India: Power Of Attorney – Position Qua ‘Interest' & Purchasing Immoveable Properties

Introduction:

Powers of Attorney have been long used as an instrument to delegate certain powers upon another person, i.e., agent to act on behalf of the person granting the power of attorney, i.e., principal. The powers delegated could range from authorising the attorney to sign a pleading on behalf of the grantor to receiving rents etc. Additionally, the practice of 'transferring' immovable properties through a power of attorney has been going on for a while.

The Supreme Court of India in recent judgment in Ghanshyam vs Yogendra Rathi¹ while dealing with the aspect of transfer of property through an agreement to sell combined with a power of attorney and a will stated that neither an agreement to sell nor a power of attorney can be construed as a document of titles and will not confer title of the suit property on the buyer or the power of attorney holder. The Supreme Court deprecated the practice of transferring property through a power of attorney holding them to be in violation of the statutory law.

In this article, we will analyse the different types of powers of attorney, practice of transfer of immoveable property through an irrevocable general power of attorney or a combination of agreement to sell and an irrevocable power of attorney, and the jurisprudence around it. We will also discuss the concept of 'interest' in relation to a power of attorney.

Revocable and Irrevocable Power of Attorney

A power of attorney is a form of agency and is governed by the Powers of Attorney Act, 1882 and the Indian Contract Act, 1872 ("Contract Act"). A power of attorney is executed by the principal in favour of the agent to perform certain acts as may be mentioned therein on behalf of the principal. The grant of power of attorney is governed under Chapter X of the Contract Act where the agent is formally appointed to act for the principal in certain transactions or to manage the affairs of the principal. It may be revocable at the instance of the principal except in certain circumstances where it becomes irrevocable. The Supreme Court of India in State of Rajasthan and Ors. vs Basant Nahata² has held that when a power of attorney is 'coupled with interest' it becomes irrevocable. The term 'coupled with interest' is used to describe a type of power of attorney that gives the agent the authority to handle not only the principal's property but also any interests which may result from such authority. In such cases, the power of attorney becomes irrevocable, i.e., it cannot be revoked at the sole discretion of the principal. Statutorily, this follows from section 202 of the Contract Act which states that where the agent himself has 'interest in the subject matter of the agency', the agency cannot be terminated to the prejudice of such agent's interest. Pertinently, section 204 of the Contract Act makes even a revocable power of attorney irrevocable when such authority has been exercised partly. In Kishni Devi v. State of Rajasthan,³ the Court held that when authority under a power of attorney has been partly exercised, subsequent revocation of power of attorney would not preclude the agent from carrying out further activities as authorized under the said power of attorney.

What is 'coupled with interest'?

The term 'coupled with interest' has not yet been defined by any statute or legislation. To understand what the term would mean, the illustrations provided under Section 202 of Contract Act may be referred to. Both the illustrations show that the authority of the agent to sell the principal's property has been clubbed with a right of the agent to recover the amounts due to him from the principal out of the proceeds from such sale. An interest of the agent with respect to the amounts owed to him is created on the principal's property, i.e., the subject matter of the agency. This has been considered as an agency 'coupled with interest'. Black's law dictionary defines 'agency coupled with an interest' as an agency in which the agent is granted not only the power to act on behalf of a principal but also has a legal interest in the estate or property involved. It is a power to do some act, conveyed along with an interest in the subject matter of the power of attorney.

In Casey vs. Walker and Mosby,⁴ the Supreme Court of Appeals of Virginia defined 'power coupled with interest' and stated that to constitute a power coupled with interest, the subject-matter of such agency or power must be vested in the agent or the power is given to the agent to deal with such property in his own name. The interest must be an interest in the subject matter of the agency itself and must not result from the execution of the authority. An interest of the agent which arises from commissions or proceeds of a transaction as compensation for execution of the authority is not the interest which makes the agency irrevocable irrespective of the fact that it is expressly declared that such agency is irrevocable.

Courts in India have also attempted to define a power of attorney 'coupled with interest'. In Seth Loon Karan Sethiya and Ors vs Mr Ivan E. John and Ors.,⁵ the principal had executed a power of attorney in favour of the bank, to which it owed money, for execution of a decree passed in favour of the principal and recover the amounts due from the principal. The Supreme Court held that such a power of attorney is coupled with interest. It was held that where the agency is created for valuable consideration and authority is given for effectuating a security interest or to secure the interest of the agent, then such power is 'coupled with interest'. However, the court made it clear that the interest of the principal under the decree is not transferred to the bank through the power of attorney.

The meaning of 'coupled with interest' and section 202 of the Contract Act has been comprehensively covered by the Delhi High Court in Shri Harbans Singh v. Smt. Shanti Devi.⁶ While dealing with the question of whether the general and special power of attorney executed by the appellant stood revoked by his lawyer's letter, the court attempted to construct section 202 of the Contract Act and the meaning of the word 'interest' used therein. The Court considered the meaning of the expression 'interest' in section 202 of the Contract Act and stated that the word 'interest' is not merely technical and has to be applied to a wide variety of cases under the Contract Act. The Court undertook a jurisprudential analysis of the term "interest" and stated that the meaning of interest is not to be restricted (as it is used at times in relation to immoveable property under the Transfer of Property Act, 1882 and Registration Act, 1908) in relation to the Contract Act. The Court referred to Bowstead on Agency which states as follows:

Power of Attorney as Deed of Transfer

The above referred judgments clearly elucidate what a power of attorney coupled with interest means. However, such an interest cannot be interpreted as complete transfer of interest in an immoveable property in favour of the agent. A power of attorney coupled with interest cannot be an instrument of transfer of entirety of rights in an immoveable property. In order to avoid payment of stamp duty and registration charges on deeds of conveyance, or to avoid prohibitions regarding certain transfers, or to invest unaccounted money, certain forms of transactions evolved where the modus operandi would be the owner of the property delivering the property to the purchaser for a consideration on basis of an irrevocable power of attorney in favour of the purchaser, authorising the purchaser, i.e., the agent to manage, deal with or dispose off the property or a combination of an agreement to sell between the seller and the purchaser combined with a general power of attorney authorising the purchaser (as an agent) to sell or transfer the property. These forms of transactions were used in place of regular conveyance deeds such as a sale deed and were assumed to have affected the transfer of entire interest in the property. The power of attorney in such transactions were classified as irrevocable as the purchaser, being the agent, had an interest in the property.

