Unconscionability and Notice under Transfer of Property Act

The Transfer of Property Act, 1882 is an important legislation in Indian property law that governs the transfer of property between living persons (inter vivos). It lays down the general principles, conditions, and procedures for transferring property—whether movable or immovable—through acts such as sale, mortgage, lease, exchange, or gift. The Act aims to ensure clarity, fairness, and legality in property transactions by defining the rights, duties, and liabilities of transferors and transferees. It also incorporates equitable principles like doctrine of notice, part performance, and fraudulent transfer to protect genuine purchasers and prevent misuse or exploitation in property dealings.

Table of Contents

1. Unconscionability
2. Concept of Notice

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1. Unconscionability

Unconscionability is a legal doctrine focused on ensuring fairness in contractual relationships. It allows a party to challenge a contract that contains overly harsh or oppressive terms, or where one party gains an unjust advantage over the other during the negotiation or formation process. The Law Commission of India acknowledged this principle in its 199th report on Unfair (Procedural and Substantive) Terms in Contracts.¹ Where the owner of property (whose ownership or title is not disputed or questioned), transfers the property which is not subject to any encumbrance, charge or any kind of obligation to another person, the transferee receives an clear cut title. A transfer is unconscionable where the transferor knows that s/he has no right to transfers yet s/he transfers or the transferor is aware that there is a charge or obligation on property still he transfers, therefore it is unconscionable transfer. On the other hand if the transferee is also aware that the transferor has not title still he accepts it is equally unconscionable and the equity will not help the transferee. In this situation the equitable doctrine of notice also plays an important role in determining the validity of transfers and protecting the bonafide purchaser. There are six cases of unconscionable transfers under the Transfer of Property Act, 1882 where notice plays an important role.

Section 39	Transfer of property where maintenance right exists on the property, the transferee takes the property with an encumbrance of maintenance right if he has notice of this fact. If he does not have notice then he is not bound by the same.
Section 40	Transfer of property which is subject to restrictive covenant or contractual obligation again the transferee takes such restrictive covenant or contractual obligation if he has notice otherwise he is not bound by the same.
Section 41	When the transfer of property is there by a ostensible owner not by the real owner, the transferee believes that he is the real owner only then section 41 protects him otherwise he is not protected under this section.
Section 43	A transfer made by an unauthorized person later he acquires a title in the property he is stopped from denying the transfer provided the transferee has believed his statement and is not aware of the fact that the transferor does not have proper title.
Section 53	Deals with fraudulent transfer and the protect the interest of the creditor.
Section 53A	Deals with a situation where the property is in possession of someone else under an agreement to sale, it protects the possession of the person.

But before understanding these section it is essential to understand the concept of notice as envisaged under Interpretation clause i.e. Section 3 of Transfer of Property Act, 1882.

2. Concept of Notice

“a person is said to have notice” of a fact when he actually knows that fact, or when, but for wilful abstention from an enquiry or search which he ought to have made, or gross negligence, he would have known it.

Explanation I.—Where any transaction relating to immovable property is required by law to be and has been effected by a registered instrument, any person acquiring such property or any part of, or share or interest in, such property shall be deemed to have notice of such instrument as from the date of registration or, where the property is not all situated in one sub-district, or where the registered instrument has been registered under sub-section (2) of section 30 of the Indian Registration Act, 1908 (16 of 1908), from the earliest date on which any memorandum of such registered instrument has been filed by any Sub-Registrar within whose sub-district any part of the property which is being acquired, or of the property wherein a share or interest is being acquired, is situated:

Provided that

(1) the instrument has been registered and its registration completed in the manner prescribed by the Indian Registration Act, 1908 (16 of 1908) and the rules made thereunder,

(2) the instrument or memorandum has been duly entered or filed, as the case may be, in books kept under section 51 of that Act, and

(3) the particulars regarding the transaction to which the instrument relates have been correctly entered in the indexes kept under section 55 of that Act.

Explanation II.—Any person acquiring any immovable property or any share or interest in any such property shall be deemed to have notice of the title, if any, of any person who is for the time being in actual possession thereof.

Explanation III.—A person shall be deemed to have had notice of any fact if his agent acquires notice thereof whilst acting on his behalf in the course of business to which that fact is material:

Provided that, if the agent fraudulently conceals the fact, the principal shall not be charged with notice thereof as against any person who was a party to or otherwise cognizant of the fraud.

The principle of notice is fundamentally based on the awareness of a fact. This awareness does not require absolute certainty; rather, it encompasses a belief in the existence of the fact that would prompt a reasonable and prudent individual to act in everyday situations. Such knowledge can be either directly held by an individual or legally attributed to them. The doctrine of notice requires either actual knowledge of a fact or evidence that, given the circumstances, one should have been aware of that fact. Importantly, it should be noted that knowledge and notice are not interchangeable terms. It is possible to have notice without explicit knowledge of a fact, and there are instances where having knowledge does not equate to notice. Notice can be defined as the legal awareness of a fact. Within the framework of the Transfer of Property Act, 1882, the doctrine of notice plays a crucial role in resolving disputes between parties involved in unfair transactions. When a party has direct knowledge of a fact, it is referred to as actual notice. Conversely, when knowledge is not explicitly communicated but can be inferred under certain conditions, it is termed constructive notice. Notice is of two kinds actual and constructive notice.

