Supreme Court rules on Enforceability of Agreements Violating Bangalore Development Authority Rules: G.T. Girish vs. Y. Subba Raju (2022) INSC 512 (18 January 2022)

Date of the Judgment: 18 January 2022
Citation: (2022) INSC 512
Judges: K.M. Joseph, J., Pamidighantam Sri Narasimha, J.
Can an agreement to sell, which violates the rules of the Bangalore Development Authority (BDA), be enforced? The Supreme Court recently addressed this question, examining whether such agreements are void under Section 23 of the Indian Contract Act, 1872. The Court analyzed the interplay between the BDA’s allotment rules and contractual obligations, ultimately deciding on the enforceability of such agreements. The bench comprised Justices K.M. Joseph and Pamidighantam Sri Narasimha, with the majority opinion authored by Justice K.M. Joseph.

Case Background

On April 4, 1979, the Bangalore Development Authority (BDA) allotted a site to the first defendant. A lease-cum-sale agreement was executed on the same day, and possession was granted on May 14, 1979. Subsequently, on November 17, 1982, the first defendant entered into an agreement with the plaintiff, agreeing to execute a sale deed within three months of obtaining the sale deed from the BDA. The plaintiff issued letters on March 1, 1983, and April 26, 1984, urging the first defendant to execute the sale deed. However, the first defendant, on May 8, 1984, claimed the plaintiff was in breach and forfeited the advance amount. The plaintiff then filed a suit for specific performance on February 14, 1985. The first defendant died on July 18, 1994, during the pendency of the suit. The BDA executed a sale deed in favor of the son of the first defendant on June 19, 1996, who then sold the property to the second defendant.

Timeline

Course of Proceedings

The Trial Court refused 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 appellants (defendants) to execute the sale deed. The High Court found that the second defendant was not a bonafide purchaser and that the alienation was hit by Section 52 of the Transfer of Property Act, 1882.

Legal Framework

The case 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: Prohibits the Board from selling sites until all improvements specified in Section 23 are substantially provided.
• Section 29 of the City of Bangalore Improvement Act, 1945: Grants the Board power to acquire, hold, and dispose of property, subject to restrictions by the government. Specifically, Section 29(3) states: “The restrictions, conditions and limitations contained in any grant or other transfer of any immovable property or 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: Empowers the government to make rules regarding allotment or sale of sites.
• Rule 7 of the City of Bangalore Improvement Allotment of Site Rules, 1972: States that the allottee is deemed a lessee until the site is conveyed in their name.
• Rule 17 of the City of Bangalore Improvement Allotment of Site Rules, 1972: Outlines conditions of allotment and sale, including payment schedules, lease agreements, and construction requirements. Specifically, Rule 17(7)(a) states: “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.”
• Rule 18 of the City of Bangalore Improvement Allotment of Site Rules, 1972: Imposes restrictions on the sale of sites, including a ten-year prohibition on alienation from the date of allotment, except for mortgages to specific entities. Rule 18(2)(a)(iii) states: “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;”. Rule 18(2)(c) states: “All transactions entered into in contravention of the conditions specified in clauses (a) and (b) shall be null and void ab initio.”.
• Rule 18(3) of the City of Bangalore Improvement Allotment of Site Rules, 1972: Provides an exception where the lessee can apply to sell the site due to reasons beyond their control, such as insolvency or inability to reside in Bangalore.
• Form II of the City of Bangalore Improvement Allotment of Site Rules, 1972: Lease-cum-sale agreement, which states: “The Lessee/Purchaser shall not alienate the site or the building that may be constructed thereon during the period to the tenancy.”
• Section 23 of the Indian Contract Act, 1872: Declares agreements void if their object or consideration is unlawful, including being forbidden by law or defeating the provisions of any law.

The Court also considered the implications of Section 52 of the Transfer of Property Act, 1882, regarding lis pendens, and Article 54 of the Limitation Act, 1963, concerning the limitation period for specific performance suits.

Arguments

Appellants (Defendants):

• The agreement to sell was unlawful, violating the ten-year alienation restriction under Rule 18(2) of the City of Bangalore Improvement Allotment of Site Rules, 1972, and Section 23 of the Indian Contract Act, 1872.
• The agreement was against public policy, as it sought to circumvent the rules designed to benefit genuine allottees.
• The suit was premature because the agreement stipulated that the sale deed would be executed three months after the first defendant obtained it from the BDA, which was beyond the ten-year restriction period.
• The second defendant was a bonafide purchaser for value without notice of the prior agreement.

Respondents (Plaintiff):

• The agreement to sell was valid and lawful, as neither the lease-cum-sale agreement nor the rules prohibited an agreement to sell.
• Rule 17 and 18 did not impede the agreement to sell or the sale in favor of the plaintiff.
• The second defendant was not a bonafide purchaser for value and had knowledge of the pending suit.
• The suit was not premature, as the first defendant had clearly indicated an unwillingness to perform the contract, justifying the filing of the suit.
• The doctrine of lis pendens applied, as the second defendant purchased the property during the pendency of the suit.

