Is cross-contract recovery justified where the clauses relied upon are not attracted and the liability is a…

Leave granted.

These three appeals arise out of three orders, each dated 07.01.2026, passed by the High Court¹, whereby three writ petitions instituted by M/s Awadhesh Singh Gautam, a partnership firm ("the appellant"), were dismissed. Since the three orders are, in substance, identical and the appeals turn upon a common question arising from a common factual matrix, they were heard together and are disposed of by this common judgment.

The controversy has its genesis in three works awarded to the appellant. Pursuant to notices inviting tenders issued by the Chhattisgarh Rural Road Development Agency ("CGRRDA"), the appellant was awarded three packages under the Pradhan Mantri Gram Sadak Yojana ("PMGSY"), for which work orders came to be issued on 01.09.2023 and 05.11.2024 ("the subsequent works").

Having executed approximately 40% of the work under each of the subsequent works, the appellant raised running bills aggregating Rs.39,78,500/- (Rupees Thirty-Nine Lakh Seventy- Eight Thousand Five Hundred only), Rs.45,62,000/- (Rupees Forty-Five Lakh Sixty-Two Thousand only) and Rs.23,55,000/- (Rupees Twenty-Three Lakh Fifty-Five Thousand only) respectively. Reminders followed on 22.09.2025 and 25.09.2025, but the amounts billed remained unreleased.

The appellant had earlier, on 03.01.2023, been awarded two separate contracts for construction of two roads at 10.10% above the Schedule of Rates, at an approved cost of approximately Rs.437.43 lakhs ("the earlier works"), under which a substantial part of the contract value had already been paid.

Complaints of irregularity in execution of the earlier works led the Collector, South Bastar, Dantewada, to constitute a five- member committee. The committee, by its report dated 09.01.2024, found that although Rs.3,55,82,055/- (Rupees Three Crore Fifty-Five Lakh Eighty-Two Thousand Fifty Five only) had been paid to the appellant, the value of work actually executed was only about Rs.1,54,75,938/- (Rupees One Crore Fifty-Four Lakh Seventy-Five Thousand Nine Hundred Thirty- Eight only), disclosing an excess payment of Rs.2,01,06,117/- (Rupees Two Crore One Lakh Six Thousand One Hundred Seventeen only). It recommended recovery of the said sum, blacklisting of the appellant, a probe into its other works, and departmental action against the concerned officers of the CGRRDA.

Acting on this report, the Collector, by memo dated 03.06.2024, directed the Tehsildar to recover Rs.2,01,06,117/- (Rupees Two Crore One Lakh Six Thousand One Hundred Seventeen only) from the appellant. The Tehsildar accordingly registered a revenue case and issued a demand note dated 16.12.2024 under Section 146 of the Chhattisgarh Land Revenue Code, 1959, calling upon the appellant to pay the amount within ten days.

The demand note was assailed in a writ petition. By order dated 05.03.2025, the High Court quashed it for want of notice or hearing to the appellant, being violative of natural justice, while reserving liberty to the respondents to act upon the committee's report afresh, in accordance with law and after complying with the principles of natural justice.

In the meanwhile, upon a complaint by an Assistant Engineer of CGRRDA, a First Information Report came to be registered against Mr. Awadhesh Singh Gautam, partner of the appellant firm, and officers of CGRRDA, for offences under Sections 420, 467, 468, 471, 409 and 120-B of the Indian Penal Code, 1860. A chargesheet was filed on 30.12.2025 upon completion of investigation.

Independently of the criminal proceedings, and drawing upon the inspection report of the District Level Investigation Team dated 18.12.2024, the reinspection report of the Departmental Supervising Engineer dated 28.10.2024, and a final re- evaluation undertaken by the Departmental Sub-Engineer, the Executive Engineer-cum-Member Secretary, Project Implementation Unit K-01 ("the Executive Engineer"), passed an order dated 27.09.2025 ("the recovery order"). By this order, a sum of Rs.84,17,003/- (Rupees Eighty-Four Lakh Seventeen Thousand and Three only) was blocked out of amounts currently payable to the appellant, to be recovered by deduction from the three subsequent works in the sums of Rs.28,00,000/- (Rupees Twenty Eight Lakh only), Rs.38,00,000/- (Rupees Thirty Eight Lakh only) and Rs.18,17,003/- (Rupees Eighteen Lakh Seventeen Thousand and Three only) respectively.

