Panchayat road-construction contracts are non-commercial under Section 34 CPC; interest awarded at 9% pendente lite and 6% post-decree.

The District Panchayat invited tenders in 1980–81 for construction of the Navagam Chhalali–Karoli Road Junction-II. The contract was awarded to Shree Ram Construction on 31 March 1981 for Rs.10,31,817.94, with completion stipulated within two years. The contractor alleged that the Panchayat failed to hand over the entire site and did not provide the necessary maps and line-out for laying the damar carpet, thereby preventing completion of the work within the contractual and extended periods.

The contractor claimed damages and compensation under several heads, including loss of profit, price escalation, refund of penalty, payment for extra work, amounts due for completed work, and interest. It filed Special Civil Suit No.44 of 1994 for Rs.25,20,183.60. The Panchayat contested the claim, asserting limitation, want of jurisdiction, abandonment of the work by the contractor, and its own entitlement to damages.

The Panchayat subsequently filed Special Civil Suit No.34 of 1995, claiming Rs.11,40,619 as damages allegedly suffered because the remaining work had to be completed through another contractor. Both suits were consolidated and tried together.

The trial court partly allowed the contractor’s suit by awarding Rs.30,000 for extra work, Rs.1,415 towards illegally deducted penalty, and amounts for completed work. It rejected the claim for 20% price escalation but awarded interest at 20% from 1 July 1985. The Panchayat’s suit was dismissed.

The Panchayat filed First Appeal No.480 of 2007 against the decree in favour of the contractor and First Appeal No.481 of 2007 against dismissal of its own suit.

Whether the contractor was entitled to Rs.30,000 for alleged extra work involving rock cutting, despite the contractual requirement of prior written consent for extra work?

Whether the trial court was justified in awarding interest at 20% per annum from 1 July 1985, including the period before institution of the present suit?

Whether the work contract for construction of a public road constituted a “commercial transaction” under the proviso to Section 34(1) of the Code of Civil Procedure, 1908, so as to permit interest exceeding 6% per annum?

Whether the Panchayat had established its claim for damages arising from completion of the remaining work through another contractor?

The Court applied Section 34 of the Code of Civil Procedure, 1908, under which the court has discretion to award pendente lite interest at a reasonable rate and post-decree interest ordinarily not exceeding 6% per annum; interest exceeding 6% may be awarded for a commercial transaction only within the limits prescribed by the contractual rate or the rate charged by nationalised banks for comparable commercial transactions.

“Commercial transaction” is confined to a transaction connected with the industry, trade or business of the party incurring the liability.

The Court also relied on Central Bank of India v. Ravindra, 1996 (5) SCC 279, and M/s. Tomorrowland Ltd. v. Housing and Urban Development Corporation Ltd., 2025 INSC 207, for the principle that award of pendente lite and post-decree interest is a discretionary, equitable, fair and judicial—not arbitrary or fanciful—exercise.

Further, contractual terms requiring prior written approval for extra work had to be enforced, and oral assertions of authority could not override those terms.

The Court held that the contract expressly prohibited execution of extra work without prior written consent from the competent Panchayat authority. The contractor relied only on alleged oral assurances by Panchayat officers regarding rock-cutting work, while the Panchayat’s witnesses denied issuing such instructions. Since the contractual precondition was not satisfied, the trial court erred in awarding Rs.30,000 merely on the basis of the contractor’s oral claim.

The Court further found that the contractor was not entitled to pre-suit interest from 1 July 1985. The earlier suit had been filed without the statutory notice required under the Gujarat Panchayat Act and was later withdrawn with liberty to institute a fresh suit. Since the delay resulted from the contractor’s failure to pursue the earlier remedy properly, the Panchayat could not be made liable for interest during that period. Interest could therefore run only from institution of the present suit on 18 June 1994.

Although the contractor’s claim arose from a construction contract, the relevant liability was that of the District Panchayat in executing a public welfare scheme and constructing a rural public road. The Court held that such activity was part of the Panchayat’s constitutional and administrative welfare functions and was not a commercial transaction under Section 34 CPC. Consequently, the statutory exception permitting interest above 6% for commercial transactions was inapplicable.

Nevertheless, considering the withholding of payment for completed work and the nature of the dispute, the Court exercised its discretion to award 9% pendente lite interest and 6% post-decree interest.

With respect to the Panchayat’s independent claim, the Court agreed with the trial court that the Panchayat had failed to produce sufficient evidence proving the actual loss allegedly caused by awarding the remaining work to another contractor.

The contractor was held entitled to simple interest at 9% per annum on the principal amount of Rs.6,19,444.57 from 18 June 1994, the date of institution of the present suit, until disposal of the suit, and thereafter to 6% per annum until realization.

The decree for the principal amount otherwise remained unaltered.

First Appeal No.481 of 2007 was dismissed, as the Panchayat failed to prove its alleged damages arising from completion of the work through another contractor.