conveyancing practice was so encumbered with the question of derivative title, that a buyer did not absolutely know whether he was buying an acre of land or a lawsuit. To eliminate these problems, Torrens directed that equity should have no place in the system. In the case of Barry v Heider  , “the Torrens statutes.. have long.. been regarded as in the main conveyancing enactments, and as giving greater certainty to titles to registered proprietors, but not in anyway destroying the fundamental doctrines by which Court of Equity have enforced, as against… registered proprietors, conscientious obligations entered into by them”.
Thus, under general property principles, a valid contract of sale of land should create rights in equity prior to the registration of an appropriate instrument under the Torrens legislation. However, this principle causes problems in respect of the Code. The Peninsular Malaysian system is said, by some, to be characterized by its exclusion of equity. Yet this exclusion is said, by others, to be limited.
This section recognizes the contractual operation of a transaction disregard of whether the dealing is carried out in accordance with the Code or not. s.206(3) has to be read with a clear understanding of s.206(1) and s.206(2) of the Code. S.206 provides that a proper instrument of dealing has to be duly registered. The registration for the dealing must be done using the prescribed form under the Code. However, s.206(2) of the Code further provides for the exception to the s.206(1) where in the case of lien and tenancies no such registration is required. A separate sub-section under s.206(3) specifically emphasises that nothing in s.206(1) shall affect the contractual operation of any transaction relating to alienated land or any interest therein.
The code drew out the matters and effect of land transactions after a registration of the dealing and not before the transaction. Matters regarding to transactions or contracts arising before the registration are not governed by the Code. Therefore, the presence of s.206(3) is very important. When a purchaser has fulfilled his side of the contract he acquires a right which is also a right. In other words, a purchaser who has entered into a valid contract but is yet to register it can only sue the vendor on his personal basis based on the contract. However, once he acquires a good title to the land through registration he has the right to sue any party for any infringement of his rights in the land. Not fulfilling any of the requirements for a valid contract would certainly postpone the right of the parties in contract and thus fail the land transaction. Again, though the Code is said to be a comprehensive code, nevertheless, there are a certain stages of land transaction that are not covered by it.
The recognition of equity in s.206(3), where the foundation of equitable estoppels is either a contract or the existence of some fact which the legal owner is estopped from denying even though it does not provide for any proprietary interest arising from the contract. It is implicated that any land contract would create a kind of land interest. Thus, in case of a breach of the contract, the innocent party would be entitled for a kind of relief that is just and reasonable in the eyes of the law and according to equity. In charge transactions relief outside the Code should be offered to parties who are not qualified to pursue their remedies under the Code.
Section 206(3) could be used to assert that in the absence of illegality indulging the contract the court has the discretion to enforce the terms of the contract. In Malaysia, the basic elements of justice were described by Salleh Abas J His Lordship said, “The principle is an equitable principle created for the protection of a person who has expended money because of his reliance upon the encouragement by the other. It is because of his reliance upon the encouragement by the other. It is because of the expenditure and encouragement that the parties are brought into a legal relationship.”
It is generally accepted that s.206(3) merely provides an space for the parties in the contract to sue. However, the latest development in the law has seen efforts to fully utilise the potential scope of application of this section. For example, the contractual remedy resulting from breach of contract is now extended to the breach of obligation. In the event of a breach for a valid land contract the usual remedy is a ‘specific performance’ which is provided under the English equity. Specific performance is a discretionary remedy which is also granted subject to others factors. For example, s.21(2)(a) of the Specific Relief Act, the court may refuse to grant the relief of specific performance to the plaintiff if it involves unforeseeable hardship for the defendant. However, damages in equity will be granted when the court chooses not to grant specific performance or the specific performance per se is not enough to give justice to the case. A pre-requisite for the remedy is the presence of an enforceable and valid contract to operate upon. The basis for specific relief in land contract is equity in cases where the common law damages are found to be insufficient. The main objective is to provide justice for the parties in contract.
In other words, since the Torrens system only recognises registered title and interest, equity remains a basis for relief in the pre-registration stage of transaction. How far this principle is adopted in the Malaysian land system remains uncertain, yet the use of ‘contractual operation’ under s.206 (3) may give room for equitable principles to operate together with the registration system as a basis of providing justice to the parties in the contract.
In the case of Templeton & Ors v Low Yat Holdings Sdn Bhd & Anor  , Edgar Joseph Jr J held that s.206(3) grants statutory authority for a liberal interpretation of equity whenever there is a basis for that. Thus, it is important to determine what the bases for the liberal application of equity are. Certainly, Joseph Jr J did not suggest the free and unqualified application of the principles of equity, more so since they are originally British. Therefore, it was concluded that s.206(3) of the Code provides statutory authority for the liberal application of equity whenever there is a basic for that.
Another important issue is whether s.206(3) undermines the concept of indefeasibility of title, which stands as one of the main feature of Torrens system. Tracing the effect of registration, its objective is to give indefeasibility to any registered title. As an indefeasible title, the validity of the title cannot be challenged unless under few grounds as provided by the Code. The question whether s.206(3) allows an unregistered interest or right to be influential on any indefeasible right or not invites dispute. According to Judith, the effect of s.206(3) is to show that there is a marked difference between the unregistered registrable interest and the unregistered unregistrable interest. Thus, to maintain that equitable principles can be used to protect the unregistered unregistrable interest will not certainly defeat the objective of the Torrens system. It is submitted that in any system, there should be a provision that prescribes the right of any interest which does not comply to the law. Therefore, the interpretation of s.206(3) with an emphasis on any contractual elements should not be perceived as one of the ways to defeat the concept of indefeasibility of title ascribed by the Torrens system.
Krishnadas & Ors v Maniyam  , despite the guarantee from the state, s.206(3) has preserved the contractual obligations or an claim to strike a balance to the indefeasibility of title under the Torrens system. Thus, despite being a registered proprietor, an owner is still bound by personal equitable obligations. The recognition of the in personam exception is an example of the emerging application of equity within the statutory provisions. In the area of contract law, unconscionability as well as fiduciary relationship are always used as a basis for an claim. Peh Swee Chin SCJ in has made an effort to explain this concept. According to him, the expression of ‘remedy’ does not appear to be fully realised semantically. The preposition ‘in’ means ‘against’ in Latin, so that the expression simply means a relief granted against a person personally, and that, most often, is an injunction, mandatory or otherwise, enforceable by imprisonment for contempt for its default. One side s 206(3) does create a danger to the concept of indefeasibility under the Torrens system. The court can give a plaintiff the status of ‘legal’ owner of the land or a person who possesses an interest in the land, even though the plaintiff does not comply with the statutory requirement under the Code. At this occasion, the question of security and certainty of the system is set aside. What has to be addressed here is this right of claim. It should be emphasized that the claim is actually in line with the concept of the registration system. Although an claim is derived from equitable principles, it works outside the registration system. Its existence serves the purpose of protecting the right of the unregistered party. It is submitted that any system which makes registration compulsory requires the law to express clearly the position of an unregistered interest. This prerequisite may work hand in hand in the Torrens system as a way to protect the right of the unregistered or unregistrable interest. Thus, equity and s 206(3) serve to complement the defect arising under the strict registration system of the Torrens. There is a need for other alternative systems to complement the present system. Thus, as far as land contract is concerned, s 206(3) should not only serve as a statutory recognition for any contractual operation relating to land. The time has come to widen the scope to include the application of equitable principles as long as those principles support the aims and objectives of the Torrens system.