INTRODUCTION
Suppose you have bought a house after having gone through the title documents and paid the full consideration and then registered the sale deed but later find out that the seller was not legally entitled to sell the house. In that case, when the original property owner or the innocent buyer must pay the price?
This is challenging question in property law. On one hand, fairness suggests that someone shouldn’t be deprived of property that is rightfully theirs. However, on the other hand, certainty and public confidence are also essential for modern property transactions. If each buyer was constantly exposed to unknown defects in the tile, even with good faith and after due diligence, there would be no stability and reliability in the property markets.
Indian property law tries to solve this conflict by providing protection to bona fide purchasers. The law acknowledges that good faith innocent purchasers are entitled to protection in certain situations, e.g. under Section 41 and 43 of the Transfer of Property Act, 1882 (“TPA”), and Section 19(b) of the Specific Relief Act, 1963. However, Section 52 TPA, doctrine of lis pendens shows that this protection doesn’t exist in perpetuity. This article explores the rationale behind the protection afforded to a bona fide purchaser and whether the existing legal system is fair to the original owner while ensuring certainty in property transactions.
RULE FOR BONA FIDE PURCHASER
The term bona fide purchaser usually refers to an individual who buys property for value, in good faith and without knowledge of any other competing claim or interest that would vitiate the seller’s title. The law does not extend to all buyers, just those buyers who have acted in good faith and with reasonable care. This is written under Section 41 of TPA. The provision applies where a person is the ostensible owner of property with the express or implied consent of the true owner. When a purchaser, having exercised due care in determining the authority of the transferor and who shall have acted in good faith, shall have purchased the property for its consideration, the transaction shall not be held invalid because the transferor was not actually authorised to transfer the property.[1]
There is a simple reason why this rule is in place. In cases where the true owner has, by her or his conduct, put another man in the position of being the owner, the risk of loss may be placed on the true owner and not on the innocent purchaser who has acted upon this appearance.
CERTAINITY IN PROPERTY TRANSACTIONS
The first reason for the protection of bona fide purchasers is certainty in property transactions. Trust is the key in a property market. Ownership representations are an important part of the financial commitment made by purchasers. If each transaction was always liable to challenge, people would not be willing to buy property, financial institutions would not be willing to give out credit, and everyone would not be willing to buy or sell.
This concern is manifested in Section 43 TPA, which adopts the doctrine of “feeding the grant by estoppel.” The provision is triggered when a person who is not entitled to transfer a property transfers it as a result of fraud or mistake and then later becomes entitled to the property. Under such a situation, then the transferee has the option to have the transfer take effect on the interest that is subsequently acquired by the transferor.[2]
This principle is exemplified in the Supreme Court case of Jumma Masjid, Mercara v. Kodimaniandra Deviah. The Court explained that Section 43 is based on the doctrine of estoppel and extends protection to transferees who have relied on the representations made by the transferor.[3] The bottom line is that it is a law which values the security of transactions and which seeks to protect reasonable reliance.
This approach was also evident in Hardev Singh v. Gurmail Singh, where the Supreme Court stressed that the intent of the provisions of Sections 41 and 43 is to safeguard innocent purchasers who act with good faith and take reasonable care prior to entering into a transaction.[4] The decision has shown that the law is not just about ownership in abstract; it is also about the legitimate expectations of those who act in good faith and with reasonable care in entering into a transaction.
FAIRNESS TO THE REAL OWNER
Certainty is important but there is inevitably a concern about fairness when protecting bona fide purchasers. The original owner may also be blameless. In most situations, the owner is a victim of fraud, forgery or misrepresentation. If property rights are essential to personal and economic security, why should the right to own the property be taken away if an innocent third party seemed to have the power to do so?
Those who oppose the strong purchaser protection believe that ownership must always be the first factor to be considered in property matters. They argue that buyers are better equipped to do the research on the title and to establish ownership. This may seem unfair from the perspective of the owner of the item not being the person that committed the wrong, for instance.
In an age of rising property fraud, this worry takes on greater importance. The forged documents, impersonation and fraudulent sales continue to be a source of litigation all over India. Under these circumstances, the separation of protection of reliance and protection of ownership becomes a more complicated affair.
This fairness argument thus goes against a market-oriented approach. The question arises whether certainty of the transaction ought to be insisted upon because it causes hardship to the rightful owner.
WHY THE PROTECTION IS NOT ABSOLUTE
Indian property laws are not unconditionally in the favour of the buyer. Rather, it places very strong protections that strive to strike a balance among competing interests.
The first is within the text of Section 41. Protection only accrues if the buyer acts in good faith and exercises due care to determine the transferor’s authority. Ignorance alone is not enough. If a purchaser fails to make adequate enquiries the provision will not benefit him/her.
Section 52 TPA is the second protection and is expressed by the principles of the doctrine of lis pendens. The provision restricts a party to defeat the result of an existing litigation by transferring assets during the litigation. A final decision in litigation involving the property can have repercussions for a subsequent purchaser.[5]
In Jayaram Mudaliar v. Ayyaswami, the Supreme Court explained that the doctrine is erected to vest courts with the authority needed for them to carry out their duties and not to be thwarted by a series of transfers.[6] It shows that certainty in transactions is not the only value that is protected by the doctrine of property law. Equality of the judicial process and of rights of the incumbent claimants are also important.
Another restriction is to be found in Section 19(b) of the Specific Relief Act, 1963. Bona fide purchasers for value without notice are protected from the specific performance. But it is upon the purchaser to prove actual good faith and lack of knowledge.[7]
These prove that the protection isn’t automatic, rather is conditional.
STRIKING THE BALANCE: FAIRNESS OR CERTAINITY?
The ultimate concern is who is to take the fall- true owner or the purchaser? Indian law takes the middle course. It does not necessarily promote ownership, nor does it necessarily promote market efficiencies. Rather, it queries who would have been better to avoid the loss.
If the true owner has allowed someone else to claim that they are the owner, Section 41 transfers the risk of ownership to the true owner. Section 43 provides protection for reliance by a purchaser on a representation that is made by the transferor and relied upon by the purchaser reasonably. In contrast, in an existing litigation situation, Section 52 has a more flexible, fair and honest approach than a certainty of transaction.
This approach is a pragmatic understanding of today’s property markets. Absolute protection of ownership would create problems of trust in transactions and absolute protection of purchasers would become a problem of security of property rights. The law strives for balance, and the reward is given for diligence, good faith and reasonable conduct.
CONCLUSION
The doctrine of Bona Fide Purchaser is one of the most obvious cases of the conflict between fairness and certainty in property. While it may be unfair to deny a true owner of his or her property, it is difficult to see how any property system could work properly without the purchaser being able to rely on the appearances of ownership and completed transactions. There is no glory in favouring certainty over fairness, or fairness over certainty, but in trying to balance them.
Author(s) Name: Sharvi Goyal (O.P. Jindal Global University)
References:
[1] Transfer of Property Act 1882, s 41
[2] Ibid s 43
[3] The Jumma Masjid, Mercara v Kodimaniandra Deviah AIR 1962 SC 847
[4] Hardev Singh v Gurmail Singh (Dead) by LRs (2007) 2 SCC 404
[5] Transfer of Property Act 1882, s 52
[6] Jayaram Mudaliar v Ayyaswami and Ors AIR 1973 SC 569
[7] Specific Relief Act 1963, s 19(b)