Exchange in Law of Property

What is Exchange of Property: Transfer of Property Act

Overview

The Contract Act, 1872, enacted in Chap. VII thereof provisions relating to the sale of goods, but No provisions were enacted as to the exchange of goods.

Relevant Provisions 

Text of Section 118

When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing nor 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 manner provided for the transfer of such property by sale.

Meaning of Exchange in Law:

To trade or barter property, goods and/or services for other property, goods and/or services, unlike a sale or employment in which money is paid for the property, goods or services. 

Legal Definition of Exchange 

Exchange is transfer of ownership of one thing for the ownership of another, neither thing or both things being money only. Absence of transfer of possession would not prevent exchange of from being an exchange

When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing nor both things being money only, the transaction is called an “exchange”. 

Examples of Exchange

(a) A transfers house x to B and B, in consideration thereof transfers field y to A. Neither field y nor house x can be said to be the price of the other. The transaction is an. exchange. 7 Cal WN 701 (DB) 

(b) A gives B one hundred-rupee currency note and B gives one hundred rupees in coins in return. In this case also neither of the things transferred can be said to be the price of the other. For the word price, which the vendor can charge at his pleasure for his property Which is capable of fluctuations according to the rise and fall of the market, cannot be applied to the change of one form of money into another form of money, both forms being legal tender. The transaction is therefore an “exchange.” 1 Cal. LR 339 (DB)

Essential Ingredients of Exchange 

Explanation of Essentials of Exchange

When a transaction does not constitute a transfer of property at all it cannot be an exchange. Thus, a transaction which is a family arrangement is not an exchange. As such arrangements are merely acknowledgments of pre-existing state of affairs and do not involve any transfer of property from one person to another. 

Where there is a transfer of ownership by one of the parties only, and not by the other the transaction is not an exchange, as there is mutual transfer of ownership. 

Examples:

(a) Where A and B hold decrees against each other and settle their claims by a document under which A transfers a property to B, and B merely gives up his claim against A under the decree, there is no mutual transfer of ownership and the transaction is not an exchange. 11 Cal. WN 342

(b) Similarly, where A surrenders his leasehold interest to his landlord in consideration of another lease given by the latter of other property, there is no mutual transfer’ of ownership, inasmuch as a surrender is merely acceleration of the reversion and not a transfer of any interest. 6 Cal. WN 905 

(2) Ownership of One thing for the Ownership of Another 

A thing is not necessarily “property.” Things which are res nullinus are not property. It is only a thing which is the subject of ownership by a person that is, in law, “property.” The words “ownership of a thing” in the section are merely equivalent to “property.” But the expression “ownership of a thing” is used instead of the word “property” in view of the words neither thing or both things being money only.” It would be an inappropriate use of words to say “neither property or both properties being money only.” 

Absence of transfer of possession would not be sufficient to invalidate transaction of exchange. There is no bar in law to exchange of land, if due to some reasons, delivery of possession does not take place. 2004 SCMR 1389

Transfer of possession not mandatory for exchange, but only proof of exchange of ownership would be essential. Section 118 of the Transfer of Property Act, 1882 clearly conveys about transfer of ownership of one thing for the ownership of another. It does not speak about the transfer of possession. Even the absence of transfer of possession would not affect the exchange. It is not mandatory for the exchange to prove that the possession was handed over, but actually it is required to prove that the ownership was exchanged between the parties. 

Absence of transfer of possession was not relevant and a valid exchange could not be cancelled, set aside or declared to be illegal merely on the ground that the part), seeking setting aside of the exchange was not delivered the possession of land given to it under exchange. 2000 CLC 769

Examples:

(3) Manner and Mode of Effecting Exchange

The second paragraph of the section provides that an exchange of property can be made in the same manner as a sale of such property.

Inequality between value of exchanged properties is not a valid ground to discard exchange. Merely on account of distinct/unequal value of exchange properties, no restriction could be imposed upon its owners to exchange their properties with each other at their option.

(a) Exchange of movable property:

Thus, where the property is “goods” as defined in the Sale of Goods Act, 1930, an exchange can be effected in the same manner as a sale of goods under that Act, namely, by a contract for the exchange of the goods. Such a contract may be made in writing, or by word of mouth or partly in writing and partly by word of mouth or may be implied from the conduct of the parties.

(b) Exchange of immovable property:

Where the property sought to be transferred by completion of exchange is immovable property, the formalities necessary to be observed under S. 54 for a sale of such property are to be observed. Otherwise no title will pass to the transferee under the transfer. The use of the word “only” in the section excludes the possibility of title being acquired to immovable property within the statutory period by any other process than that laid down in the section. Thus, in the case of tangible immovable property of the value of one hundred rupees and upwards, or in the case of a revision or ether intangible thing, the transfer by way of exchange can be made only by a registered instrument. And in the case of tangible immovable property of a value less than one hundred rupees, a transfer by way of exchange can be made either by a registered instrument or by delivery of the property. 

Difference Between Sale and Exchange 

A sale is a transfer of ownership of property (not being money) for a price, ie., a sum of money which the transferor sets as the value of the property transferred. In other words, a sale may be a mutual transfer of ownership of one thing for the ownership of another, one of such things being the price of the other. An exchange, as defined in this section, is similar to a sale insofar as it is also a mutual transfer of ownership of one thing for the ownership of another, but it differs from a sale in that neither of the things transferred is the price of the other. 

The distinction between a transfer by way of sale and a transfer by way of exchange thus lies in the nature of the consideration for such transfer. If the consideration is the price of the property transferred it is a sale. But if it is property (not being price) then it is an exchange. Distinction between an alienation by way of sale and a transfer by way of exchange, Held, lies in nature of consideration for such transfer.

Distinguishing features between the two types of transactions was that if money was paid or promised or partially paid then transaction was one of "sale" and if no such payment in cash had been made and only two properties had changed hands, then it was an "exchange". 2006  YLR  824 LAHORE

Remedy of Parties to Exchange 

On the completion, by mutual transfer, of the transaction of exchange, the right to the properties, respectively transferred, becomes vested in the parties to whom they have been transferred, and the party who has failed to obtain possession must sue for possession of the property and not for the specific performance of a contract, for a completed transaction of exchange is an executed contract and not an executory one. 

Example:

Where A, one of the parties to a contract of exchange, has performed his part of the contract by executing a transfer of his property to B, the other party, but the latter has not done his part of the contract by executing a transfer of his property to A, A’s remedy is Only to sue B for the specific performance of the contract or for damages for breach of the contract. He cannot sue B for recovery of possession of the property transferred to B.