The Doctrine of Subrogation under The Transfer of Property Act

Introduction

The Transfer of Property Act of 1882 is a significant law from the nineteenth century. The primary goal of this Act is to make the transfer of immovable property a public transfer system. Registration is necessary to complete the transfer. Property is a wide phrase that encompasses a thing’s value as well as the ownership exercised by the owner. It encompasses a person’s property rights. In different legal systems, the term subrogation has varied meanings. The doctrine of subrogation is derived from Roman law.

Subrogation is defined as the substitution of one person or thing for another, and as a result of this change, the same rights and obligations that applied to the original person or thing apply to the substitute person or thing. As a result, it merely entails putting oneself in another’s shoes.

The doctrine of subrogation gives the insurer the right to benefit from the assured’s rights and remedies against third parties in accordance with the loss, to the degree that the insurer has indemnified and made good the damage. As a result, the insurer has the right to utilise whatever rights the assured has in order to recover compensation for the loss to that degree, but it should be done in the name of the assured.^[1]

 Section 92 in The Transfer of Property Act, 1882 states the Doctrine of Subrogation.

The doctrine applies to the following persons:

1. A person has an interest in the mortgaged property or has any right of redemption.
2. Any creditor of the mortgage.
3. A co-mortgagor.
4. It includes a  mortgagor’s surety redeeming the mortgage.^[2]

The following are the essential aspects for a legitimate subrogation claim:

1. The person claiming the right must have an interest in or charge on the mortgaged property that entitles him to redeem the mortgage.
2. He has till the end of the month to pay off the mortgage.
3. A person must have given money to a mortgagor in order to redeem a mortgage, with an agreement in writing that he will be subrogated to the rights of the mortgagee whose mortgage is discharged.

The essence and scope of the doctrine of subrogation were defined by the Calcutta High Court in Bisseswar Prasad v. Lala Sarnam Singh (1910) 6 Cal. LJ 134 : “The doctrine of subrogation is a doctrine of equity jurisprudence. It does not depend upon the privity of contract, express or implied, except in so far as equity may be supposed to be imported into a transaction and thus raise a contract by implication. It is founded on the facts and circumstances of each particular case and on the principles of natural justice.” ^[3]

According to Broomfield, J., in the case of Isap Bapuji Amiji’ v. Umarji Abhram Adam, the retrospective effect should be used as a guide for determining what equitable rules are not inconsistent with the Act should be adopted as valid in India in cases where there is a conflict of authority. Whereas according to N.J. Wadia, J., Section 92 of the Transfer of Property Act, as amended in 1929, has a retrospective effect.^[4]

Historical Perspective

Stringer V. The English and Scotch Marine Insurance Co. was the first English case to use the term “subrogation.” The plaintiffs in this case insured a ship cargo with the defendants for the ‘taking at sea, arrests, restraints, and detention of all Kings, princes, and people.’ The ship was eventually captured by a US cruiser and transferred to New Orleans, where a lawsuit for its condemnation was filed. The plaintiffs successfully challenged the action, and the captors appealed. The plaintiffs were compelled to provide security for fees, which they could not pay. As an outcome, the ship was condemned, and the plaintiffs filed a formal notice of cargo abandonment, requesting that the insurance compensate them for their whole loss. The court stated that the plaintiff, as the assured, had the option of contesting the appeal in an American court or claiming a loss under the policy. The insurers were forced to pay because the assured picked the latter. The insurers were entitled to be subrogated to them after they had paid. They’d take whatever they could from the Americans for their own profit.’

Subrogated rights do not arise from an indemnity contract, according to both Canadian and English law. It arises as a result of the common law’s application to the relationship. Subrogated rights do not emerge under common law until the insured is completely compensated for its loss. Once full indemnity has been paid, the insurer has the right to file suit in the insured’s name against the offender and make all legal judgments. In situations like giving evidence at trial, the insured has a duty to cooperate in the action.

The ideas of subrogation established by equity were accepted and welded into common law in the case of London Assurance Co. V. Sainsbury. The common law played a significant role in shaping the future of this equitable theory.^[5] In the case of Deering v. Winchelsea, the Court of Exchequer concluded that ‘bottom of contribution’ is a permanent principle of justice that is not established in contract: His contribution is regarded to be based on equity, with no mention of a contract. In a Court of Equity, the principle is more obvious than in a Court of Law. At law, the party is dragged before an Audita Querela or Seire Facias in order to stop the execution and compel execution against everyone.

The court explained the basis on which courts of law could justify the adoption of equitable norms in the sphere of contribution in Craythorn V. Swinburn. If there are co-sureties under the same instrument, and the creditor requires one of them to settle the principal obligation, or any part of it, that surety has the right to call on his co-surety for contribution, either on the basis of equity or contract.

The Doctrine of Subrogation in India

Subrogation is a doctrine founded on ideals of equity, justice, and morality. The basic tenet of the doctrine is that the individual who pays off a mortgage inherits all of the mortgagee’s rights. Even in parts of India where the Act itself did not apply, this notion was rendered applicable. ^[6] Section 92 of the Transfer of Property Act, 1882, recognises and describes the Right of Subrogation.

