GETTING YOUR PRIORITIES RIGHT (PART ONE)
A unique feature of the English legal system is that there were 2 courts of co-ordinate jurisdiction, a court of law and another court of equity (the Chancery Court). The court of law would only recognise legal rights (rights in law) and the court of equity would recognise both legal and equitable rights. The Court of Judicature Act, 1873 fuses the 2 courts but the concepts, doctrine and principles of law and that of equity remains distinct and separate; in the event of conflict, equity shall prevail. The two streams of jurisdiction, though they run in the same channel, run side by side and do not mingle their waters.
Hence, a landowner could be both legal and equitable owner (an absolute owner); or just a legal owner (trustee) and the beneficial owner (the equitable owner) is someone else. There is a duality of ownership.
A conflict which causes competing equitable interest usually arises out of mischief or misfortune on the part of the legal owner. The owner could have contracted with party A for the sale of the land to him and goes on to sell it to another party, B. The owner could also die or become insolvent after he contracted with A, whereby his heir, trustee or creditor would make a claim on the owner’s land.
Consider the following case[1] –
“The first and second defendants in this case had agreed in writing on November 2, 1957 to sell their land to the plaintiff for $30,000. The plaintiff paid $15,000 towards the agreed purchase price before January 24, 1958 on which date he lodged a caveat against the land with the Registrar of Titles. On the same day the third and fourth defendants approached him and offered to pay him $10,000 to give up his rights under the agreement and to withdraw his caveat. He refused.
On the morning of January 30, 1958 he called at the land office and discovered that his caveat had been rejected and that the land had been registered in the names of the third and fourth defendants in pursuance of a document of transfer in their favour, purporting to have been executed on January 17, 1958 but stamped and presented for registration on January 30, 1958.”
In a court of law, based on the facts that the first and second defendants contracted to sell the land to the plaintiff but then went on to sell and convey the legal title to the third and fourth defendants; the plaintiff will have no claim against the land (in rem) and is left with his action for damages against the first and second defendants (in personam) for breach of contract.[2] Actions are either in personam or in rem. Actions in personam are founded upon breaches of personal obligations; they are called in personam because they give relief only against the defendant personally. An action in rem, founded upon ownership. The relief given in a common-law action in personam is always the same; namely, a compensation in money. That leaves the plaintiff in a very unsatisfactory position, especially where the first and second defendants are impecunious.
The court of equity, on the other hand have the power to compel the parties to perform specific reparation; in the form of injunction and specific performance. If either of them refuses or neglects so to perform, he will be punished for contempt on the application of the other.
It may also be a position where the first and second defendants enter into multiple contracts with various other parties for the sale of the same land to them; which adverse claimants should the court assist?
Where the competing equities are equal, the first in time prevails
The rule which declares that he who is first in time has the better title, proceeds upon the principle that a grantor shall not be allowed to derogate from his own grant. He cannot interfere with, or defeat, a right created by himself, but can confer only such interest, if any, as he has not already parted with.
But this rule of priority is subordinate to an exception in which equity follows the law and, that is to say, where the equities are equal, the law prevails; once the purchaser obtained the legal interest without notice, the rights are of a different level; hence the maxim of the oldest shall prevail shall have no application. Nevertheless, this exception only protect the purchaser who has obtained the legal title without notice and for valuable consideration – for the taking of the real estate after notice of a prior right for valuable consideration was a fraud, and took away the bona fides of the purchaser, making it mala fides; which is agreeable to the definition of fraud in the civil law.[3]
The time of making the contract
The performance of a contract enforced in equity relates back to the time of making the contract[4]; the relationship back is a legal fiction so that more perfect justice may be done. Hence, where the court of equity intervene by a decree of specific performance “equity looks upon as done that which ought to have been done”; the contract to sell and purchase is deemed completed on the date of the contract and the purchaser is the equitable owner of the land, henceforth.
It must be recognise that such a fiction is adopted for the sole purpose of doing justice between the adverse claimants and such fiction should not be taken to its logical end, which would result in mischief and injustice. Taking the maxim, equity looks upon as done that which ought to have been done, the logical time for the relation back would be to the time fixed for completion by the parties; for neither party intended the contract to be completed on the date it was entered into. Nevertheless, adopting the logical time would not do justice – as the later purchaser, in the illustration above, would have obtained the legal title, working in cahoots with the first and second defendants to defraud the plaintiff.
