Govt Can't Deduct Dues Under One Contract From Payments Under Another Without Contractor's Consent: Supreme Court

The Supreme Court has held that the government cannot deduct money from payments due under one contract to recover an amount it claims the same contractor owes under another, unrelated contract, unless the contractor has agreed to such a deduction or the amount has already been legally determined.

A Bench of Justices P S Narasimha and Alok Aradhe held that such a deduction, when made without notice, consent or prior adjudication, violates the principles of natural justice.

Court held, unless the contract specifically permits such a cross-contractual set-off, the State cannot unilaterally deduct an amount claimed to be due for alleged breaches under an earlier contract from payments payable under a separate and subsisting contract.

The Bench was dealing with an appeal filed by M/s Awadhesh Singh Gautam against three orders passed by the Chhattisgarh High Court on January 7, 2026. The high court had dismissed three writ petitions filed by the partnership firm on the ground that the matter involved disputed questions of fact.

The Supreme Court held that the high court was wrong in doing so. It said the legality of a unilateral recovery of an unadjudicated claim for damages, when it turns on the interpretation of contractual terms and compliance with principles of natural justice, can be examined in proceedings under Article 226 of the Constitution.

The appellant had been awarded three packages under the Pradhan Mantri Gram Sadak Yojana (PMGSY), for which work orders were issued on September 1, 2023 and November 5, 2024 by the Chhattisgarh Rural Road Development Agency (CGRRDA).

After executing around 40% of the work, the appellant raised bills for payment. However, the bills remained unpaid.

The appellant had earlier been awarded two separate contracts for construction of two roads. Following complaints regarding irregularities in the execution of those works, the Collector, South Bastar, Dantewada, constituted a five-member committee.

In 2024, the committee found an excess payment of Rs 2,01,06,117. It recommended recovery of the amount, blacklisting of the appellant, an inquiry into its other works and departmental action against concerned CGRRDA officials.

An FIR was also registered against Awadhesh Singh Gautam, a partner of the appellant firm, and CGRRDA officials for offences under Sections 420, 467, 468, 471, 409 and 120-B of the Indian Penal Code [corresponding to Sections 318(4), 338, 336(3), 340(2), 316(5) and 61(2) of the Bharatiya Nyaya Sanhita, 2023 (BNS), respectively].

Subsequently, an order was passed directing that the amount be recovered by deducting it from the sums payable to the appellant under the three subsequent contracts.

The Supreme Court examined the terms of the contracts and found that none of the clauses relied upon by the respondents, whether read individually or together, authorised deduction of the disputed amount from the three subsequent contracts or permitted the manner in which the deduction was made.

The Bench noted that the recovery order had been passed without notice, consent or sanction. It further found that neither the contract nor any provision of law permitted an amount allegedly due under the earlier works to be adjusted against sums payable under a separate contract without the contractor's consent.

The recovery was therefore not only contrary to the contractual conditions but also amounted to a "flagrant violation" of the principles of natural justice, Court held.

The Bench said, "The high court fell into error on the ground that the relief claimed was contingent upon resolution of disputed questions of fact touching the earlier works, which could not be gone into under Article 226 of the Constitution".

The Supreme Court clarified that the question before it was not whether the alleged excess payment had actually been made under the earlier contracts. Rather, the issue was whether the State could appropriate that disputed amount from money admittedly payable to the appellant under three subsequent contracts that had nothing to do with the earlier works.

"Neither the agreement governing the contracts consented to by the contractor nor any provision of law permits such appropriation, and that question turns entirely on the construction of the contract and compliance with its terms, not on the resolution of the disputed facts pertaining to the earlier works," the Bench said.

Court quashed the recovery order and directed the respondents to release Rs 84,17,003 to the appellant, along with interest at 6% per annum from September 27, 2025, until the date of actual payment.

Court, however, clarified that its judgment would not prevent the respondents from taking appropriate proceedings in accordance with law to recover any amount that may ultimately be found due from the appellant in respect of the earlier works.

The Bench also made it clear that the pending criminal proceedings, as well as the correctness and quantum of the alleged overpayment relating to the earlier works, would be examined and decided independently on their own merits.

The appeal was accordingly allowed.

Case Title: M/s Awadhesh Singh Gautam Vs State of Chhattisgarh & Ors

Bench: Justices P S Narasimha and Alok Aradhe 

Date of Judgment: September 30, 2026