SANMUGAM AND ANOTHER
COURT OF APPEAL.
G. P. S. DE SILVA. J. (President. C/A) AND GOONEWARDENA, J.
A. No. 263/86.
C. MANNAR No. 559.
NOVEMBER 25. 26. 27 AND 28. 1986.
Contract – Conditional transfer – Payment for reconveyance by promissory note – Bonafide purchase for valuable consideration – Trust – Ss. 93 and 98 of Trusts Ordinance -Registration – Notice – Constructive notice – Neglect to make claim for several years.
The defendants sold their interests to P and his wife subject to the right to obtain are-transfer within 2 years on payment of Rs. 5,000. The defendants claimed that thesaid sum of Rs. 5,000 was paid by way of a promissory note made for valuableconsideration by one R in favour of the 1 st defendant who duly endorsed and assignedit to P’s wife. As P and his wife had thus received the consideration, they held the landin trust for the defendants. P and his wife however acting fraudulently and in collusionwith the plaintiff conveyed it to plaintiff who sued the defendants for ejectment. Thedefendants while praying for a dismissal of the action asked for an order on the plaintiffto convey these interests back to them.
The endorsement of the promissory was not valid. The assignment of thepromissory note did not constitute payment as P's wife did not accept it as payment.There was failure of consideration even if the note was accepted as consideration.
If a transferee has obtained property in good faith and for valuable consideration theproperty cannot in any case be followed into his hands and no decree for specificperformance can be obtained against him. Nor can any one seeking specificperformance against such purchaser invoke the assistance of s. 93 of the TrustsOrdinance.
Section 93 of the Trusts Ordinance imposes the following requirements: notice of anexisting contract of which specific performance can be enforced and when the contractaffects immovable property due registration. The object of the requirement in theproviso to s. 93 of registration is to give notice ta any person desirous of acquiring suchproperty of an existing contact affecting the property of which specific performancecould be enforced.
Constructive notice can be defined thus: whatever is sufficient to put any person ofordinary prudence on inquiry is constructive notice of everything to which that inquirymight have led.
The object of registration is the protection of bona fide purchasers; a person searchingthe register has notice of what is on the register. A person who ought to search theregister must be taken as having notice of what he would find there if he did search.Facts and circumstances that might thus be discovered will then be the subject ofconstructive notice. Constructive notice as much as actual notice may afford evidenceof fraud or want of bona fides. Notice that another person had entered into an existingcontract affecting immovable property can mean only the constructive notice that arisesupon registration, that is, notice of facts and circumstances that would be found uponsearch of the registration and would not include notice of anything not to be found uponsearch of the registration of such contract.
Contracts contemplated by s. 93 when they relate to immovable property must benotarially executed.
If the plaintiff searched the registration he would have found that the period of twoyears stipulated for obtaining the re-trasnfer had long passed without a reconveyancehaving been obtained. Hence even if the contract to reconvey was existing whenplaintiff purchased he must be deemed to have had no notice of it.
Cases referred to:
Hallv. Pelmadulla Valley Tea and Rubber Co., Ltd.-(1929) 31 NLR 55 (P.C.)
Rajapaksa v. Fernando-! 1918) 20 NLR 301.
Silva v. Sato Nona-(1930) 32 NLR 81, 85.
APPEAL from judgment of the District Court of Mannar.
Nimal Senanayake, P.C. with J. V. C. Nathanial, and R. Jayendra fordefendant-appellants.
Dr. H. W. Jayewardene, Q.C. with S. Mahenthiran for plaintiff-respondent.
Cur. adv. vult.
January 28, 1987.
The plaintiff-respondent filed this action in the District Court seekingon the strength of a title he claimed, to have the defendants-appellantsejected from the lands and premises in suit.
His case was that upon P1 of 1964 the defendants themselves soldand transferred their interests in these properties to two persons• Pirapathy and his wife Parameswary subject to a condition that theywould re-transfer the same to them upon repayment within a period of
two years of a sum of Rs. 5,000. but that they having failed to doso the transferees became entitled to the premises free of suchcondition and that thereafter they upon P2 of 1970 sold andtransferred to him the interests conveyed on P1, together with likeinterests they already held in the same premises. He contended thatcontrary to an undertaking contained in P1 the defendants failed toquit and deliver vacant possession of the properties thus rendering itnecessary for him to file this action to obtain such possession.
