Concept of exchange under property law

CONCEPT OF EXCHANGE UNDER PROPERTY LAW

INTRODUCTION

Exchange is defined under section 118 of the Transfer of Property Act, 1882 – when two people mutually transfer the ownership of one thing for the ownership of another, the transaction is called an ‘exchange’ when neither thing or both things are money only. A transfer of property at the completion of an exchange can take place only in the manner provided for the transfer of such property by sale.

The transaction is called an exchange when the ownership of one thing for the ownership of another is mutually exchanged by two parties, neither thing or both things being money only. It is a transaction in which each party acquires property in which it previously had no interest. There must be a physical delivery of the property to the parties for a valid exchange, and each party to the exchange has the rights and is subject to the seller’s liability as to what he gives, and also has the rights and liabilities of the buyer as to what he takes.

ESSENTIALS OF AN EXCHANGE

  1. There must be a minimum of two parties and two properties, one each belonging to each of them;
  2. A mutual transfer of these properties has to take place, i.e. A to transfer his property to B and B to transfer his property to A;
  3. Property can be exchanged for property that is either movable or immovable.
  4. Besides these properties, no other consideration should be involved.

An exchange involves a mutual transfer of their respective properties between two parties. The primary factor which distinguishes an exchange from a sale is that no monetary consideration is involved in an exchange. A sale is the exchange of one property for money, and a barter is an exchange of movable property with another movable property. An exchange of one stamp for another, or as a consideration shares in a limited company, is an exchange. The consideration must be specified in an exchange, since, if it is not mentioned, the transaction is not an exchange. If one of the transferred items is coupled with money, the transaction is not an exchange, but a sale.

Mutual Exchange     

The term ‘mutually’ indicates that the parties need to be the same and two things need to be exchanged. A transfers his property to B, for instance, and B transfers his own property in return for A. It is not an exchange if the transfer is just from the hand of one of the parties. In the discharge of her maintenance claim, a transfer by a husband to a wife is not an exchange, as the wife does not transfer the possession of something. Similarly, a document in which one decree is set off against another and the balance made up by the transfer of land is not an exchange, since two items are not mutually transferred.

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The object of exchange must be lawful

The object of exchange must not be unlawful. Exchange is primarily a contract, and if the object is unlawful or aims at defeating the provisions of law, it will be invalid. A deed of exchange to compromise criminal proceedings between the parties was executed in Srihari Jena v. Khetramohun Jaina. The agreement between them specified that the deed of exchange could not be taken from the Registrar’s Office until the proceedings had been compromised. The court held that the exchange was not valid in light of section 23 of the Indian Contract Act, 1872.

Oral exchange is not permissible in view of the amendment of Section 49 of the Registration Act, 1908 brought about by Act No. 21 of 1929, which by inserting in Section 49 of the Registration Act, 1908 the words” or by any provision of the Transfer of Property Act, 1882”, has made it clear that the documents of which registration is necessary under the Transfer of Property Act, 1882 but not under the Registration Act, 1908 fall within scope of Section 49 of the Registration Act, 1949. And if not registered they are not admissible as an evidence of any transaction affecting any immovable property comprised therein and do not affect any such immovable property.

SALE AND EXCHANGE

In respect of the liabilities of both parties, the TP Act has kept both sales and exchanges on the same footing. Often similar are the procedures and formalities for conducting a sale and an exchange. Yet in two basic ways, the two are distinct. The following are the two main distinctions between an exchange and a sale:

i) In a sale, only one property is usually exchanged for money, but in an exchange, one property is exchanged for another property.

(ii) In a sale, money is a consideration, but money should not be a consideration in an exchange.

In John Thomas v Joseph Thomas, whether the written agreement for the mutual exchange of properties amounted to a sale or an exchange was the question before the court. The parties had known each other for a long time. One of the parties, A, owned property X, while the other party, B, owned property Y. Since X was more valuable than Y, B paid an additional amount of one lakh rupees towards equalization money when A exchanged X for Y. The court held that it amounted to a sale and not an exchange, because money had been paid from one party to another.

