Specific Performance and Public Policy: Supreme Court on Enforceability of Sale Agreements: G.T. Girish vs. Y. Subba Raju (2022) INSC 380 (18 January 2022)

Date of the Judgment: 18 January 2022
Citation: (2022) INSC 380
Judges: K.M. Joseph, J., Pamidighantam Sri Narasimha, J.
Can a contract that appears to violate public policy be enforced? The Supreme Court addressed this critical question in a case concerning the specific performance of a sale agreement for a property allotted by the Bangalore Development Authority (BDA). The core issue revolved around whether an agreement to sell a property, which was subject to restrictions on alienation, could be enforced through specific performance. The Supreme Court bench comprising Justices K.M. Joseph and Pamidighantam Sri Narasimha delivered the judgment, with Justice Joseph authoring the opinion.

Case Background

The case originated from a suit filed by the plaintiff seeking specific performance of an agreement to sell a site allotted by the BDA to the first defendant. On April 4, 1979, the BDA allotted a site to the first defendant, and a lease-cum-sale agreement was executed on the same day. The first defendant was given possession on May 14, 1979. On November 17, 1982, the first defendant entered into an agreement with the plaintiff to sell the site. The agreement stipulated that the sale deed would be executed within three months of the first defendant obtaining a sale deed from the BDA. The plaintiff issued letters on March 1, 1983, and April 26, 1984, requesting the execution of the sale deed. The first defendant, however, claimed the plaintiff was in breach and the agreement had lapsed via a letter dated May 8, 1984. Following a notice on February 14, 1985, the plaintiff filed a suit for specific performance. The first defendant passed away on July 18, 1994, during the pendency of the suit. The plaintiff then impleaded the husband and son of the first defendant as defendants 1(a) and 1(b), respectively. The BDA executed a sale deed in favor of the son of the first defendant on June 19, 1996. Subsequently, the son sold the property to the second defendant. Both the son and the second defendant were impleaded in the suit in 1997.

Timeline:

Course of Proceedings

The Trial Court refused to grant specific performance but directed the return of the amount paid by the plaintiff with interest. The High Court, however, allowed the plaintiff’s appeal, directing the defendants to execute the sale deed in favor of the plaintiff. The High Court also found the second defendant was not a bonafide purchaser and that the sale was hit by Section 52 of the Transfer of Property Act, 1882.

Legal Framework

The case primarily involves the interpretation of the City of Bangalore Improvement Act, 1945, and the City of Bangalore Improvement Allotment of Site Rules, 1972. Key provisions include:

