Legal Review and Analysis of Canara Bank vs K L Rajgarhia D Thr LRS 2025 INSC 1278

In-Short

Canara Bank vs. K.L. Rajgarhia (D) Thr. LRS. (2025 INSC 1278)
 A contract whose very object is unlawful cannot be enforced by severing its illegal core; courts cannot rewrite agreements to make an illegal contract legal.

1. Heading of the Judgment

Canara Bank vs. K.L. Rajgarhia (D) Thr. LRS.
Citation: 2025 INSC 1278
Court: Supreme Court of India
Civil Appeal No.: 2483 of 2014
Date of Judgment: October 9, 2025

2. Related Laws and Sections

This judgment primarily deals with the following legal provisions and doctrines:

• Specific Relief Act, 1963: Section 12 - Deals with the specific performance of a part of a contract.

• Indian Contract Act, 1872: Section 23 - Defines what considerations and objects are lawful and what are not.

• Doctrine of Severability (Blue Pencil Rule) - The principle that a court can sever the invalid parts of a contract from the valid parts and enforce the latter.

• Legal Maxims:
  Ex turpi causa non oritur actio: No action arises from a base cause.
  In pari delicto potior est conditio defendentis: In equal fault, the condition of the defendant is stronger.

3. Basic Judgment Details

• Parties:
  Appellant: Canara Bank (Plaintiff in the original suit).
  Respondent: K.L. Rajgarhia (Deceased) through Legal Representatives (Defendant in the original suit).

• Subject Matter: Appeal against the judgment of the Delhi High Court Division Bench which set aside the Trial Court's decree for specific performance.

• Core Dispute: Enforceability of an "Agreement to Sell" dated 27.12.1984 for a property with a building to be constructed with eight flats, which violated the permissible limits under the building bye-laws.

4. Core Principle and Analysis of the Judgment

This judgment addresses the critical interplay between contractual obligations and statutory illegality, specifically in the context of suits for specific performance.

The Central Issue

The Supreme Court was tasked with determining whether an agreement, whose core object was to construct and sell a certain number of flats in violation of the prevailing building laws, could be enforced either wholly or in part by severing the illegal components.

Analysis of the Supreme Court's Reasoning

The Court structured its analysis around four key points, which form the body of this judgment.

I. Whether the construction of eight flats was an essential term of the agreement?

The Court meticulously analyzed the clauses of the Agreement to Sell. It placed significant emphasis on Clause 6, which explicitly stated: “It is specifically understood that the purchaser is interested in purchasing the flats to be constructed thereon along with the rights concerning the plot of land and not the rights over the land alone and therefore the construction of the flat within the period and subject to the specification set out herein is the essential term of this agreement.”

• Conclusion: The Supreme Court held that the construction and delivery of eight flats was not merely a part of the agreement but its very "core and essential" object. The agreement was fundamentally for the purchase of the constructed flats, not just the land. Without this, the contract could not subsist.

II. Whether the agreement was unenforceable due to violation of building laws?

The Court invoked Section 23 of the Indian Contract Act, which renders an agreement void if its object is unlawful or forbidden by law. It relied on its precedent in Narayanamma v. Govindappa [(2019) 19 SCC 42], reiterating that courts will not enforce an agreement that contravenes the law, as doing so would be against public policy.

The factual finding, confirmed by both the Trial Court and the High Court, was that the 1984 Master Plan for Delhi and the Building Bye-Laws of 1983 permitted only 2.5 residential units on a 300 sq. yard plot, whereas the agreement envisaged the construction of eight flats.

• Conclusion: The Supreme Court affirmed that the agreement, in its current form, was inherently unenforceable because its object was patently in violation of the building regulations.

III. Whether the Trial Court was justified in modifying the agreement to make it workable?

This point deals with the applicability of the Doctrine of Severability and Section 12 of the Specific Relief Act. The Appellant-Bank argued that it was willing to accept the property "as is" with a lesser number of legally permissible flats, and the invalid part of the contract could be severed.

The Supreme Court made a crucial distinction:

• It acknowledged that courts generally have the power to sever invalid parts from a contract.

• However, it held that this power cannot be exercised to remove the very essence or fundamental object of the contract. Citing Mayawanti v. Kaushalya Devi [(1990) 3 SCC 1], the Court emphasized that it cannot rewrite or reconstruct a contract for the parties.

• Conclusion: Since the construction of eight flats was the essential object, the Trial Court's act of reducing the number to three to comply with the law amounted to rewriting the contract, which was legally impermissible. The doctrine of severability cannot be used to salvage a contract by excising its very heart.

IV. Whether the Division Bench of the High Court erred in its judgment?

Based on the conclusions on the first three points, the Supreme Court held that the Division Bench of the High Court was correct in setting aside the Trial Court's decree for specific performance. The High Court rightly held that a public sector bank should not enter into agreements whose object is to violate the law.

5. Final Outcome

The Supreme Court dismissed the appeal filed by Canara Bank. The judgment and decree of the Delhi High Court Division Bench were affirmed. The suit for specific performance remained dismissed. The Court upheld the High Court's direction for the refund of the principal amount of ₹28,86,750/- paid by the Bank to the Defendant, along with interest as stipulated in the agreement.

6. (MCQs) Based on the Judgment

Question 1: In Canara Bank v. K.L. Rajgarhia, why did the Supreme Court hold the Agreement to Sell as unenforceable?
a) Because the defendant was coerced into signing the agreement.
b) Because the consideration paid by the bank was grossly inadequate.
c) Because the object of the agreement was to construct eight flats, which violated the building bye-laws.
d) Because the defendant had abandoned the construction project.

Question 2: The Supreme Court ruled that the Doctrine of Severability could not be applied in this case because?
a) The bank was not a private party but a public sector institution.
b) The defendant had already abandoned his plea of undue influence.
c) The illegal part of the contract constituted its essential and fundamental object.
d) The agreement contained a clause for refund of the advance payment.