India: ‘As Is Where Is' Basis – Striking Balance Between Caveat Emptor And Section 55 Of Transfer Of Property Act, 1882

I. 'AS IS WHERE IS' CLAUSE - INTRODUCTION

The phrase 'as is where is' is a clause in any agreement which implies that the thing so contracted is transferred, by one person to another in its existing condition and the transferee has accepted it with all its faults and defects, whether or not immediately apparent. This clause finds its root in the common law doctrine of 'Caveat Emptor'. Caveat Emptor means 'let the buyer beware'. This doctrine puts the duty on the purchaser to carry out all necessary inspection of the property before entering into an agreement¹. If the purchaser fails to conduct such an inspection, then later, on identification of defects in the property may not be a ground to revoke or claim damages under the contract. In such cases it is presumed that the purchaser had the notice of defects, if any.

II.   STATUTORY INCORPORATION OF 'AS IS WHERE IS' CLAUSE

Transfer of Property Act, 1882 (hereinafter referred as "TPA, 1882") incorporates this part of English Law as 'Doctrine of Constructive Notice' under section 3 of the Act as quoted herein below

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

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.

Nonetheless the TPA, 1882, also envisages the duty of the seller "to disclose to the buyer any material defect in the property 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."² This is, however, subject to the presence of contract to contrary between the parties.

III.   UNDERSTANDING THE DIFFERENCE BETWEEN 'AS IS WHERE IS' AND CAVEAT EMPTOR

The doctrine of Caveat Emptor finds its origin in a 17th century case of Chandelor v. Lupos,³ where it was held that the defendant being the seller of the store is not liable to the plaintiff for any defect thereon since the plaintiff was at liberty to inspect the same. The doctrine later on developed on the principle that "no man can be cheated except it be with his own consent"⁴. On the other hand, 'as is where is' is a clause incorporated in the agreement generally by the seller in order to sell the property with defects, if any. At times this clause is also misused by the seller to escape their burden to disclose any material defect in the concerned property. In such cases the theory of Caveat Emptor becomes strongest.

It is significant to note that 'as is where is' clause adds a new dimension to Caveat Emptor rule and consequently in many cases the presence of this clause in an agreement discharges the seller of his duty as enshrined under section 55(1)(a) of TPA, 1882.

IV.   SELLER'S OBLIGATION UNDER SECTION 55(1)(A) OF TPA, 1882

Contract for sale of any immovable property is not a contract uberrimae fidei and the seller thereunder is duty bound to disclose only the latent defects of which he is aware.⁵ Latent defects are such which are unlikely to be discovered by the purchaser during inspection.⁶ On the other hand, defects that are discoverable if a buyer would have carried inspection with due diligence are termed as patent defects. Even though section 55 of TPA, 1882, is subject to contract to the contrary between the parties, judicial interpretation to it has reflected that the disclosure of the material defects is an obligation on the part of the seller making the provision mandatory in nature and not directory.⁷ However, in the commercial contract involving the clause of 'as is where is' basis, the courts have excused the seller of their statutory duty to disclose material defects and the title deeds. In the matter of V. Sambandan v. The Punjab National Bank⁸ (V. Sambandan case) where the sale was concluded on 'as is where is' basis and the seller citing the same did not provide the original title deed or the copy of any other documents and the purchaser because of which willfully defaulted in making payments and claimed the refund of the amount already paid, the court dismissed the petition relying upon the Supreme Court decision in United Bank of India v. Official Liquidator and Others⁹ where it was held that the purchaser is deemed to have purchased property subject to all encumbrances, liens and claims where it has been sold on 'as is where is' basis.

Also, in the case of Punjab Urban Planning and Development Authority (PUDA) and Ors. v. Raghu Nath Gupta & Ors.,¹⁰ commercial plots were allotted on  'as is where is' basis and the Hon'ble Supreme Court held inter alia, once the respondent accepted the plots on such condition, they are estopped from contending that PUDA had not provided the basic amenities.

Similarly in Delhi Development Authority v. Kenneth Builders & Developers Ltd.,¹¹ the court opined that where the sale is made on an  'as is where is basis', presumption is that the intending purchaser has inspected the site and has familiarized himself with the "prevalent conditions in all respects including status of infrastructure facilities available etc. before giving its bid."

However, the 'as is where is' clause does not entail a rigid interpretation in all cases. There are a number of cases where the court has been proactive in protecting the interest of the purchaser even where the 'as is where is' clause is present. In the of  Haryana Financial Corporation & Another v. Rajesh Gupta,¹² where the purchaser claimed refund of the amount deposited on the ground that the seller did not disclose the material defect and the title deed, the Hon'ble Supreme Court negated the submission that the plots were accepted on  'as is where is basis' and therefore, the purchaser cannot wriggle out of a confirmed bid, and dismissed the appeal on the ground that seller failed to perform its obligations in giving a fair description of the property.

