Property law I

NATIONAL LAW UNIVERSITY, LUCKNOW Final Draft of Property Law-I On the topic “Specific enforceability of contract is almost as good as a registered property right" Submitted by: Submitted to: Varnika Jain Mr. Sudeep Malik B.A. LLB (Hons.) Guest Faculty- Property Law Vth Semester Dr. Ram Manohar Lohiya Section- B National Law University, Roll Number- 146 Lucknow ACKNOWLEDGEMENT I take this opportunity to express my sincere thanks to Mr. Sudeep Malik, Faculty in Property Law, Dr. Ram Manohar Lohiya National Law University, for giving me a chance to work on this project and for all his valuable suggestions and guidance that went towards the completion of this project. Without him, the project would not have been able to take such a shape I would also like to thank my family, without their love and support this project would not have seen the light of day. Last but not the least, I would like to thank my friend Arpit Goel, whose help and suggestions are highly appreciated. Varnika Jain INDEX Methodology Introduction Rights and liabilities arising under Section 55 Enforceability against third persons Relevant Caselaws Specific enforceability is not marred by Court’s discretion Additional rights under specific enforceability Conclusion Bibliography METHODOLOGY During the course of this project, the author shall try to establish how specific enforceability, though not a proprietary interest, charge or right in itself, is almost as good as a registered property right. It will be shown through statutory provisions, cases and situations that specific enforceability falls short of being a fully fledged property right only in a select few circumstances apart from which it provides almost all the benefits that accrue from having a registered property right. It is to be noted at the start that specific enforceability pertains to the specific enforceability of a contract, i.e., a specifically enforceable contract which can be a contract for sale, lease, mortgage, etc. For the purpose of this project, the author shall refer only to a contract for sale in order to keep the scope of the project limited. Most of the arguments advanced however, apply also to other contracts for transfer of property as well. INTRODUCTION The term ‘property right’ has nowhere been defined exactly and precisely. However, the hallmark of a registered property right is its exigibility. That is, it is enforceable against third parties or the whole world, with or without their notice. Whereas, a contractual right is dependent upon the doctrine of privity of contract, i.e., it is enforceable only against the parties to the contact and no other person can be bound by it. Specific Enforceability has been defined in Section 10 of the Specific Relief Act, 1963 which reads as follows: 10. Cases in which specific performance of contract enforceable Except as otherwise provided in this Chapter, the specific performance of any contract may, in the discretion of the court, be enforced- (a) when there exists no standard for ascertaining actual damage caused by the non-performance of the act agreed to be done; or (b) when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. Explanation: Unless and until the contrary is proved, the court shall presume- (i) that the breach of a contract to transfer immovable property cannot be adequately relieved by compensation in money; and (ii) that the breach of a contract to transfer movable property can be so relieved except in the following cases: (a) where the property is not an ordinary article of commerce, or is of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market; (b) where the property is held by the defendant as the agent or trustee of the plaintiff. Thus, a contract for the transfer of an immoveable property is statutorily a specifically enforceable one and specific performance of it is to be granted instead of providing monetary compensation since. A Contract for sale is defined in Section 54 of The Transfer of Property Act, 1882 as “A contract for the sale of immoveable property is a contract that a sale of such property shall take place on terms settled between the parties. It does not, of itself, create any interest in or charge on such property.” In other words, on the strength of such an agreement the person does not become the owner of such a property but gets merely the right to obtain another document of sale. On fulfillment of the conditions specified therein, the contract for sale becomes specifically enforceable. In Ram Swarup Gaur v Ratiram AIR 1984 All 369 the plaintiff’s suit was decreed for specific performance of the agreement to sell, that is, the court decreed for the specific enforcement of a contract for sale. It also directed the defendants to execute a sale deed in favour of the plaintiff and failure to do so within the specified time will entitle the plaintiff to get the sale deed executed through the Court. Thus, a contract for transfer of an immoveable property wherein the terms and conditions of the agreement are settled is specifically enforceable. This almost always results in the acquisition and execution of a sale deed by which the ownership of the property is formally transferred. Hence, a specifically enforceable contract is almost as good as a property right as even without the creation or transfer of ownership or interest the right to obtain and get the sale deed executed is acquired. THE RIGHTS AND LIABILITIES ARISING UNDER SECTION 55 CAN BE AVAILED BY PARTIES TO A CONTRACT FOR SALE Section 55 of The Transfer of Property Act, 1882 enumerates various rights and liabilities of the buyers and sellers of immovable property. It reads as follows: 55. Rights and liabilities of buyer and seller.