• Section 24 of the City of Bangalore Improvement Act, 1945:
  The Board shall not sell or otherwise dispose of any sites for the purpose of constructing buildings thereon for the accommodation of person until all the improvements specified in Section 23 have been substantially provided for the estimates.
• Section 29 of the City of Bangalore Improvement Act, 1945:
  Power of Board to acquire, hold and dispose of property. —(1) The Board shall, for the purposes of this Act, have power to acquire and hold movable and immovable property, whether within or outside the City. (2) Subject to such restrictions, conditions and limitations as may be prescribed by rules made by the Government, the Board shall have power or lease, sell or otherwise transfer any movable or immovable property which belongs to it, and to appropriate or apply any land vested in or acquire by it for the formation of open spaces or for building purposes or in any other’ manner for the purpose of any improvement scheme. (3) The restrictions, conditions and limitations contained in any grant or other transfer of any immovable property of any interest therein made by the Board shall notwithstanding anything contained in the Transfer of Property Act, 1882 (Central Act 4 of 1882) or any other law have effect according to their tenor.
• Section 42 of the City of Bangalore Improvement Act, 1945:
  Power of Government to make rules.—The Government may, from time to time; make rules, not inconsistent with this Act. — (aa) regulating the allotment or sale by auction of sites by Board; (ab)specifying the conditions, restrictions and limitations subject to which the Board may sell, lease or otherwise transfer movable or immovable property;
• Rule 7 of the City of Bangalore Improvement Allotment of Site Rules, 1972:
  Allottee to be a lessee. —The site allotted under Rule 3 or Rule 5 shall be deemed to have been leased to the allottee until the lease is determined or the site is conveyed in the name of the allottee in accordance with these rules. During the period of the lease, the allottee shall pay to the Board rent at the rate of rupees three per annum where the area of the site does not exceed two hundred square meters, rupees six per annum where the area of the site exceeds two hundred square meters but does not exceed five hundred square meters and rupees twelve per annum where the area of the site exceeds five hundred square meters before the commencement of each year.
• Rule 17 of the City of Bangalore Improvement Allotment of Site Rules, 1972:
  Conditions of allotment and sale of site. – The allotment of a site under these rules shall be subject to the following conditions. — (7) (a) On the expiry of the period of ten years and if the allotment has not been cancelled or the lease has not been determined in accordance with these brutes or the terms of the agreement in the meanwhile the Board shall by notice call upon the allottee to get the sale deed of tire site executed at his own cost within the time specified in the said notice. (b) If the allottee fails to get the sale deed executed within the time so specified the Board shall itself execute the same and recover the cost and other charges, if any, incidental thereto from the allottee as if the same are amount due to the Board.
• Rule 18 of the City of Bangalore Improvement Allotment of Site Rules, 1972:
  Restrictions, conditions and limitation on sales of sites.—(1) Notwithstanding anything contained in. — (i) these rules or any other rules, bye-laws or orders governing the allotment, grant or sale of sites by the Board for construction of buildings; or (ii) any instrument executed in respect of any site allotted, granted or sold by the Board for construction of buildings, the Chairman may at the request of the allottee grantee or purchaser of a site, execute a deed of conveyance subject to the restrictions, conditions and limitations specified in sub-rule (2). (2) The conveyance by the Chairman of a site in favour of an allottee, grantee or purchaser of a site (hereinafter referred to as “the purchaser”) shall be subject to the following restrictions, conditions and limitations, namely.— (a) .in the case of a site on which a building has not been constructed. — (iii) the purchaser shall not alienate the site within a period of ten years from the date of allotment except by mortgage in favour of the Government of India, the Government of Mysore, the Life Insurance Corporation of India or the Mysore Housing Board, or any 1[any company or Co-operative Society approved by the Board] or any Corporation set up, owned or controlled by the State Government or the Central Government to secure moneys advanced by such Government, 2[Corporation, Board, CompanyJ, Society or Corporations, as the case may be, for the construction of the building on the site; (c) in the event of the purchaser committing breach of any of the conditions in clause (a) or clause (b), the Board may at any time, after giving the purchaser reasonable notice, resume the site free from all encumbrances. The purchaser may remove all things which he has attached to the earth: ‘Provided he leaves the site in the state in which he received it. All transaction entered into in contravention of the conditions specified in clauses (a) and (b) shall be null and void ab initio.
• Section 23 of the Indian Contract Act, 1872:
  What consideration and objects are lawful, and what not. —The consideration or object of an agreement is lawful, unless — it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
• Section 52 of the Transfer of Property Act, 1882:
  Transfer of property pending suit relating thereto.—During the pendency in any court having authority within the limits of India, excluding the State of Jammu and Kashmir or established beyond such limits by the Central Government of any suit or proceeding which is not collusive and in which any right to immoveable property is directly and specifically in question, the property cannot be transferred or otherwise dealt with by any party to the suit or proceeding so as to affect the rights of any other party thereto under any decree or order which may be made therein, except under the authority of the court and on such terms as it may impose.

The court also considered the interplay between these provisions and the lease-cum-sale agreement executed between the BDA and the first defendant.

Arguments

Appellant’s (Second Defendant) Submissions:

• The agreement was unlawful, violating public policy and Section 23 of the Indian Contract Act, 1872, because it circumvented the ten-year restriction on alienation imposed by the BDA rules.
• The agreement was premature as it required the first defendant to execute the sale deed only after obtaining the sale deed from the BDA, which was not possible until ten years after the allotment.
• The High Court erred in finding that the second defendant was not a bonafide purchaser, as the second defendant had no knowledge of the pending suit and had conducted all necessary inquiries.
• The High Court’s finding that the second defendant, a 20-year-old at the time of the sale, did not have the means to purchase the property was unjustified, as evidence showed the second defendant owned land and had a milk business.

