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Report No. 168

Questionnaire on Law of Hire-Purchase

Since law operates in a society, social ethics and values do play an importants role in the framing, operation and implementation of laws. Customary laws, codes and legislation quite often consolidate the prevailing norms of a given society. Cases are not, however, uncommon in which legislation provides for or embodies new rules of law which create rights and obligations different from the norms prevailing in the society. Commercial transactions form one set of such legislation in which new rights and obligations may be created for the parties. It needs no mention that whenever a society which is primarily an agricultural society transforms into an industrialised society commercial or business law is needed.1

1. A.G. Guest The Law of Hire-purchase (London, 1966), p.1

Viewed in this context, despite rapid developments of industries in India and despite a general acclaim that India ranks in the top ten industrialized countries of the world, it still remains basically art agricultural society and a large chunk of its population still lives in villages which are far away from the aura or influence of industrialization. Industrialization and commercial activities in India were strengthened by the British-rulers which were designed and devised for safeguarding the economic interests of our colonial masters.

Industrialization in Europe started long back and it has passed through centuries as of today. England occupied a leading position in the race of industrialization 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.

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 when the Singer Manufacturing Company began to offer to housewives and others the opportunity of acquiring sewing machines on "hire and purchase" terms. The precedent thus set was quickly followed by the vendors of furniture pianos and other household consumer goods.

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.

The words 'hire-purchase' are frequently used in general discussion to denote all forms of instalment trading. There are in fact, two classes of instalment contract in common use, the hire-purchaser agreement and the credit sale agreement. A hire-purchase agreement usually provides 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 consumer has paid all the instalments he shall become the owner of the goods.

It is also customary that 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. The 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 price.

Industrialisation and commercial activities in India were introduced by the British rulers which were designed and devised for safeguarding the economic interests of our colonial masters. The advent of hire-purchase transaction in England was subsequently introduced into various colonies of Great Britain depending on the economic and commercial development in the colonies. India was no exception. Disputes involving hire-purchase transactions in India perhaps reached the court in the first quarter of the twentieth century. Perhaps the first important reported case is that of A Cecil Cole v. Nanalal Moraji Dave, AIR 1925 Born 18 in which Justice Martin observed:

"Now the very expression "hire-purchase agreement" is not one that originated in this country. It is clearly a form of an agreement which has originated in England and has been created by those engaged in the trade of particular articles. Substantially in this country there is little or no authority on hire-purchase agreement...."

Similarly, in the case of V. Dakshinamurthi Mudaliar v. General and Credit Corporation (India) Ltd., AIR 1960 Mad 328 the Madras High Court, inter alia, observed as follows:-

"To sum up, the law of hire and hire-purchase stems from the law of contract of which it forms an important segment. It is comparatively modern in origin and is designed to serve the needs of credit buying while at the same time protecting the vendor from being caught in the meshes of the law relating to sales stricto sensu. In effect hire-purchase is bailment with an option to purchase though it is sometimes where there is an irrevocable agreement to buy in instalment terms with the proviso that the-title shall not pass until the instalments are paid.

A hire-purchase agreement thus creates a bailment but is a bailment plus an option to purchase. The transaction is compounded of the element of both the law of hire and sale and it would be clearly wrong to assimilate it to a hypothecation of moveable property."

During the past few decades there has been a mushroom growth of hire-purchase transactions in India. The growth of hire-purchase transactions and the complexities surrounding such transactions perhaps prompted the Law Commission to undertake a study of the subject. The Commission made an in-depth study of the subject and submitted its 20th Report on "The Law of Hire-Purchase" in May 1961. The Commission also appended a Bill to its report on the Hire-Purchase. The Indian Parliament enacted the Hire-purchase Act, 1972 following the recommendations of the Law Commission.

The Government of India by G.S.R. 228(E), dated 13-4-1973 notified that the Act will come into force with effect from 1-6-1973. A number of companies which were carrying on hire-purchase business or financing of hire-purchase transactions made representations to the Government pointing out certain deficiencies in the Act and requested for postponement of decision of the enforcement of the Hire-purchase Act.

