The Supreme Court held that an agreement to sell flats, which was contingent upon construction violating building bye-laws and the master plan, was unlawful and void under Section 23 of the Indian Contract Act. The Court ruled that specific performance cannot be granted for an illegal contract, and courts cannot rewrite or sever its essential, unlawful terms to make it enforceable.
Facts Of The Case:
In December 1984, Canara Bank entered into an agreement with K.L. Rajgarhia to purchase residential flats to be constructed on his plot in East of Kailash, Delhi, for ₹32,07,500. The bank paid approximately 90% of the consideration upfront. The agreement specified the construction and sale of eight flats and a basement, with completion required within 18 months. When the defendant failed to complete construction or hand over possession, the bank sued for specific performance. The defendant initially claimed the agreement was a camouflaged loan but later abandoned that plea. Instead, he argued the contract was void, as constructing eight flats on the 300 sq. yard plot violated the Delhi Master Plan and Building Bye-Laws, which permitted only 2.5 dwelling units. The Trial Court decreed the suit, applying Section 12 of the Specific Relief Act and allowing the bank to accept the property with fewer, law-compliant flats. The Division Bench of the Delhi High Court reversed this, holding the agreement’s object was unlawful and thus void. It ordered the refund of the bank’s payment with interest. The bank appealed to the Supreme Court.
Procedural History:
The procedural history of this case originated with the plaintiff-bank filing Suit No. 1669 of 1989 for specific performance before the Delhi High Court (acting as the Trial Court). The Single Judge decreed the suit in favour of the bank, directing the defendant to execute a sale deed. The defendant then filed Regular First Appeal (OS) No. 47 of 2009 before a Division Bench of the same High Court. The Division Bench allowed the appeal, set aside the trial court’s decree, and dismissed the suit for specific performance, instead ordering the refund of the consideration paid with interest. The plaintiff-bank subsequently appealed to the Supreme Court by way of Civil Appeal No. 2483 of 2014, which was ultimately dismissed, thereby affirming the judgment of the Division Bench.
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Court Observation:
The Supreme Court made critical observations on the enforceability of contracts violating statutory law. It held that the agreement’s core object was the construction of eight flats, which was an essential term. Since this construction contravened the Delhi Master Plan and Building Bye-Laws, the agreement was unlawful under Section 23 of the Indian Contract Act and void ab initio. The Court emphasized that specific performance cannot be granted for an illegal contract, and courts cannot rewrite or sever its fundamental, unlawful object to render it enforceable. It further observed that public institutions like banks are expected to act lawfully and not enter into agreements designed to circumvent legal restrictions.
Final Decision & Judgement:
The Supreme Court dismissed the bank’s appeal and upheld the judgment of the Delhi High Court’s Division Bench. The final decision denied the plea for specific performance of the agreement, declaring it void and unenforceable due to its unlawful object of constructing flats in violation of building laws. The Court affirmed the order directing the defendant to refund the consideration of ₹28,86,750 to the bank with interest as stipulated in the agreement, concluding that monetary restitution was the only permissible remedy in light of the contract’s illegality.
Case Details:
Case Title: CANARA BANK (APPELLANT) vs. K.L. RAJGARHIA (D) THRU LRS. (RESPONDENT) Citation: 2025 INSC 1278 Appeal Number: CIVIL APPEAL NO. 2483 OF 2014 Date of Judgement: OCTOBER 9, 2025 Judges/Justices Name: JUSTICE ARAVIND KUMAR and JUSTICE VIPUL M. PANCHOLI