When, how a power of attorney should be used4 min read . Updated: 26 Apr 2009, 09:36 PM IST
When, how a power of attorney should be used
When, how a power of attorney should be used
Imagine you have been trying to sell your house for a very long time and have finally landed a good deal. Unfortunately, the buyer insists on completing the sale on dates when you are scheduled to travel! This is a perfect example where a power of attorney, or a PoA, as it is popularly known, can be the answer to your problem.
A PoA functions on the principle of an “agency" where the PoA holder, that is, the person to whom the power is given, is authorized to perform certain acts on behalf of the PoA grantor, and such authorized acts by the PoA holder will have the same effect as if done by the PoA grantor himself. Consequently, the PoA grantor is bound by the acts of the PoA holder in relation to transactions with a third party. PoAs are widely used both by corporate entities and individuals for various purpose such as applying for consents and approvals and dealing with governmental authorities in relation to these, getting property registered, incorporation of a company, execution and registration of documents and so on.
An oft-debated point is the “irrevocability" of a PoA, that is, whether a PoA once granted can be withdrawn/cancelled. Contrary to common perception, by merely calling a PoA an “irrevocable PoA", it does not become irrevocable. Legally, the terminology used in a PoA has little bearing on whether the PoA is revocable or irrevocable. Under Indian law, a PoA executed in favour of a PoA holder where the PoA holder holds/acquires an interest in the property which is the subject matter of the PoA itself cannot be revoked or terminated, if the same is prejudicial to the PoA holder’s interest. This principle would apply irrespective of whether the PoA states that it is irrevocable. The courts give due consideration to the terms of the document and the course of dealing between the parties in determining the interest of the PoA holder in the subject matter of the PoA. Until such time that the PoA holder has an undischarged interest or obligation in its favour, the powers granted under the PoA cannot be revoked by the PoA grantor. Conversely, a PoA that only authorizes the PoA holder to perform certain actions in the name of the PoA grantor can be revoked at any point in time by the PoA grantor, irrespective of the PoA stating that it is irrevocable.
To illustrate, if a developer has developed a piece of land on behalf of a landowner (under the terms of a PoA granted by the landowner) and also holds ownership rights along with the sole selling rights for such built-up space, then it could be argued that the developer has acquired an interest in the underlying property. Accordingly, any revocation of the PoA would be to the detriment of the developer and such PoA would fall within the category of an irrevocable PoA.
Compare this to an escrow mechanism used by parties selling and purchasing shares. What could happen here is that the seller and the purchaser simultaneously deposit the sale shares and the sale consideration, respectively, with an escrow agent, authorizing the escrow agent through a PoA to carry out the sale transaction on completion of certain agreed conditions. In this case, the escrow agent is merely holding the shares in trust and does not have/acquire any interest in the sale shares or the sale consideration. If the seller revokes the PoA in favour of the escrow agent, then though the revocation would constitute a breach of the contractual terms agreed between the parties, it will nevertheless be binding on the escrow agent and the escrow agent may lose its ability to sell the sale shares to the purchaser. The situation is not altered by the fact that the PoA is stated to be an irrevocable PoA.
However, in a case where PoAs are executed for a stipulated time period, and such PoA is revoked before the specified time, then the PoA holder may pursue action against the PoA grantor for unilateral termination, without sufficient cause.
It is important to note that for being a legally valid document, each PoA is required to be compulsorily executed on appropriate value stamp paper and should also be notarized/authenticated. A related question that often arises is whether a PoA is required to be registered or not. The answer to this lies in the terms of the PoA. For example, if a PoA merely authorizes the PoA holder to sell the immovable property on behalf of the PoA grantor and does not result in creating, declaring, assigning, limiting or extinguishing any right, title or interest in favour of the PoA holder in the property, then the PoA would not be required to be compulsorily registered.
However, if the intention of the parties is to transfer/convey property under the guise of a PoA, then the document is not only required to be stamped at a higher rate, as a conveyance deed, but also requires registration.
Send your comments to firstname.lastname@example.org This column is contributed by Amrita Patnaik of AZB & Partners, Advocates & Solicitors.