State Cannot Deduct a Disputed Overpayment from a Contractor's Other Bills Without Notice, Says Supreme Court

Case at a glance: The Supreme Court has quashed a recovery of Rs 84,17,003 that a Chhattisgarh road agency deducted from a contractor's bills on three subsisting PMGSY works to make up an alleged overpayment on earlier works. As reported, the Court treated an unadjudicated overpayment claim as a disputed claim for damages and not a debt presently due, found no notice, consent or sanction, and directed release of the sum with 6 per cent interest from 27 September 2025.

The appellant firm won three Pradhan Mantri Gram Sadak Yojana road works from the Chhattisgarh Rural Road Development Agency and had completed about 40 per cent of each. A committee alleged an excess payment of Rs 2,01,06,117 on earlier works. A Tehsildar's demand note under Section 146 of the Chhattisgarh Land Revenue Code, 1959 was quashed by the High Court.

An FIR was then registered against a partner and agency officers under IPC Sections 420, 467, 468, 471, 409 and 120-B. The Executive Engineer ordered recovery of Rs 84,17,003 by deduction from the three subsequent works. The High Court dismissed the writ petitions on the footing that disputed facts were involved, and the firm appealed.

The Key Question Before the Court

Can the State recover a disputed, unadjudicated overpayment from sums admittedly payable under separate subsisting contracts, and was the High Court right to refuse relief because facts were disputed?

Why a Disputed Claim Is Not a Debt

As reported, the Court held that the recovery was made without notice, consent or sanction, in breach of Clause 4.1 of the General Conditions of Contract and of natural justice. Clause 53.1(ii) permits cross-contract recovery only where a contract is terminated for breach of defects-liability or maintenance obligations under Clause 32, and no termination was shown.

The recovery order also did not invoke or find a breach of the Integrity Pact (Clause 7(iv)). An overpayment claim that has not been adjudicated was described as a disputed claim for damages, not a debt presently due.

On the High Court's reasoning, the Court reportedly held that the real question did not require resolving disputed facts: it was whether the State could take a disputed amount out of sums admittedly payable.

What the Court Actually Held

• The recovery order was quashed and the appeals allowed.
• The State was directed to release Rs 84,17,003 with 6 per cent interest from 27 September 2025.
• An unadjudicated overpayment claim is not a debt presently due.
• Cross-contract recovery needs a contractual basis such as Clause 53.1(ii), which was not engaged.
• The High Court erred in declining relief on the ground of disputed facts.

Why This Judgment Matters

• It protects contractors from self-help recovery by public bodies.
• It ties recovery to the contract's own clauses and to natural justice.
• It limits the use of “disputed facts” as a reason for writ courts to decline relief.

What Should Advocates Take Away From the Judgment?

For Contractors' Counsel

• Check the contract's recovery and set-off clauses and whether notice was given before any deduction.
• Frame the writ around the legal power to deduct, not the underlying factual dispute.

For Government Counsel

• Adjudicate the overpayment, or follow the termination route in the contract, before deducting from other bills.

Key Takeaways

Frequently Asked Questions

Not without a contractual basis and notice. The Court held the deduction here breached Clause 4.1 and natural justice, and Clause 53.1(ii) was not engaged.

The State must release Rs 84,17,003 with 6 per cent interest from 27 September 2025.

No. The Court treated it as an unadjudicated claim, so the State's claim itself was not decided here.

Conclusion