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Report No. 168

1.3.1. Growth of Hire-Purchase transactions.-

Industrialisation in Europe started long back and it has passed through centuries as of today. England occupied a leading position in the race of industrialisation in Europe. Colonisation of Asia, Africa and certain parts of America by the European powers started with the objectives of securing supply of raw materials to their industries and later on markets for their products. The colonial markets, however, were originally not attractive in view of their poverty, backwardness and ignorance. The colonial masters, therefore, had to find alternate markets for their products. One of the novel methods of achieving this object was perhaps hire-purchase and credit sale.

1.3.2. In England, the practice of selling goods on credit, the price being payable by instalments, is of very early origin; but the appearance of hire-purchase as a commercial institution dates substantially to the second half of the nineteenth century. In the industrial sphere, at about the same time, the North Central and British Wagon Companies began to finance the purchase by collieries of the railway wagons needed for the carriage of coal and security for the advances made was provided by hire-purchase transactions. The subsequent advent of the motor-car immensely extended the ambit of hire-purchase, and hire-purchase terms are now available over a large range of consumer durables.

1.3.3. It cannot be denied that whenever a society which is primarily an agricultural society transforms into an industrialised society, commercial or business law is required to be enacted to protect certain rights and interests of parties. The law of hire-purchase differs considerably from the law of sale owing to differences in commercial practice. Thus the existence of codifying Act for sale of goods will not serve the purpose with regard to hire-purchase transactions.

Despite rapid developments of industries in India and despite a general acclaim that India ranks in the top industrialized countries of the world, it still remains basically an agricultural society and a large chunk of its population still lives in villages which are far away from the aura of influence of industrialization. However in metropolitan cities, there is vast increase in commercial transactions through the system of 'hire-purchase'. Such transactions include purchasing of motor vehicles, domestic appliances, and even purchasing of houses/flats. Even the public undertakings are building houses and selling these on hire-purchases basis.

1.4. Concept or Hire-Purchase.-

The words "hire-purchase" are frequently used in general discussion to denote all forms of instalment trading. Two classes of instalment contract are in common use; the hire-purchase agreement and the credit sale agreement (sometimes called a deferred payment sale contract). A hire-purchase agreement connotes that the vendor of the goods will let them and the customer will hire them for a fixed period and will pay an agreed rental by a series of instalments throughout the hiring period; and that when the customer have paid all the instalments he shall become the owner of the goods.

It is also customary that the customer shall have the right to return the goods in good order at any time during the hiring period and to discontinue the hiring, provided that he pays an agreed proportion of the total hiring cost and any overdue instalments. Such transaction is thus a contract of hire with an option to purchase; and until that option is exercised, the vendor remains the owner of the goods.

A credit sale agreement, on the other hand, is a contract of sale which provides that the owner will sell and the purchaser will buy the goods and will pay an agreed price by a series of instalments. Ownership of the goods passes immediately the agreement is signed and the purchaser becomes an ordinary debtor for the several instalments of the purchase price1.

1. H. Simpson Cook, J. Anderson Hermon and H. Pearse Hire-Purchase Accounts and Finance (London, 1959 Edn.), p. 17.

1.4.1. 'Hire-purchase agreement', means1 an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the term of the agreement and includes an agreement under which-

(i) possession of the goods is delivered by the owner thereof to a person on condition that such person pays the 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 Act, 1972, section 2(c)].

1. A.R. Biswas in Mitra's Legal and Commercial Dictionary, 2nd Edn., p. 367

1.4.2. Hire-purchase system is a transaction or system whereby a person agrees to take on hire an article with a stipulation that if he pays certain number of instalments by way of hire, he shall become the owner of that article, on payment of a further sum by way of option of purchase, at his choice1.

1. Venkataramaiya's Law Lexicon, Vol. 1, 1971 Edn., p. 551.

1.4.3. According to Halsburys Law of England1:

"Hire-purchase agreement" means an agreement, other than a conditional sale agreement, under which: (1) goods are bailed in return for periodical payments by the person to whom they are balled; and (2) the property in the goods will pass to that person if the terms of the agreement are complied with and either: (a) the bailee exercises an option to purchase the goods;

(b) any party to the agreement does a specified act; or (c) any other specified event occurs. For the avoidance of doubt it is expressly stated that the person by whom goods are bailed to an individual under a hire-purchase agreement is taken to provide that individual with fixed-sum credit to finance the transaction of an amount equal to the total price of the goods less the aggregate of any deposit and the total charge for credit.

"Conditional sale agreement" means an agreement for the sale of goods or land under which the purchase price or part of it is payable by instalments, and the property in the goods or land is to remain in the seller notwithstanding that the buyer is to be in possession of the goods or land until such conditions as to the payment of instalments or otherwise as may be specified in the agreement are fulfilled".

"The contract of hire-purchase is one of the variations of the contract of bailment, but it is a modern development and the rules with regard to bailments, which were laid down before any contract of hire-purchase was contemplated, cannot be applied without modification because such in contract has in it not only the element of bailment but also the element of sale. At common law "hire-purchase" properly applies only to contracts of hire conferring an option to purchase, but it is often used to describe contracts which are in reality agreements to purchase chattels by instalments, subject to a condition that the property in them is not to pass until all instalments, have been paid.

The distinction between these two types of contracts is, however, a most important one, because under a contract to purchase by instalments there is a binding obligation on the buyer and he 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, the contract not being an agreement to buy within the Factors Act, 1889 or the Sales of Goods Act, 1893."

1. Halsbury's Laws of England, (4th Edn., London, 1979), Vol. 22, para. 37, p. 34.

1.4.4. The same author further explains.1 the nature of hire-purchase contracts as follows:-

1. Halsbury's Laws of England, (4th Edn., London, 1979), Vol. 22, Para. 37, p. 34, para. 209, p. 173.

1.4.5 The similarity between contracts of sale and hire-purchase is accentuated by the artificial nature of most hire-purchase agreements. This is evident by consideration of three points. Firstly, the real object of a contract of hire-purchase is almost invariably the ultimate sale of goods. Secondly, the amount which the hirer is bound to pay under the contract is usually far in excess of that which he would have had to pay if he were really hiring the goods.

And thirdly, the legal purchase price for which the hirer has the option to buy the goods is frequently nominal only and, in fact is sometimes not exacted in practice. There is further a practical complication about hire-purchase contracts which makes them distinct from contracts of sale. A transaction under which a person 'buys' goods on hire-purchase is often and, in the motor trade is usually, a complex transaction involving three and not two parties. Many retailers have no wish to act as financiers themselves supplying credit to consumers.

So a hire-purchase transaction often involves, first, a sale, under which the retailer sells the goods to a finance company, and then secondly, a hire-purchase contract, under which the finance company take the goods on hire-purchase terms to the 'buyer'. It follows that the 'buyer' has no contractual relations with the seller and this sometimes has important legal consequences1.

1. P.S. Atiyah The Sale of Goods (Delhi, 1995), p. 12.

The Hire-Purchase Act, 1972 Back

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