- In the absence of a contract to the contrary, the buyer and the seller of immoveable property respectively are subject to the liabilities, and have the rights, mentioned in the rules next following, or such of them as are applicable to the property sold: (1)The seller is bound— (a) to disclose to the buyer any material defect in the property 2[ or in the seller' s title thereto] of which the seller is, and the buyer is not, aware, and which the buyer could not with ordinary care discover; (b) to produce to the buyer on his request for examination all documents of title relating to the property which are in the seller' s possession or power; (c) to answer to the best of his information all relevant questions put to him by the buyer in respect to the property or the title thereto; (d) on payment or tender of the amount due in respect of the price, to execute a proper conveyance of the property when the buyer tenders it to him for execution at a proper time and place; (e) between the date of the contract of sale and the delivery of the property, to take as much care of the property and all documents of title relating thereto which are in his possession as an owner of ordinary prudence would take of such property and documents; (f) to give, on being so required, the buyer, or such person as he directs, such possession of the property as its nature admits; (g) to pay all public charges and rent accrued due in respect of the property up to the date of the sale, the interest on all incumbrances on such property due on such date, and, except where the property is sold subject to incumbrances, to discharge all incumbrances on the property then existing. (2) The seller shall be deemed to contract with the buyer that the interest which the seller professes to transfer to the buyer subsists and that he has power to transfer the same: Provided that, where the sale is made by a person in a fiduciary character, he shall be deemed to contract with the buyer that the seller has done no act whereby the property is incumbered or whereby he is hindered from transferring it. The benefit of the contract mentioned in this rule shall be annexed to, and shall go with, the interest of the transferee as such, and may be enforced by every person in whom that interest is for the whole or any part thereof from time to time vested. (3) Where the whole of the purchase- money has been paid to the seller, he is also bound to deliver to the buyer all documents of title relating to the property which are in the seller' s possession or power: Provided that, (a) where the seller retains any part of the property comprised in such documents, he is entitled to retain them all, and, (b) where the whole of such property is sold to different buyers, the buyer of the lot of greatest value is entitled to such documents. But in case (a) the seller, and in case (b) the buyer, of the lot of greatest value, is bound, upon every reasonable request by the buyer, or by any of the other buyers, as the case may be, and at the cost of the person making the request, to produce the said documents and furnish such true copies thereof or extracts therefrom as he may require; and in the meantime, the seller, or the buyer of the lot of greatest value, as the case may be, shall keep the said documents safe, uncancelled and undefaced, unless prevented from so doing by fire or other inevitable accident. (4) The seller is entitled-- (a) to the rents and profits of the property till the ownership thereof passes to the buyer; (b) where the ownership of the property has passed to the buyer before payment of the whole of the purchase- money, to a charge upon the property in the hands of the buyer, 1[ any transferee without consideration or any transferee with notice of the non- payment], for the amount of the purchase- money, or any part thereof remaining unpaid, and for interest on such amount or part 1[ from the date on which possession has been delivered]. (5) The buyer is bound-- (a) to disclose to the seller any fact as to the nature or extent of the seller' s interest in the property of which the buyer is aware, but of which he has reason to believe that the seller is not aware, and which materially increases the value of such interest; (b) to pay or tender, at the time and place of completing the sale, the purchase- money to the seller or such person as he directs: provided that, where the property is sold free from incumbrances, the buyer may retain out of the purchase- money the amount of any incumbrances on the property existing at the date of the sale, and shall pay the amount so retained to the persons entitled thereto; (c) where the ownership of the property has passed to the buyer, to bear any loss arising from the destruction, injury or decrease in value of the property not caused by the seller; (d) where the ownership of the property has passed to the buyer, as between himself and the seller, to pay all public charges and rent which may become payable in respect of the property, the principal moneys due on any incumbrances subject to which the property is sold, and the interest thereon afterwards accruing due. (6) The buyer is entitled-- (a) where the ownership of the property has passed to him, to the benefit of any improvement in, or increase in value of, the property, and to the rents and profits thereof; (b) unless he has improperly declined to accept delivery of the property, to a charge on the property, as against the seller and all persons claiming under him, 1[ to the extent of the seller' s interest in the property, for the amount of any purchase- money properly paid by the buyer in anticipation of the delivery and for interest on such amount; and, when he properly declines to accept the delivery, also for the earnest (if any) and for the costs (if any) awarded to him of a suit to compel specific performance of the contract or to obtain a decree for its rescission. An omission to make such disclosures