Hire-purchase and distinction between hire-purchase agreements and credit-sale contracts

Legislation in England

The hire-purchase agreement represents a fairly modem phase in the development of commerce. In England when the Sale of Goods Act, 1893, was enacted, it had not acquired such importance as to call for special legislation, though it was fairly well-known in the world of business. But subsequent thereto, as a result, it is stated, of large-scale production of goods and competition among the manufacturers to find a market for them, there had been an enormous expansion of business on the hire-purchase system, and attendant thereon, there appeared certain evils, which are brought out in great detail in the proceedings in Parliament relating to the enactment of the Hire-Purchase Act, 1988 (1 and 2 Geo. 6, c. 53) known as Miss Wilkinson’s Act.

“Hire-purchase agreement” means an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement; and includes an agreement under which–
(i) possession of goods is delivered to another person, on condition that he pays an agreed amount in periodical instalments, and (ii) the property in the goods is to pass to such person on the payment of the last of such instalments, and (iii) such person has a right to terminate the agreement at any time before the property so passes;

Hire-purchase price” means the total sum payable by the hirer under a hire-purchase agreement in order to complete the purchase of the goods to which the agreement relates;

Thus, a hirer who wanted to terminate the agreement, could do so only on payment of a minimum amount, which in many cases was penal and exorbitant. The hire-purchase agreements conferred on the owner power to seize the goods, when default occurred in the payment of any instalment, and this power was often exercised, even after substantial payments had been made by the hirer, with the result that the latter forfeited all the payments made and lost the goods as well. It also appeared that not seldom persons entered into successive hire-purchase agreements with reference to different goods and the later agreements provided that for the amounts payable thereunder, the goods covered by the earlier agreements were also liable, and, as a result of this linking up, those goods were also seized when there was any default in payment of any of the instalments due under the other agreements, even though all the hire payable in respect of those goods had been paid. Miss Wilkinson’s Act was enacted with a view to removing those and other defects. The provisions of this Act were supplemented by the Hire-Purchase Act, 1954 (2 and 3 Eliz. 2, c. 51).

Legislation in other countries

In Australia, every State has its own legislation on the subject of hire-purchase agreements, the latest being an Act of the State of Victoria of the year 1959. The provisions of these Acts are designed to give relief to the hirer against harsh and unconscionable terms in the agreements. Hire-purchase agreements form a substantial segment of American business. In 1918, the National Conference of Commissioners on Uniform State Laws compiled the “Uniform Conditional Sales Act”, with reference to hire-purchase agreements, and that has, in general, been adopted by many of the States, while some of them have their own legislation on the subject. While taking into consideration all the above materials, we have adapted the English Acts of 1938 and 1954 as the basis for the present draft, introducing therein such alterations as would seem to be called for in the conditions prevalent in this country. And these we proceed to explain.

Scope of the English Acts

At the very outset it should be stated that the English statutes aforesaid do not purport to codify the law on the subject of hire-purchase agreements. They merely enact certain provisions intended to give relief to hirers against penal terms in the agreements and against oppressive conduct on the part of the owners. All other matters relating to the agreement, however, such as whether the parties thereto had the capacity to enter into it, whether there was free consent for it, whether it is bad as being illegal, immoral or opposed to public policy and the like, are governed by the ordinary law relating to contracts. Our proposals are, likewise, not intended to be exhaustive of the law on the subject. There purpose is only to define and regulate the rights of the owners and hirers and of persons claiming under them in certain circumstances. In all other respects, the agreements will be governed by the law in force relating to contracts. In other words, it is not proposed by this legislation to codify the law relating to hire-purchase agreements, but only to amend it.

