Report No. 20
12. 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 draft11 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.
1. Vide para. 7, supra.
2. See Appendix I, clause 6(2)(a).
3. Uniform Laws Annotated (Bogert), Vol. 2A, p. 28.
4. Uniform Laws Annotated, Vol. 2A, p. 30.
5. Section 29 of the Uniform Laws Annotated, Vol. 2, p. 41.
6. (1933) 2 KB 251 (263).
7. Published in 1907.
8. Vide Karflex Ltd. v. Poole, (1933) 2 KB 251; Warman v. Southern Counties Car Finance Corporation Ltd., (1949) 1 AER 711; Mercantile Union Guarantee Corporation v. Wheatly, (1937) 4 AER 713.
9. Pollock and Mulia Sale of Goods Act, 2nd Edn., p. 246.
10. Warman v. Southern Counties Car Finance Corporation Ltd., (1949) 1 AER 711.
11. Appendix 1, clause 6(2)(a).