ADDRESSING THE INCONSISTENCY BETWEEN RULE OF EQUITY AND CAVEAT EMPTOR IN TRANSFER OF PROPERTY

-by Urmil Shah 

Article 17 of UDHR, which provides for the right to property as the fundamental tenet of human existence, finds its nemesis under the Transfer of Property Act, 1882 (“TPA”). TPA, considered as a conglomeration of the principles of Equity and English Common Law governs the transfer of certain movable and immovable properties by an act of parties through various absolute and partial modes of conveyance. The doctrine of notice u/s. 3 of TPA is used to determine the rights of parties vis-à-vis each other involved in an unconscionable transaction with the former transferor not being a party to the suit. The premise underlying such a transaction is that the transferee (both former and subsequent) ought to ascertain any third party charges or encumbrances, thereby safeguarding their own interest.

Section 3 tries to curb the mischief of property frauds by putting the purchaser of property in a position of vigil to determine ingenuity of transaction by making inquiries into and inspecting relevant documents of the property. The rule of equity, on the other hand, requires the transferor of the property to sell the property free of any charges and without any apparent deceit. The TPA has been drafted in the essence that superficially the rights of an innocent transferee is protected; however, a practical examination reveals the disadvantage suffered by such transferee without any fault on his part.

The Rule of Feeding the Grant by Estoppel – Estopping innocent transferee?

Section 43 of TPA deals with a situation where the transferor makes a fraudulent or erroneous representation to the transferee and upon which the transferee enters into the contract by way of offering consideration. The critical distinction between the rule of feeding the grant by estoppel and rule of spes successions u/s. 6(a) is that the transferee in the former is unaware of the lack of authority on part of transferor to transfer the property, implying that the transferee is a bona fide transferee. The provision also deals with the fact that in the subsequent course of time, if the transferor acquires the required authority to transfer the property and in case the contract between the parties is still subsisting then the transferee has the option to assent or dissent from the new contract for the transfer of property.

The requirement of “subsistence of contract and availability of property with transferor” creates a muddle for the bona fide former transferee as in the course of time when the transferor acquires the lawful authority to dispose of the property and in case he does dispose of to a subsequent bona fide transferee then the former transferee loses all interest in the property. The legislative basis for such circumstance is that there is no conveyance of property in the first place between the transferor and former transferee as former has no lawful competence to transfer; however, the rule of equity does not disregard the fact that the former transferee doesn’t have any notice of the unlawful authority of the transferor and due to fraud on his part, the transferee has to bear the incidental legal consequences of parting away with the property. The rule obliges unnecessary burden upon the former transferee after the transaction has been effected to firstly, ascertain the competency of the transferor, secondly, if ascertained wait for the lawful competency, thirdly, prevent the transferor from effecting another transfer and then consequently, either assent or dissent to the contract of the transfer. Such a burdensome provision indeed has the effect of defeating the equitable claim over the property of the bona fide transferee for value.

Transfer to Defeat Creditors – Lack of Remedial Measures?

Section 53 of the TPA seeks to preserve the interest of creditors in the property of the transferor (the debtor), which the latter intents to defeat or delay, by providing the former with the option to affirm or dissent from such transaction. The provision superficially incorporates a rule of equity, justice and good conscience by not preventing the legitimate claims from the property of the insolvent debtor. It is of importance that there is no presumption of fraudulent intention on part of the transferor and the burden to provide the same is upon the creditor. Where the transfer; however, is partly for genuine consideration and partly fraudulent and in absence of severability of such terms, then the entire transaction will be held voidable at the option of the creditor. It acts only as a deterrence on the innocent purchaser who has no knowledge of the legitimate fact misrepresented by the transferor.

The provision is so detrimental to the interest of creditors that it offers no remedy when a bona fide transferee takes the property for consideration in good faith without any actual or constructive notice, even though the transfer may have been transacted with a fraudulent intention. Moreover, it has been repeatedly held by courts that a creditor is a transferee in good faith even when he is aware of proceedings of another creditor against transferor as he seeks to protect his interest without defeating that of the other. Thus the creditor without any fault of his has to suffer at hands of the fraudulent transferor who effected the transfer to defeat the claim of the creditor over his property and no remedy has been provided for such loss. Although the provisions contain a general rule of the prevalence of special insolvency law, the efficacy of such an onerous provision still needs to be ascertained on lines of the Insolvency& Bankruptcy Code, 2016 and recently notified provisions for individual insolvency.