This fiction of relation back, now commonly referred to as “the equitable doctrine of conversion, or the doctrine of equitable conversion”, has its origin in the doctrine of trust, also known as users in ancient time, and succession. Accordingly, the priority of the various adverse claimants would be determined in according to the time the equitable interest arise, provided that such claimant is entitled to a decree for specific performance. I use the word ‘entitled’ notwithstanding that the grant of a decree of specific performance is discretionary, for the reason that such discretion is a judicial discretion to be exercised in according to the maxims of equity; the guiding principle is that more perfect justice may be done.
Trustee sub modo[5]
The contract to sell is a disposition of the estate, and by it the vendor parts with his right and dominion over it. It is in equity no longer his; he is considered constructively to be a trustee of the estate for the purchaser, and the latter as a trustee of the purchase-money for him. They are so considered by construction only; but the court acts upon that notion.
The vendor is at this stage, not a naked trustee nor is he a mere trustee. A mere trustee is without beneficial ownership in the estate and never had; in contrast with one who agreed to sell his estate, who until he contracted to sell his estate was both legal and beneficial owner; and may again become the beneficial owner, if anything should happen to prevent the execution of the contract; and in the interim, between the contract and conveyance, it is possible that much may happen to prevent it.
Before it is known whether the agreement will be performed, he is not even in the situation of a constructive trustee; he is only a trustee sub modo, and provided nothing happens to prevent it. Sub modo is a Latin term which means ‘subject to alteration or requirement.
It may turn out that the title is not good, or the purchaser may be unable to pay; he may become bankrupt, then the contract is not performed, and the vendor again becomes the absolute owner; here he differs from a naked trustee, who can never be beneficially entitled.
We must not, therefore, pursue the analogy between the vendor and a naked or bare trustee too far. It must be borne in mind that in a situation of competing equities, the vendor maybe a bare trustee to a purchaser, nevertheless such a purchaser may lose his priority to a bona fide purchaser for value without notice; and in-so-far as the court of equity refuse to intervene and to exercise its discretion to decree specific performance in favour the purchaser his claim would be restricted to the remedy at law which is compensation in money.
What’s sauce for the goose is sauce for the gander – justice requires mutuality of remedies
In Paine v Meller[6], the Contract for the sale the house, which from defects in the title, could not be completed on the day fixed for completion. The contract however proceeded upon a proposal to waive the objections upon certain terms. The house being burnt before a conveyance. The purchaser is held to be bound, if he accepted the title; and the circumstance, that the vendor suffered the insurance to expire at the day, on which the contract was originally to have been completed, without notice, makes no difference.
The vendor prayed for specific performance of the contract, as per Lord Chancellor [Eldon] –
“As to the mere effect of the accident itself no solid objection can be founded upon that simply; for if the party by the contract has become in equity the owner of the premises, they are his to all intents and purposes. They are vendible as his, chargeable as his, capable of being incumbered as his; they may be devised as his; they may be assets; and they would descend to his heir. …
I am therefore of opinion, that if the agent on behalf of this purchaser did accept this title previously to the destruction of the premises, the vendors are in the situation, in which they would have been, if the title and the conveyance were ready at Michaelmas 1796, but by the default of the vendee were not executed[7], but the title was accepted, and the premises were burnt down on the quarter day. As to the fact, where there has been a great deal of treaty, and a considerable hardship must fall upon one party, if the case is to be put entirely upon the fact, the Court must guard against surprise.”
Justice requires mutuality of remedies, hence where specific performance is available for the vendee, it should equally be available for the vendor. Nevertheless, it is my submission that Lord Eldon would not have decree specific performance, in this case, had it not been for the vendee’s default. It should not be assumed that the court of equity is bound to decree specific performance against the vendee in any event that the house is destroyed after the date of the contract; the court ought to exercise Its discretion within the recognise heads of equity for more perfect justice. The late C.C. Langdell, Professor of Law (Emeritus) in Harvard University, is of the same opinion.
Below is an extract from A Brief Survey of Equity Jurisdiction (Part 3) by the late professor, more than 100 years ago –
“… but, since the time of Lord Eldon, English courts of equity have drifted into great confusion upon this subject, for they now hold that a loss by fire which happens any time after the making of the contract falls upon the vendee, thus holding in effect that the performance of a contract enforced in equity relates back to the time of making the contract.