Actual Notice – Direct or explicit knowledge or notification of a fact to an individual is referred to as actual notice. Actual notice involves the formal communication of a specific fact pertinent to a transaction from one party to another who has an interest in that transaction. For actual notice to be legally binding on a person, certain procedural criteria must be met:

1. Definite Knowledge – The information must be clear and not based on hearsay or rumors. The notice should be credible enough that a reasonable person would take it seriously, stemming from formal communication rather than casual discussions.
2. Provided by an Interested Party – It is established that individuals are not obligated to heed vague rumors or statements from strangers. For a notice to be binding, it must originate from someone with a vested interest in the transaction.
3. Relevant to the Transaction – The knowledge must pertain specifically to the transfer in question and cannot be general or unrelated to the matter at hand. Additionally, the notice must be associated with the same transaction; information related to different transactions may be overlooked, and since the doctrine of notice is grounded in equity, it does not permit such lapses.

Constructive notice is based upon principle of the equity which treats a man who ought to have known a fact, as if he actually does know it. Constructive notice is understood to stem from an unchallengeable assumption of notice. In the case of Plumb v. Fluitt, Eyre, CB stated:

“Constructive notice, in my view, is essentially evidence of notice, with presumptions so strong that the court will not permit any contradiction of them.”

The basis on which courts consider possession as constructive notice of any rights the occupant may have in the property is that possession serves as prima facie evidence of some interest in the land by the tenant. This should typically alert a purchaser to be cautious and prompt them to explore the nature and extent of that interest. Constructive notice refers to the knowledge that a court attributes to a party based on a presumption so strong that it cannot be challenged, implying that the knowledge must have been communicated. This presumption can only arise when the party seeking to benefit from this doctrine has acted in good faith. The doctrine of constructive notice cannot be invoked if the party seeking its benefits has engaged in fraud or secrecy during the transaction. This irrebuttable presumption can only arise when the party seeking to benefit from the doctrine has acted in good faith. The doctrine of constructive notice will not be applied if the party attempting to invoke it has engaged in secrecy or fraud regarding the transaction that affects a purchaser. Consequently, a vendor obligated to disclose an encumbrance cannot argue that the purchaser had constructive notice of it. This legal presumption of knowledge may arise from:

1. Wilful abstention from an inquiry or search.
2. Gross negligence.
3. Registration.
4. Actual possession.
5. Notice to an agent.

2.1 Wilful Abstention from Search Which One Ought to Make

Deliberate avoidance of inquiry or investigation indicates a lack of good faith. In this context, an individual intentionally refrains from making any inquiries or searches, likely to evade the potential consequences of what they might learn. For example, if a person refuses to accept a registered letter addressed to them, they cannot later claim ignorance of its contents. Similarly, if a purchaser fails to review the details of a title deed, they may be deemed to have notice of all the facts that would have been revealed through a proper title investigation. Lord Selborne with reference to the duty of a purchaser observed that:²

“But this, if it can properly be called a duty, it is not a duty owing to the possible holder of a latent title or security. It is merely the course which a man dealing bona fide in the proper and usual manner for his own interest, ought, by himself or his solicitor, to follow with a view to his own title and his own security. If he does not follow that course, the omission of it may be a thing requiring to be accounted for or explained. It may be evidence, if it is not explained, of a design inconsistent with bona fide dealing, to avoid knowledge of the true state of the title,”

Bank of Bombay v. Suleman3 Somji Parpia passed away on February 15, 1885, leaving behind eight sons – four from his first wife (referred to as the elder sons) and four from his second wife, Labai, who also survived him. In his will, he bequeathed all his property to his elder sons, with a provision for a charge of ` 30,000 in favour of his widow Labai and his younger sons. The sons from the first wife borrowed ` 52,000 from the bank and deposited the title deeds for the house and land as an equitable mortgage to secure the loan. However, the will was not included among the title documents submitted. When the bank sought to enforce their mortgage and put the house and land up for sale, the sons of the second wife asserted that their charge took precedence. If the bank had inquired about how the mortgagors acquired their title from S, they would have been aware of the will. As a result, the bank had constructive notice of the charge, and the claim of the sons from the second wife was upheld over that of the mortgage.

Conversely, a notice to a buyer through their title documents in one transaction does not serve as notice in a later, separate transaction where the documents containing the statements are not essential to their title. This principle was enunciated by Lord Redesdale in Hamilton v. Royse,⁴ follows:

If a man purchases an estate under a deed, which happens to relate also to other lands not comprised in that purchase, and afterwards purchases the other lands to which an apparent title is made, independent of that deed, the former notice of the deed will not of itself affect him in the second transaction, for he was not bound to carry in his recollection those parts of a deed which had no relation to the particular purchase as was then about, nor to take notice of more of the deed than affected his then purchase.

