Bar Council of India Notice

Disclaimer & Confirmation

As per the rules of the Bar Council of India, an advocate is not permitted to solicit work or advertise. By clicking “I Agree” below, you acknowledge and confirm that:

you are seeking information about Advocate Manish Jha of your own accord and for your own information and use; there has been no advertisement, personal communication, solicitation, invitation or inducement of any kind whatsoever from Advocate Manish Jha or the chamber to solicit any work through this website; the information made available here is provided only on your specific request; and no information on this website is to be construed as legal advice, nor does its use create any advocate-client relationship.

⚖  E-397, 4th Floor, Tagore Garden Extension, New Delhi – 110027 Mon–Sat  ·  +91 98738 50301  ·  legal@advocatemanishjha.com
Advocate Manish Jha Criminal · Civil · Family Law — New Delhi ☎  Consult the Chamber
Home › Supreme Court — Case Note
Supreme Court of India · 30 September 2026

Deducting Old Dues From New Contracts: Supreme Court Quashes Recovery Made Without Notice

In M/s Awadhesh Singh Gautam v. State of Chhattisgarh, 2026 INSC 1072, decided on 30 September 2026, a Bench of Justice P.S. Narasimha and Justice Alok Aradhe held that none of the contract clauses authorised deducting alleged excess payments under earlier contracts from the running bills of three ongoing contracts — least of all without notice or hearing.

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.

Contractual authority first. A public buyer's right to deduct is a creature of the contract invoked — it does not float free across every engagement with the same contractor.
Natural justice always. Even an authorised recovery mechanism required notice, hearing and approval; a deduction imposed in silence fails independently of the clause question.
Interest follows wrongful retention. The Court ordered refund with 6% interest from the date of the recovery order — withheld money is not free money.
Remedies survive. The State's underlying claim about the earlier contracts was not decided; it was remitted to proper proceedings where both sides can be heard.

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.

Note: This article is general information about the law and is not legal advice. It does not create an advocate-client relationship. The position stated is as at 5 October 2026 and may have changed since. Readers should verify any provision or decision referred to against the official text and seek advice on their own circumstances.