The Supreme Court in Suraj Lamps and Industries Pvt. Ltd, vs State of Haryana and Another⁷ recognised the widespread use of such practices and came down heavily on them, criticising them and holding that such transactions will not convey any title or create any interest in the immoveable property and hence cannot be recognized as a valid mode of transfer of immoveable property. Immoveable property can only be transferred through a registered deed of conveyance. A 3-judge bench of the Supreme Court in Shiv Kumar and Anr, vs Union of India and Ors.⁸ further held that a power of attorney does not create interest in the immoveable property and hence no right can be claimed by way of a transfer of property through a power of attorney.

Revocation on Death and Developer's Interest

Another important aspect that has gained a lot of attention recently is the vesting of interest through a development agreement along with a power of attorney. Under Section 201 of the Contract Act, an agency may be terminated on the death of the principal or the agent. A general power of attorney would stand rescinded on the death of the principal. Pertinently, under Section 3 of the Powers of Attorney Act, 1882, any act done in good faith by the attorney who, at the time of such act, did not have the knowledge of the fact that the donor of such power of attorney had died, would not be liable for the said acts.

When a power of attorney is coupled with interest under section 202 of the Contract Act, such power of attorney would not be automatically rescinded in the event of death of the donor of the power. In Bhagwanbhai Karamanbhai Bharvad v. Arogyanagar Co-op. Housing Society Ltd.,⁹ the Gujarat High Court held that when there is no express contract for termination, the agency under section 202 of the Contract Act would not be terminated even after the death of the person who has given such authority. Similarly, in Manubhai Chhotabhai Patel vs Manubhai Motibhai,¹⁰ the Gujarat High Court stated that where the power of attorney was not coupled with interest under section 202 of the Contract Act, the death of one executor / donor of the power of attorney will not entitle the grantee / donee of such power to act on her behalf. Such power of attorney being a general power of attorney, without being coupled with interest, may be cancelled at any time.

The general principle is that a power of attorney stands rescinded on the death of the principal / donor except where it is coupled with interest under Section 202 of the Contract Act. However, with respect to joint development agreements there have been contrasting judicial decisions concerning the power of attorney granted in favour of developers and their interest therein.

In Bhaskar Aditya vs Minati Majumdar,¹¹ a division bench of the Calcutta High Court held that the developers by virtue of entering into a development agreement with the owners of the property, apart from being the agent of the owners, also acquire an interest in the property. Such power of attorney flowing from the development agreement is coupled with interest created by such agreement and is hence protected under Section 202 of the Contract Act. However, the Calcutta High Court in Shambhu Nath Sharma vs Samiran Chandra Majumder¹² stated that the said position is not settled as there are conflicting decisions of the division bench of the said High Court¹³ stating that the agency under a development agreement does not create interest over the property in favour of the developer and hence the question as to whether any interest is created in favour of the developer is to be settled by a larger bench.

Conclusion

The judgments cited above including the judgment in Ghanshyam vs Yogendra Rathi¹⁴ base their reasoning of the interpretation of the term 'interest' under Section 202 of the Contract Act. The term 'coupled with interest' which makes a power of attorney irrevocable refers to the interest of the agent in the property forming subject matter of the agency anterior to such agency being created. The interest in the property, if created by virtue of the agency, would not be considered to fall within the term 'coupled with interest'. Such power of attorney then becomes revocable at the option of the principal. This would affect the title rights of the buyer especially when such transfer is done through a power of attorney irrespective of the fact that the power of attorney itself states that it is irrevocable. In view of the authors, the Hon'ble Supreme Court has correctly held that these transactions are in violation of the statutory law and should not be recognised.

Further, a power of attorney stands terminated on the death of the donor of the power except where it is coupled with interest under Section 202 of the Contract Act. With respect to development agreements, we note that there have been conflicting decisions regarding whether a developer, by virtue of the power of attorney in the development agreement, acquires an interest in the property under Section 202 of the Contract Act. While this issue awaits attaining finality, many projects where such interest is created by virtue of the development agreement and the power of attorney therein continue to be executed.

Footnotes

1. 2023 SCC OnLine SC 725.

2. (2005) 12 SCC 77.

3. 1990 SCC OnLine Raj 37.

4. 122 Va. 465 (1918).

5. AIR 1969 SC 73.

6. 1977 SCC OnLine Del 102.

7. (2012) 1 SCC 656.

8. Civil Appeal No. 8003 of 2019 - Judgment dated October 14, 2019.

9. AIR 2003 Guj 294.

10. 2022: GUJHC:25711.

11. 2002 SCC OnLine Cal 610.

12. 2013 SCC OnLine Cal 15656.

13. Vipin Bhimani v. Sunanda Das 2006 (2) CHN 396.

14. 2023 SCC OnLine SC 725.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.