The Agreement Is Only the Beginning: What a Bank Case Teaches Us About Legal Enforceability

Legal Perspective Series : Episode 2

The story — where it began

Canara Bank needed residential flats in Delhi for its officers. Around December 1984, it entered into an agreement with K.L. Rajgarhia, owner of a 300 sq. yard plot at B-9, East of Kailash, New Delhi. The arrangement was that Rajgarhia would construct residential flats on the plot and hand them over to the Bank. The agreed consideration was ₹32,07,500, and the Bank paid about 90%, roughly ₹28.86 lakh. The construction was to be completed within 18 months, with a further grace period of six months.

On the face of it, the Bank had a strong paper case: written agreement, substantial payment, and failure by the owner to complete construction and deliver possession.

Where the dispute started

Construction did not get completed. The Bank said the owner had failed to perform his obligation. The owner, on the other hand, raised various defences. One line of defence was that the transaction was not really a sale arrangement but more in the nature of a loan transaction. Issues were framed before the court on whether the agreement was a sale/purchase arrangement, whether it was vitiated by undue influence/coercion, whether refund with interest would bar specific performance, and whether the agreement was unenforceable or contrary to law.

So the Bank went to court seeking specific performance — in simple terms, asking the court to compel the owner to complete what he had agreed to do.

Where it really got stuck - Agreement Legal Enforceability

The case got stuck on a more fundamental issue: could the agreed construction itself lawfully be done?

The agreement contemplated construction and delivery of multiple flats — the summaries describe it as eight flats on the 300 sq. yard plot. The defendant argued that this construction was contrary to the applicable Delhi Master Plan/building bye-laws. In other words, the Bank was asking the court to enforce an agreement whose essential object required construction beyond what the law permitted.

That became the turning point.

The issue was no longer just: “Did the seller fail to perform?”

It became: “Can a court compel performance of a contract whose central obligation is legally impermissible?”

What the Trial Court did

The Single Judge/Trial Court initially leaned in favour of Canara Bank. The reasoning was that the Bank had paid a substantial amount and the owner should not be allowed to avoid the bargain. The court considered whether the agreement could be enforced in a modified way — for example, by reducing the number of flats to what was legally permissible.

That is where the legal danger lay: the court would effectively be rewriting the bargain.

What the Division Bench did

The Division Bench of the Delhi High Court reversed the decree for specific performance. It held that the agreement could not be specifically enforced because the construction of the flats was not a minor or detachable term. It was the very object of the transaction. The Bank had not merely bought bare land; it had bargained for constructed flats. If that construction was legally impermissible, the court could not create a new contract by saying, “Build fewer flats” or “convey something else.”

The High Court therefore refused specific performance but ordered refund of the money paid, with interest.

What the Supreme Court finally said

The Supreme Court affirmed the High Court’s approach. The key idea was that specific performance depends on a valid, lawful and enforceable contract. A court cannot enforce an agreement by deleting or modifying its essential term. The doctrine of severability may apply in exceptional situations, but not where the allegedly severable portion is the heart of the bargain.

So the Bank lost the specific performance claim not because there was no agreement, and not because it had not paid money, but because the agreement in its essential form could not lawfully be enforced.

Contract Act vs Specific Relief Act: Why the Difference Matters

Before going further, it is useful to separate two ideas that are often mixed up.

The Indian Contract Act, 1872 helps us answer the first question:

Was there a valid contract?

It deals with the foundation of contractual obligation — offer, acceptance, consideration, free consent, lawful object, capacity of parties and other essentials of a valid agreement.

The Specific Relief Act, 1963 answers a different question:

If there is a contract or civil obligation, what specific remedy can the court grant?

That difference is important.

Every breach of contract does not automatically result in specific performance. In many cases, damages may be the appropriate remedy. But in certain cases, especially involving immovable property or unique obligations, the court may be asked to compel the defaulting party to perform the exact obligation promised.

So, in a property sale dispute, the Contract Act may help establish whether an agreement existed. But the Specific Relief Act decides whether the buyer can actually force the seller to execute the sale deed or complete the promised transaction.

A simple way to remember it is this:

The Contract Act asks: “Is there a contract?”

The Specific Relief Act asks: “What should the court do about it?”

This distinction matters greatly for bankers. A document may create a contractual right, but the real test is whether that right can be converted into an enforceable legal remedy.

In credit, security and recovery, that difference can decide whether a document is merely comforting — or genuinely protective.

What the Specific Relief Act Says

After the 2018 amendment, Section 10 of the Specific Relief Act states that specific performance of a contract shall be enforced by the court, but this is subject to Section 11(2), Section 14 and Section 16.

Section 10 — Specific performance subject to statutory filters

Specific performance may be enforced, but only subject to the limits and personal bars contained in the Act.

Section 12 — Court cannot casually enforce part of a bargain

A court will not normally rewrite a contract by enforcing only a part of it, unless the Act permits such partial enforcement.

Section 14 — Some contracts cannot be specifically enforced

Certain contracts are outside the remedy of specific performance because their nature makes court-compelled performance inappropriate or impossible.

Section 16(c) — Buyer must show readiness and willingness

A plaintiff cannot demand specific performance unless he proves that he has performed, or has always been ready and willing to perform, his essential obligations.