The Doctrine of Part Performance – The Precursor?

Section 53A of TPA provides a particular circumstance where the transferee has either paid or is willing to pay the compensation of the property and willing to fulfil his part of transfer deed but the transferor unilaterally decides to no go ahead with the transfer and sells the property to some other transferee who offers him a better consideration. Section 53A prohibits such second transfer on grounds of equity as it would amount to unjust enrichment on part of the transferor. The situation envisaged u/s. 53A is common to the real estate industry where the allottees pay the advance for plot upfront and the promoter sells the estate to another allottee who offers a better consideration. The consequential effect of the doctrine of part performance faces a stern challenge in light of homebuyers’ reforms in the domain of real estate.

The conundrum with this provision is that it can be utilized only as a right of defence by the defendant in cases of a challenge to the title of the property on the premise that the original transaction (and not transfer since it doesn’t comply with requirements of attestation and registration) does not confer any new title on the transferee. The redundant premise was challenged before the Gujarat High Court where the Court resorting to the purposive interpretation of Section 53A held that such a proposition defeats the purpose of the doctrine of part performance for it is possible that for an overpowering transferor to forcibly dispossess transferee and compel him to institute a plaint. The proviso to the section envisages a situation wherein despite the curbs on the transferor, he manages to transfer the property to a subsequent transferee. It protects the interest of a bona fide subsequent transferee of value who has no knowledge or notice of the potential right of the former transferee, and in the process defeats the essence of the doctrine.

The law of equity would warrant the right of the former transferee who for no wrong on his part suffers from loss of ownership of the property due to the stringent consequential effect of law, despite enjoying possession till the existence of transfer deed The rule of priority, if applicable, in light of equity, would also entitle the former transferee to the interest in property over the rights of the subsequent transferee by unjustly enriching him for the want of fraud committed by the transferor. It is not the doctrine by itself but its consequential and incidental effect which upsets the innocent and genuine parties from their interest in the property.

Marshalling of Properties – The Real “Equity”?

Section 56 and Section 81 of the TPA provides for the marshalling of properties whereby the owner of two or more properties are mortgaged and subsequently either sells or mortgages the other properties to another person, thereby protecting the interest of subsequent transferee from being sold to repay the debt which the transferor is unable to pay. The law of marshalling is based on the equitable doctrine and in consonance with the rule of priority to safeguard the interest of a bona fide purchaser or mortgagee. Unlike the other rules and doctrines discussed above, the rule of marshalling seeks to protect the interest of both the mortgagee and the bona fide buyer, due to no application of the doctrine of notice. The applicability of the rule will be rejected if there is a special law in existence with respect to the concerned transaction or where there is a contract to the contrary.

There has to the existence of a common debtor and more than one property has to be secured for application of the rule of marshalling. The legislative intent behind non-incorporation of the doctrine of notice is to adjust the equities by requiring a prior mortgagee to proceed against properties not subject to the puisne mortgage and the option of marshalling shall be refused if the rights of subsequent purchasers are adversely affected. This apparent inconsistency of application of the doctrine of notice makes it evident that the rule of marshalling shall not be hit by common law doctrine of caveat emptor and interest of neither of the parties to the transfer deed shall be hindered due to the inaction or fraud on part of the transferor. There doesn’t seem to be any reasonable legislative intent for the discrimination between the rights and obligations of bona fide purchasers under the specific and general mode of transfer under the TPA.

Conclusion – The Way Forward

The rule of caveat emptor has faced the heat of judiciary in recent matters arising out of consumer disputes and there seems to be a gradual shift in favour of the consumers by subtle acceptance of caveat venditor, in context of consumer laws in India. The judiciary has started recognizing the possibility of misuse of the leeway given to the sellers which promote frauds in property disputes and has been burdening them with additional responsibilities to ensure a fair transaction. In the context of property transactions; however, moving away from the doctrine in its entirety can lead to a domino effect. There is a need to recognize and take effective policy measures to curb the inconsistency of rule of equity and doctrine of caveat emptor prevailing with regards to a general and specific transfer of immovable property and latent inconsistencies hindering the application during litigations. With no central repository for ascertaining data regarding properties and lack of digitization has not only triggered time-consuming litigation but also shows the shortcoming in the implementation of property laws.

ABOUT THE AUTHOR

Urmil Shah is a 3rd year BALLB student from AURO University, Surat. His area of interest lies in commercial laws and public policy and has a keen interest in writing.

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