Government departments and their agencies hold a powerful lever over contractors: the running bill. When an audit or committee later concludes that an earlier work was overpaid, the temptation is to simply withhold the difference from whatever bills are currently due — whichever contract they arise under. The Supreme Court’s decision in Awadhesh Singh Gautam, arising out of Pradhan Mantri Gram Sadak Yojana road contracts in Chhattisgarh, holds that lever to the terms of the bargain: recovery must find authority in the contract, and must respect natural justice, or it is simply appropriation.
Three live contracts, one old grievance
The appellant partnership firm held three road construction contracts under the Pradhan Mantri Gram Sadak Yojana, awarded by the Chhattisgarh Rural Road Development Agency. Work was roughly 40% complete, and running bills of about Rs 1.09 crore lay unpaid. Separately, a committee reviewing earlier, concluded road contracts alleged excess payments of about Rs 2.01 crore and recommended recovery. The Executive Engineer’s answer was an order of 27 September 2025 deducting Rs 84.17 lakh from the three ongoing contracts’ dues — no show-cause, no hearing, no adjudication of the disputed audit figures.
The clause-by-clause audit
The Bench of Justice P.S. Narasimha and Justice Alok Aradhe tested the deduction against every contractual peg the State offered. Clause 44.1 dealt with liquidated damages for delay — inapplicable. Clause 53.1(ii) permitted recovery only upon termination of the contract for specified breaches — there was no termination. Clause 4.1 of the Special Conditions allowed technical-audit recoveries, but from dues under the same contract, after hearing the contractor and with the CEO’s approval — none of which happened. The broader recovery clauses presupposed a prior determination of breach. The conclusion was categorical: none of the clauses authorised either the deduction of the disputed amount from the three subsequent contracts, or the manner in which it was effected.
A rule with wide application
The pattern condemned here is endemic in public works, supply and service contracting: dues under live engagements treated as a convenient pool from which to satisfy disputed claims arising elsewhere. The judgment restores the orthodox position. Cross-contract set-off needs either a contractual stipulation that plainly says so, the contractor’s consent, or an adjudication — arbitral or judicial — converting the disputed claim into an established debt. An internal committee’s report, however considered, is an allegation, not a decree. Contractors, for their part, should resist the deduction promptly: acquiescence over successive bills can later be painted as consent, while a contemporaneous protest preserves both the money claim and the interest that now clearly rides with it.
Practice pointer: when a public body proposes recovery from running bills, ask three questions in the first reply — which contract, which clause, and where is the hearing? The answers, or their absence, will frame the writ petition or suit that follows.
This article is for general information only and is not legal advice or a solicitation.
Frequently Asked Questions
What had the state agency done?
A committee examining earlier road contracts alleged excess payments of about Rs 2.01 crore and recommended recovery. Acting on that, an Executive Engineer passed a recovery order on 27 September 2025 deducting Rs 84.17 lakh from the running bills of three ongoing, separate contracts — about 40% complete, with roughly Rs 1.09 crore in bills pending — without giving the firm notice or an opportunity to respond.
Why did the contract clauses not support the recovery?
The Court examined each clause invoked: the liquidated damages clause addressed delay, not audit recoveries; the recovery-on-termination clause applied only upon termination for specified breaches; and the technical audit clause permitted recovery from dues under the same contract, after hearing the contractor and with higher-level approval. None authorised cross-contract deduction, and none dispensed with a hearing.
What did the Supreme Court order?
It quashed the recovery order of 27 September 2025 and directed the State to release Rs 84.17 lakh with interest at 6% per annum from that date until actual payment. The State remains free to pursue its claim about the alleged overpayments in earlier contracts through separate legal remedies — a suit or other proceedings where the firm can be heard.
What does the ruling mean for contractors in Delhi and elsewhere?
That unilateral cross-contract set-off by public bodies is vulnerable on two independent grounds: absence of contractual authority and breach of natural justice. A contractor facing such deductions should demand the clause relied upon in writing, insist on a hearing, and — where the deduction has already occurred — challenge it with a claim for interest, as the appellant successfully did here.