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Report No. 20

5. 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".2

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.

1. Halsbury's Laws of England, 3rd Edn., Vol. 19, p. 510, para. 823.

2. Halsbunfs Laws of England, 3rd Edn., Vol. 19, pp. 510-511, para. 823.

3. See "Australian Mercantile Law", by Yorston and Fortescue, 9th Edn., p. 196.

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