The appellant's representation dated 09.10.2025 to the Executive Engineer, pointing out that the deductions were being made from bills payable under contracts wholly distinct from the earlier works out of which the alleged liability arose, and seeking a refund of Rs.84,17,003/- (Rupees Eighty-Four Lakh Seventeen Thousand and Three only) within fifteen days, elicited no response.

Three writ petitions came to be filed assailing the recovery order and seeking release of the amounts deducted. By the impugned common order dated 07.01.2026, the High Court held that the relief claimed was contingent upon adjudication of disputed questions of fact, which could not be undertaken in proceedings under Article 226 of the Constitution, and dismissed the writ petitions, reserving liberty to the appellant to pursue such alternate remedy as may be available in law.

It is in this backdrop that these appeals fall for our consideration.

Mr. Gaurav Agrawal, learned senior counsel for the appellant, submitted that the recovery order was passed without notice or opportunity of hearing, in violation of Clause 4.1 of the Special Conditions of Contract contained in the Standard Bidding Document ("SBD"), which alone contemplates recovery consequent upon technical audit and that too after hearing the contractor. It was urged that appropriation of amounts payable under one contract towards a liability alleged to arise under an altogether different contract is impermissible, and that Clauses 43 and 53, dealing respectively with security deposit and payment upon termination, have no bearing on the recovery in question. It was highlighted that a sum of Rs.1,07,02,594/- (Rupees One Crore Seven Lakh Two Thousand Five Hundred Ninety-Four only) remained payable to the appellant under the very earlier works out of which the alleged liability is said to arise, yet the respondents chose to recover from three unconnected and ongoing contracts instead. Reliance was placed on a decision of this Court².

Mr. Bishwajit Dubey, learned Additional Advocate General for the State, submitted that the power of cross-contract recovery flows expressly from the contract. Reliance was placed on Clause 7(iv) of the Pre-Contract Integrity Pact and Clause 38 of the Conditions of Contract, both of which, it was submitted, permit recovery of dues under one contract from sums payable under another, and on Clauses 44.1 and 53.1(ii) of the General Conditions of Contract in the SBD. It was submitted that the allegation against the appellant is not a mere billing discrepancy but one of manipulation of measurement books to draw excess payments from public funds, that a contractual set-off founded on agreement is enforceable on that basis alone, and that the appellant cannot claim the benefit of the contract while disowning the burden it places upon it. Reliance in support of these submissions was placed on the decisions of this Court³.

We have heard learned counsel for the parties and perused the record.

The following questions arise for determination in these appeals:

We deal with the clauses of the General Conditions of Contract, the Special Conditions of Contract, the Pre-Contract Integrity Pact, and the Conditions of Contract on which the respondents have placed reliance, to examine whether the recovery order can be justified by reference to any of them.

Clause 44.1 of the General Conditions of Contract in the SBD reads thus: "44.1 In the event of failure on part of the Contractor to achieve timely completion of the project, including any extension of time granted under Clause 27, he shall, without prejudice to any other right or remedy available under the law to the Employer on account of such breach, pay as agreed liquidated damages to the Employer and not by way of penalty in a sum calculated at the rate per week or part thereof as stated in the Contract Data. For the period that the Completion Date is later than the Intended Completion Date, liquidated damages at the same rate shall be withheld if the Contractors fails to achieve the milestones prescribed in the Contract Data. However, in case the Contractor achieved the next milestone, the amount of the liquidated damages already withheld shall be restored to the Contractor by adjustment in the payment certificate. Both the Parties expressly agree that the total amount of liquidated damages shall not exceed 10% (ten percent) of Initial Contract Price and that the liquidated damages payable by the Contractor are mutually agreed genuine pre- estimated loss and without any proof of actual damage likely to be suffered and incurred by the Employer; and the Employer is entitled to receive the same and are not by way of penalty. The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any sum due, or to become due to the Contractor or from Performance Security or any other dues from Government or semi Government bodies within the state. The payment or deduction of such damages shall not relieve the Contractor from his obligations to complete the Works, or from any other of his duties, obligations or responsibilities under the Contract. The Contractor shall use and continue to use his best endeavours to avoid or reduce further delay to the Works, or any relevant Stages.”

