Exchange and actionable claims

1. Exchange: section 118

When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, the transaction is called an exchange. A transfer of property in completion of an exchange can be made only in the manner provided for a transfer of such property by sale. So an exchange of immovable property worth one hundred rupees or more needs a registered instrument.

• Both sides transfer ownership, not a lesser interest.
• If one side gives money and the other a thing, it is a sale.
• If both sides give money only, it is still an exchange (s.121 deals with it); the words “both things being money only” bring exchange of currency within the chapter.
• Land given in exchange together with a sum of money to equalise values remains an exchange in substance.

2. Rights and liabilities in an exchange: sections 119 to 121

• Section 119. If a party is deprived of the thing he received in exchange, or any part of it, by reason of a defect in the other party's title, then, unless a contrary intention appears, the other party is liable to him for loss caused, or, at his option, to return the thing he received, if it is still in his possession or that of his legal representative or a transferee from him without consideration.
• Section 120. Save as otherwise provided, each party has the rights and is subject to the liabilities of a seller as to what he gives, and of a buyer as to what he takes. All of s.55 is imported.
• Section 121. On an exchange of money, each party warrants the genuineness of the money given by him.

3. Meaning of actionable claim: section 3

An actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.

• Unsecured debts: money due on a promissory note or a loan, arrears of rent already due, the balance payable under a contract, a book debt. A secured debt is not an actionable claim; it travels with the security.
• Beneficial interests in movables not in possession: the right of a buyer to goods not yet delivered, a beneficiary's interest in movables held by a trustee.
• Existent, accruing, conditional or contingent: a claim under a life insurance policy before the insured event, money payable under a contract on a future date, the right to the return of a deposit.

Not actionable claims: a mere right to sue for damages for a tort or breach of contract (which cannot be transferred at all, s.6(e)); a decree (governed by Order XXI CPC); a secured debt.

4. Transfer: section 130

The transfer of an actionable claim, with or without consideration, can be made only by an instrument in writing signed by the transferor or his duly authorised agent. It is complete and effectual upon the execution of the instrument, and all the transferor's rights and remedies, whether by way of damages or otherwise, vest in the transferee, whether notice of the transfer is given or not.

The proviso protects the debtor: every dealing by the debtor with the transferor, such as payment to him, is valid against the transfer unless the debtor is a party to the transfer or has received express notice of it. The assignment of a life insurance policy is governed by its own rules in s.38 of the Insurance Act, 1938.

5. Notice and the transferee's position: sections 131 to 134

• Notice, s.131. Every notice of transfer must be in writing, signed by the transferor or the transferee or an authorised agent, and must state the name and address of the transferee. Notice is not needed to complete the transfer; it is needed to bind the debtor.
• Subject to equities, s.132. The transferee takes subject to all liabilities and equities to which the transferor was subject at the date of the transfer. If the debtor had a set-off or a defence of fraud against the transferor, he may raise it against the transferee.
• Warranty of solvency, s.133. Where the transferor warrants the solvency of the debtor, the warranty, unless otherwise agreed, applies only to his solvency at the time of transfer and is limited, where the transfer is for consideration, to the amount of the consideration.
• Mortgaged debt, s.134. Where a debt is transferred by way of security, the sums recovered are applied first to costs of recovery, then to the amount due under the transfer, and the balance belongs to the transferor.

6. Special cases and exclusions: sections 135 to 137

• Section 135. Every assignee of a policy of insurance against fire by endorsement or other writing has transferred and vested in him all rights of suit as if the contract had been made with him.
• Section 136. No judge, legal practitioner or officer connected with any court of justice shall buy or traffic in, or stipulate for, or agree to receive any share of, or interest in, any actionable claim, and no court shall enforce such a transaction at his instance. The rule prevents officers of the court from trading in litigation.
• Section 137. Nothing in the chapter applies to stocks, shares or debentures, or to instruments which are for the time being by law or custom negotiable, or to any mercantile document of title to goods. These pass under their own laws: the Companies Act, the Negotiable Instruments Act and the Sale of Goods Act.

7. Problem

D owes C Rs 2 lakh on an unsecured loan. C assigns the debt to T by a signed writing. T gives no notice. D, unaware, pays C. T sues D.

Law. Section 130 and its proviso; s.131.

Application. The transfer was complete when the writing was signed, so as between C and T the debt belonged to T. But D paid without express notice, and the proviso protects his payment.

Conclusion. D is discharged. T's remedy is against C, who received money that belonged to T.

How this is examined

Short notes: actionable claim (definition with examples, mode of transfer, notice, s.137 exclusions); exchange (definition and ss.119 to 120). Occasionally a 10-mark question asks to “define actionable claim and explain how it is transferred.” The D, C and T problem is the standard illustration.