In the case of Kausalsi Ammal v. Shankaramthiar⁵, it was determined that if a person refuses to accept a registered letter sent by post, they are considered to have constructive notice of its contents. The court noted that the term “wilful” in the interpretation indicates that the refusal to inquire is intentional and stems from a desire to avoid gaining knowledge. Similarly, in Mahomed Yunus Khan v. Courts of Wards⁶, it was established that if a purchaser neglects to review the title deeds, they cannot claim ignorance of the conditions stated within them, particularly since the deed indicated that it pertained to partitioned property, warranting further inquiry into the partition conditions.

2.2 Gross Negligence

Negligence refers to the failure to exercise the level of care that a reasonable person would have taken. Gross negligence represents a more severe form of this neglect. Equity cannot intervene with legal titles, except in cases involving trusts, fraud, or accidents. While negligence suggests a lack of diligence and indifference, it is distinct from fraud, which involves active dishonesty. However, in extreme cases, courts of equity have addressed this issue by presuming that the negligent party wilfully ignored circumstances that warranted investigation. Under this assumption, gross negligence can be seen as evidence of fraudulent intent, thereby granting the Court of Equity the authority to intervene. In the case of Hudston v. Vincy⁷, Eve J. said,

“Gross negligence does not mean mere carelessness, but means carelessness of so aggravated a nature as to indicate an attitude of mental indifference to obvious risk.” It can be described as ‘a degree of negligence so gross that a court of justice may treat it as evidence of fraud, impute a fraudulent motive to it and visit it with the consequences of fraud’.

Wigram VC has said that:

“Gross negligence is a degree of negligence so gross (crassa negligentia) that a Court of Justice may treat it as evidence of fraud—impute a fraudulent motive to it—and visit it with the consequences of fraud, although (morally speaking) the party charged may be perfectly innocent.”

A Full Bench of the Allahabad High Court ruled in Nawal Kishore v. Agra Municipality⁸, endorsing Ramjilal v. Municipal Board, Lucknow⁹ and rejecting Municipal Board v. Roop Chand Jain¹⁰. The court determined that anyone purchasing property in a municipal area should be considered aware that municipal taxes are a lien on the property and that there may be outstanding tax payments. It is the buyer’s responsibility to inquire about any arrears; failure to do so results in them being deemed aware of these taxes. The Calcutta High Court expressed a similar opinion. However, in Ahmedabad Municipality v. Haji Abdul¹¹, the Supreme Court disapproved of the ruling in Nawal Kishore, stating that no general legal rule can be established regarding this matter. Instead, whether a transferee has a duty to inquire about tax arrears should be assessed based on the specific facts of each case

Lloyds Banks Ltd. v. P.E. Guzdar & Co.12 The defendant deposited title-deeds of his house in Calcutta with a bank, National Bank to secure an overdraft in his account. Subsequently, the defendant represented to the bank that he wished to sell his house in order to clear his overdraft. According to the usual practice, the bank should have delivered the title-deeds to their solicitor in order to arrange for their inspection by the solicitor of the prospective purchaser. But the defendant represented that if the prospective purchaser knew that the deeds were pledged, he would beat him down in price and ask for the deeds to be returned to him. National Bank complied and departing from the usual practice returned the deeds to the defendant. The defendant then mortgaged the house to another bank Lloyds Bank Ltd. National Bank was considered guilty of gross negligence which enabled the defendant to induce bank Lloyds Bank Ltd. to advance money on the house as if it was unencumbered. The mortgage of National Bank was postponed to the mortgage of bank Lloyds Bank Ltd.

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1. Unconscionable contract terms refer to agreements where one party holds significant power while the other is at a disadvantage, yet these contracts do not fall under the specific provisions of the Indian Contract Act, 1872. Consequently, courts have turned to various statutes to interpret unconscionability in different contexts, aiming to ensure fairness for the weaker party. If a contract or any of its terms is deemed unconscionable at the time it is formed, a court may choose not to enforce the entire contract, may enforce the remaining parts without the unconscionable term, or may limit how any unconscionable term is applied to prevent unjust outcomes. To grasp the concept of unconscionability within Indian contract law fully, one should look into specific sections of three distinct statutes – sections 14, 16, and 19A of the Indian Contract Act.
2. Agra Bank v. Barry (1874) IR 7 HL 135.
3. (1908)10 BOMLR 1065.
4. 1804 2 Sch. & Lef. 31 also referred in
5. AIR 1941 Mad 707.
6. AIR 1937 Oudh 301.
7. (1921) 1 Ch 98.
8. I.L.R. [1943] All. 453.
9. AIR 1941 Oudh 305.
10. AIR 1940 All. 456.
11. 1971 AIR SC 1201.
12. (1929) 56 Cal 868.