“If I should buy an house, and, before such time as by the articles I am to pay for the same, the house be burnt down by casualty of fire, I shall not, in equity, be bound to pay for the house.” Sir Joseph Jekyll, M.R., in Stent Bailis, v. 2 P. Wms. 217, 220.
The same rule was acted upon by Lord Eldon in Paine v Meller, 6 Ves. 349. It is true that the purchase there was to be completed on the 29th of September, while the fire did not happen till the 18th of December following; but the time for completing the purchase had been extended by the mutual consent of the parties; and Lord Eldon held that the vendee must bear the loss, provided he had been put in default by the vendor before the loss happened, but not otherwise[8].”
No merely equitable right can be enforced against one who has acquired a legal right bona fide, for value, and without notice.
To reiterate the rules on competing equities – he who is first in time has the better title; but this rule is subject to a further rule, which is that equity follows the law.
Hence, once a subsequent purchaser has intervened and obtained not merely the equitable title but also the legal title, this legal ownership is recognised by the court of law; this purchaser’s right is on a different level and no longer merely in equity. To prevail over this subsequent purchaser, his legal title must first be defeated; and this the court of equity would do only where this subsequent purchaser lacks bona fides –
“The ground, on which all the cases went, was that taking the real estate after notice of a prior right for valuable consideration was a fraud, and took away the bona fides of the second purchaser, making it mala fides ; which is agreeable to the definition of fraud in the civil law.”[9]
Hence, in a challenge to the legal ownership of the bona fide purchaser for valuable consideration, his plea would be that –
“We are purchasers for valuable consideration. We ask no relief; we only ask to be let alone”[10];
“We say that we have the legal estate, and that there is no equity to deprive us of it”[11]; and
“I do not want the assistance of the Court; I disclaim any interference on the part of the Court to deal with the property as it pleases; I am perfectly content to rest on my possession of the deeds”.[12]
The true character of an equitable interest
Equitable estates and interest are right in personam but they have a misleading resemblance to rights in rem. The trust is enforceable against the trustee, his representatives, volunteers claiming through or under him and persons who acquires legal rights through or under him, with knowledge of the trust or ought to have knowledge of the trust[13].
The true character of the equitable interest, i.e. the right in personam, becomes apparent where a purchaser acquires the legal rights for value and without notice of the trust. The court of equity will not and have no grounds to interfere with the right of a purchaser who acquires the legal right for value and without notice of the trust. Consider this illustration, where the purchaser contracted to purchase the land from a trustee, without notice of the trust; and before the full payment of the purchase price, the purchaser gained knowledge of the trust. At that point in time, both the purchaser’s and the cestui que trust’s interest are equitable and the oldest or first in time shall prevail. But had the purchaser obtained the conveyance of the legal title before he has knowledge of the trust, equity has no reason to interfere with the legal ownership, as hereinbefore stated.
Semblance of the bona fide purchaser in our Land Code
The provision for indefeasibility in our Land Code provides, inter-alia, that the title of the person for the time being registered shall not be indefeasible in any case of fraud or misrepresentation to which the person or his agent is privy.[14] It then provides that in the event such title be subsequently transferred to any purchaser in good faith and for valuable consideration, or by any person claiming through or under such a purchaser, the title shall then be indefeasible.[15]
These provisions seems similar to the equitable principles for competing priorities between equitable and legal title, above. There have not been any critical analysis of these provisions of our Land Code to determine where these similarity begins and ends.
Rights in personam vis-à-vis the Torrens system
It is my suggestion that there is not one homogenous Torrens system as the name imply. At its broadest definition, the Torrens system is a system of title to land by way of registration, in contrast with the then existing title by Deed; the title deeds may be registered but it is merely a record of ownership, the legal title is conveyed by the deed, as opposed to the Torrens system where title to land is created by the fact of registration.
Written in 1920,[16] James Edward Hogg states that “there are, throughout the British Empire, twenty-eight separate systems of registration of title, each based on a separate set of statutes, and covering thirty-one territorial divisions, three systems being in force in more than one territorial division”; the Federated Malay States included.
