CAN GOVERNMENT ADJUST DUES FROM AN UNRELATED CONTRACT? SUPREME COURT ON CONTRACTUAL RECOVERY

A State that believes a contractor has been overpaid on one project cannot simply help itself to the contractor’s bills on another. In M/s Awadhesh Singh Gautam v. State of Chhattisgarh & Ors., 2026 INSC 1072, a Bench of J. Pamidighantam, J. Sri Narasimha and J. Alok Aradhe set aside a recovery of Rs.84,17,003 made from three unrelated road contracts, holding that the power of cross-contract recovery must be found in the contract itself and exercised on the terms it prescribes.

 

Background

The Appellant, a partnership firm, had been awarded road works under the Pradhan Mantri Gram Sadak Yojana. Two earlier contracts, awarded on 03.01.2023, were examined by a five-member committee constituted by the Collector, South Bastar, Dantewada. The Committee reported that Rs.3,55,82,055 had been paid whereas work worth only about Rs.1,54,75,938 had been executed, indicating an excess payment of Rs.2,01,06,117. An FIR for offences including cheating, forgery and criminal breach of trust followed, and a chargesheet was filed on 30.12.2025.

Independently, on 27.09.2025, the Executive Engineer passed an Order blocking Rs.84,17,003 from amounts payable to the firm under three subsequent works. The High Court dismissed the Writ Petitions on 07.01.2026, reasoning that the relief depended on disputed questions of fact unsuited to Article 226. The firm appealed.

Was the recovery traceable to the contract?

The State defended the deduction as a contractual set-off under four clauses. The Court found none applicable.

Clause 44.1 of the General Conditions of Contract deals only with liquidated damages for delay, capped at ten per cent of the contract price. The recovery was never founded on delay. Clause 53.1(ii) permits recourse to other State dues only where a contract has been terminated for fundamental breach of defects-liability and maintenance obligations; nothing showed that any contract had been terminated.

Clause 7(iv) of the Integrity Pact allows outstanding payments under other contracts to be used to recover sums paid, but presupposes a determination that the pact has been violated. The Recovery Order neither mentioned the pact nor recorded such a finding. Clause 38 of the Conditions of Contract, though wide enough to reach sums due under other contracts, is conditional on a breach being ascertained and the contractor being told of it. Again, there was no finding and no notice.

Clause 4.1 of the Special Conditions of Contract, dealing with technical examination, was the only provision matching what the Authorities had purported to do. Yet it permits recovery only from the security deposit or dues under the very work audited, and about Rs.1.07 crore remained payable under the earlier works, untouched. The clause also requires that the contractor be given an opportunity to explain, that no recovery be made without the orders of the CEO, CGRRDA and that action be initiated within twelve months of completion. The Order was issued by the Executive Engineer alone, without hearing.

A disputed claim is not an ascertained debt

Relying on Union of India v. Raman Iron Foundry, (1974) 2 SCC 231, it held that until an alleged overpayment is established in accordance with law, it remains a disputed and unadjudicated claim for damages, not a debt presently due. A party cannot treat such a claim as an ascertained debt merely because it holds money otherwise payable to the other side. Since no clause or provision of law permitted adjustment against a separate, subsisting contract without the contractor’s consent, the recovery contravened the conditions of Clause 4.1 and flagrantly violated natural justice.

Article 226 and contractual disputes

The High Court’s reasoning was also corrected. The Supreme Court held that the question before the writ court was not whether the earlier works had been over-billed. It was whether the State could appropriate that disputed amount from money admittedly payable under three contracts unconnected with the earlier works. That turned on construction of the contract and compliance with its terms, not on resolving contested facts and the High Court should have decided it.

Directions and what remains open

The Recovery Order was quashed. The Respondents were directed to release Rs.84,17,003 with interest at 6% per annum from 27.09.2025 until payment.

The Court acknowledged the seriousness of the allegations but clarified that the Judgment does not affect the criminal proceedings or the quantum of the alleged overpayment. The State remains free to pursue lawful proceedings for any amount ultimately found due.

Conclusion

First, if a government contract commits adjustment of excess payment from another contract, the specific clause with preconditions must be in the contract. Second, even a widely worded clause requires breach to be ascertained and communicated first. Third, where the contract prescribes a procedure, including hearing and approval by a designated authority, bypassing it is fatal. Fourth, writ courts cannot decline relief by pointing to disputed facts when the real question is the legality of the manner of recovery.

For contractors, this ruling safeguards ongoing projects against deductions founded on unproven allegations. For public bodies, it is a reminder that the seriousness of an allegation does not dispense with procedure.

Shomdeepta Chanda

Associate

The Indian Lawyer & Allied Services

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