We next consider Clause 53.1(ii) of the General Conditions of Contract, which reads: "53.1(ii) If the Contract is terminated because of a fundamental breach of contract by the Contractor due to non compliance of the requirements of clause 32 of GCC regarding defects liability period and routine maintenance of roads for five years, the Engineer will assess the cost of having the defect corrected. If the total amount due to the Employer exceeds any payment due to the Contractor, the difference shall be recovered from the Security Deposit and Performance Security. If any amount is still left un-recovered, it will be recovered from any dues payable to the Contractor from State PMGSY works, any other State Government works including State Public Sector works executed by the Contractor. If any amount still remains unrecovered, it shall be recovered as arrears of land revenue. "

Clause 7(iv) of the Integrity Pact, described as a sanction for its violation, reads as follows:

Clause 38 of the Conditions of Contract, reads as follows:

This brings us to Clause 4.1 of the Special Conditions of Contract, which alone answers the description of what the respondents purported to do, namely, a technical audit of the earlier works resulting in a finding of overpayment and consequential recovery. It reads:

It follows that none of the clauses relied upon by the respondents, whether read singly or cumulatively, authorises either the deduction of the disputed amount from the three subsequent contracts, or the manner in which it was effected.

We are not unmindful that the allegations against the appellant in respect of the earlier works are of a serious character and are already the subject of departmental inquiry and of criminal proceedings arising out of Chargesheet No. 87 of 2025; nothing said in this judgment touches upon their merits. That, however, does not answer the second question framed above, namely, whether the manner of recovery satisfies the conditions Clause 4.1 itself prescribes. Clause 4.1 incorporates within itself, certain principles of natural justice. As already noticed, the recovery order was passed without notice, consent and sanction, and no other clause, nor any provision of law, permits the amount said to be due under the earlier works to be adjusted against sums payable under a separate and subsisting contract without the contractor's consent. Until the alleged overpayment is established in accordance with law, it remains, a disputed and unadjudicated claim for damages and not a debt presently due⁴; and 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. Therefore, the recovery effected by the recovery order was not only in contravention of the conditions prescribed in the clause but also in flagrant violation of principles of natural justice.

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 question before it was whether the respondent-State was justified in appropriating that very disputed amount from money admittedly payable to the appellant under the three subsequent contracts, contracts that have nothing to do with the earlier works.

For the reasons set out above, 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.

For the foregoing reasons, the recovery order dated 27.09.2025 cannot be sustained in law and is quashed and set aside. The respondents are directed to release to the appellant the sum of Rs.84,17,003/- (Rupees Eighty-Four Lakh Seventeen Thousand and Three only), together with interest thereon at the rate of 6% per annum from 27.09.2025 till the date of actual payment.

We clarify that this judgment shall not preclude the respondents from taking recourse to appropriate proceedings, in accordance with law, for recovery of any amount that may ultimately be found due from the appellant in respect of the earlier works. We further clarify that the observations contained in this judgment are confined to the legality of the manner in which the impugned recovery was effected, and shall have no bearing on: (a) the pending criminal proceedings arising out of Chargesheet No. 87 of 2025; or (b) the correctness or quantum of the alleged overpayment in respect of the earlier works, both of which shall be examined and decided independently and strictly on their own merits.

The appeals are allowed in the above terms. There shall be no order as to costs.

Pending application(s), if any, shall stand disposed of. ........................................................J. [PAMIDIGHANTAM SRI NARASIMHA] ........................................................J. [ALOK ARADHE] NEW DELHI; SEPTEMBER 30, 2026.