Supreme Court: A State cannot recover alleged overpayment on old works from a contractor's bills under separate contracts

Court: Supreme Court of India
Date of judgment: 30 September 2026
Case: C.A. No. 13299/2026
Parties: M/S. Awadhesh Singh Gautam Vs State Of Chhattisgarh
Outcome: Allowed

Summary

The Supreme Court on 30 September 2026 quashed a recovery order by which a Chhattisgarh road agency had deducted Rs 84,17,003 from a contractor's bills on three ongoing road projects to make good an alleged overpayment on two earlier, separate contracts. A bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe (judgment by Justice Aradhe) held that none of the contract clauses relied on by the State permitted this, and that the order was passed without notice, in breach of natural justice. It directed the State to release the amount with 6 per cent interest.

The appellant, M/s Awadhesh Singh Gautam, a partnership firm, was awarded three packages under the Pradhan Mantri Gram Sadak Yojana by the Chhattisgarh Rural Road Development Agency (CGRRDA), with work orders of 1 September 2023 and 5 November 2024. After doing about 40 per cent of each, it raised running bills of Rs 39,78,500, Rs 45,62,000 and Rs 23,55,000, which stayed unpaid despite reminders in September 2025. Separately, on 3 January 2023, it had been given two other road contracts of about Rs 437.43 lakh. After complaints of irregularities, a five-member committee appointed by the Collector, South Bastar, Dantewada, reported on 9 January 2024 that Rs 3,55,82,055 had been paid for those earlier works against work of only about Rs 1,54,75,938, an excess of Rs 2,01,06,117. It recommended recovery, blacklisting and a probe.

A demand note issued under Section 146 of the Chhattisgarh Land Revenue Code, 1959 was quashed by the High Court on 5 March 2025 for want of notice or hearing, leaving the State free to act afresh in accordance with law. An FIR was registered under Sections 420, 467, 468, 471, 409 and 120-B of the Indian Penal Code against a partner of the firm and CGRRDA officers, and a chargesheet was filed on 30 December 2025. Independently, the Executive Engineer of the Project Implementation Unit passed a recovery order on 27 September 2025, blocking Rs 84,17,003 out of the amounts payable and deducting Rs 28,00,000, Rs 38,00,000 and Rs 18,17,003 from the three subsequent works. The firm's representation of 9 October 2025 drew no response, and the High Court on 7 January 2026 dismissed its three writ petitions, saying disputed questions of fact could not be decided under Article 226.

The question before the court

Is the recovery order traceable to any clause of the contract that lets the State recover dues of one contract from payments under another?
Even if it is, did it satisfy the conditions of that clause and the principles of natural justice, and could the High Court refuse relief because the earlier overpayment was disputed?

What each side argued

The appellant's senior counsel argued that the recovery order was passed without notice or hearing, in violation of Clause 4.1 of the Special Conditions of Contract, which alone provides for recovery after a technical audit and only after hearing the contractor. Appropriating amounts due under one contract towards a liability alleged under a different contract is impermissible, and Clauses 43 and 53 have no bearing. A sum of Rs 1,07,02,594 was still payable under the very earlier works, yet the State recovered from three unconnected contracts. He relied on ABL International Ltd. v. Export Credit Guarantee Corporation of India Ltd.
The Additional Advocate General for the State argued that the power of cross-contract recovery flows from the contract itself, from 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. The allegation was manipulation of measurement books to draw excess payments from public funds, a contractual set-off is enforceable on that basis alone, and the contractor cannot take the benefit of the contract while disowning its burden. He relied on Caretel Infotech v. HPCL, Bharti Airtel v. Vijaykumar V. Iyer, State of Gujarat v. Amber Builders, H.M. Kamaluddin Ansari v. Union of India, Nabha Power v. PSPCL and Union of India v. N. Murugesan.

The court's decision

The Court examined each clause. Clause 44.1 of the General Conditions deals with liquidated damages for delay, capped at ten per cent of the initial contract price, and the recovery order was not based on any claim for delay. Clause 53.1(ii) applies only where a contract is terminated for the contractor's fundamental breach of defects-liability and five-year maintenance obligations, and there was nothing to show that either set of works had been terminated. Clause 7(iv) of the Integrity Pact permits recovery from dues under any other contract, but presupposes a prior determination that the bidder violated the pact, and the order neither mentions the pact nor records such a finding. Clause 38 is wide enough to allow recovery from other contracts once validly invoked, but only after a breach has been ascertained and the contractor told of it, which did not happen.

Clause 4.1 of the Special Conditions, on technical examination, alone answers the description of what the State did. But it allows recovery only from the security deposit or dues from the account of the very work audited, and it was undisputed that about Rs 1.07 crore remained due under the earlier works, which the State did not touch. It also requires that the contractor be given an opportunity to explain, that no recovery be made without the orders of the CEO of CGRRDA, and that action be initiated within twelve months of completion. No opportunity was given, the order was issued by the Executive Engineer alone without showing the CEO's approval, and nothing established the date of completion of the earlier works. None of the clauses, read singly or together, authorised the deduction or the manner of it.