This resulted into the issuance of notification G.S.R. No. 288 (E), dated 31-5-1973 rescinding the earlier notification and appointing 1-9-1973 as the date on which the Act would come into force. Meanwhile Shri R.T. Parthasarathy, M.P. who was the Chairman of the Joint Committee which examined and reported upon the Hire-Purchase Bill wrote a letter dated 10-8-1973 to the Minister in the Ministry of Law and Justice pointing out certain anomalies in the Act. As a result G.S.R. No. 402(E), dated 30-8-1973 was issued rescinding the operation of the Act from 1-9-1973 as notified earlier.

The Report dated April 24, 1987 of the Committee on Petitions, Rajya Sabha relating to the question of bringing into force the Hire-Purchase Act, 1972 noted the said state of affairs and recommended that immediate steps be taken to notify and implement the Hire-Purchase Act, 1972 without any further delay.

In due course, the Ministry of Law &. Justice prepared a comprehensive Amendment Bill for the amendment of the Hire-Purchase Act which was introduced in the Rajya Sabha on the 5th May, 1989. A copy of the Bill is annexed hereto for ready reference. In pursuance of the rules relating to the Department related Parliamentary Standing Committee, the Chairman of Rajya Sabha referred the Bill to the Committee on Home Affairs for examination and report. The Committee considered the Bill and heard the representative of Ministry of Law, Justice & Company Affairs.

The Committee vide its 21st Report dated August 7, 1995 recommended that Government may consider referring the whole issue of hire-purchase to the Law Commission for an in-depth examination, keeping in view the observations of the Committee and thereafter bring in a fresh comprehensive legislation on the subject before Parliament, as expeditiously as possible. Accordingly, the subject of hire-purchase was referred by the Government to the Law Commission for an in-depth examination.

The Law Commission has thoroughly examined the Act and the Amendment Bill. The Commission is of the opinion that the Hire-purchase Act enacted in 1972 was based upon the 20th Law Report submitted by the Law Commission, which was prepared under the Chairmanship of Justice Shri T.L. Venkatrama Iyer-one of the greatest judges produced by this country. The report was prepared after extensive consultations.

The basic framework of the Act is sound and needs no change. Indeed, no one asked for such a total change. It is fairly simple and capable of being understood by the persons likely to be governed by it. (The changes and additions now proposed by the Law Commission make it more simpler, as would be evident from what follows). Only the trading community had raised two objections. The Amendment Bill meets and satisfies the two objections raised by the trading community to the Act.

The formula in sub-section (2) of section 7 has been completely substituted. Certain unnecessary definitions in section 7 have been omitted and certain others amended. However, with a view to simplify and clarify the material provisions of the Hire-Purchase Act, the following changes/amendments are suggested in the Act (as proposed to be amended by the 1989 Amendment Bill).

I. In section 2, the definitions of "contract of guarantee", "hire" and "hire-purchase agreement" need no amendment. However, the definition of "hire-purchase price" in clause (d) requires to be simplified. The present definition, as proposed to be amended by 1989 Amendment Bill, reads as follows:-

"(d) "hire-purchase price" means the total sum payable by the hirer under a hire-purchase agreement in order to complete the purchase of, or the acquisition of property in, the goods to which the agreement relates; and includes any sum so payable by the hirer under the hire-purchase agreement by way of a deposit or other initial payment, or credited or to be credited to him under such agreement on account of any such deposit or payment, whether that sum is to be or has been paid to be owner to any other person or is to be or has been discharged by payment of money or by transfer or delivery of goods or by any other means; but does not include any sum

(i) payable as expenses for delivering the goods to the hirer and the installation thereof, in accordance with the terms of the agreement,

(ii) payable as any fee, in respect of the goods and the agreement, for the purposes of registration or otherwise under any law for the time being in force,

(iii) payable as insurance premium, and

(iv) payable as a penalty or as compensation or damages for a breach of the agreement".

The Hire-Purchase Act, 1972 Back

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