Notice for interest under the Interest Act must precede repayment of principal, Bombay High Court rules

The Plaintiff was engaged to construct 650 police quarters and related infrastructure under a contract with the Defendant.

After completing the work, the Plaintiff sought payment for additional foundation excavation and other extra works, and interest on delayed bill payments.

The Single Judge decreed specified sums for extra work and pre-suit interest but declined other interest claims.

The Defendant appealed the awards for extra work and interest; the Plaintiff appealed the rejection of further interest.

1. Whether the Plaintiff was entitled to payment for additional foundation depth and the other extra works, having regard to the contract’s approval and notice requirements

2. Whether the Plaintiff could recover pre-suit interest under Section 3 of the Interest Act, 1978, including on bills whose principal amounts had been paid before the relevant notice

3. Whether the Plaintiff was entitled to pendente lite and post-decree interest under Section 34 of the Code of Civil Procedure, 1908

Section 3 of the Interest Act permits a court to award interest, subject to its terms and the statutory current-rate ceiling; for claims not arising from a written instrument payable at a certain time, a written notice stating that interest will be claimed is required, and interest cannot be awarded under the section for a period after repayment of the principal.

The court held that such a notice must be issued while the principal remains outstanding.

Section 34 CPC gives the court discretion to award pendente lite and post-decree interest on a money decree; in commercial transactions, post-decree interest may exceed 6% but must remain within the contractual rate or, absent one, the applicable nationalised-bank rate.

The court also applied Chandigarh Construction Company Pvt. Ltd. v. State of Punjab, (2020) 11 SCC 161, on payment for extra work once its execution is established despite non-compliance with a contractual notice stipulation, and relied on Satish Solvent Extractions, Tomorrowland Ltd. and Jagdish Rai & Brothers for the principles governing pendente lite and post-decree interest.

The Court upheld payment for additional foundation work because the work and its quantity were not disputed, the PMC recommended payment, and the record supported that the work had been required during site inspections; it found the contractual notice objection had been waived and, in any event, not a basis to deny payment for established extra work.

It also upheld the award for the compound wall, GSR and transformer works because their execution and valuation were supported by the evidence and were not effectively disputed.

As to pre-suit interest, the Court found that the January 1998 notice supported claims for specified bills then outstanding, but a later notice could not create a claim under Section 3 for bills whose principal had already been paid; accordingly, the Single Judge’s limited pre-suit interest award was affirmed.

For the money decrees, the Defendant had retained sums lawfully due, and no reason had been given to deny pendente lite or post-decree interest. The Court therefore awarded interest at 9% per annum, consistent with the rate accepted for the relevant period.

Appeal No. 29 of 2022, filed by the Plaintiff, was partly allowed: the decree was modified to provide simple interest at 9% per annum on the sums in paragraphs 20(iii)–(v) of the Single Judge’s judgment from the date of suit until payment or realisation, and on the sum in paragraph 20(vi) from the date of judgment until payment.

The remaining judgment was left unmodified, and the Defendant’s deposited Rs. 30 lakhs, with accrued interest, was directed to be paid to the Plaintiff in part satisfaction within eight weeks.