The position of the defendants in essence was that the sum of Rs.5,000 payable by them to secure a reconveyance of these interestswas paid by way of a promissory note made for valuable considerationby one Dr. Rajaratnam in favour of the 1 st defendant which was dulyendorsed and assigned by the 1 st defendant to the said Parameswarywho therefore having received this consideration, together with herhusband Pirapathy held these interests in trust for them. Thedefendants alleged that Pirapathy and Parameswary acting fraudulentlyand in collusion with the plaintiff entered into the transaction in P2.Consequently while asking for a dismissal of the plaintiff's action thedefendants asked for an order on the plaintiff and/or the said Pirapathyand Parameswary to convey these interests back to them.
The District Judge at the conclusion of the trial held with the plaintiffprincipally on the basis that the endorsement of the promissory noteand hence the promissory note itself (vis-a-vis Parameswary) lackedvalidity and also that the assignment of the promissory note did notconstitute a payment of the sum payable for the retransfer, asParameswary did not accept such promissory note as payment.Accordingly he gave judgment declaring the plaintiff entitled to thereliefs he sought and thus this appeal came to be filed.
Learned President's Counsel who appeared for the defendants atthe hearing before us complained that the District Judge had failed totake into consideration and deal with certain items of importantevidence which he argued supported the case of the defendants. Bethat as it may, for reasons which will appear later, it will not benecessary to interfere with the District Judge's finding or to deal atlength with the evidence in the case though some reference mightusefully be made to the circumstances surrounding the transactionsthat had given rise to this litigation.
The 2nd defendant, the wife of the 1st defendant, is a sister ofParameswary and in the same way that the 2nd defendant had beengiven certain interests in these properties by their mother at the timeof her marriage, Parameswary also was given like interests upon hermarriage. At the time of the registration of the marriage ofParameswary a certain cash dowry was promised and according tothe attestation in P1, as a substitute for part of it the conditionaltransfer on P1 was effected. It was the evidence of Parameswary thatthe conditional transfer went towards payment of the purchase pricefor her share of a business carried on by her deceased father calledlyadurai Stores, while it was the evidence of the 1 st defendant that theconditional transfer was given to cover a sum of Rs. 5,000 being partof the said dowry promised. The 1st defendant testified that thepromissory note I earlier referred to was negotiated to Parameswaryas the consideration for the retransfer reserved on P1. The finding ofthe District Judge as stated earlier was that -he endorsement on thepromissory note was not valid (apparently naving regard to certainproceedings which had taken place where Pi. apathy and Parameswarysued the 1st defendant and Dr. Rajaratnam the maker of the note).His additional finding suggests that since no money was received orrecovered upon such promissory note there was a failure ofconsideration for the retransfer, even if such note was accepted asconsideration. It is these findings by the District Judge that wereassailed by learned counsel for the defendants-appellants at thehearing before us, but he submitted no arguments with respect to thefurther findings relating to certain issues of prescription and theposition arising in the case under the law of pre-emption.
The documentary evidence (D2) shows that Pirapathy andParameswary sued Dr. Rajaratnam and the 1st defendant upon thepromissory note and although the 1 st defendant had filed answeradmitting liability and stating that the note was endorsed by him infavour of Pirapathy and Parameswary in settlement of the sum of Rs.5,000 paid as dowry, Dr. Rajaratnam had challenged suchendorsement. However the plaintiffs in that case, Pirapathy andParameswary had subsequently withdrawn that action and it cannot inmy view be said that the District Judge misdirected himself in thinkingthat there was a failure of consideration for the retransfer, even if suchpromissory note was accepted as consideration.
There is however in my view another reason which when identifiedmakes it inevitable upon the evidence that the appeal must fail. Ofrelevance in this regard are the issues numbered 7 and 8 adopted atthe trial which read thus:
Have the defendants settled the said sum of Rs. 5,000 as setout in paragraph 6(a) of the answer?
If so is the plaintiff holding the said undivided half share referredto in the schedule in trust, for the defendants?
The question arising upon such issues may for present purposes beformulated thus:
Even if the defendants are considered to have established that asum of Rs. 5,000 being consideration for the retransfer had beenpaid and settled on 7.1.1964 by the assignment by them of thepromissory note, yet can it be said upon the evidence led and thecase presented that they have succeeded in establishing that theplaintiff is holding the property in trust for them and thus liable totransfer the same in their name?
The answer to such question must be looked for in the appropriateprovisions of the Trusts Ordinance and those that have relevance hereas far as I see, are sections 93 and 98 of which conveniently referencemay be first made to the latter. The material part reads thus .
"98. Nothing contained in this chapter shall impair the rights oftransferees in good faith for valuable consideration".
