Supreme Court Quashes Rs 84 Lakh Recovery From Contractor’s Ongoing Road Works, Orders Refund With Interest; Government Cannot Treat Disputed Overpayment Claim as Debt Even Amid Criminal Case
New Delhi: The Supreme Court on 30 September 2026 quashed a recovery order by which the Chhattisgarh Rural Road Development Agency had blocked Rs 84,17,003 from a contractor’s bills on three ongoing road projects, to make good an alleged overpayment of over Rs 2 crore on two entirely different, earlier works. A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held that none of the contract clauses relied on by the State authorised such a cross-contract deduction, that the order was passed without notice or hearing, and that an unproven overpayment is “a disputed and unadjudicated claim for damages and not a debt presently due”. The State was directed to refund the money with interest at six per cent per annum from 27 September 2025.
The twist is that the contractor is not a clean-hands litigant on the facts alleged. A five-member committee found a Rs 2 crore excess payment, a First Information Report is pending against its partner and officers of the Agency itself, and a chargesheet has been filed. The Court still ruled for the contractor on the manner of recovery, while making it clear that none of the serious allegations has been decided.
Case at a Glance
Case Title: M/s Awadhesh Singh Gautam vs State of Chhattisgarh and Others
Citation: 2026 INSC 1072 (non-reportable)
Case Number: Civil Appeals arising out of Special Leave Petition (Civil) Nos. 10464, 12766 and 12346 of 2026
Bench: Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe (judgment authored by Justice Alok Aradhe)
Date of Judgment: 30 September 2026
What Was Challenged: Three orders dated 7 January 2026 of the High Court of Chhattisgarh at Bilaspur dismissing the contractor’s writ petitions against the recovery order dated 27 September 2025
Outcome: Appeals allowed; recovery order quashed; refund of Rs 84,17,003 with six per cent interest; State free to pursue lawful recovery for the earlier works
Background: Two Sets of Contracts and One Explosive Audit
The appellant, a partnership firm, was awarded two road contracts on 3 January 2023 at 10.10 per cent above the Schedule of Rates, at an approved cost of about Rs 437.43 lakhs (the earlier works). Later, under the Pradhan Mantri Gram Sadak Yojana, it received three more packages through work orders dated 1 September 2023 and 5 November 2024 (the subsequent works). After completing about 40 per cent of each, it raised running bills of Rs 39,78,500, Rs 45,62,000 and Rs 23,55,000. Reminders in September 2025 went unanswered.
Meanwhile, complaints about the earlier works led the Collector of South Bastar, Dantewada, to constitute a five-member committee. Its report of 9 January 2024 found that Rs 3,55,82,055 had been paid, while work worth only about Rs 1,54,75,938 had actually been executed, an excess payment of Rs 2,01,06,117. It recommended recovery, blacklisting, a probe into other works, and departmental action against the officers of the Agency concerned.
The first attempt at recovery failed. A demand note of 16 December 2024 under Section 146 of the Chhattisgarh Land Revenue Code, 1959 was quashed by the High Court on 5 March 2025 for want of notice and hearing, with liberty to the State to proceed afresh in accordance with law. A First Information Report was also registered under Sections 420, 467, 468, 471, 409 and 120-B of the Indian Penal Code against the contractor’s partner and officers of the Agency, and a chargesheet followed on 30 December 2025.
The Order That Triggered the Dispute
Instead of starting afresh, the Executive Engineer passed a recovery order on 27 September 2025. Without a hearing, it blocked Rs 84,17,003 from the amounts payable under the three subsequent works, deducting Rs 28,00,000, Rs 38,00,000 and Rs 18,17,003 respectively. The contractor’s representation of 9 October 2025 pointing out that the deductions were being made from wholly distinct contracts drew no response.
The High Court dismissed the contractor’s writ petitions on 7 January 2026, holding that the relief depended on disputed questions of fact that could not be decided under Article 226 of the Constitution, and leaving it to pursue alternate remedies.
What the State Argued and What the Contractor Said
The State argued that the power of cross-contract recovery flows from the contract itself, relying on Clause 7(iv) of the Pre-Contract Integrity Pact, Clause 38 of the Conditions of Contract, and Clauses 44.1 and 53.1(ii) of the General Conditions of Contract. It submitted that the allegation was manipulation of measurement books to draw public money, not a mere billing discrepancy.
The contractor, represented by senior counsel Gaurav Agrawal, argued that the only clause dealing with recovery after technical audit, Clause 4.1 of the Special Conditions of Contract, requires a hearing, and that amounts payable under one contract cannot be appropriated towards a liability said to arise under another. It also pointed out that Rs 1,07,02,594 was still payable to it under the very earlier works from which the alleged liability arose, yet the State chose to recover from three unconnected contracts.
Clause by Clause: Why Each Provision Failed
The Court examined every clause relied on by the State and found that none supported the recovery:
Clause 44.1 (General Conditions): Confined to liquidated damages for delay, capped at ten per cent of the initial contract price. The recovery order was never based on delay.
Clause 53.1(ii) (General Conditions): Applies only when a contract is terminated for breach of defects liability and five-year maintenance obligations. Nothing showed any of the contracts had been terminated.
Clause 7(iv) (Integrity Pact): Does allow recovery from dues under any other contract, but only after a prior determination that the bidder violated the pact. The order neither mentioned the pact nor recorded any such finding.
