On February 9, 2026, the Supreme Court of India set aside a Kerala High Court judgment that had awarded interest to a government contractor for delayed payment of contractual dues. The Court held that the preliminary agreement expressly barred any claim for interest. Therefore, the High Court could not grant such relief.

A Bench comprising Justice M.M. Sundresh and Justice Nongmeikapam Kotiswar Singh delivered the judgment in Civil Appeal Nos. of 2026 arising out of SLP (C) Nos. 17823/2023 and 24631/2023.

Senior Advocate Thomas P. Joseph appeared for the appellants. He was assisted by Bijo Mathew Joy, AOR, and Gifty Marium Joseph, Advocate.

The appeals challenged a common judgment dated February 23, 2023 passed by the High Court of Kerala at Ernakulam in RFA No. 56/2020.

Factual Background

The dispute arose from a preliminary agreement dated April 30, 2013 between T.I. Raju and the Kerala Water Authority. The agreement concerned construction of a Sewage Treatment Plant at Medical College, Calicut.

The contractor completed the work on July 7, 2014. A principal sum of ₹86,64,846/- became payable upon completion. However, the Authority did not release the amount immediately.

Consequently, in 2015, the contractor filed a writ petition before the High Court seeking disbursal of the principal amount. The High Court allowed the petition. Authorities released the funds on March 2, 2016.

Suit for Interest

After receiving the principal amount, the contractor filed a civil suit on November 25, 2017. He claimed interest at 14% per annum for the period between July 9, 2014 and March 2, 2016.

The trial court decreed the suit. It directed the defendants to pay ₹21,48,411/- with 14% interest from the date of filing of the suit until realization.

On appeal, the Kerala High Court partly allowed the appeal of defendant Nos. 2, 3 and 7. It reduced the pre-decretal interest to 9% per annum, amounting to ₹12,90,469/-. In addition, it reduced pendente lite interest to 6% per annum. However, it upheld the finding that interest was payable despite the contractual clause.

Core Legal Issue

The central issue before the Supreme Court concerned Clause (5) of the preliminary agreement dated April 30, 2013.

Clause (5) stated that settlement of claims depended on budget availability and allocation of funds. Importantly, it expressly provided that no claim or interest for damages whatsoever shall arise for belated settlement of bills.

Senior counsel for the appellants argued that Clause (5) created a binding contractual bar. They relied on Section 3(3) of the Interest Act, 1978. They submitted that courts cannot override express contractual exclusions. Further, they contended that Section 34 of the Code of Civil Procedure, 1908 does not permit rewriting negotiated contractual terms.

Supreme Court’s Findings

The Bench accepted these submissions.

First, the Court observed that Clause (5) reflected a conscious allocation of financial risk in a public infrastructure project. The contractor entered into the agreement knowing that payment depended on fund allocation.

Second, although the High Court referred to Section 3(1) of the Interest Act, 1978, it failed to consider the exception under Section 3(3). That provision protects contractual stipulations relating to interest.

The Supreme Court clarified that the Interest Act operates only where no agreement exists or where the agreed rate is unlawful. It does not authorise courts to disregard express contractual exclusions.

Moreover, the Court rejected reliance on Section 34 CPC. It held that Section 34 governs the rate of interest in decrees. However, it does not override a contractual exclusion recognised under Section 3(3) of the Interest Act.

Further, the Bench noted that the Kerala Water Authority falls within the definition of “State” under Article 12 of the Constitution of India. The project served a public purpose. Therefore, Clause (5) ensured continuity of public infrastructure projects despite temporary budget constraints.

Appreciation of the Court’s Reasoning

The judgment reflects a disciplined and contract-centric approach.

Importantly, the Court gave primacy to the contractual framework agreed between the parties. It declined to dilute express stipulations through expansive statutory interpretation.

Arguments Advanced by the Appellants

Senior Counsel for the Kerala Water Authority submitted that:

• Clause (5) expressly barred any claim for interest on delayed settlement of bills.
  
• The contractor entered the agreement with full knowledge that payments depended on budget allocation.
  
• Section 3(3) of the Interest Act preserves contractual exclusions and operates as an exception to Section 3(1).
  
• Section 34 CPC cannot override a binding contractual term.
  

They further argued that granting interest contrary to Clause (5) would amount to judicial modification of a negotiated contract. Such modification, they contended, would undermine certainty in public infrastructure agreements.

Supreme Court’s Endorsement of Contractual Autonomy

The Court agreed.

It emphasised that when parties consciously allocate risk in a commercial contract, courts must respect that allocation unless it violates statutory or constitutional principles.

The Bench underscored that the Interest Act fills a legislative vacuum. It does not authorise courts to override express contractual exclusions.

By invoking Section 3(3), the Court clarified that contractual agreements governing interest prevail over general statutory provisions. Thus, the ruling strengthens doctrinal consistency in contract enforcement jurisprudence.

Harmonisation with Public Law

The Court also placed the dispute in a broader constitutional context.

Because the Kerala Water Authority qualifies as “State” under Article 12, the project served public infrastructure needs. Consequently, Clause (5) ensured that essential works could proceed even when immediate funds were unavailable.

Thus, the Court balanced contractual autonomy with public interest considerations.

Judicial Discipline in Statutory Interpretation

The ruling further demonstrates restraint in interpreting Section 34 CPC.

The Court made clear that Section 34 concerns the rate of interest. It does not override substantive contractual exclusions protected under Section 3(3) of the Interest Act.

By refusing to expand Section 34 beyond legislative intent, the Bench preserved statutory coherence.

Broader Significance

The decision strengthens certainty in government contracts. It confirms that express risk-allocation clauses remain enforceable.

Further, it affirms that parties cannot seek relief contrary to agreed contractual terms by invoking general statutory provisions.

Accordingly, the judgment enhances commercial predictability, clarifies the scope of the Interest Act, and stabilises public works contracting jurisprudence.

Final Order

Accordingly, the Supreme Court set aside the Kerala High Court’s judgment.

The appeal filed by Kerala Water Authority in Civil Appeal arising out of SLP (C) No. 17823/2023 was allowed.

The appeal filed by T.I. Raju in Civil Appeal arising out of SLP (C) No. 24631/2023 was dismissed.