Contractual bar on interest held void where prolonged retention of money defeats public policy and compensatory commercial justice.

A contractual clause excluding interest on sums payable to a contractor was held void and unenforceable as opposed to public policy. Applying Section 23 of the Indian Contract Act, 1872 with the Interest Act, 1978, the court reasoned that prolonged wrongful retention of money in commercial transactions cannot be insulated from compensatory interest by agreement. It held that public policy is dynamic, that immorality is not confined to sexual immorality, and that withholding payment without interest conflicts with commercial justice and the legislative policy reflected in the Interest Act. The contractor was therefore entitled to interest on the awarded sums.

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Issues: Whether a contractual clause barring payment of interest on amounts payable under the contract is void as being opposed to public policy and therefore unenforceable, with the result that pre-reference, pendente lite, and post-reference interest can be awarded notwithstanding the clause.

Analysis: The contractual clause excluded interest on amounts payable to the contractor. The Court held that Section 23 of the Indian Contract Act, 1872 invalidates an agreement whose object or consideration is unlawful, including one that is immoral or opposed to public policy. Reading that provision with the Interest Act, 1978, especially Sections 4 and 5, the Court reasoned that long wrongful retention of money in commercial dealings cannot be insulated from interest by a contractual exclusion. It held that public policy is dynamic, that immorality is not confined to sexual immorality, and that persistent withholding of money without compensatory interest is inconsistent with commercial justice, the rule of law, and the legislative policy reflected in the Interest Act.

Conclusion: The clause barring interest was held to be void and unenforceable, and the contractor remained entitled to interest on the awarded sums.

Ratio Decidendi: A contractual term that authorises prolonged wrongful retention of money without interest, in the setting of commercial transactions, is void if it is opposed to public policy under Section 23 of the Indian Contract Act, 1872, and cannot defeat the grant of compensatory interest.

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