Clause 38 (Conditions of Contract): Wide enough to reach sums under other contracts, but only after a breach is first ascertained and the contractor is told of it. The order recorded no breach and no notice preceded it.
Clause 4.1 (Special Conditions): The one clause that actually describes a technical audit and recovery, but it permits recovery only from the security deposit or dues under the audited work itself, requires a hearing, requires orders of the Chief Executive Officer of the Agency, and sets a twelve month limit from completion of the audited work.
On Clause 4.1, the Court noted that about Rs 1.07 crore was still due under the earlier works yet no step was taken to appropriate it. It also noted that no opportunity of hearing was given, that the order was issued by the Executive Engineer alone without showing approval of the Chief Executive Officer, and that nothing established the date of completion of the earlier works. The Court concluded that none of the clauses, read singly or together, authorised the deduction.
The Core Holding: A Disputed Claim Is Not a Debt
The Court acknowledged that the allegations about the earlier works are serious and are the subject of departmental inquiry and criminal proceedings, and stressed that nothing in its judgment touches their merits. But that, it said, does not answer whether the manner of recovery was lawful. Relying on Union of India vs Raman Iron Foundry, it held:
Until proved in accordance with law, the overpayment remains “a disputed and unadjudicated claim for damages and not a debt presently due.”
A party holding money payable under a contract, the Court said, cannot treat such a claim as an ascertained debt and appropriate the money in satisfaction of it. The recovery was therefore not only contrary to the conditions of Clause 4.1 but, in the Court’s words, in flagrant violation of principles of natural justice.
Why the High Court Was Held to Be Wrong
The Supreme Court held that the High Court erred in treating the matter as a dispute of fact. The real question was whether the State could appropriate that disputed amount from money admittedly payable under three separate contracts that had nothing to do with the earlier works. That, the Court held, turns entirely on the construction of the contract and compliance with its terms, not on resolving disputed facts about the earlier works, and so was fit for writ jurisdiction.
Directions Issued by the Court
The recovery order dated 27 September 2025 is quashed and set aside.
The respondents shall release Rs 84,17,003 to the contractor with interest at six per cent per annum from 27 September 2025 till actual payment.
The State is free to take appropriate proceedings, in accordance with law, to recover any amount ultimately found due for the earlier works.
The observations are confined to the legality of the manner of recovery and have no bearing on the pending criminal case (Chargesheet No. 87 of 2025) or on the correctness or quantum of the alleged overpayment, which will be decided independently on merits.
The appeals are allowed with no order as to costs.
What This Means Going Forward
For government departments: Set-off against dues under unrelated contracts needs a clause that is actually triggered, with its preconditions of breach, finding, notice or approval satisfied first. A general suspicion of overpayment is not enough.
For contractors: Withholding under one contract to satisfy an allegation under another can be challenged in writ jurisdiction when the question is one of contractual power and procedure.
For contract drafters: Cross-contract recovery, integrity pact sanctions and audit clauses must be drafted with clear triggers, hearing requirements and time limits, because courts will read each precondition strictly.
For the pending case: The State can still prove the overpayment and recover it lawfully, and the criminal case continues untouched.
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Frequently Asked Questions
1. Can the government recover money from one contract by deducting from payments due under another contract?
Only if the contract or a provision of law clearly authorises it and the conditions of the relevant clause are met. In this case the Supreme Court held that none of the clauses relied on by the State authorised deduction from the three subsequent contracts.
2. Is an alleged overpayment to a contractor a debt that can be recovered immediately?
No. The Court held that until the overpayment is established in accordance with law, it remains a disputed and unadjudicated claim for damages and not a debt presently due.
3. Does Clause 4.1 of the Special Conditions of Contract require a hearing before recovery?
Yes. The Court noted that the clause requires the contractor to be given an opportunity to explain, requires orders of the Chief Executive Officer of the Agency, and requires action within twelve months of completion of the audited work.
4. Can a High Court refuse a writ petition against a contractual recovery because facts are disputed?
Not where the real question is the construction of the contract and compliance with its terms. The Supreme Court held that the High Court erred in dismissing the writ petitions as involving disputed questions of fact.
5. Does this judgment end the criminal case or the claim of overpayment against the contractor?
No. The Court clarified that its observations do not affect the pending criminal proceedings or the correctness and quantum of the alleged overpayment, and that the State may pursue lawful recovery for the earlier works.
Keywords
Supreme Court contractor recovery judgment 2026, Awadhesh Singh Gautam vs State of Chhattisgarh, 2026 INSC 1072, cross contract recovery, set off against other contract dues, disputed claim not a debt, technical audit recovery, Clause 4.1 Special Conditions of Contract, Integrity Pact Clause 7(iv), natural justice government contracts, Pradhan Mantri Gram Sadak Yojana, Article 226 contractual disputes, Chhattisgarh Rural Road Development Agency
Judgment and Source
Download the judgment: M/s Awadhesh Singh Gautam vs State of Chhattisgarh and Others (2026 INSC 1072), PDF
Source link: Judgment on Google Drive
Case Title: M/s Awadhesh Singh Gautam vs State of Chhattisgarh and Others
Case No.: Civil Appeals arising out of Special Leave Petition (Civil) Nos. 10464, 12766 and 12346 of 2026
Citation: 2026 INSC 1072
Bench: Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe
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