Sir Robert Torrens listed five principal grievances[17] which result from the English law of real property having a common origin in “dependent or derivatives title”, may be remedied by “rendering title indefeasible on registration”, thus cutting off the necessity for retrospection.[18]
Sir Robert Torrens original concept of title by registration was intended, to be applied firstly, in the conversion of the land held under the deed system to the Torrens system and subsequently the transfer or conveyance between the first owner and the subsequent owners; I shall refer to the first instance as “the conversion” and the second instance as “the conveyance”. In a conveyance of title, the original title would be annulled and a new title issued to the transferee; akin to a surrender by the original owner and a re-alienation by the state to the transferee.
As the so called Torrens system is introduced by legislation, each enactment or statute by individual states incorporates or adopt so much of Sir Robert Torrens concept as it deem fit. It is as useful to refer to such new legislation as “modified Torrens system” as it is to define a centaur as part man and part horse; how much is it man and how much is it horse. I will attempt to reconcile this centaur, part equity and part law, in so far as it would reveal itself. We must guard ourselves against the danger of interpreting the statute as if it is a Torrens statute, incorporating concepts which was never adopted.
The court is not to look at what is the Torrens system as practised in other jurisdictions but to interpret s 340 as it stands, and to find the real intention of Parliament when enacting it and the intention of Parliament must be deduced from the language used.[19]
The application of equity in Peninsula Malaysia
It has been expressly provided that the common law of England and the rules of equity as administered in England on 7th. April, 1956 shall be applicable in Peninsula Malaysia and in the event of any conflict or variance between the common law and the rule of equity with reference to the same matter, the rules of equity shall prevail.
This is what Lord Killowen of Kinkel has to say in OH HIAM & ORS. v. THAM KONG l M.L.J. 2 M.L.J 159
“Apart from authority their Lordships would not expect that the intervention of equity by a remedy in personam based upon a transaction to which the plaintiff and defendant were parties would be ousted by such provisions. The Torrens system is designed to provide simplicity and certitude in transfers of land, which is amply achieved without depriving equity of the ability to exercise its jurisdiction in personam on grounds of conscience. In the instant case the defendant could have shown an indefeasible title had he sold Lot 3660, a step which he could not take because he undertook to the court not to: the court could have granted an injunction against sale, and that could scarcely have been described as an order inconsistent with his indefeasible title. H the registered proprietor were a trustee, his indefeasible title would not have precluded intervention by the court in execution of the trust: under the then Land Code there was no express provision for registration as trustee. The in defeasible title would not preclude an order for specific performance of a contract for sale by the proprietor. All these are instances of equity acting in personam, and indeed the order in the instant case may be described as an order in personam that the registered proprietor should defeat his own title.
There was more over a number of authorities which deny to the Torrens system the effect for which the defendant contends, where there is not merely a question of competitive claims to the title, but a relationship between the parties justifying intervention by equity acting in personam.”
There are quite a few judgment from the Federal Court which adopted a very liberal attitude towards the application of equity, inter-alia, per Ramly Ali FCJ, Samuel Naik Siang Ting v Public Bank Bhd [20]at paragraph 62 –
“The question as to what extent the rules of equity are recognised and applied by our courts was explained by the Federal Court in Chuah Eng Khong v Malayan Banking Bhd [1998] 3 MLJ 97; [1999] 2 CLJ 917, where it was held that ‘Rules of equity in general are applicable by virtue of the Civil Law Act 1956 and those rules of equity relating to equitable interests in land have no doubt always been recognised and applied in Malaysia unless they are expressly or by necessary implication precluded by the Code … This view has been asserted and reasserted in a number of cases in the appellate courts in Malaysia.”
[1] Ong Chat Pang & anor v Valliappa Chettiar [1971] 1 MLJ 224
[2] The statutory provisions of our land code would be considered at a later stage.
[3] LE NEVE V. LE NEVE 1 VES. SEN. 64.