Since Section 93 occurs within the 'chapter' referred to in section98, the provisions of the latter clearly override those of the former.Section 93 reads thus:
"Where a person acquires property with notice that anotherperson has entered into an existing contract affecting that property,of which specified performance could be enforced, the former musthold that property for the benefit of the latter to the extentnecessary to give effect to the contract:
Provided that in the case of a contract affecting immovableproperty, such contract shall have been duly registered before suchacquisition".
These provisions seem to follow the principles applied in equity inEngland for decreeing specific performance. The effect of theauthorities there are reflected in the following words in Dart on'Vendors and Purchasers' 8th Edition, Volume II at page 883:
"Equity will enforce specific performance of the contract for saleagainst the vendor himself, and against all persons claiming underhim by a title arising subsequently to the contract, exceptpurchasers for valuable consideration who have paid their moneyand taken a conveyance without notice of the original contract".
The words 'in good faith' in section 98 are I think in the contextof similar effect as the words 'without notice' in the English rule andthis view seems fortified by the use of the words of allied import 'withnotice' in section 93, though occurring there in the reverse form.
Having regard both to the principle in equity, which in my view isembodied in our legislation, as well as the language of section 98 ofthe Trusts Ordinance, it seems to me that if a transferee has obtainedproperty in good faith and for valuable consideration the propertycannot in any case be followed into his hancs and no decree forspecific performance can be obtained against him; and any oneseeking specific performance against such purchaser cannot invokethe assistance of section 93 which then ceases to be applicable.
In the instant case the attestation in the transfer deed P2 in theplaintiff's favour bears a certification by the Notary that the fullconsideration of Rs. 35,000 was paid in his presence, a statement notchallenged, and it cannot in my view be reasonably said upon a reviewof all the evidence, that the plaintiff was not a transferee in good faith.The remaining question then is as to whether the plaintiff had 'notice' .within the meaning of section 93 having regard to the transaction onP2.
The provisions of the principal part of section 93 are in termsidentical with section 91 of the Indian Trusts Act of 1882 (from whichour provision is said to have been taken). However in the Indiansection the proviso which is contained in our section has beenomitted. Section 93 (without the proviso) imposes the followingrequirements, viz: (1) notice; (2) of an existing contract; and (3) of
which specific performance can be enforced. With respect thereforeto contracts to which our proviso has no application one may say thatany kind of notice of an existing contract of which specificperformance can be enforced would suffice. What then is the positionwith respect to contracts to which the proviso does apply? Would anykind of notice be sufficient there as well? I venture to think not. Theproviso imposes the requirement that when such contract affectsimmovable property it should have been duly registered. Thus whenthe proviso applied in addition to the other requirements I earlierreferred to, due registration of the contract is also demanded. Thequestion one must necessarily ask then is whether such registration isrequired to satisfy the law relating to registration or is it required togive notice to prospective purchasers and if the latter whether itseffect is to exclude all other forms of notice which then becomeirrelevant, and to limit such notice only to what can be gathered froman examination of the appropriate registration entry.
The case of Hall v. Pelmadulla Valley Tea and Rubber Co., Ltd. (1)was a decision of the Privy Council where the contract, the specificperformance of which was sought though with respect to immovableproperty was not registered as it was not capable of registration. TheSupreme Court took the view that the object of the proviso to section93 was to secure compliance with the law as to registration and thatas non registration of the contract involved no breach of theRegistration Law, the proviso in such a case had no effect. TheirLordships of the Privy Council disagreed with this view. In his speechLord Warrington (at page 58) said:
"On this point the Chief Justice said that in his view the object ofthe proviso was to secure compliance with the law as to registrationand that as the non registration of the contract involved no breachof the Registration Law the proviso in such a case had no effect.Their Lordships are unable to concur in this view. The priorregistration of the contract is made a condition of the application to
it of the benefit conferred by the sectionUnder these words
(the words in the proviso) it is plain that the contract is one whichdoes not satisfy the condition upon which alone it is entitled to thebenefit conferred by the section."
If the requirement as to registration contained in the proviso is not tosecure compliance with the law as to registration as was thought bythe Privy Council, what then is its object? In my view such object is to
give notice to any person desirous of acquiring such property of an“existing contract affecting the property of which specific performancecould be enforced", as these words occur in section 93.
This brings me then to the concept of constructive notice – noticeimputed by construction of law. It has been defined in the followingterms: Whatever is sufficient to put any person of ordinary prudenceon inquiry is constructive notice of everything to which that inquirymight have led.