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RIGHT OF A PARTY DEPRIVED OF THING RECEIVED IN EXCHANGE; [Section 119 of the Transfer of Property Act, 1882]

If any party to an exchange or any person claiming through or under such party is by reason of any defect in the title of the other party deprived of the thing or part of the thing received by him in exchange , then, unless a contrary intention appears from the terms of the exchange , such other party is liable to him or any person claiming through or under him for loss caused thereby, or at the option of the person so deprived for the return of thing transferred , if still in the possession of such other party or his legal representative or a transferee from him without consideration.

An exchange, like a sale, is primarily an agreement between two parties; and unless the object of exchange is illegal, all parties will be subject to the terms of the contract. A contract to the contrary is also subject to the law enunciated in section 119. According to this section, each party is entitled to the property to which it was entitled under the contract and provides the aggrieved party with a remedy in the case that it does not receive what it was supposed to obtain under that contract. A and B, for example, enter into a contract to mutually exchange their X and Y properties, respectively. A supplies X to B, but B fails to supply Y to A. In accordance with the rules laid down in this section, A’s rights will be determined. It provides the party so dispossessed in the alternative with two remedies:

i) He can seek compensation for the loss of such dispossession caused to him.

(ii) He is entitled to take back the property he has transferred. This right may be exercised as against:

(a) The other party to the exchange in whose hands there is possession;

(b) Where the possession is kept by the transferee’s legal representative;

(c) Where the possession is with the other party’s gratuitous transferee.

An exchange of land took place between A and the predecessor of B in 1941 in Ramsayivan v Lalji Ram, but B sold the same illegally to a third party in 1988. It was decided that the purchaser of the land would not have any locus standi to say anything about the exchange nor that of A’s title. The principle of getting the property in return in the case of deprivation of the exchanged property also extends to cases where there is no transfer at all instead of subsequent deprivation of the transferred property. If a party to an exchange fails to acquire possession of the property it is entitled to obtain in exchange, it shall also be entitled, at his option, to the return of the assets which it has exchanged.

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Jattu Ram V. Hakama Singh, where, due to false entries made by patwari, there was a defect in the title of land obtained by one party for exchange and the party was deprived of some portion of the land as per Deed of Exchange. It was held by the Supreme Court that entries made in the official records by patwari do not generate title, so to the extent that the opposite party was liable to return land (property).

  1. The provisions of Section 119 shall apply only in situations where one of the parties to the Transaction has been deprived of the things/property transferred because of a defect in the title of another person transferring the things/property.
  2. It is not necessary to invoke the provisions of Section 119 of the Transfer of Property Act, 1882 in a situation where another person has forcefully disposed of the property / things obtained by him by exchange.

Example: Assume that Mr. A and Mr. B were transferred ownership of their residential property and Mr. C’s brother, Mr. A, was forcibly disposed of Mr. B’s possession of residential property, the ownership of which was transferred in exchange to Mr. B.

RIGHTS AND LIABILITIES OF PARTIES TO THE EXCHANGE (Section 120)

The rights and liabilities of the parties to the exchange are not expressly stated in section 120. It just provides that each party has the rights and is subject to a seller’s liabilities as to what he gives and has rights and is subject to a buyer’s liabilities as to what he takes. The rights and liabilities of the parties in the event of an exchange are therefore the same as in the case of a sale. One thing is given in return and another thing has been taken, so parties play the role of both seller and buyer. The rules of the Sale of Goods Act 1930 are also applicable in exchange for movable property.

In exchange, all parties have equal rights over one another. He is considered to be in the role of a seller when the person transfers the property to the other and he holds all the rights that a seller has when selling property. The person who receives the property is called a buyer and, because of being a buyer, he has all the privileges that a buyer possesses.

EXCHANGE OF MONEY (Section 121)

On an exchange of money, each party thereby warrants the genuineness of the money given by him. Money can be exchanged with money, of the same or different denominations or even different currencies. The term money here includes not only coins, but also currency notes.

Author: Ishita Agrawal,
B.A.LL.B. 3rd year, Himachal Pradesh National Law University Shimla

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