Respondent’s (Plaintiff) Submissions:

• The Trial Court had found a valid contract, which was not challenged by the appellants.
• Neither the lease-cum-sale agreement nor the rules prohibited the allottee from entering into an agreement to sell the site.
• The relevant rule, Rule 17, did not prevent the agreement to sell or the sale in favor of the plaintiff.
• The doctrine of Lis Pendens applies to this case.
• The second defendant was not a bonafide purchaser for value and was fully aware of the pending suit.
• The suit was not premature, given the first defendant’s refusal to comply with the agreement.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but addressed the following:

1. Whether the agreement to sell was lawful and enforceable.
2. Whether the suit for specific performance was maintainable.
3. Whether the second defendant was a bonafide purchaser for value without notice.
4. Whether the High Court was correct in applying the Doctrine of Lis Pendens.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed the principle laid down in Kedar Nath Motani [AIR 1960 SC 213] and Narayanamma [(2019) 19 SCC 42] that courts will not enforce illegal agreements.
• The Court distinguished the cases of conditional decrees for specific performance, like Motilal v. Nanhelal [AIR 1930 PC 287], Vishwa Nath Sharma [(2007) 10 SCC 595], and Ferrodous Estates [AIR 2020 SC 5041], by emphasizing that those cases involved agreements that were not inherently illegal.
• The Court distinguished the decisions of the Karnataka High Court in T. Dase Gowda [(1990) SCC Online Karnataka 613] and Yogambika [ILR 1992 KAR 717] by highlighting that those cases did not involve agreements that directly violated the law.
• The Court distinguished its own decision in Union of India v. Col. L.S.N. Murthy [(2012) 1 SCC 718] by stating that the said decision was dealing with a letter and not subordinate legislation.
• The Court relied on Gherulal Parakh v. Mahadeodas Maiya [AIR 1959 SC 781] to define what constitutes an act forbidden by law.
• The Court distinguished Ramzan v. Hussaini [(1990) 1 SCC 104] based on the facts and relied on Ahmadsahab Abdul Mulla [(2009) 5 SCC 462] to interpret the term “date fixed for performance” in Article 54 of the Limitation Act, 1963.
• The Court distinguished the decision of the Madras High Court in Nallakumara Goundan v. Pappayi Ammal [AIR 1945 Mad 219] by stating that the facts were different.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following:

• The agreement to sell, if enforced, would directly violate the statutory rules and the lease-cum-sale agreement.
• The agreement was structured to circumvent the ten-year restriction on alienation and the requirement to construct a residential building.
• The plaintiff’s intention was not to reside on the land but to profit from a real estate transaction.
• The court found that the plaintiff was a seasoned contractor and the agreement was entered with a view to make profit.
• The court found that the plaintiff was not a person who was in need of a site for residential purposes.

The Court’s reasoning was step-by-step, starting from the premise that the agreement to sell was unlawful and against public policy. This led to the conclusion that the suit for specific performance was not maintainable. The Court also noted the plaintiff’s intention was not to reside on the property but to profit from the transaction, further reinforcing its decision against specific performance.

Conclusion

The Supreme Court held that the agreement to sell was unenforceable, as it violated public policy and the statutory rules of the BDA. The Court emphasized that agreements designed to circumvent legal restrictions, particularly those designed to promote public interest, will not be enforced. The Court reversed the High Court’s decision and restored the Trial Court’s judgment, which had only directed the return of the amount paid by the plaintiff with interest. The Court also held that the doctrine of Lis Pendens did not apply in this case. This judgment underscores the importance of upholding public policy and statutory restrictions in contractual agreements and the limits of specific performance in cases where such agreements are found to be unlawful.