(1) This second appeal is directed against the decree and judgment of the learned Additional City Civil Judge, Madras, in A. S. No. 201 of 1955, confirming the decree and judgment of the learned 4th Additional Judge of that Court in O. S. No. 390 of 1952.
(2) The learned advocate for the appellant Mr. N. R. Raghavachariar raises an interesting point of law which is not covered by direct authority. It arises from the wide-spread business to-day of hire-purchase agreements.
(3) The suit, out of which this second appeal arises, relates to a cinema projector set, the particulars of which are given in the hire-purchase agreement Ex. A-1, a standardised form of hire purchase agreement1 in English to which the parties conversant with English have subscribed dated 25-8-1949, entered into between the plaintiffs as owners, the first defendant as the hirer and the second defendant as the guarantor. The agreement stipulates for the payment of Rs. 8,156/- as instalments of hire for twelve months and provides for an option by the hirer to purchase at the end of the hiring on payment of the hire.
The agreement is made subject to the conditions annexed thereto and condition No. 6 empowers the owners to terminate the contract of hiring and recover possession of the machinery in certain contingencies, one of which being default in payment of hire and condition No. 8 provides that upon such recovery of possession of the machinery the owners are entitled to collect from the hirer all arrears of hire and other sums due to them up to date with interest and that the hirer shall also be liable for damages, if any, for breach of contract. Ex. A-2 is the proposal for hire-purchase. Exs. A-3 to A-5 show that the machine was old by the first defendant to the plaintiffs and Ex. A-10 shows that the payment of instalments was to start only from 10-11-1948 after the sale price hand been paid.
The documents filed also show that there was default in the payment of even the first instalment, whereupon the plaintiffs made demands under Exs. A-11 and A-12 in response to which a sum of Rs. 600/- was paid on 21-11-1948 (vide Ex. A-13). Again there was default in the payment of the balance of the first instalment and the second instalment in respect of which demands were made under Exs. A-14 to A-17 and there was a further part payment of Rs. 400/- on 26-12-1948 (vide Ex. A-18). The plaintiffs pressed for payment of the balance and threatened to take back the machinery (vide Exs. A-19 and A-20) and finally authorised their representative to take possession of the machinery on 2-4-1949: vide Ex. A-21.
The second defendant wrote Ex. A-22 dated 15-4-1949 stating that the first defendant was not in Arkonam and that he would come to Madras on return and again in reply to Ex. A-23 to wrote Ex. A-24 dated 5-5-1949 to the same effect and finally the plaintiffs after a demand for a telegraphic remittance under Ex. A-25 authorised their representative under Ex. A-26 dated 15-9-1949 to seize the set. The first defendant wrote Ex. A-27 dated 15-9-1949 admitting default and stating that he had already on 3-4-1949 handed over some parts and that he would deliver the other parts on 17-9-1949 at Arkonam and that he would pay the balance within three months and thereafter the machinery may be returned to him.
This was followed by a telegram Ex. A-28 dated 16-9-1949 which asked the plaintiffs not to proceed to Arkonam and another letter dated 17-9-1949 in which the first defendant states that he would pay the money by the 25th and then followed Ex. A-31 dated 6-8-1950 in which the plaintiffs intimated that they had authorised their representative to take possession of the remaining parts. After exchange of lawyer notices, the suit was filed for recovery of Rs. 2,100/- being the arrears of hire rentals, charges and expenses and interest for taking possession of a portion of the hired properties and for the return of the remaining hired properties or their value Rs. 1,000/-.
(4) The case for the first defendant was: The agreement alleged by the plaintiffs is in fact and indeed only a hypothecation document to secure the repayment of Rs. 7,000/- borrowed by him from the plaintiffs. The amount claimed by the plaintiffs is only the balance due under the hypothecation bond. The suit as laid on the basis of plaintiffs being the owners of the machinery is unsustainable, because in truth and in law the right of the plaintiffs is only that of hypothecatees.
(5) Both the Courts below came to the conclusion that the suit had been laid not on a hypothecation bond but on a hire-purchase agreement and decreed the suit. The defeated defendants have preferred this second appeal.
(6) The controversy whether Ex. A-1 is a hire-purchase agreement as it purports to be, or a hypothecation bond, arises from the fact, as pointed out by Wiltsie on Mortgage Foreclosure, including Law of Mortgages, Fifth Edition (U.S.A.) page 4, that 'modern financing has adapted the old device of mortgage security to meet completely new situations. These situations are varied and bear little resemblance to each other. Their sole common characteristic is the employment of the mortgage device... They are all mortgages theoretically susceptible to the same rules of foreclosure. Theoretically the debt is still the core of the transaction; the pledge is still no more than collateral'. But at the same time these situations are varied and one cannot be confused for the other.
(7) In order to distinguish between a hypothecation of movables and a hire-purchase agreement, we must bear in mind the following characteristics of mortgage of movables and hire-purchase agreement, culled out from the standard treatises on the subject.
