A disputed claim is not a debt: Supreme Court bars recovery from a contractor's live bills
Justices P.S. Narasimha and Alok Aradhe quash an order adjusting an alleged overpayment on two earlier roads against running bills due under three unrelated later contracts.
A State that believes it has overpaid a contractor on one set of works cannot simply help itself to money admittedly due to him on another. The Supreme Court has quashed a Chhattisgarh recovery order that adjusted Rs 84,17,003 from running bills on three rural road packages against an alleged overpayment on two earlier roads, holding that until the overpayment is established in accordance with law it remains a disputed and unadjudicated claim for damages — not a debt presently due — and cannot be appropriated from sums payable under separate, subsisting contracts. Justices P.S. Narasimha and Alok Aradhe directed the money released with interest. The judgment was authored by Justice Alok Aradhe.
Two roads, a committee, and a bill that stopped being paid
The appellant, a partnership firm, had been awarded two road contracts in January 2023 at 10.10 per cent above the Schedule of Rates, at an approved cost of about Rs 437.43 lakh. A substantial part of that value had already been paid when complaints of irregularity in execution led the Collector of South Bastar, Dantewada, to constitute a five-member committee. Its report of January 2024 found that although Rs 3,55,82,055 had been paid, the value of work actually executed was about Rs 1,54,75,938, disclosing an excess of Rs 2,01,06,117. It recommended recovery of that sum, blacklisting of the firm, a probe into its other works, and departmental action against the agency's own officers.
Separately, the firm had been awarded three packages under the Pradhan Mantri Gram Sadak Yojana, with work orders in September 2023 and November 2024. Having executed roughly 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 brought no payment.
The State's first attempt at recovery was a demand note issued by the Tehsildar under Section 146 of the Chhattisgarh Land Revenue Code, 1959, which the High Court quashed in March 2025 for want of notice or hearing, in violation of natural justice, while reserving liberty to act on the committee's report afresh and in accordance with law. A criminal case also followed, a first information report against the firm's partner and officers of the agency under Sections 420, 467, 468, 471, 409 and 120-B of the Indian Penal Code, and a chargesheet was filed. Then, in September 2025, came the recovery order now in question, which simply adjusted the alleged overpayment against the money owed on the three later packages. Three writ petitions against it were dismissed by the High Court of Chhattisgarh at Bilaspur in January 2026.
Four clauses, and what each could and could not do
The Court framed two questions: whether the recovery order was traceable to the contractual clauses relied on, and whether, even if traceable, it satisfied the conditions such a clause prescribes and survived the principles of natural justice. It then took the clauses in turn.
Clause 44.1 of the General Conditions of Contract provides for liquidated damages for failure to achieve timely completion or contractual milestones, capped at ten per cent of the initial contract price, recoverable from any sum due to the contractor. On a plain reading, the Court held, it is confined to delay. The recovery order was never founded on a claim for liquidated damages; it proceeded from an allegation of overpayment detected on technical audit. The clause furnished no foundation.
Clause 7(iv) of the Pre-Contract Integrity Pact does contemplate recovering sums already paid, with interest, and using outstanding payments due under any other contract for that purpose. But invoking it presupposes a prior determination, through whatever process the pact itself prescribes, that the bidder has violated the pact. The recovery order neither referred to the pact nor recorded any finding that it stood violated.
Clause 38 of the Conditions of Contract is wide enough, once validly invoked, to permit recovery of sums payable under other contracts. But its invocation is conditional on a breach of contract first being ascertained and forfeiture being effected as damages for that breach — which obliges the Government to ascertain the breach and to tell the contractor of it so that he may answer the allegation. The order recorded no finding of breach, and no notice preceded it.
That left Clause 4.1 of the Special Conditions of Contract, which alone answered the description of what the State had actually done: it confers a right to cause audit and technical examination of works and final bills, and provides that if any sum is found to have been overpaid, or paid for work claimed but not executed, the contractor shall refund it and the amount may lawfully be recovered from his security deposit or from dues payable to him.
Why even the right clause did not save the order
Clause 4.1, the Court held, incorporates within itself certain principles of natural justice, and the recovery order was passed without notice, consent or sanction. No other clause, and no provision of law, permits an amount said to be due on one set of works to be adjusted against sums payable under a separate and subsisting contract without the contractor's consent.
The reasoning behind that is the part with the widest reach. Until the alleged overpayment is established in accordance with law, it remains a disputed and unadjudicated claim for damages and not a debt presently due — the principle in Union of India v. Raman Iron Foundry. A party to a contract cannot, merely because it also holds amounts otherwise payable under it, treat such a claim as though it were an ascertained debt and appropriate those amounts in satisfaction of it. The recovery was therefore not only contrary to the conditions the clause prescribes but in flagrant violation of natural justice.
The Court was careful about what it was not deciding. The allegations concerning the earlier works are of a serious character and are already the subject of a departmental inquiry and of criminal proceedings, and nothing in the judgment touches their merits.
It also identified where the High Court went wrong. That court had declined relief on the view that it turned on disputed questions of fact about the earlier works, which could not be gone into under Article 226. But the question actually before it was whether the State was justified in appropriating that very disputed amount from money admittedly payable under three subsequent contracts which have nothing to do with the earlier works — a question turning entirely on the construction of the contract and compliance with its terms, not on resolving disputed facts.
Order
The recovery order of 27 September 2025 was held unsustainable in law and quashed. The respondents were directed to release to the appellant Rs 84,17,003 together with interest at 6 per cent per annum from that date until actual payment.
The Court clarified that nothing precludes the respondents from taking recourse to appropriate proceedings, in accordance with law, to recover any amount that may ultimately be found due in respect of the earlier works. It further clarified that its observations are confined to the legality of the manner in which the recovery was effected, and have no bearing either on the pending criminal proceedings or on the correctness or quantum of the alleged overpayment, both of which are to be examined and decided independently and strictly on their own merits. The appeals were allowed in those terms, with no order as to costs.