Sales on credit

The Hire-purchase Act, 1938, applies not only to transactions of hire-purchase but also to certain sales on credit. One of the questions which we had to determine was, whether the present legislation should be limited to hire-purchase agreements, or whether it should extend also to credit-sale agreements. In England, the term hire-purchase is applied to denote not only transactions which are hire-purchases strictly and properly so-called, but also credit-sale agreements, that is, agreements to purchase goods under which price is to be paid by instalments and the title is to pass only when all the instalments are paid.1 There is, in law, a well-defined distinction between agreements of hire-purchase and credit sales. A hire-purchase agreement is a form of bailment. The hirer is given the right to purchase the goods on certain conditions. That, however, is an option, not an obligation to purchase. The hirer may elect to purchase the goods, and when he does that and fulfils all the conditions prescribed in the agreement, the title to the goods will pass to him. But he may elect not to do so, and in that event he is entitled to return the goods and terminate the agreement in the manner provided therein. In an agreement of credit-sale on the other hand, the purchaser has no right to terminate it at his option. If he did that, he would be in breach of the contract and would be liable, in law, in damages, vide Lee v. Butler, (1893) 2 QBD 318; Helby v. Matthews, 1895 AC 471; Auto Supply Co. v. Raghunath Chetti, ILR 52 Mad 829. In Halsbury’s Laws of England, the distinction between hire-purchases and credit-sales is stated to be that “under the latter type of contract there is a binding obligation on the hirer to buy and the hirer can therefore pass a good title to a purchaser or pledgee dealing with him in good faith and without notice of the rights of the true owner, whereas in the case of a contract which merely confers an option to purchase there is no binding obligation on the hirer to buy, and a purchaser or pledgee can obtain no better title than the hirer had, except in the case of a sale in market overt”.

Hire-purchase agreements and credit-sale contracts being thus fundamentally different in their character and in their legal incidents, the question is whether the present legislation should apply also to the latter. The argument in support of their inclusion is, that the two classes of agreements have so many features in common, that it may not always be possible to distinguish between them, that if these transactions are excluded from the operation of this legislation, it will be easy for the owner to circumvent it by disguising hire-purchase agreements under the trappings of credit-sale agreements, and the legislation will be bereft of much of its utility. That, no doubt, is a result which must be avoided. But the question to be considered is whether, for achieving this object, it is necessary to bring credit-sale agreements within the purview of this legislation. There should be no difficulty in distinguishing an agreement of hire-purchase from a credit-sale agreement, when it is understood that the cardinal point of distinction between the two is whether the so-called hirer or purchaser has an option to purchase or not. If he has not such an option, then it can only be a credit-sale agreement. The fact that the price is payable by instalments or that the title is to pass after all of them are paid, are matters on which the parties are free to enter into their own agreement, vide section 19(1) and section 32 of the Sale of Goods Act, 1930, and cannot affect the character of the transaction as an agreement of sale. Nor is it material how the parties label the transaction or whether the instalments to be paid are described as hire or rent or as price. It is the substance of the transaction that determines its true character, and if on a reading of the agreement it is found that the purchaser has no option to withdraw from the contract, then it can only be construed as a credit-sale agreement.

Credit-sale agreements are now governed by the Sale of Goods Act, 1930, which is a self-contained code defining the rights of parties, and the inclusion of these agreements within the purview of this enactment must lead to complications and result in confusion. It may be mentioned that though credit-sale agreements are within the purview of the English Hire-purchase Act, 1938, the only sections that are made applicable to them are sections 3, 5(e) and 6. Section 3 prescribes the formalities to be complied with when a credit-sale agreement is entered into; section 5(e) provides that the owner is liable for the acts or defaults of his agents in connection with the formation or conclusion of a credit-sale agreement; and section 6 imposes on an owner an obligation to supply to the other party, on demand, a copy of the agreement and a statement of particulars relating thereto. Thus they all relate to matters of form and not of substantive rights of the parties under the agreement, which will be governed by the Sale of Goods Act, 1893. It is true that in some of the Australian States the provisions of the Hire-Purchase Acts applicable to credit-sale agreements refer not only to formalities but also to substantive rights. But even among these States, the law varies “owing”, it has been said, “to the divergent opinion of Governments on the control which should be exercised over this type of contract”.3 The conditions of business in this country do not seem to require any special control over credit-sale agreements, the provisions of the Contract Act, 1872, and the Sale of Goods Act, 1930, being ample to give relief to purchasers under credit-sale agreements; and in this respect we have preferred to follow the precedent of the English Hire-Purchase Acts, 1938 and 1954, to the enactments in some of the Australian States. While circulating the draft Bill for opinion, we had sent a questionnaire in which one of the questions was whether credit-sale agreements should be included within legislation. The opinion is overwhelming against such inclusion. We have therefore decided to exclude them from this legislation. If it should become necessary at any time, owing to the exigencies of business, to enact legislation for granting relief to purchasers under credit-sale agreements, that should, in our view, be more appropriately done, by inserting special provisions in the Sale of Goods Act, 1930.

