022) 2 SCC 331
These decisions affirm that contractual waiver of interest remains enforceable.
Supreme Court’s Reasoning
The Supreme Court examined Clause (5) contextually and emphasized contractual autonomy.
First, the Court noted that the parties consciously entered into the agreement despite potential delays in budget allocation. Clause (5) specifically addressed belated payment and barred consequential interest.
Second, the Court observed that the High Court considered Section 3(1) of the Interest Act but overlooked the exception under Section 3(3).
Third, the Bench clarified that the Interest Act mandates interest only in the absence of agreement. Where parties expressly waive interest, courts must respect the contractual bargain.
Importantly, the Court rejected the High Court’s finding under Section 23 of the Contract Act. It held that Clause (5) did not violate public policy. Instead, the clause reflected commercial risk allocation that the contractor factored into his bid.
Further, the Court clarified that Section 34 CPC does not override Section 3(3) of the Interest Act.
Final Verdict
After examining the statutory framework and contractual terms, the Supreme Court concluded:
- The High Court misinterpreted Clause (5).
- The statutory exception under Section 3(3) was ignored.
- The contractual waiver of interest remained binding.
Accordingly:
- The judgment dated 23.02.2023 was set aside.
- Civil Appeal arising out of SLP (C) No. 17823/2023 was allowed.
- Civil Appeal arising out of SLP (C) No. 24631/2023 was dismissed.
Conclusion of the Supreme Court Order
In conclusion, the Supreme Court held that the Kerala High Court erred in awarding interest despite the express contractual bar contained in Clause (5) of the preliminary agreement. The Bench clarified that Section 3(3) of the Interest Act, 1978 protects agreements where parties consciously waive interest, and courts cannot override such contractual stipulations by invoking Section 3(1) of the Act or Section 34 of the Code of Civil Procedure.
The Court further held that Clause (5) was neither opposed to public policy under Section 23 of the Indian Contract Act nor legally invalid. Instead, it represented a legitimate commercial allocation of risk between the contracting parties in the context of a public infrastructure project.
Accordingly, the Supreme Court set aside the impugned judgment dated 23.02.2023 passed by the Kerala High Court. The Civil Appeal arising out of SLP (C) No. 17823/2023 filed by the Kerala Water Authority was allowed, while the connected Civil Appeal arising out of SLP (C) No. 24631/2023 filed by T.I. Raju was dismissed. All pending applications, if any, stood disposed of.