Section 21 — Compensation may substitute or supplement performance

Where specific performance is refused or becomes inappropriate, the court may consider compensation in suitable cases.

That phrase “subject to” is important.

It means specific performance is not viewed in isolation. The plaintiff must still cross statutory filters.

Section 14 deals with contracts that cannot be specifically enforced. Section 16 deals with personal bars to relief, including the requirement that the plaintiff must prove readiness and willingness to perform the essential terms of the contract.

This is where the common misconception breaks down.

Many people believe that once there is an agreement to sell property, the buyer can automatically force the seller to complete the sale. The law is more nuanced.

Courts do not merely ask:

Was there an agreement?

They also ask:

Was the agreement lawful? Was it enforceable? Was the buyer ready and willing? Was the conduct fair? Has there been delay?Would enforcement require the court to rewrite the bargain?

That is the central lesson.

An agreement is necessary. But it is not sufficient.

The Banker’s Lens: Documentation Is Not Enforceability

The Canara Bank case is especially interesting because banks are document-driven institutions.

In banking, documentation is often treated as the backbone of enforceability. Sanction letters, loan agreements, mortgages, undertakings, guarantees, escrow arrangements, compromise terms and sale agreements are all expected to protect the institution.

But this case reminds us that documentation is only one layer.

The underlying transaction must also be lawful, structurally sound and capable of enforcement.

A document may be signed. Money may be paid. Possession may be promised. Timelines may be recorded. But if the essential bargain violates law, depends on an impermissible construction, lacks statutory approval, or requires the court to modify core terms, the remedy may fail.

That is why the real test of a document is not how well it is drafted, but how well it survives scrutiny.

Lessons for Underwriters

For an underwriter, the first lesson is that legal documentation is not the same as legal enforceability.

A signed agreement, paid advance, valuation report or title note may create comfort, but the underwriter must ask a deeper question:

Can this arrangement actually be enforced if it is tested?

In property-backed exposures, assessment cannot stop with value. It must also cover title, approvals, zoning, building permissions, permitted usage, possession, statutory restrictions, encumbrances and whether the proposed transaction can be completed without violating law.

A collateral may look valuable on paper, but if its legal pathway is defective, its credit value is impaired.

The underwriter’s role is not merely to ask, “What is the market value?” The better question is:

What is the enforceable value?

Lessons for Sourcing Teams

For sourcing teams, the lesson is that speed cannot substitute structure.

A transaction should not be pushed merely because the customer is reputed, the property is attractive, or documentation appears to be available.

Before promising timelines or structuring comfort to the borrower, sourcing teams must identify whether the underlying property transaction is legally clean, practically performable and capable of being perfected.

Early red flags should be surfaced upfront — missing approvals, unclear ownership, construction deviations, disputed possession, unapproved layouts, vague development arrangements or permissions that do not support the proposed use.

These are not technical irritants. They are enforceability risks.

The worst place to discover a structural defect is after disbursement.

Lessons for Recovery Teams

For recovery teams, the lesson is equally important.

Enforcement strategy cannot be built only on the existence of documents. The recovery value of a security depends on whether the bank can actually enforce, sell, possess or realise it without being trapped in avoidable litigation.

When recovery depends on property documents, settlement agreements, consent terms, compromise arrangements or sale undertakings, the team must test whether the relief being sought is legally available.

A weakly structured document may give negotiating comfort for some time, but it may fail when judicially tested.

Recovery strategy must therefore combine three elements:

documentation, legal enforceability and practical execution.

A right that cannot be enforced in time may have limited recovery value.

Lessons for Fellow CFEs

For Certified Fraud Examiners, the case offers a familiar message:

Do not stop at the document.

Fraud examination often begins where documentation comfort ends.

A file may contain agreements, payment records, board approvals, valuation reports and legal opinions. Yet the examiner must ask:

Was the structure lawful? Were approvals genuine? Was the bargain commercially sensible?Was the transaction capable of performance? Did any party benefit from an arrangement that could not have been lawfully performed?

In fraud risk, unenforceable structures are often not merely technical defects. They may be symptoms of poor governance, wilful blindness, collusion or camouflage.

The CFE’s role is to test whether the paper trail reflects a genuine, lawful and performable transaction — or whether it merely creates the appearance of one.

The Wider Lesson

The Canara Bank case is not relevant merely because a bank lost a property dispute.

Its relevance lies elsewhere.

Even a bank, with documents and substantial payment behind it, could not bypass the foundational test:

Is the agreement legally enforceable and capable of being specifically performed?

That question matters in every property-linked transaction.

• It matters to buyers.

• It matters to sellers.

• It matters to bankers.

• It matters to underwriters.

• It matters to recovery teams.

• It matters to fraud examiners.

Because in real life, the document is not the destination. Enforceability is.

Specific performance is not a mechanical reward for holding an agreement. It is a legal remedy shaped by validity, legality, readiness, conduct and performability.

The court does not enforce paper alone.

It enforces a lawful and enforceable obligation.

That is why the agreement is only the beginning.

The real test begins after that.

Citation :

This entire blog stems from the study of the recent case Canara Bank v. K.L. Rajgarhia (D) through LRs., 2025 INSC 1278, decided on 9 October 2025, the Supreme Court refused specific performance despite the existence of an agreement and substantial payment, because the essential bargain could not be lawfully enforced.