In the case of Gokuldas V. Puranmal, the Privy Council applied the principle of subrogation to a purchaser of the equity of redemption, holding that Gokuldas was subrogated to the rights of the prior mortgagee whom he had paid off, and that this claim could not be disposed of unless it was redeemed.Gokuldas, the mortgagor’s creditor, bought the equity of redemption at a sale in execution of a money decree and took possession, according to the facts of the case. He paid off a previous mortgagee, but a puisne mortgagee sued him for possession. A mortgagor who pays off a prior debt is not entitled to be subrogated to his creditor’s rights and remedies. This is because, by releasing a former encumbrance he established, he is releasing his own debt to his creditor.^[7]

In the matter of Narain V. Narain, it was established that where the mortgagor redeems the property himself, the doctrine could not be applied. A mortgagor who pays off a former debt is not eligible to be subrogated to his creditor’s rights and remedies. This is because he is discharging his own duty to his creditor by eliminating a prior encumbrance he imposed.

The Madras High Court ruled that when a subsequent mortgagee redeems a prior mortgage, there is no doubt about whether the payment is for the advantage of the mortgagor or the mortgagee. To determine whether section 92 applies, all that is required is to determine whether the individual claiming the benefit of this section was a mortgagee during the time he made the payment.^[8]

Kinds of Subrogation

Section 92 of the Transfer of Property Act, 1882, mentions two kinds of subrogation : (1) Legal Subrogation and (2) Conventional Subrogation.

Legal Subrogation

Paragraph 1 of Section 92 deals with legal subrogation. A legal subrogation occurs as a result of the law’s operation. A legal subrogation occurs when a mortgage loan is paid off by someone who has an interest or charge on the debt, or who is a surety, creditor, or co-mortgagor to safeguard the interest. When a subsequent mortgagee redeems the former mortgagee, a co-mortgagor redeems the mortgage, a surety redeems the mortgagee, or a purchaser of equity of redemption redeems the mortgage, legal subrogation occurs.

The following people can claim Legal Subrogation:

1. Puisne mortgagee: This person is a subsequent mortgagee who redeems a prior mortgage and is entitled to subrogation to the preceding mortgage’s position.
2. Surety: Under section 91, a person who acts as a surety in a mortgage for the repayment of the loan if the mortgagor fails to do so is also entitled to redeem the mortgaged property. When the mortgagor’s surety redeems the property, he becomes subrogated to the creditor’s status and rights.^[9]
3. Co-mortgagor: The co-mortgagor is liable only to the extent of his portion of the debt. He becomes entitled to be subrogated in lieu of the other mortgagor when, in addition to redeeming his own part, he also pays off the other mortgagor’s portion.
4. Purchaser of equity of redemption: There is some ambiguity about whether or not the purchaser of redemption equity could be subrogated. The mortgagor’s equity of redemption is considered his property, which he can sell or transfer. The buyer of such equity becomes the property’s owner.

Conventional Subrogation

Paragraph 3 of Section 92 deals with conventional subrogation. When the individual paying off the mortgaged obligation is a stranger, a traditional subrogation occurs since the stranger has no interest in protecting the mortgaged property. This person repays the loan under the arrangement that he will be subrogated to the rights of the paid-off mortgagee. It’s a subrogation based on a contract. This subrogation agreement can be written and registered, and it can be expressed or inferred.

Conclusion

Overall, when evaluating the applicability of equitable subrogation principles, it is necessary to examine the method in which the insured party is compensated for the loss they have sustained. The existence or absence of subrogation rights can have a considerable impact on the risk profile of a given exposure, especially in the case of large and complicated risks involving several insureds. After a loss, the party gaining charge of the proceedings must use caution in any settlement and ensure that it conforms with its duty of good faith. In terms of the entire claim’s merits, the settlement must be consistent with legal advice.

When a subrogated claim involves damages that are not covered by the policy, there is considerable confusion about who has control of the proceedings and how the proceeds of any recovery should be split between them. The law provides that all securities be given to the surety in order for them to get their claim in full.^[10]

The Supreme Court of India ruled that subrogation rights are only granted by operation of law, not by deliberate agreement. Subrogation, according to the Supreme Court of India, is the assignment of rights by the insured, and so the insurer is not a “consumer” within the definition of the Consumer Protection Act, 1986, and hence is not allowed to file a complaint.

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References:

^[1] Oberai Forwarding Agency v. New India Assurance Co. Ltd. 2002 (2) SCC 407 (India).

^[2] Abigail D’mello, Doctrine of Subrogation – Transfer of Property Act, NEAR LAW(Oct. 24, 2017),  http://kanoon.nearlaw.com/2017/10/24/doctrine-subrogation-transfer-property-act/.

^[3] Priyanka Gupta, Doctrine of Subrogation under Transfer of Property Act, LAW COLUMN (Sept. 4, 2021), https://www.lawcolumn.in/doctrine-of-subrogation/.

^[4] C.R. Nanda, Doctrine of Subrogation, LAW PAGE, https://lawpage.in/property_law/doctrine-of-subrogation.

^[5] Id. at 4.

^[6] Ganesh Lal v. Jyothi Pershad, AIR 1953 SC 1 (India).

^[7] Narain v. Narain, AIR 1931 All 40 (India).

^[8] Nagayya v. Govindayuyar, AIR 1923 Mad 349 (India).

^[9] Supra note 4.

^[10] Law Bhoomi, Doctrine of Subrogation: Meaning, Case laws and Provisions, LAW BHOOMI (Mar.3,2020), https://lawbhoomi.com/doctrine-of-subrogation/.