as are mentioned in this section, paragraph (1), clause (a), and paragraph (5), clause (a), is fraudulent. The question that arises is who is a buyer or seller for the purpose of this section. It is to be noted here that some of the provisions mentioned above are applicable to pre-sale situations while some are applicable to post-sale. Thus, it can be safely concluded that an executed sale deed is not required to invoke the rights conferred and liabilities imposed therein. However, by virtue of it being a contractual provision with proprietary consequences even contracts for sale fall within its purview as far as pre-sale provisions are concerned. This issue had been addressed in the case of Surendra Maneklal Kathia v bai Narmada widow of Jethalal AIR 1963 Guj 239. The question before the Court was whether there has been a concealment of fact when the accused had not mentioned to the complainant the fact that there was an injunction order of a civil court restraining them from selling the property, at the time when they entered into an agreement to sell the property. It is true that they did not sell the property but they merely agreed to sell the property. A perfected conveyance had not been executed, but there was only an agreement to sell. The Court relied on Deep Chandra v Sajjad Ali Khan AIR 1951 All 93 in which it was said that Section 55 of the T. P. Act also applies when there is a mere contract for sale and before a conveyance has been executed. The learned Judge Agarwala has discussed the question at length and has given various reasons in support of his conclusion. He has expressed his reasons in the following words : -- "To my mind the warranty of title embodied in Section 55(2), T. P. Act, attaches to and is implicit in every contract of sale, assuming of course, there is no contract to the contrary. I arrive at this conclusion for two reasons. First, that the language of Section 55(2) is applicable, both to a conveyance as well as to a contract of sale, and second, even if the language applied to conveyances alone, in the very nature of things the warranty of title implied in a sale deed will be implied in a contract of sale also". He has further observed that the language of Section 55(2) of the Transfer of Property Act,1882 refers both to a contract to sell as well as to a sale deed. The words 'buyer' and 'seller' as used in Section 55(2), Transfer of Property Act, do not refer merely to a person who has already purchased or sold a property but refer also to a person who intends to buy and intends to sell the property. For instance, under Section 55(1)(b), the seller is bound to produce to the buyer on his request for examination all documents of title relating to the property which are in the seller's possession or power. The examination of documents is before the execution of a conveyance and not after the conveyance. Under Section 55(1)(d), the seller is bound on payment of the amount due in respect of the price to execute a proper conveyance. It is, therefore, clear that a person who executes an agreement to sell property is regarded as a seller for the purpose of this section. Clause (e) of Section 55(1), also provides that the seller is bound between the date of the contract of sale and the delivery of the property, to take as much care of the property and all documents of title relating thereto which are in his possession, as an owner of ordinary prudence would take of such property and documents. It is, therefore clear that the words 'buyer' and 'seller' in Section 55(2) of the Transfer of Property Act refer also to a person who has entered into an agreement for sale of property and also to a person who has entered into a contract for the purchase of property and not merely to a person who has purchased the property or who has sold the property. This was the reasoning followed by the Court as well. Thus, having a specifically enforceable contract for sale would makes one a buyer or seller for the purpose of Section 55. Parties to such contracts can avail all the rights and benefits and impose all liabilities that are available to parties to an executed sale deed depending on the nature of property concerned and is, therefore, almost as good as a registered property right. ENFORCEABILITY AGAINST THIRD PERSONS WHO ARE NOT PARTIES TO THE CONTRACT A contractual right or obligation is limited by the doctrine of privity of contract according to which a contract can be enforced only against a party to the contract. No liability can be imposed on any third person or party who shall not be bound by any of the clauses of the contract which he is not a party to. In stark contrast to this is the fact that a registered property right is enforceable against third parties or the whole world with or without their knowledge or consent. However, specific enforceability creates an exception to the doctrine of privity of contract by invoking the principles of equity which have been statutorily incorporated in Indian law. Section 91 of The Trusts Act, 1882 is one such provision. It states that: 91. Property acquired with notice of existing contract.