Innovativeness of the Argument: The appellants innovatively argued that the agreement was not only unlawful but also against public policy, as it circumvented the BDA’s rules designed to benefit genuine allottees. This argument highlighted the broader societal impact of enforcing such agreements.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section but addressed the following key issues:

1. Whether the agreement to sell, dated November 17, 1982, was lawful and enforceable, considering the restrictions imposed by the BDA rules and the lease-cum-sale agreement.
2. Whether the suit for specific performance was maintainable, given the terms of the agreement and the BDA rules.
3. Whether the second defendant was a bonafide purchaser for value without notice of the prior agreement.
4. Whether the doctrine of lis pendens applied to the sale in favor of the second defendant.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following cases and legal provisions:

Judgment

The Supreme Court held that the agreement to sell, dated November 17, 1982, was unenforceable as it violated the BDA rules and the lease-cum-sale agreement. The Court found that the agreement, which contemplated the sale of the site without any construction, was in direct conflict with the BDA’s objective of providing residential sites to eligible persons.

How each authority was viewed by the Court?

• The Court relied on Kedar Nath Motani and others v. Prahlad Rai and others [AIR 1960 SC 213]* to emphasize that courts will not enforce illegal agreements.
• The Court distinguished T. Dase Gowda v. D. Srinivasaiah [(1990) SCC Online Karnataka 613]* to clarify that an agreement to sell does not create a transfer of interest.
• The Court distinguished Ramzan v. Hussaini [(1990) 1 SCC 104]* and followed Ahmadsahab Abdul Mulla (2) (dead) v. Bibijan and others [(2009) 5 SCC 462]* to clarify that the date for performance must be a specific date.

What weighed in the mind of the Court?

The Court emphasized that the agreement to sell was a clear violation of the BDA rules, designed to provide residential sites to eligible persons. The Court noted that the agreement bypassed the requirement for the allottee to construct a residential building and instead facilitated a real estate transaction for profit. The Court was also influenced by the plaintiff’s intention to sell the property to a nominee, indicating a lack of genuine need for the site for residential purposes. The Court also took into consideration the conduct of the parties, the plaintiff’s business background and the fact that the plaintiff was only interested in the monetary gain.

Logical Reasoning:

The Court considered the argument that the agreement was a conditional one, contingent on the first defendant obtaining the sale deed from the BDA. However, it rejected this interpretation, holding that the agreement’s terms, particularly the immediate transfer of possession, were fundamentally at odds with the BDA rules and the lease-cum-sale agreement. The Court also rejected the claim that the agreement was valid because it was only an agreement to sell and not a sale, finding that the agreement, by its very nature, impliedly prohibited the first defendant from fulfilling her obligation to construct a residential building. The Court also considered the argument of the plaintiff that the suit was not premature and the same was rejected by holding that the agreement was unenforceable.

The Court’s decision was based on the following reasons:

• The agreement to sell directly contravened the BDA rules, which aimed to provide residential sites to genuine beneficiaries.
• The agreement’s terms, particularly the immediate transfer of possession, made it practically impossible for the first defendant to construct a residential building as required by the rules.
• The plaintiff’s intention to sell the property to a nominee indicated that the agreement was a real estate transaction for profit, rather than a genuine need for a residential site.
• The agreement was, therefore, in violation of Section 23 of the Indian Contract Act, 1872, as its object was to defeat the provisions of law.

The Court quoted from the judgment:

• “The ‘sublime’ object of the law, the very soul of it stood sacrificed at the altar of the bargain which appears to be a real estate transaction.”
• “The agreement to sell involved clearly terms which are impliedly prohibited by law in that the first defendant was thereunder to deliver title to the site and prevented from acting upon the clear obligation under law.”
• “If every allottee chosen after a process of selection under the rules with reference to certain objective criteria were to enter into bargains of this nature, it will undoubtedly make the law a hanging stock.”

The judgment was unanimous.

Key Takeaways

• Agreements to sell that violate statutory rules and regulations are void under Section 23 of the Indian Contract Act, 1872.
• Allottees of public property cannot enter into agreements that circumvent the purpose for which the allotment was made.
• Courts will not enforce agreements that are against public policy or designed to defeat the provisions of law.
• The doctrine of lis pendens applies only when the transfer is made by a party to the suit during the pendency of the litigation.

Directions

The Supreme Court directed the appellants to pay Rs. 20,00,000 (Rupees twenty lakhs) to the respondents (Legal Representatives of the plaintiff) within three months. If the amount is not paid within this period, the appellants will be liable to pay interest at 8% per annum.

Development of Law

The Supreme Court clarified that an agreement to sell, which is in contravention of the statutory rules and regulations, is void under Section 23 of the Indian Contract Act, 1872. This decision reinforces the principle that agreements that circumvent the intent of the law will not be enforced. The ratio decidendi of the case is that agreements to sell, which violate the statutory rules and regulations, are void under Section 23 of the Indian Contract Act, 1872 and that such agreements cannot be enforced. This decision has reaffirmed the principle that agreements that circumvent the intent of the law will not be enforced.

Conclusion

The Supreme Court’s ruling in G.T. Girish vs. Y. Subba Raju underscores the importance of adhering to statutory rules and regulations, particularly in matters of public property allotment. The Court’s decision reinforces that agreements that contravene the intent of the law will not be enforced, ensuring that the objectives of public welfare are not subverted by private contracts. The Court allowed the appeals and set aside the judgement of the High Court and dismissed the Suit for Specific performance. However, the Court directed the appellants to pay Rs. 20,00,000 (Rupees twenty lakhs) to the respondents (Legal Representatives of the plaintiff) within three months. If the amount is not paid within this period, the appellants will be liable to pay interest at 8% per annum. This decision serves as a reminder that the law will not aid those who seek to profit from illegal transactions.