Illegality as to Essential Object Bars Specific Performance: Courts Cannot Rewrite Building-Law-Violative Construction Contracts via Section 12 SRA

1. Introduction

Case: CANARA BANK v. K.L. RAJGARHIA (D) THRU LRS. (Supreme Court of India, 09-10-2025). The appellant-bank (plaintiff) sued for specific performance of an Agreement to Sell dated 27.12.1984 relating to a 300 sq. yard plot at East of Kailash, Delhi, under which the defendant was to construct and convey multiple flats (Schedule-I contemplated eight flats plus basement; the text also referred to possible additional flats).

The plaintiff claimed it paid about 90% of the consideration and that the defendant failed to complete construction/hand over possession. The defendant initially pleaded the agreement was a disguised loan/obtained under coercion, but later abandoned those pleas and argued—at the stage of final arguments—that the contract was incapable of lawful performance because the contemplated number of dwelling units violated the Master Plan/Building Bye-Laws and sanctioned plan norms.

The Trial Court decreed specific performance (invoking Section 12 of the Specific Relief Act to enforce the contract to the extent legally permissible). The Division Bench reversed, denied specific performance, and ordered refund with interest (treating the advance consistently with the agreement’s “loan”/refund mechanism). The Supreme Court affirmed the Division Bench.

Key Issues Framed by the Supreme Court

Whether construction and delivery of the eight flats in Schedule-I was an essential condition without which the agreement could not subsist?
Whether the agreement was unenforceable for violation of building laws?
Whether the Trial Court was justified in modifying/interpreting the agreement to make it workable (Section 12 / severance / “blue pencil” approach)?
Whether the Division Bench erred in setting aside the Trial Court decree?

2. Summary of the Judgment

The Supreme Court dismissed the appeal and affirmed the High Court Division Bench. It held:

Construction and delivery of the eight flats was the essential object/term of the agreement (particularly in light of Clause 6).
The agreement, “in its current form,” was unenforceable because it contemplated construction contrary to building laws (Master Plan/Building Bye-Laws).
While courts may sever invalid portions in limited circumstances, they cannot remove the essential object or rewrite/reconstitute the bargain to make it lawful and enforceable.
Accordingly, the Trial Court erred in effectively reducing the bargain (from eight flats to a legally permissible lesser number) under Section 12; the Division Bench correctly refused specific performance.
The Court reiterated that State instrumentalities (including public sector banks) should not enter “camouflage agreements,” especially where the object would result in violation of law.

3. Analysis

A. Precedents Cited

i. Narayanamma and Anr v. Govindappa and Ors (2019) 19 SCC 42

The Supreme Court used Narayanamma and Anr v. Govindappa and Ors to reaffirm a foundational rule: courts will not enforce agreements that contravene statutory prohibitions, and illegality goes to the root of enforceability in specific performance suits.

Importantly, the judgment extracts from Narayanamma the proposition that even if illegality is not pleaded, the court may notice it when it appears from the evidence and dismiss the claim on the principle that a “polluted hand shall not touch the pure fountain of justice” (the maxims ex turpi causa non oritur actio and ex dolo malo non oritur actio), also invoking the equity principle in pari delicto potior est conditio defendentis et possidentis.

The present case applies that logic to building-law violations: where the contract’s performance necessarily entails contravention of the governing development regime, specific performance is barred because enforcement would place the court’s authority behind an unlawful object.

ii. Mayawanti v. Kaushalya Devi . Devi (1990) 3 SCC 1

Mayawanti v. Kaushalya Devi . Devi was cited for the classic limitation on the specific performance jurisdiction: specific performance presupposes a valid and enforceable contract, and courts do not “make a contract” for the parties.

The Supreme Court used Mayawanti to hold that the Trial Court’s approach—treating the agreement as enforceable by effectively altering its core performance obligation—crossed from interpretation/severance into impermissible reconstruction of the bargain.

iii. Case titles referenced in the extracted passage

Within the quoted extract, the Court referred to Kedar Nath Motant³ and Immani Appa Rao as part of the doctrinal lineage on illegality and the court’s duty to deny relief where the plaintiff must rely on an illegal transaction. While not independently discussed on facts in this judgment, these references reinforce the same normative restraint: no relief founded on illegality.

B. Legal Reasoning

1) Essential term analysis: the “object” of the bargain

The Court begins with contract construction. It treats Clause 6 as decisive: the purchaser was “interested in purchasing the flats … and not the rights over the land alone,” making construction “an essential term.” This mattered because the plaintiff attempted to salvage enforceability by offering to accept the property “as is” under Section 12.