- Where a person acquires property with notice that another person has entered into an existing contract affecting that property, of which specific performance could be enforced, the former must hold the property for the benefit of the latter to the extent necessary to give effect to the contract. It is very clear that, by virtue of the above mentioned Section, the transferee who is a third party in such cases shall also be bound by the right of a person emanating from a specifically enforceable contract and shall hold the property in question as a constructive trustee to the extent required for the performance of the said contract. Thus, specific enforceability is not only almost as good as a registered property right but also gains precedence over it in some cases where the transferee has acquired the property by way of a properly registered deed of sale. If he had notice of the previous agreement affecting the property, his property right would become subservient to the contractual right to the extent required to bring it into force. His right would not stand in front of specific enforceability. The only remedy that he shall have in law is to get compensation for the consideration he had paid to the transferor. The beneficial interest in the property is from the beginning in the person who has been wronged. The constructive trust arises from the situation in which he is entitled to the remedy of restitution, and it arises as soon as that situation is created. For this reason, the person who is wronged is entitled to specific restitution from the wrongdoer even though the wrongdoer becomes insolvent before suit is brought, and he is entitled to specific restitutions from a person to whom the wrongdoer has transferred the property, if the transferee is not a bona fide purchaser, even though the transfer is made before suit is brought for restitution. The owner in law transfers his equitable interest to the other party when he enters into a contract for sale and it vests in that party until the said contract is executed. This equitable interest or right in equity is statutorily codified in India and, thus, giving an equitable right arising from specific enforceability the same standing as a property right. Such right is not enforceable against the transferee only when he had no notice of the prior contract concerning the said property. Thus, equity’s darlings are protected from such a liability since Section 91 is, in essence, an equitable right. Analogous to this is the second part of Section 40 of the Transfer of Property Act, 1882 which reads as follows: Or of obligation annexed to ownership but not amounting to interest or easement.- where a third person is entitled to the benefit of an obligation arising out of contract and annexed to the ownership of immoveable property, but not amounting to an interest therein or easement thereon, such right or obligation may be enforced against a transferee with notice thereof or a gratuitous transferee of the property affected thereby, but not against a transferee for consideration and without notice of the right or obligation, nor against such property in his hands. Thus, a contract for sale can be enforced against a transferee with notice. Here also, it is only equity’s darling against whom such a right cannot be enforced. Other than that, it is almost as good as a registered property right in so far as it binds third parties with notice. RELEVANT CASELAWS In Durga Prasad v. Deep Chand AIR 1954 SC 75, the Supreme Court has emphatically held that when the vendor after entering into the contract of sale again transfers the same property in favour of others by conveyance, the proper remedy for the first purchaser (agreement-holder) is to sue for specific performance of the contract between himself and the vendor and also directed the subsequent transferee to join in the conveyance so as to pass on the title which resides in him to the prior transferee. The said legal principle enunciated by the Supreme Court was further reiterated in Soni Lalji Jetha v. Kalidas AIR 1967 SC 978. It was held that the subsequent transferee with notice of prior agreement of sale is in a fiduciary position holding the property in trust for the prior agreement-holder. To the same effect is the Judgment laid down by the Supreme Court in Bai Dosabai v Mathuradas Govinddas AIR 1980 SC 1334 wherein it was authoritatively held that the ultimate paragraph of Section 54 of Transfer of Property Act expressly enunciates that a contract for the sale of immovable property does not, of itself create any interest in or charge on such property. But the ultimate and penultimate paragraphs of s. 40 of the Transfer of Property Act make it clear that such a contract creates an obligation annexed to the ownership of immovable property, not amounting to an interest in the property, but which obligation may be enforced against a transferee with notice of the contract or a gratuitous transferee of the property. Thus the Equitable ownership in property recognised by Equity in England in translated into Indian law as an obligation annexed to the ownership of property, not amounting to an interest in the property, but an obligation which may be enforced against a transferee with notice or a gratuitous transferee.’ All of these judgments were considered in Kondapalli Satyanarayana v. Kondapalli Mayullu AIR 1999 Andhra Pradesh 170 which reiterated them and also stated that the prior agreement-holder cannot automatically become the owner by seeking declaratory relief and has to necessarily file a suit for specific performance impleading both the vendor and the subsequent transferee. Thus, it is not the agreement for sale which in itself gives a right to the purchaser but it is the element of specific enforceability, by virtue of which a suit for specific performance can be filed, that gives rise to such a right and protection. SPECIFIC ENFORCEABILITY NOT MARRED BY DISCRETION OF THE COURT It is to be noticed that specific enforceability is distinct form specific grant of relief. Grant is discretionary but specific enforceability is a question of law and no discretion of the court can change the nature of the Contract. However, even the contention that pseudo property right given by specific enforceability is dependent upon the Court’s discretion in the grant of specific relief does not stand by virtue of Section 20 of The Specific Relief Act, 1963. It states that: 20. Discretion as to decreeing specific performance.