There is, however, one aspect of the matter which may be cleared up. Some of the hire-purchase agreements contain a provision that on payment of all the instalments the hirer might exercise his option to purchase the goods, while others merely provide that on payment of the instalments the title will automatically vest in the hirer. A doubt was expressed whether the latter kinds of agreements could be classed as hire-purchase agreements, because on payment of the last instalment title will pass to the hirer, without his having to exercise any option. But the essence of a hire-purchase agreement is the option on the part of the hirer to purchase the goods, that is, the right to withdraw from the transaction at any time, and where that option is granted to the hirer, it would not affect the character of the transaction as a hire-purchase agreement, whether the title is to vest automatically on the payment of all the instalments or whether the hirer has to express his intention to become the owner. With a view to clarifying the position, we have defined hire-purchase agreements so as to cover all agreements under which the hirer takes the goods on bailment and under which he could either purchase the goods or terminate the agreement, at his option, whether the title is to pass to him on payment of the instalments and fulfilment of the conditions automatically or on the further exercise of option by the hirer.

Maximum limit for application of the Act

We should refer to another point on which the present draft differs from the English Act. The Hire-Purchase Act, 1938 as amended in 1954, does not apply to agreements in which the hire-purchase price exceeds, in the case of live-stock. £1,000, and in other cases, £300. We have considered the question whether we should likewise impose a maximum pecuniary limit on the transactions to which this legislation should apply. There is, among the opinions received, some support for the view that the Act should be restricted in its application to hire-purchase agreements below a certain pecuniary limit. But as against this, it has been urged that this country has just entered on an era of industrial expansion, that hire-purchase transactions would greatly facilitate such expansion and that therefore we should not impose any such restriction. The main ground on which the demand for prescribing pecuniary limit was based had reference to the provision in the draft which was circulated that the owner could not seize the goods in case of default, when one-third of the hire-purchase amount had been paid. It was said that this provision would act harshly on the owner, when high-priced goods such as trucks and lorries were given on hire-purchase agreements. This objection loses much of its force, now that we have provide1 that the owner cannot exercise his right to seize the goods otherwise than through court where the hire-purchase price exceeds Rs. 15,000 when three-fourths thereof had been paid, and where it is Rs. 15,000 or less, when half of it had been paid. This provision will give, in our opinion, sufficient protection to the owner. To bar the application of the Act altogether when the hire-purchase price exceeds a limit would, in our opinion, impede the expansion of industrialisation, and we have accordingly decided that the legislation should apply to all hire-purchase agreements, whatever the amount payable thereunder.

Assignment by hirer

The Hire-Purchase Act, 1938, is silent on the question of assignment of hire-purchase agreements, which will therefore be governed by the Common Law. According to that law, in a contract of bailment pure and simple, the bailee gets no property in the goods, and he has therefore no right to transfer them by sale or pledge. But a person, who has an option to purchase goods, has a kind of proprietary interest therein, and that is capable, in law, of being transferred, unless there is a prohibition against it in the agreement.

As a hire-purchase agreement is a composite transaction involving elements both of bailment and of sale, the validity of the assignment of the rights thereunder or of the goods comprised therein must be judged on the principles stated above. It has accordingly been held that when the hirer assigns his rights under a hire-purchase agreement, the assignee succeeds to all his rights and his obligations, vide Whitley v. Hilt, (1918) 2 KB 808. and that that is the position even though there is a restriction on the right to assign the goods, vide Belsize Motor Co. v. Cox, (1914) I KB 244;1 but that where there is in the agreement a prohibition against assignment thereof, a transfer of the goods by the hirer conferred no rights on the assignee, vide Trust Commercial Ltd. v. Parkway Motors Ltd., (1955) 2 AER 557 In the draft which was circulated for opinion it was proposed that, notwithstanding any restriction contained in the agreement, a third person who obtains bona fide a transfer of the goods from the hirer without any notice of the hire-purchase agreement should have the same rights and be subject to the same obligations as the hirer, and that should be without prejudice to the rights of the owner as against the hirer and his surety. But as there was some opposition to this proposal, we decided, on reconsideration, to drop it. The result is that, under this legislation as under the English Act, when there is an assignment of a hire-purchase agreement, the rights of the parties will be governed by the general law. To this, however, we have provided one exception,1 departing, in that particular, from the English Act. It is that the hirer could assign the agreement, notwithstanding any prohibition contained therein, if the owner unreasonably withholds his consent thereto. Such a provision is to be found in the Australian Acts, and is calculated to do justice. It might happen that a hirer who had made considerable payments under a hire-purchase agreement may not be in a position to go on with it, either because he is in financial difficulties or because he wants to close down his business. In such a case if he can assign the agreement, he will have a chance of realizing at least part of his investments. But if there is a prohibition against assignment in the agreement, and that is to be strictly enforced, he would have no option but to surrender the goods and lose all the payments made. A provision such as the one now proposed to be inserted would give relief to the hirer in such cases, while the owner will not be prejudiced thereby as he can insist on all the amounts due to him being paid before the assignment is recognised, and further, neither the hirer nor the surety is discharged from their obligations to him under the agreement by reason of the assignment.