The Court’s reasoning is that Section 12 cannot be used to convert a contract for a specific development outcome (multiple flats) into a different bargain (transfer of land/limited construction). Once the “essential object” is identified as the construction-and-transfer of a particular multi-unit scheme, stripping that object would destroy the contract rather than partially enforce it.

2) Illegality / unenforceability under Section 23 of the Contract Act

The Court anchors illegality in Section 23 of the Contract Act (object/consideration unlawful if forbidden by law or opposed to public policy). On facts, both the Trial Court and Division Bench had accepted that the construction contemplated (eight dwelling units and the described use/extent) was contrary to the then-applicable Master Plan and Building Bye-Laws.

Having found the agreement’s essential performance to be building-law violative, the Court treats the agreement “in its current form” as unenforceable. The practical consequence is decisive: a decree for specific performance would either (a) compel illegal construction, or (b) require the court to refashion the contract into a different, lawful arrangement—both impermissible.

3) Section 12 Specific Relief Act, severability, and the limit against rewriting

The Court accepts a general proposition: doctrine of severability may apply in specific performance and invalid portions may sometimes be separated from valid ones. However, it draws a bright line: a court cannot sever away an essential term/object and then enforce what remains, because that would amount to creating a new contract.

The Trial Court, after acknowledging illegality of constructing eight flats, effectively enforced transfer/possession while reducing the number of flats to a legally permissible number. The Supreme Court characterizes this as rewriting the bargain—precisely what Mayawanti v. Kaushalya Devi . Devi forbids.

4) Institutional integrity and public law expectations

The Court expressly endorses the Division Bench’s observation that a public sector bank is not expected to enter “camouflage agreements,” particularly where the object would violate law. This is not merely moral commentary; it functions as an equitable and public policy lens through which discretionary relief (specific performance) is assessed.

C. Impact

Constraining Section 12 SRA “salvage” strategies: Plaintiffs cannot rescue an illegal/inherently impermissible development bargain by offering to accept a reduced/altered performance if the illegal aspect is the contract’s essential object.
Sharper “essential term” inquiry in development-linked sale agreements: Where land conveyance is bundled with construction obligations, courts will examine whether the purchaser bargained for land simpliciter or for a particular development outcome. If the latter, illegality in the development outcome can defeat the entire suit for specific performance.
Illegality may be noticed even if raised late: Reinforcing the approach reflected through Narayanamma and Anr v. Govindappa and Ors, courts may deny enforcement once illegality is apparent, resisting technical objections about pleadings where enforcement would endorse unlawful conduct.
Public institutions held to higher compliance expectations: The judgment signals that State instrumentalities seeking equitable relief may face heightened scrutiny where the underlying transaction appears designed to circumvent regulatory frameworks.
Remedial consequence: When specific performance is barred due to illegality/inability, courts may still structure monetary restitution/refund consistent with contractual allocation (here, the “loan/repayment” mechanism and interest direction affirmed).

4. Complex Concepts Simplified

Specific Performance: A discretionary equitable remedy compelling a party to perform the contract as promised, typically used in immovable property disputes. It is not granted if the contract is invalid, unenforceable, or requires unlawful acts.
Section 23, Contract Act (Unlawful Object): If the contract’s object/consideration is forbidden by law or opposed to public policy, the agreement is void/un-enforceable. Courts will not aid a party in enforcing such bargains.
Section 12, Specific Relief Act (Partial Specific Performance): Allows partial enforcement in limited situations, but it does not authorize courts to delete the core of the bargain and enforce a materially different contract. “Partial performance” is not “contract redesign.”
Severability / “Blue Pencil” Approach: A technique where an invalid clause can be cut out while leaving the rest intact—only if what remains still reflects the parties’ original, lawful bargain. It cannot be used to remove the agreement’s essential object.
Ex turpi causa non oritur actio: A claimant cannot found a legal action on an immoral/illegal act. Courts refuse relief where the claim depends on illegality.
In pari delicto: Where both parties are equally at fault in illegality, the defendant’s position is stronger and courts typically refuse to assist either side in enforcing the illegal transaction.

5. Conclusion

This decision crystallizes a strict limit on judicial “salvaging” of contracts in specific performance suits: where the essential object of the agreement is to deliver a construction outcome that is impermissible under building laws, the contract is unenforceable and courts cannot invoke Section 12 or severability to rewrite the bargain into a lawful substitute. By affirming the denial of specific performance and endorsing heightened expectations from public sector entities, the Supreme Court reinforces that equity will not be used to operationalize arrangements whose performance would contravene statutory planning and building regimes.