Further, in the case of Rekha Sahu v. UCO Bank and Ors.¹³ (Rekha Sahu case) court laid down that the immunity claimed by the seller on the pretext  'as is where is' and  'as is what is' basis is dying a slow death and due diligence must be conducted on their part also before proposing for sale. The court went to the extent to state that if the property is sold  'as is where is basis' without the knowledge of the subsequent encumbrances, there is apprehension that the auction proceedings could be stalled by the purchaser through the judicial intervention on the ground of nonfurnishing of the material information relating to encumbrance. Failing to supply such information under Section 55(1) of TPA 1882 could be construed that the purchaser was misled.¹⁴

V.   JUDICIAL VIEW IN CASES INVOLVING COMMERCIAL CONTRACT WITH GOVERNMENT

These days in a commercial contract involving government as a party, the 'as is where is' clause is used more often. Under such agreement the property is transferred by the government to the prospective bidder for the construction purpose or for carrying out activity on the land on behalf of the government. The implication of this clause makes it binding for the prospective bidder to conduct due diligence of the property on which the proposed contract is to be executed, before making the bid. Any failure to conduct such due diligence restricts the bidder to raise claims later, on ground of defects in the contracted property. However, it may be noted that due diligence can only be carried out for identification of patent defects and not latent defects and therefore, in cases of latent defects the clause of 'as is where is' does not benefit the authority to evade its liability to disclose any such defects.

In the case of Rajasthan State Industrial Development & Investment Corp. v. Diamond & Gem Development Corp. Ltd.,¹⁵ the court reiterated its earlier view in ascertaining the liability of the government who transferred the property to the respondent company on  'as is where is' basis on lease for some construction purposes. Court, inter alia, observed that since the allotment was made on  'as-is-where-is' basis respondent cannot claim that providing accessibility via road, from the Jaipur Tonk main road was the duty of the government.

Similarly in the case of Ram Kala v. Delhi Development Authority¹⁶, the Delhi High Court, adopting a similar approach rejected the petitioner's claim who was granted the license for collecting parking charges, when he contended that there was flowing water, waste material and garbage in the allotted parking site on the ground that the allotment was made on  'as is where is' basis. It must be noted that the defect claimed in both the above-mentioned cases was patent in nature.

However, in cases of latent defect the transferor is duty bound to disclose all such defects known to him even if the transfer is made on 'as is where is' basis. In Umrah Developers v. State of Karnataka¹⁷ where the land was sold to the petitioner on 'as is where is' basis comprising High Tension or High Voltage electricity lines passing through each of the schedule lands and neither the auction notification nor the auction sketch nor the sale certificates nor even the conversion orders referred to such HT Lines and Towers. The court held it is not the petitioner who is entitled to dismantle the HT lines and it is unfair on the part of the State to hold that the petitioner is bound to suffer the HT lines.

CONCLUSION

TPA, 1882, as observed by J. Rankin¹⁸ is a conglomeration of English Common Law and the principle of Equity which must be kept in mind to develop a balanced construction between Section 3 of TPA, 1882 (which is the reflection of the doctrine of Caveat Emptor) and section 55(1)(a) of TPA, 1882, to prevent one party enjoying any unjust enrichment at the cost of other. Since it cannot be the case, and the legislature also could not have intended that in any circumstances, the onus of being prudent and awareness of all the facts of the concerned property is to be shifted to one person that being the purchaser in the cases where the sale is made on 'as is where is' basis. Therefore, such clauses should be adjudicated on the Principle of Equity considering the facts and circumstances of each case individually rather than turning to any rigid Positive Law. It is on this reasoning, the judicial approach to give a progressive interpretation to the concept of 'as is where is' is laudable, and that the plea of 'let the buyer beware' of any encumbrance on the property sold on the pretext of 'as is where is' is no longer an acceptable argument. Moreover, the duty of the purchaser or the transferee under the principle of Caveat Emptor should be restricted only to the extent of patent defects as discernible from the above discussion on the cases involving the commercial contract with the government and the party failing to which, cannot later seek judicial interpretation since it will be presumed that he entered into the contract with open eyes.

Footnotes

1 Mohd. Ma'sum Billah. (1998). Caveat Emptor versus Khiyar al-'Aib: A Dichotomy. Arab Law Quarterly, 13(3), 278-299. Retrieved from http:// www.jstor.org/stable/3382012.

2 Section 55(1)(a), Transfer of Property Act 1882.

3 (1603) Cro. Jac. 4, 79, ER 3.

4 P.S. Atiyah, The rise and fall of freedom of contract, Clarendon Press, Oxford, 1979, at 179.

5 Mulla, The Transfer of Property Act, 12th ed., 2015 at P. 387.

6 Rao Saheb Mohanlal Keshavji Kothari and Ors. v. Rode Theresa Gonslves and Ors., AIR 1965 Bom 139 ¶39.

7 Flight v. Booth, (1834) 1 Bing (NC) 370.

8 W.P. No. 19557 of 2009, dated 28.10.2009.

9 (1994) 1 SCC 575.

10 (2012) 8 SCC 197.

11 (2016) 13 SCC 561.

12 (2010) 1 SCC 655.

13 (2013) SCC OnLine All 13203.

14 Neelam Dalia and Ors. v. Amrut Industries and Ors., 2017 SCC OnLine Hyd 266.

15 AIR 2013 SC 1241.

16 2017 SCC OnLine Del 10258

17 Writ Petition Nos. 3603-3607 of 2016, dated 25.02.2016 - KARHC (Unreported).

18 Sadasook Ramprotap v. Hoare Miller & Co., AIR 1923 Cal 719.

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