Contract Act | Agreement To Sell Not Enforceable Contract Prior To Conveyance Deed; State Can Re-Auction For Price Maximisation: Supreme Court

"An agreement enforceable in law alone is a contract. Such an enforceable agreement, in the present case, will come into existence only upon execution of the conveyance deed. Execution of the conveyance deed is the culmination of the process by which the promise, the offer, acceptance, payment of consideration, and execution of an Agreement to Sell are complete." Supreme Court, in a significant ruling dated October 16, 2026, held that an Agreement to Sell executed after an e-auction does not constitute an enforceable contract under Section 2(h) of the Indian Contract Act, 1872 until the formal conveyance deed is executed.

A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe observed that a public authority retains the sovereign right to revisit an auction process and cancel an allotment prior to the execution of a conveyance deed if the decision is bona fide and aimed at securing price maximisation for public property.

The dispute arose after the Chandigarh Administration issued an e-auction notice on August 31, 2022, for two identical nursing home plots in Sector 33C, Chandigarh, with a reserve price of Rs 6.91 Crores each. While the appellant secured Site No. 3 for Rs 18.25 Crores, M/s Bedi Hospital was declared the highest bidder for adjacent Site No. 4 at Rs 12.58 Crores and executed an Agreement to Sell upon depositing the bid amount. Realising that Site No. 4 fetched approximately Rs 6 Crores less than the contiguous site of equal dimension, the Administration cancelled the bid contract and the Agreement to Sell to re-auction the plot, which came to be challenged by the hospital before the Punjab and Haryana High Court.

The primary question before the Supreme Court was whether an Agreement to Sell executed pursuant to an e-auction creates a concluded, enforceable contract under Section 2(h) of the Indian Contract Act, 1872 that prevents the State from cancelling the process. The court was also called upon to determine whether the State can legitimately rescind an auction process to maximise public revenue prior to the execution of a conveyance deed.

Agreement To Sell Does Not Form Concluded Contract Under Section 2(h) Contract Act

Analyzing the statutory framework governing auction sales under Rule 5 of the Chandigarh Estate Rules, 2007 and the tender conditions, the bench clarified the exact stage at which contractual rights crystallise. The court held that entering into an Agreement to Sell does not finalise the transaction in legal contemplation, as rights and liabilities are governed entirely by the final conveyance deed.

"An Agreement to Sell contemplated under Rule 5(iv) of the Chandigarh Estate Rules, 2007 in itself is not an enforceable contract under Section 2(h) of the Indian Contract Act, 1872. As the conveyance deed is not yet executed, the Chandigarh Administration will be in a position to exercise its power under Rule 5(vi) read with Explanation I of the Chandigarh Estate Rules, 2007 or under Clauses VI(1) and VI(5) of the General Terms and Conditions of E-Auction dated 31.08.2022," the bench ruled.

The bench stressed that courts interpreting statutory auction rules must identify the specific event through which a contract gets concluded, which in this statutory scheme was the execution of the conveyance deed.

"As the Allotment Letter was not issued with no corresponding Conveyance Deed executed, the Chandigarh Administration is entitled to exercise its power to cancel."

State Action Justified When Aimed At Maximising Public Revenue

Addressing the limitations on executive power under public law, the Supreme Court held that while the State must act fairly and non-arbitrarily, it possesses an overriding duty to safeguard the public exchequer when dealing with public assets. The court underscored that price discovery and securing the best possible price are paramount considerations when disposing of State-owned property.

"While dealing with matters relating to sale or lease of public property, the action of a public authority to recall or revisit the auction process would be justified if the decision is intended to maximise the price for the sale/lease of public property. This is permissible as long as the enforceable contract has not been entered into," the court observed, relying upon its landmark decision in Chairman and Managing Director, SIPCOT, Madras v. Contromix Pvt. Ltd. (1995).

The court reiterated that a substantial disparity in prices between two identical plots auctioned on the very same day constitutes a rational and relevant basis for executive intervention.

"At this stage, a substantial lower price fetched at the auction can be a relevant consideration for not finalising the contract in favour of a so-called 'highest bidder'."

"When a contract is being evaluated, the mere possibility of more money in the public coffers, does not in itself serve public interest. A blanket claim by the State claiming loss of public money cannot be used to forego contractual obligations... In the present case, the cancellation was followed by a full refund of the total consideration along with the Chandigarh Administration requesting M/s Bedi Hospital to take part in the fresh E-Auction."

Court Distinguishes Precedents on Contractual Sanctity and Natural Justice

The Supreme Court rejected the respondent hospital’s reliance on Vice-Chairman and Managing Director, CIDCO v. Shishir Realty Private Limited (2022) and Golden Food Products India v. State of Uttar Pradesh (2026). The bench pointed out that Shishir Realty involved unilateral cancellation of concluded lease deeds on unproven allegations without opportunity to cure defects, whereas the present case pertained to the pre-conveyance stage.

The bench similarly distinguished Golden Food Products, where an allotment was discarded based on internal notes without transparency or intimation to the highest bidder. The court observed that the Chandigarh Administration complied with natural justice by issuing a transparent cancellation letter explaining the exact commercial disparity, immediately refunding the entire deposited money, and inviting the hospital to participate in the re-auction.

Flawed Interim Orders Create Avoidable Multiplicity of Litigation

Criticising the High Court's procedural handling, the bench noted that the High Court committed a grave error by permitting a fresh e-auction by way of an interim order on February 10, 2023, but subsequently ignoring the results of that re-auction during the final hearing. In the subsequent auction, the appellant had emerged as the highest bidder at Rs 18.30 Crores, generating an additional Rs 6 Crores for the public purse.

"Six crores is not a small amount, and this Court cannot shut its eyes to the glaring reality of the facts that have unfolded about price discovery," the bench observed. The court emphasized that when rights of third parties are created pursuant to judicial orders permitting re-auction, a writ court cannot simply disregard the subsequent developments and status reports.

Although the hospital offered to match the Rs 18.30 Crores bid during the hearing, the bench declined to allow substitution, noting that the hospital had chosen not to participate in the court-permitted second auction, while the appellant had deposited the full consideration.

Directions for Fresh Auction

To reconcile the equities and undo the procedural impasse created by the prolonged litigation, the Supreme Court set aside the High Court's judgment quashing the cancellation orders. The bench directed the Chandigarh Administration to conduct a fresh, transparent e-auction for Site No. 4 under the Chandigarh Estate Rules, 2007 within three months.

The Supreme Court allowed the civil appeals and set aside the judgment of the Punjab and Haryana High Court, upholding the executive's prerogative to recall an incomplete auction process for price discovery before conveyance. The ruling solidifies the legal principle that an Agreement to Sell does not strip public authorities of their power to cancel auctions to protect public revenue, provided the full deposit is refunded and procedural fairness is maintained.

Date of Decision: October 16, 2026