Insolvency of hirer

An allied question which calls for consideration is as to the rights of parties when the hirer is adjudged insolvent. According to the law of England, goods which are in the possession of the insolvent in trade or business on the date of the petition with the consent of the true owner and under such circumstances that he is the reputed owner thereof, would vest in the Official Receiver and be divisible among the creditors. Under this doctrine, hire-purchase goods will also pass to the Official Receiver, provided, of course, the other conditions are satisfied. Section 16 of the Hire-Purchase Act, 1938, provides that where the Court postpones the operation of an order for the specific delivery of goods under the Act, then the goods shall not be treated as being in the possession of the insolvent with the consent of the true owner. Subject to this exception, the general law as to reputed ownership will apply to hire-purchase goods in the possession of the hirer. The result is that the owner loses his property, his only right being to prove in insolvency for the value of the goods. Vide, Ex parte Haviside, Re Button, (1907) 2 KB 180.

Now, the doctrine of reputed ownership is a serious invasion on the rights of an owner, and the tendency of the Courts in England has been to limit its application within narrow limits. A series of exceptions have been recognised on the ground that it is the well-known custom of a particular trade that the goods in the possession of the trader are taken by him under a hire-purchase agreement, and that that excludes reputation of ownership in the hirer. Thus, when the proprietor of a hotel was adjudged insolvent the furniture therein was held not to have passed to the trustee-in-bankruptcy, as it was a notorious custom of the trade that hotels were furnished on hire-purchase system, and similar decisions have been given in respect of several other trades.1 An attempt to get out of the mischief of the reputed ownership doctrine has sometimes been made in England, by inserting a clause in the agreement, that the consent of the owner to possession by the hirer will stand revoked when he commits an act of insolvency. If this provision is valid, then the goods would cease to be in the possession of the hirer with the consent of the owner and the reputed ownership clause will not apply. The validity of this clause, however, has not been tested in Courts.

The doctrine of reputed ownership forms part of the law of this country, and, therefore, goods in the possession of a hirer, taken on a hire-purchase agreement, will vest in his assignee in bankruptcy. The question is, whether the law as to reputed ownership requires to be changed, insofar as it applies to goods which are covered by hire-purchase agreements. In our opinion, it does. It is common knowledge that having regard to the exigencies of modern business, many traders carry on with goods taken on hire-purchase system, and accordingly the foundation on which the doctrine of reputed ownership rests has practically no existence. The following observations in “Williams on Bankruptcy” are illuminating:—

“In considering the decided cases on reputation of ownership, the widespread prevalence in recent times of the practice of obtaining on hire-purchase almost all goods must be borne in mind. Reputation is a matter necessarily dependent on the habits of society and varies therewith, and the extension of the hire-purchase system has already considerably reduced the efficacy of the reputed ownership clause.”1 We accordingly recommend that a provision may be inserted in the Insolvency Acts, to the effect that goods taken on hire-purchase system are not subject to the doctrine of reputed ownership. So far as the Hire-purchase Act is concerned, it would be sufficient to provide that the Official Receiver shall have the same rights and obligations in respect of them as the hirer had.

