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Report No. 70

Chapter 76

Priority of Mortgage

Section 78

76.1. Introductory.-

The general rule is that transfers of interests in the same immovable property take effect in the order in which they are created.1 This general rule applies as much to mortgages as to other transfers of interest in property. But equitable considerations may justify as departure from the general rule.2

According to section 78, where, through the fraud, misrepresentation or gross neglect of a prior mortgagee, another person has been induced to advance money on the security of the mortgaged property, the prior mortgagee shall be postponed to the subsequent mortgagee. Three different kinds of misconduct are mentioned in the section and each of them would make the section applicable.

It is obvious that fraud is not the only ground for relief under the section. However, it is necessary that the misconduct in question was the proximate cause leading to the advance of money by the subsequent mortgagee to the mortgagor.3

The principle of the section was thus explained in a Bombay case.4 Where a person holding a prior title connives at, or assists in, a fraud or other conduct for the creation of a subsequent title in favour of a person who has no notice of the prior estate, the prior title is postponed to the subsequent one.

1. Compare section 48.

2. ILR 43 Cal 105.

3. AIR 1933 All 299.

4. ILR 18 Born 444.

76.2. Subsequent purchaser.-

Of course, section 78 does not apply there the alleged competition is between the mortgagee and a subsequent purchaser. The question of priority in such a situation is governed by section 48. Under section 48, where a person purports to create by transfer at different time rights in or over the same immovable property, and such rights cannot all exist or be exercised to their full extent together, each later created right shall, in the absence of a special contract or reservation binding the earlier transferees, be subject to the right previously created.1 However, estoppel and similar considerations may modify this general rule.

1. AIR 1961 Cal 300.

76.3. Notice.-

Reverting to mortgagees and their priority inter se, it has been held1-2 that section 78 does not apply if the subsequent mortgagee had notice of the prior mortgage. This, in fact, is implicit in the words "where, through the fraud misrepresentation or gross neglect of a prior mortgagee, another person has been induced to advance money", occurring in section 78. If the subsequent mortgagee has notice, then he cannot plead that the misconduct of the prior mortgagee 'induced' him to advance money.

1. ILR 18 Born 444.

2. AIR 1938 Mad 161.

76.4. Estoppel.-

The principle of section 78 is that priority is lost by fraud or misrepresentation or gross neglect. This seems to be an extension of the principle of estoppel, which is based on a misleading statement made either by act or declaration of the person concerned. Ghose1 describes it as an elementary rule that if a person having a charge upon property encourages another to believe that he has got no charge and induces such other person to act on that belief, then the person who induces such belief shall be precluded from averring against the other person a different state of things as existing at the same time.

1. Ghose Law of Mortgage in India, (1902), pp. 487, 488.

76.5. No duty to give notice.-

The law, however, does not oblige the prior mortgagee to give notice of his charge to another person whom he knows to be negotiating for the sale or settlement of the property. It is of the essence of the concept of constructive fraud1 that the person sought to be charged with such fraud should be proved to have concurred or co-operated in some deceit or should have been guilty of some gross negligence. As regards gross negligence, again the principle, as observed by Lord Romilly,2 is that a person who puts it in the power of another to deceive and raise money must take the consequences.

1. Salamat All v. Budh Singh, 1876 ILR 1 All 303.

2. Briggs v. Jones, 1871 Eq 92 (98).

76.6. The principle, then, is simple, but it is not always easy to apply such obstruct concepts to concrete situations and a difference of views is bound to arise. There has been, as may be expected, a fairly large number of judicial decisions on section 78, particularly as to the scope and meaning of the three crucial expressions used in the section-fraud, misrepresentation and gross neglect. These expressions are not defined in the section, but the definitions of fraud and misrepresentation contained in the Contract Act, sections 17 and 18, would apply. In England, the corresponding concept of constructive fraud covers such situations.1-2

The term "gross neglect" is not defined in the Act.

It would seem to mean failure on the part of the prior mortgagee to take such reasonable precautions against the deception of a subsequent mortgagee as in the circumstances, renders, it unjust that the prior mortgagee should retain his title.3

1. Salmat All v. Budh Singh, 1876 ILR 1 All 303.

2. Briggs v. Jones, 1871 Equity 92 (98).

3. Dharam Mohan v. Pramatha Nath, AIR 1936 Cal 283 (288) (M.N. Mukerji and S.K. Ghose, B.).

76.7. Gross neglect.-

As stated above, the principle underlying section 78 is one of estoppel.1 Some controversy has arisen by reason of the observations of Jenkins J.2 to the effect that the gross neglect must amount to fraud. Principally, this view was based on English decisions, but it is now pertinent to refer to two aspects; first, that in England also the current view is different; and secondly, the view of Jenkins J. has not, in general been followed by later decisions in India. Having regard to the fact that the section makes the three concepts distinctive, one concept cannot be defined in terms of other or others.3 It is, therefore, not proper to read section 78 narrowly.

In the Lahore case,4 it was specifically held that the gross neglect (in section 78) need not be neglect that amounts to evidence of fraud. On the facts of the case, however, gross, neglect was not proved. In that case, the mortgagor after creating an equitable mortgage of his house by deposit of title deeds in favour of B, mortgaged the same house to G by a registered deed. The mortgage deed made no mention of the earlier mortgage. G was not aware of the earlier mortgage, nor did he call for the title deeds from the mortgagor.

Subsequently, the mortgagor mortgaged the same house to C, with title deeds, without disclosing the mortgage in favour of G. G then instituted a suit against the mortgagor to enforce this mortgage and obtained a decree. Pending this suit, the mortgagor mortgaged the same house to F. Subsequently F sued on the mortgage, obtained a decree and in execution of the same purchased the house himself and entered into possession, the question to be determined was the respective priorities to G and C.

It was held that in the circumstances of the case, C's failure to call for the title deeds at the time of taking a registered mortgage could not, by itself, amount to gross neglect. Nor could it be regarded as a proximate cause of C's entering into the mortgage. Hence section 78 had no application. Further, as C took the mortgage during the pendency of the suit instituted at the instance of G, G's rights were not in any way affected by C's mortgage. The fact that C had entered into possession was immaterial, there being no rule of law or equity giving special protection to a person in possession in the circumstances of the case.

It will be noted that in this case the mortgage in favour of G was registered, and if C had taken the ordinary precaution of enquiring from the registration office, he would have become aware of the mortgage in favour of G. Therefore, it was C's own difference that was the proximate cause of his being "induced" to advance money, apart from the fact that there was no "gross" on part of prior mortgagee G so far as the position of C was concerned.

1. AIR 1934 Nag 31 (32).

2. Mohindra Chandra v. Trovlokhi Nath, 1898 CWN 750 (754).

3. Wanda Lai v. Abdul Aziz, AIR 1916 Cal 33 (36, 39) (Holmwood and Imam, JJ.).

4. Gopal Devi v. Ghulam Fatima, AIR 1943 Lah 113 (Tek Chand & Sale, JJ.).

76.8. Thus, it is necessary that misconduct must be the cause of the inducement, and not only one of the various contributory effects.1 The contributory negligence of the subsequent mortgagee might, for negligence of the subsequent mortgagee might, for example, take away the protection conferred by the section-for instance, where the subsequent mortgagee fails to examine the title deeds of his mortgagor,2 even though the mortgage deed makes a mention thereof.

1. AIR 1943 Lah 113 (117).

2. AIR 1933 All 299 (301).

76.9. No change.- We do not think that the above discussion calls for any amendment of the section.



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