In the case of Rajapaksa v. Fernando (2) Ennis, J. in dealing with thequestion of constructive notice arising by reason of registration stated(at pp. 304 and 305) thus-
"The object of registration is the protection of bona fidepurchasers; it enables them by search to discover previous dealingswith the property; and Hogg (on Deeds of Registration) page 99enunciates the consequent rule as follows:
The rule that a person searching the register has notice ofwhat is on the register – in Lord Redesdale's words in Bushell v.Bushell ti he searches he has notice – seems to supply the rightprinciple on which to rest the further rule, that a person whoought to search the register must be taken as having notice ofwhat he would find there if he did search. Facts andcircumstances that might thus be discovered will then be thesubject of constructive notice, and constructive notice, quite asmuch as actual notice, may afford evidence of fraud or want ofbona fides"’.
To my mind "notice that another person had entered into an existingcontract" referred to in the principal part of section 93 in the case ofcontracts affecting immovable property can mean only theconstructive notice that arises upon registration of the existingcontract required by the proviso, that is to say, notice of facts andcircumstances that would be found upon search of the registration;and would not include notice of anything not to be found upon searchof the registration of such contract.
Garvin, A. C. J. said in Silva v. Salo Nona (3) as follows:
"Indeed the reason for penalizing unregistered contracts affectingland would seem to be to insist upon such transactions being placedupon the registers which are designed and intended to give notice ofevery existing transaction relating to any land or lands to personswho may be desirous of acquiring any interests therein. In short, noform of notice other than due registration will suffice to admit acontract affecting land to the privileges of section 93."
Contracts contemplated by section 93 when they relate toimmovable property in my view are necessarily of the kind whichattract to themselves the provisions of section 2 of the Prevention ofFrauds Ordinance which requires that transactions to which suchsection applies should in addition to being in writing be notariallyattested as well. Any such notarially attested document relating toimmovable property though contemplated by the Registration ofDocuments Ordinance as capable of registration under its provisiondoes not make registration compulsory to give it validity; registration,taking on importance only when a question of completing deeds arises(vide section 7 (4) of the Registration of Documents Ordinance). Whythen is registration made essential in the case of any contract fallingwithin the proviso to section 93 only when not so with respect to allcases to which the provisions of section 2 of the Prevention of FraudsOrdinance applies? Could it be said that it is to give validity to suchcontract? Clearly not, since its validity as I pointed out is notdependant on registration and hence would without registration be offull force and effect against the person who entered into the contractand against whom specific performance could be enforced (referredto in that section as "another person"). But when section 93 is reliedupon the person sought to be bound is not such person who directlyentered into the contract but a third person who acquires suchproperty and to my mind the clear purpose of the proviso then is togive such third person constructive notice of the existing contract inorder that he may be considered to hold the property for the benefit ofhim who claims the right of specific performance.
In the instant case if prior to the execution of P2 in 1970 the plaintiffsearched the registration entry reflecting the registration of thetransfer P1 it would have led him to the document P1 itself, and uponits terms he would have observed that the period of two vearsstipulated therein had long passed without a reconveyance havingbeen obtained and it would not in my view be reasonable or possible tosay that he should have had notice of any existing contract affectingthe property to which the privilege of section 93 could have beenattracted. In other words the document P1, if it had been examinedprior to the execution of P2, could not be said to be reasonablycapable of having shown that there was an existing contract of whichspecific performance could be enforced. Therefore even if thecontract to reconvey was existing at the time of execution of P2 andwas capable of being specifically enforced, to my mind the plaintiffmust be deemed to have had no notice of it inasmuch as anexamination of the registration entries leading up to P1 would not have. revealed it; and even if there had been actual knowledge of any suchexisting contract which the plaintiff had gathered aliunde, to my mindsuch knowledge would be irrelevant and of no value for the purposesof attracting the pr: ,.ege granted by section 93. Stated in other termsthe plaintiff cannot be thought to have been in a position any worse orany different from that of any other, who might have purchased theseinterests in total ignorance of all the transactions preceding hispurchase. It follows then that whatever information might have beengathered by reason of the caveats the defendants had registeredthe position in this respect would be no different.
By way of counter claim the defendants had asked for an order tohave these interests reconveyed. Assuming the truth of their assertionthat the promissory note constituted the consideration for theretransfer of such interests yet (where for several years after thealleged payment of such consideration the defendants neglected totake proper steps to secure such retransfer by due process of law)whatever claims they may have against Pirapathy and Parameswary,there can in my view be no doubt that these interests cannot befollowed into the hands of the plaintiff.
I am of the view that the issues numbered 7 and 8 must beanswered against the defendants and that the plaintiff must getjudgment. Thus the judgment and decree of the District Judge areaffirmed and the appeal is dismissed with costs.
G. P. S. DE SILVA, J.-I agree.
SANMUGAM AND ANOTHER v. THAMBIYAH