The Supreme Court has set aside a recovery of ₹84.17 lakh from a contractor’s running bills under three separate road construction contracts, holding that the State could not adjust an alleged overpayment under earlier contracts without satisfying the applicable contractual conditions and principles of natural justice.

The bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe directed the authorities to release ₹84,17,003 with interest at 6% per annum from September 27, 2025, until actual payment. 

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The dispute arose from road construction works awarded to M/s Awadhesh Singh Gautam, a partnership firm, by the Chhattisgarh Rural Road Development Agency under the Pradhan Mantri Gram Sadak Yojana.

The firm received three subsequent work packages through work orders issued on September 1, 2023, and November 5, 2024. After executing approximately 40% of the work under each package, it submitted running bills of ₹39,78,500, ₹45,62,000 and ₹23,55,000, respectively. Despite reminders in September 2025, the billed amounts remained unreleased.

Separately, the contractor had been awarded two earlier road construction contracts on January 3, 2023, at 10.10% above the Schedule of Rates, with an approved cost of approximately ₹437.43 lakh.

Complaints concerning execution of these earlier works prompted the Collector of South Bastar, Dantewada, to constitute a five-member committee.

In its report dated January 9, 2024, the committee recorded that the contractor had received ₹3,55,82,055, while the value of work actually executed was approximately ₹1,54,75,938. It consequently alleged an excess payment of ₹2,01,06,117.

The committee recommended recovery of the amount, blacklisting of the contractor, examination of its other works and departmental action against the concerned agency officers.

Acting on the report, the Collector directed the Tehsildar to initiate recovery. A demand note issued on December 16, 2024, under Section 146 of the Chhattisgarh Land Revenue Code, 1959, required payment within ten days.

However, the Chhattisgarh High Court quashed that demand note on March 5, 2025, because the contractor had not received notice or an opportunity of hearing. The High Court permitted the authorities to proceed afresh in accordance with law after complying with natural justice.

Criminal proceedings were also initiated against a partner of the firm and agency officers over the alleged irregularities. A chargesheet was filed on December 30, 2025.

Following further inspections and departmental re-evaluation, the Executive Engineer passed a recovery order on September 27, 2025, blocking ₹84,17,003 from amounts payable under the three subsequent contracts.

The deductions were apportioned as ₹28 lakh, ₹38 lakh and ₹18,17,003 across the three packages.

The contractor submitted a representation asserting that these contracts were distinct from the earlier works that had generated the alleged liability. It sought release of the deducted amount, but received no response.

Three writ petitions challenging the recovery were dismissed by the High Court on January 7, 2026. The High Court held that the relief depended on resolving disputed questions of fact and left the contractor free to pursue an alternative remedy.

The contractor then approached the Supreme Court.

Before the Supreme Court, the contractor argued that the recovery had been ordered without notice or hearing, contrary to Clause 4.1 of the Special Conditions of Contract governing recovery following a technical audit.

It also submitted that ₹1,07,02,594 remained payable under the earlier works themselves, yet the authorities had chosen to deduct money from three unrelated, ongoing contracts.

The State maintained that the contracts expressly permitted recovery across different works. It relied on provisions concerning liquidated damages, termination, sanctions under the Pre-Contract Integrity Pact and compensation for contractual breach.

The State further argued that the allegations involved manipulation of measurement books to obtain excess payments from public funds, rather than a simple billing discrepancy.

The Supreme Court examined each contractual provision relied upon by the State and found that none supported the recovery as effected.

Clause 44.1 of the General Conditions of Contract concerned liquidated damages for delayed completion or failure to achieve contractual milestones. The recovery order, however, concerned an alleged overpayment identified through technical examination. Consequently, the delay-related provision did not apply.

Clause 53.1(ii) dealt with recovery after termination for a fundamental breach of defects-liability and five-year road maintenance obligations. Recovery from other State works arose only after the prescribed sources of recovery proved insufficient. There was no material showing that the contracts had been terminated on those grounds.

The Court acknowledged that Clause 7(iv) of the Integrity Pact contemplated recovery from payments due under other contracts. Its application nevertheless required a prior determination of a violation of the pact through the prescribed process. The recovery order neither referred to the pact nor recorded such a finding.

Similarly, Clause 38 permitted recovery of damages following an established contractual breach. The authorities had neither recorded the necessary finding nor issued notice enabling the contractor to answer the allegation.

The Court held that Clause 4.1 of the Special Conditions of Contract specifically governed the alleged overpayment arising from technical audit of the earlier works.

As interpreted by the Court, that provision permitted recovery from the contractor’s security deposit or dues payable from the account pertaining to the audited works. It did not justify the deductions made from the three unconnected packages.

The provision also expressly required an opportunity for the contractor to explain its case before recovery. Further, recovery following a technical audit required an order of the Chief Executive Officer of the agency.

Neither requirement had been shown to have been satisfied. The recovery order was issued by the Executive Engineer without a prior hearing and did not disclose that the CEO’s approval had been obtained.

The clause additionally required action to be initiated and intimated within twelve months of completion of the audited work. No material establishing the completion date of the earlier works had been placed before the Court.

The Supreme Court distinguished an allegation of overpayment from an amount legally established as payable.

Until determined in accordance with law, the alleged overpayment remained a disputed and unadjudicated claim for damages, rather than a debt presently due. The State could not treat that claim as an ascertained debt merely because it held other payments payable to the contractor.

The Court concluded that the recovery breached the contractual conditions and amounted to a flagrant violation of natural justice.

Its reasoning did not exclude contractual recovery across different works in every situation. Rather, the Court found that the provisions relied upon did not authorise this particular deduction because their necessary conditions had not been fulfilled.

The Supreme Court also rejected the High Court’s reasoning that the petitions necessarily required adjudication of disputed facts concerning the earlier projects.

The issue was whether the State could appropriate the disputed amount from money admittedly payable under three separate contracts. Resolving that issue required interpretation of the contractual terms and examination of compliance with them.

It did not require the court to determine whether the alleged overpayment under the earlier works had actually occurred.

Allowing the appeals, the Supreme Court quashed the September 27, 2025, recovery order and directed release of ₹84,17,003 with 6% annual interest from the date of the recovery order until payment.

The Court expressly preserved the authorities’ right to initiate appropriate proceedings for recovery of any amount ultimately found payable under the earlier contracts.

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