We think that the Official Receiver should be authorised to assign the hirer’s rights under the hire-purchase agreement, even if there is a prohibition in the agreement against such assignment. The reason is, that the Official Receiver, very often, might not have sufficient funds for paying the instalments of the hire-purchase price and would find it more convenient to transfer the rights to a third person. We have accordingly provided that the Official Receiver might assign the hire-purchase agreement with the permission of the Court, notwithstanding any prohibition contained therein.1

 Condition of Title

Section 8(1)(b) of the Hire-Purchase Act, 1938, provides that in a hire-purchase agreement there shall be implied a condition that the owner will have the right to sell the goods at the time when property is to pass. This provision was adopted in the draft which was circulated, but in the questionnaire which we issued we called for opinion, as to whether we should provide that the owner should have the right to sell even at the date of the agreement. Quite a large number of opinions was received, and they revealed a sharp conflict. Though the majority opinion was decidedly in favour of the provision in the draft, out of deference to the opinion contra, we re-examined the question from all points of view, and came to the conclusion that there was no need to depart from the view embodied in section 8(1)(b) of the English Act, 1938, which we had adopted. We now proceed to state the grounds of our decision.

The matter may be considered under three heads: (1) nature of the transaction; (2) the law of hire-purchase as adopted in other countries; and (3) the consequences of adopting one view or the other, on the rights of parties, and on the prospects of the business.

(1) Nature of the transaction.—A hire-purchase agreement is, as already stated,1 a composite transaction, made up of two elements—bailment and sale. Viewing it as a contract of bailment, the question of title is wholly foreign to it, the bailee being estopped from disputing the title of the bailor. There is in such a contract no covenant for title, but the bailor is liable to the bailee for any loss which may result by reason of the fact that he is not entitled to make the bailment. Then there is the element of sale. In a contract for the sale of goods simpliciter, the condition as to title operates at the time when the property is to pass and not when the agreement is made, vide section 12(1) of the English Sale of Goods Act, 1893, and section 14 (a) of the Indian Sale of Goods Act, 1930. The rights of a hirer under a hire-purchase agreement cannot be higher than those of a purchaser under an agreement to sell, because it is only when the hirer exercises his option and fulfils all the conditions laid down in the agreement that he becomes entitled to call upon the owner to convey the property in the goods to him. It would, therefore, be logical to provide that the condition as to title should operate in a hire-purchase agreement, as in an agreement of sale, only when the property is to pass. What purpose is served by insisting that the owner should have title even at the date of the agreement, if in fact the hirer may not choose to purchase the property, or may be unable to do so? Having regarded, therefore, to the nature of the transaction, it would seem proper to provide2 that the owner must have title only when the property is to pass.

(2) Law in other countries.—It will be now instructive to examine the law on this question in countries where hire-purchase transactions have been largely in vogue. In the Australian States, the law as to condition of title is the same as under section 8(1)(b) of the English Act, 1938. In America, section 2 of the Uniform Conditional Sales Act which applies to hire-purchase agreements contains the following as regards the rights of the hirer or the intending buyer:—
“The buyer shall have the right when not in default to retain possession of the goods, and he shall also have the right to acquire the property in the goods on the performance of the conditions of the contract.”

The commentary on this section runs as follows:—

“The section states the fundamental rights of the conditional buyer, recognised everywhere, namely, the right to possession when not in default, and the right to title on performance of the condition”3 Then again, “the buyer has the right that title to the goods shall pass to him the instant he performs, or tenders performance of, the conditions precedent to the passage of property”.4 Subject to these provisions, the general law relating to sales applies.5 Thus the law “recognised everywhere” insists only on the owner making out title at the time when the property is to pass.