The Court added that, however serious the allegations on the earlier works, until an overpayment is established in accordance with law it remains a disputed and unadjudicated claim for damages and not a debt due, as explained in Union of India v. Raman Iron Foundry. A party cannot treat it as an ascertained debt and appropriate sums otherwise payable under another contract. The recovery was in breach of the conditions of Clause 4.1 and in flagrant violation of natural justice. The High Court erred in declining relief on the ground of disputed facts, since the real question was whether the State could appropriate that disputed amount from money admittedly payable under three contracts unconnected with the earlier works, and that turns on the construction of the contract.

The recovery order of 27 September 2025 was quashed. The State must release Rs 84,17,003 with interest at 6 per cent a year from 27 September 2025 until payment. The State may still take appropriate proceedings in accordance with law to recover any amount ultimately found due on the earlier works. The observations are confined to the legality of the manner of recovery and do not affect the pending criminal case on Chargesheet No. 87 of 2025 or the correctness and quantum of the alleged overpayment. The appeals were allowed with no order as to costs.

Precedents referred to

Union of India v. Raman Iron Foundry, (1974) 2 SCC 231
ABL International Ltd. v. Export Credit Guarantee Corporation of India Ltd., (2004) 3 SCC 553 (relied on by the appellant)
Caretel Infotech Ltd. v. Hindustan Petroleum Corporation Limited, (2019) 14 SCC 81 (relied on by the State)
Bharti Airtel Ltd. v. Vijaykumar V. Iyer, (2024) 4 SCC 668 (relied on by the State)
State of Gujarat v. Amber Builders, (2020) 2 SCC 540 (relied on by the State)
H.M. Kamaluddin Ansari and Co. v. Union of India, (1983) 4 SCC 417 (relied on by the State)
Nabha Power Limited v. Punjab State Power Corporation Limited, (2018) 11 SCC 508 (relied on by the State)
Union of India v. N. Murugesan, (2022) 2 SCC 25 (relied on by the State)

Provisions referred to

Article 226 of the Constitution of India
Chhattisgarh Land Revenue Code, 1959, Section 146
Standard Bidding Document: Special Conditions of Contract Clause 4.1; General Conditions of Contract Clauses 44.1 and 53.1(ii)

Read the full judgment (PDF) ↗

Official source: Supreme Court of India. The PDF above is a copy from an open dataset of the court's public records.

This summary is prepared for general assistance only. It may contain errors and is not legal advice — rely on the full judgment.

Government Contracts Recovery Of Dues Natural Justice Writ Jurisdiction Contractor Payments

Supreme Court ·30 Sep 2026 ·Cheque Dishonour ★ Editor's pick

Supreme Court: Cheque-bounce notice sent to the right address is valid even if a relative takes it; M.D. Thomas per incuriam

The question: Is the requirement of 'giving' notice under proviso (b) to Section 138 satisfied when a correctly addressed registered notice is received by the drawer's mother, not by the drawer?

The Supreme Court on 30 September 2026 held that a statutory demand notice under Section 138 of the Negotiable Instruments Act, 1881 is validly given once it is dispatched by registered post to the drawer's correct address, even if a family member receives it. A bench of Justices Ahsanuddin Amanullah and Manmohan (judgment by Justice Manmohan) set aside a Kerala High Court order that had acquitted an accused on the ground that the notice was received by his mother, and restored his conviction. In doing so, the Court held that its own earlier decision in M.D. Thomas v. P.S. Jaleel (2009) 14 SCC 398, which had set aside a conviction because the notice went to the drawer's wife, was per incuriam and not binding under Article 141 of the Constitution. The appellant, Sainaba, alleged that the second respondent had borrowed Rs 3,00,000 from her and issued a cheque (No. 479097) on the Catholic Syrian Bank, Perumbavoor Branch, which was dishonoured. She sent a statutory demand notice dated 31 August 2016 by registered post to his correct address, where it was received by his mother. He neither paid nor replied, and she filed a complaint (S.T. Case No. 114 of 2017). In his statement under Section 313 of the Code of Criminal Procedure he said that he had borrowed Rs 7,00,000 in all and repaid it, and that he had given a blank signed cheque when he borrowed Rs 3,00,000. The Trial Court convicted him on 10 July 2019 and sentenced him to six months' simple imprisonment and a fine of Rs 3,00,000, with a default term of further imprisonment. His appeal was dismissed by the Additional District and Sessions Judge on 16 February 2023. The Kerala High Court, in a revision (Crl. R.P. No. 865 of 2023) decided on 29 July 2025, set aside the concurrent findings, holding that unless there was evidence that the accused was aware of the notice received by his mother, service could not be concluded. The complainant appealed. Despite service of notice on him on 11 December 2025, the second respondent did not appear, and the State of Kerala said it was not a contesting respondent.

Allowed Crl.A. No. 4640/2026