[4] The Federal Court recognised the relation back in the judgment of Hassan bin Kadir & Ors v Mohamed Moidu bin Mohamed & Anor [2018] Supp MLJ 266, at page 278. In an earlier and somewhat conflicting judgment, Edgar Joseph Jr FCJ held in Borneo Housing Mortgage Finance Berhad v Time Engineering Bhd [1996] 2 MLJ 12, at page 29 E-F, that the contractual events which result in the vendor becoming a bare trustee of the land for the purchaser, is on completion of the sale and purchase agreement, that is to say, upon receipt by the vendor of the full purchase price, timeously [it must be noted that time is not of the essence in equity] paid and when the vendor has given the purchaser a duly executed, valid and registrable transfer of the land in due form in favour of the purchaser, for it is then that the vendor divests himself of his interest in the land. The judgment in Borneo Housing is difficult to reconcile with the doctrine of equitable conversion; which we shall critique at a later stage. In a later judgement of the Federal Court of Tan Ong Ban v Teoh Kim Heng [2016] 3 MLJ 23, which held that the principle of beneficial ownership differentiate between the rights of a purchaser of a property who has fully settled the purchase price with one who has not. This principle clothes a purchaser who has settled the full purchase price with a distinct privilege equivalent to a legal owner, although he or she has yet to be registered as the proprietor of the property Under this principle of beneficial ownership, the vendor becomes a bare trustee for the purchaser in respect of the transacted property, while the purchaser assumes the position of beneficial owner having right in rem over the property. The purchaser is commonly accepted as having a beneficial interest in the land on the execution of the contract and upon which specific performance may be granted by the court. This beneficial interest is also sufficient to entitle the purchaser to enter a caveat under the NLC; this judgment is equally difficult to reconcile with that of the doctrine of conversion.
[5] WALL V. BRIGHT 1 JAC. & W. 49
[6] Paine v Meller, 31 E.R. 1088 (1801)
[7] Emphasise are mine.
[8] Emphasise is mine.
[9] LE NEVE V. LE NEVE 1 VES. SEN. 64.
[10] George Jessel for the defendants, see Pilcher v. Rawlins (1872) L.R. 7 Ch. App. 259 at p 263.
[11] ibid
[12] Ibid per James L.J. at p. 271, explaining the nature of the defendant’s plea
[13] LE NEVE V. LE NEVE 1 VES. SEN. 64
[14] Section 340(2) (a), National Land Code, 1965.
[15] The proviso to section 340(3) ibid.
[16] Registration of Title to land throughout the empire, 1920.
[17] THE SOUTH AUSTRALIAN SYSTEM OF CONVEYANCING BY REGISTRATION OF TITLE, ROBERT R TORRENS, WITH A COPIOUS INDEX BT HENRY GAWLER, ESQ., BARRISTER, SOLICITOR TO THE LANDS TITLES COMMISSIONERS.
[18] Ibid, at page 8, Five grievances.
The grievances practically imposed upon the Australian colonists by the English law of real property may be glassed under five counts:
1st. By reason of the “complexity” thereof this community is held and firmly bound unto the conveyancers in such sort that no man may venture to deal with his own land except he use the hands of some member of that learned body.
This yoke might be borne if it were a mere abstract principle of villanage, but, like other monopolies, this of the conveyancers has induced that which constitutes the next count of this indictment, viz. : —
2ndly. ” Heavy costs” are thereby imposed upon all manner of transaction! in land, however ordinary or simple in their nature. This, also, might be tolerated if security were attained by the expenditure, but the shortcoming in that respect constitutes the next count.
3rdly. ” Losses and much perplexity” are entailed upon purchasers and mortgagees by reason of the uncertainty which in a greater or less degree hangs upon the validity of every title acquired under the English law of property.
4thly. In aggravation of these grievances, that law ” is unsuited to the requirements of a progressing community,” by reason of the tardiness of the process of conveyancing thereunder.
These defects in the aggregate have brought it to pass that—
5thly. Through the operation of this law, the value of land as a secure and convenient basis of credit is greatly diminished. Any substituted process to secure immunity from these grievances must be simple, inexpensive, invariably certain, and expeditious.
The South Australian Real Property Act, based upon the principle that title is conveyed by “registration,” not by execution of instruments, realizes all these requirements.
[19] Tan Ying Hong v Tan Sian San & Ors [2010] 2 MLJ 1, paras 43 and 44, referring with approval to this passage in the judgement of Adorna Properties Sdn Bhd v Boonsom Boonyanit @ Sun Yok Eng [2001] 1 MLJ 241; [2001] 2 CLJ 133, FC, which judgment it then overruled.
[20] [2015] 6 MLJ 1