It must be mentioned that in Karflex Ltd. v. Poole, (1933) 2 KB 251, Goddard J., as he then was, took a different view. There, the hirer having defaulted in the payment of instalments, the owners seized the goods and sued for compensation as provided in the agreement. On the facts it was found that the plaintiffs had purchased the goods from a person who had got them by theft, and that accordingly they had no title to them at the date of the agreement, and even at the date of the action. There was in that agreement an express condition that the owner had title to the goods at that time, and in view of that, it was held by the court consisting of Acton and Goddard JJ., that as there was a breach of the condition as to title on which the agreement was based, no claim for compensation based on that agreement could be maintained. So far this decision is no authority for the proposition that apart from agreement there is to be implied in hire purchase agreements a condition that the owner had title at the date of the agreement. But Goddard J., after basing his conclusion on the terms of the agreement, went on to observe that “where a person is letting out chattels of any description on hire-purchase, he does thereby impliedly contract, not that he will at sometime become possessed of that property during the currency of the agreement, but that he is the owner of the property at the time when he lets it out”.6 No authority in support of this view was cited in the judgment or in the argument, nor is any such statement of law to be found in the English decisions or authoritative text-books or in Halsbury’s Laws of England,7 First Edition, Volume 1, pages 554-556, where this subject is dealt with. The precise scope of the observations in Karfiex Ltd. v. Poole, quoted above, came up for elucidation before the same learned Judge, in Mercantile Union Guarantee Corporation v. Wheatly, (1937) 4 AER 713 (718). There the owner had not acquired the goods on the date of the hire-purchase agreement, but before they were actually put into the possession of the hirer he had acquired them. The hirer having committed default, the owner sued him for damages and was met by the plea that by reason of the defect in title at the date of the agreement the suit was not maintainable, and the decision in Karfiex Ltd. v. Poole was relied on. Goddard J., observed that he adhered to his statement of the Law in Karfiex Ltd. v. Poole, but that decision had no application because “the material time was when the bailment took place, not the actual moment of signing the agreement”. The bailment no doubt took effect when possession was given, but the right to possession arose under the hire-purchase agreement. It was that agreement that fixed the rights of parties and that came into force when it was signed. It is understandable that a condition as to title should be implied at the date of the agreement, though it would be more logical to imply it when the title is to pass. But it is difficult to see how if a condition as to title is not to be implied at the date of agreement, it could be implied at the date of bailment. With respect, it would be a mismatch to link up a condition as to title with bailment. It is unnecessary to pursue the discussions, further because, shortly after these decisions, the English Hire-Purchase Act was passed in 1938, and the view that the condition of title operates at the time when the title to the goods is to pass was adopted. This provision has stood all these years without question, and the law may therefore be taken to be generally accepted that it is sufficient if the condition operates when the title is to pass.

(3) Effect on rights of parties.—We may now consider how the adopting of one view or the other would react on the rights of parties and the business in hire-purchase agreements. The question can be of practical importance only when the owner had no title at the date of the agreement, but had acquired it before it had to pass to the hirer. In such cases, will it result in hardship or injustice to the hirer, if the condition is that the owner should have title when the property is to pass? There are two different classes of cases with reference to which this question might be considered: (a) Where the transaction of hire-purchase is directly between the dealer and the hirer, and (b) where it is done through a financier.

(a) Taking up, first, cases of direct dealing between the dealer and the hirer, while a provision that the owner should have title at the time of the transaction would in general work satisfactorily in such cases, it is conceivable that it might work hardship in some cases. The reported cases show that the owner not infrequently acquires goods bona fide and for consideration in the full belief that he is getting good title, but eventually it turns out that the person, who sells them to him has had himself no title.81 In such cases, if he is able to acquire title from the true owner before it is to pass to the hirer, no hardship is likely to be caused to the hirer. The acquisition, of title by the owner in the interim period would be effective to protect all his rights under the agreement. It should also be borne in mind that where the owner is unable to acquire the title at the time when the title to the goods is to pass, it will make no difference in the position of the hirer or in the quantum of his rights whether the condition for title operates as on the date of the agreement or on the date on which the title is to pass. He has the right to claim damages for breach of the agreement to convey property, and all monies paid under the agreement would be returnable by way of damages. Where there is a simple agreement to sell goods and the seller is unable to convey title, the law is that, “in addition to recovering the difference between the market and contract price on that date, the buyer may also recover the price pre-paid with interest”.9 Vide also Rameshwardas Poddar v. Paper Sales Ltd., AIR 1945 Born 21. The position is the same when the owner in a hire-purchase agreement is unable to pass title when the hirer becomes entitled to it. It was so decided in Warman’s case,10 where it was further held that the hirer was not even liable on the principle of quantum meruit to pay reasonable hire for his enjoyment of the property. Therefore, in this class of cases, a provision that the condition should operate as on the date when the title is to pass is not likely to result in any injustice to the hirer. On the other hand a provision that the condition is to operate on the date of the agreement will result in injustice to a bona fide dealer who has himself been deceived and has incurred further expenses in acquiring a good title.