-(1) The jurisdiction to decree specific performance is discretionary, and the court is not bound to grant such relief merely because it is lawful to do so; but the discretion of the court is not arbitrary but sound and reasonable, guided by judicial principles and capable of correction by a court of appeal. (2) The following are cases in which the court may properly exercise discretion not to decree specific performance- (a) where the terms of the contract or the conduct of the parties at the time of entering into the contract or the other circumstances under which the contract was entered into are such that the contract, though not voidable, gives the plaintiff an unfair advantage over the defendant; or (b) where the performance of the contract would involve some hardship on the defendant which he did not foresee, whereas its non- performance would involve no such hardship on the plaintiff; (c) where the defendant entered into the contract under circumstances which though not rendering the contract voidable, makes it inequitable to enforce specific performance. Explanation 1.- Mere inadequacy of consideration, or the mere fact that the contract is onerous to the defendant or improvident in its nature, shall not be deemed to constitute an unfair advantage within the meaning of clause (a) or hardship within the meaning of clause (b). Explanation 2.- The question whether the performance of a contract would involve hardship on the defendant within the meaning of clause (b) shall, except in cases where the hardship has resulted from any act of the plaintiff subsequent to the contract, be determined with reference to the circumstances existing at the time of the contract. (3) The court may properly exercise discretion to decree specific performance in any case where the plaintiff has done substantial acts or suffered losses in consequence of a contract capable of specific performance. (4) The court shall not refuse to any party specific performance of a contract merely on the ground that the contract is not enforceable at the instance of the other party. Thus, the Court’s discretion is not arbitrary. It is a guided one. Also, there are only certain specified situations wherein the court can exercise its discretion and refuse the grant of specific relief. In all other cases, it shall have to grant it. Thus, the Court’s discretion is not arbitrary. It is a guided one. Also, there are only certain specified situations wherein the court can exercise its discretion and refuse the grant of specific relief. In all other cases, it shall have to grant it. Explanations 3 and 4 further spell out the protection forwarded to a specifically enforceable contract. NOT ONLY ALMOST AS GOOD AS BUT SOMETIMES EVEN MORE BENEFICIAL--ADDITIONAL RIGHTS UNDER SPECIFIC ENFORCEABILITY Section 21 of the Specific Relief Act, 1963 reads as follows: 21. Power to award compensation in certain cases.- (1) In a suit for specific performance of a contract, the plaintiff may also claim compensation for its breach, either in addition to, or in substitution of, such performance. (2) If, in any such suit, the court decides that specific performance ought not to be granted, but that there is a contract between the parties which has been broken by the defendant, and that the plaintiff is entitled to compensation for that breach, it shall award him such compensation accordingly. (3) If, in any such suit, the court decides that specific performance ought to be granted, but that is not sufficient to satisfy the justice of the case, and that some compensation for breach of the contract should also be made to the plaintiff, it shall award him such compensation accordingly. (4) In determining the amount of any compensation awarded under this section, the court shall be guided by the principles specified in section 73 of the Indian Contract Act, 1872 (9 of 1872 ). (5) No compensation shall be awarded under this section unless the plaintiff has claimed such compensation in his plaint: Provided that where the plaintiff has not claimed any such compensation in the plaint, the court shall, at any stage of the proceeding, allow him to amend the plaint on such terms as may be just, for including a claim for such compensation. Explanation.- The circumstance that the contract has become incapable of specific performance does not preclude the court from exercising the jurisdiction conferred by this section. This Section creates a very unique provision through clauses 1 and 3. By virtue of clause 1, it gives the beneficiary of a specific enforceable contract to also sue for compensation for breach of contract which shall be in addition to the specific performance. Furthermore, by virtue of Clause 3 the Section grants the power to the Court to award compensation to the plaintiff if it, in its wisdom, feels that specific performance is insufficient in furthering the ends of justice. Thus, specific enforceability is not only almost as good as a registered property right but goes as far as to enable the grant of additional compensation to the plaintiff. Thus, it goes a step further. CONCLUSION In light of the above mentioned cases and arguments, it can be safely concluded that specific enforceability is almost as good as a registered property right. It falls short of a fully fledged proprietary right only in the presence of equity’s darling or when the contract falls within the exceptions to specific performance which shall make the right subject to the Court’s discretion. Specific enforceability combines principles of the law of contract and of that of equity to present a package of rights which can almost always pass off as proper proprietary rights. BIBLIOGRAPHY http://www.manupatra.com/ http://www.indiankanoon.org/ https://www.scconline.co.in/ The Transfer of Property Act, Mulla, 10th edn., G.C. Bharuka, LexisNexis Buttersworth Wadhwa, India.