Supreme Court: State can't recover a disputed overpayment by deducting an unrelated contract

A contractor executing PMGSY road-building packages for the Chhattisgarh Rural Road Development Agency had running bills withheld, and the Executive Engineer separately ordered Rs. 84,17,003 to be deducted from three ongoing, unrelated contracts to recover an alleged overpayment of over Rs. 2 crore found by a committee probing an earlier, distinct set of road contracts. The contractor was not given notice or a hearing before the deduction, and challenged it by writ petition.

The Chhattisgarh High Court dismissed the petitions, holding that the dispute over the alleged overpayment under the earlier works involved disputed questions of fact that could not be examined under Article 226 of the Constitution. The Supreme Court held that the High Court had framed the wrong question: the issue was not whether the overpayment under the earlier works was correctly computed, but whether the State could appropriate a disputed, unadjudicated claim from money admittedly payable under separate, later contracts, a question of contract construction, not of disputed fact. Citing Union of India v. Raman Iron Foundry (1974), the Court held that until an alleged overpayment is established in accordance with law, it remains a disputed claim for damages and not an ascertained debt, so a party cannot unilaterally set it off against unrelated sums owed under a different contract, and the Special Conditions of Contract here required notice before any audit-based recovery. The recovery order was quashed and the amount ordered released with 6% interest.