(b) Then there is the second class of cases in which hire-purchase agreements are entered into through financiers. It appears that large scale and wholesale dealers do not carry on business on hire-purchase system because that would oblige them to deal in second-hand goods, and throw additional burden on them in having to maintain a branch for hire-purchase business. That is how financiers become an essential factor in hire-purchase business. We must now examine how the financiers conduct the business. A financing company starts with some capital, but that will be too small to enable it to purchase from the dealer all the goods which it proposes to give on hire. If every financing company were required to find its own funds for acquiring goods from dealers, the business of hire-purchase will cease to be paying, especially having regard to the risks with the hirers. What the company actually does is to adopt one of two courses. It arranges for overdraft with some bank, purchases the goods from the dealer on payment of the full price, and gives them, on hire-purchase, the bank being given a general security over the agreements. In this class of cases the financier becomes the full owner, and that presents no problems. But there is another mode by which finance companies do business. They do not pay the full price of the goods to the dealer, but take them under an arrangement which gives them the right to immediate possession and the right to purchase them in due course, but the title to the goods does not pass to them at that time. When in turn the financiers enter into a hire-purchase agreement with the hirer, they lawfully transfer to him the right to immediate possession and the right to purchase the goods which on fulfilment of all the conditions they themselves have. In practice, the amounts received by the financiers from the hirer are in turn paid over to the dealers, and by the time the hirer qualifies himself to obtain a purchase by payment of all the instalments, the financiers would have obtained a clean title to the goods. If we are now to provide that the condition as to title should operate as on the date of hire-purchase agreement, we would be striking at this class of business. Now a good portion of the business in hire-purchase system is said to be carried on in this mode, and what is more, the consumer goods are mostly dealt with in this manner. The object of this legislation being the expansion of industrialisation, that object would clearly be defeated if we are to provide that the condition as to title should operate as on the date of the agreement.

It may be argued against the above mode of business that it may result in serious injustice to the hirer, because it might happen that though he has paid all the instalments regularly to the financier, the latter might make default in paying them to the dealer, and that the latter would then seize the goods in the hands of the hirer. We consider that if regard is had to the normal course of business, this objection will be found to be groundless. Financing, as a regular business, is done not by individuals—because it will be beyond their capacity—but by companies who have a subscribed capital, and carry on business in accordance with rules. They provide a regular machinery to collect the instalments and pay them over to the dealer. The company itself being liable to the dealer for the value of the goods, it is inconceivable that the instalments received by it would not be paid by it to the dealer. It is again an important factor to be taken into account, that the dealers have themselves a controlling hand in the management of the companies, and it is by reason of this fact that they extend to them the facilities of delivering goods with a view to being dealt with under hire-purchase agreements. That being the recognised course of business, the possibility of the dealer seizing the goods of the hirer in opposition to the financiers is a mere theoretical possibility, far removed from the realm of actualities. It should be added that if the hirer is in fact deprived of the goods by the dealer for the defaults of the financier, he is in law entitled to damages from the latter. Thus, whether we view the question as a matter of law or as a practical proposition, the hirer cannot suffer if the condition as to title is to operate when the property in the goods is to pass, whereas if it is to operate on the date of the agreement, it is bound to result in the closure of a large section of the financing system.

Then it is said, that if the condition as to title is to operate not at the date of the agreement but when title is to pass, that would result in fraudulent transactions by persons who do not own properties. The position must be examined. A has in his possession goods which do not belong to him. Then he enters into a hire-purchase agreement with reference to them fraudulently, that is to say, with the knowledge that he has no title to them. In that case, the hirer B will be unable to acquire the title even though he pays all the instalments, and he might also be deprived of the possession of the properties by the real owner. B is thus damnified, and has to proceed against A to recover compensation. This, it is said, should be prevented. But then the question is, can this be prevented by providing that the condition should operate not at the date when the title is to pass but at the time of the agreement? Exhypothesi we are dealing with a person who wants to commit a fraud. Is such a person scared away from his fraudulent schemes by a provision in the statute that the condition of title operates at the time of the agreement itself? It would make no difference to him whether it operates at the date of the agreement or at the time of the passing of title, because he has no thought of giving a good title at any time. Thus a provision that the condition should operate on the date of the agreement will have no effect on a fraudulent person, but may hit hard a bona fide dealer.

To sum up, the provision in the draft that the owner should have the right to sell when property in the goods is to pass is in consonance with the character of the transaction. It has been adopted as law in other countries. While this provision cannot result in any injustice to the hirer, a provision that the owner should have title to the goods on the date of the agreement might work hardship on bona fide dealers and hamper the growth of hire-purchase business. The preponderance of opinion, especially of Governments, of Chambers of Commerce, and of other mercantile interests, supports our view.

SOURCE AND ADOPTED FROM : The Law of Hire-Purchase- Law commission of India Report no 20 (June 19, 1961)

Categories: CIVIL

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