(8) The too frequent and indiscriminate use of the word 'hypothecation' has given rise to confusion. It has been used as synonymous with a mortgage bond, a pledge a mortgage of movables and even a simple mortgage of immovables. To none of the above transactions does this word in its true significance apply. It is confused with the word 'hypotheque' which resembles a simple mortgage in which immovable property is assigned to a creditor for debt although he is not in possession of it. Hypothecation is a species of pledge known to the Contract Act, where possession is transferred from the pawner to the pawnee. Borrowed from the Roman Civil Law, there are hardly any cases, either in English or in Indian law, relating to hypothecation. The origin of the word is lost in obscurity. It is more commonly used in Maritime Law, for example bottomry bonds and cases relating to wages and remuneration of seamen in the merchant service who have a claim against the ship in rem. Even these strictly speaking, are not hypothecation. As distinguished from a mortgage or pledge, it confers only an enforceable right against a vessel for necessities supplied to the Master under stress. Unlike a mortgage it does not transfer any interest in the property nor is it dependent as a pledge upon actual possession. In view of the unsettled state of authorities, both English and Indian, on the subject, it was observed in Manmohan v. Kesrichand ILR 62 Cal 1046, that the use of this word should be abandoned as being equivocal, and therefore, dangerous. The word is used in the definition of 'actionable claim' in S. 3 of the T. P. Act, perhaps in reference to mortgages of movable property.
(9) Mortgage of movable properties is not governed either by the T. P. act or by the Contract Act and there is no other statutory provision to govern them corresponding to the Bills of Sale Acts in England; Flory v. Denny (1852) 7 Ex 581. According to the English Law such a mortgage may be effected without writing and the registration is in no way compulsory: Kalka Prasad v. Chandan Singh ILR 10 All 20 See Gour: Law of Transfer, Seventh Edn., p. 952. Mortgages of movables are created by way of security for repayment of loans. At times they are followed by possession and at others they are not accompanied by any delivery of possession.
Regarded in the nature of hypothecation known to English Law, the validity of such mortgages has been recognised in India and sometimes enforced even against bona fide purchasers without notice. With regard to priority in mortgages of movables, the goodwill of a business, though not mentioned, passes, the maxim, qui prior est tempore potior est jure, applies: See Darashaw on Transfer of Property Act (1938 Edn.) pp. 471 and 472.
(10) Turning to hire-purchase agreement, its characteristics can be gathered from the following:
Pereira's Law of Hire and Hire-purchase including Credit sale, Second Edn. pp. 2 and 3:
'By a contract of hire-purchase is meant a contract which, in addition to the terms of hire, provides that on the payment of rent for a certain period, or for a certain number of times, or on the payment of a certain sum after such payment of rent or at some time during the hiring the property in he goods hired shall (or may) pass from the owner to the hirer. Since the decision in Helby v. Matthews (1895) A. C. 471, the expression 'hire-purchase agreement' has in the legal profession generally meant an agreement to hire with an option to purchase. It was not, however, until the passing of the Hire Purchase Act, 1938, a legal term of art and was frequently loosely used to describe contracts, which were agreements to purchase by instalments at the conclusion of a period of hire, as well as those which merely gave the hirer an option to purchase, whether by payment of a lump sum or by completion of the instalments.
These two forms of agreement are in reality essentially different as will be seen later when the legal struggle which culminated in the decision of the House of Lords in (1895) AC 471 comes to he discussed, although many of the terms of the agreements are frequently similar. Where there is an absolute binding obligation to buy, although only by instalments, then the contract is in essence a contract of sale, and the property passes either on delivery or at a time intended by the parties, and the so-called hirer (really a purchaser) can pass a good title under certain circumstances. Where there is only an option to purchase by the hirer at his election then the contract remains in essence a contract of bailment. It is really immaterial what the agreements are called, however, as it is for the Court to determine what the real nature of the contract is and to look to the substance of it and not the words.'
Halsbury's Laws of England, 3rd Edn., Vol. 19, pp. 510-511:
'The contract of hire-purchase is one of the variations of the contract of bailment, but it is a modern development of commercial life, and the rules with regard to bailments, which were laid down before any contract of hire-purchase was contemplated, cannot be applied simpliciter because such a contract has in it not only the element of bailment but also the element of sale. At common law the term 'hire-purchase-properly applies only to contracts f 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 hire-purchase contracts is, however, a most important one, because 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 pledges 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 in 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 over, the contract not being an agreement to buy within the Factors Act, 1889, or the Sale of Goods Act, 1893. '
6 American Jurisprudence at p. 200 (S. 38):
'Contracts which may be classified as bailments with privilege of purchase frequently provide, either absolutely or contingently, that payment shall be made for the use of the property during the term of the bailment or until the exercise of the privilege of purchase.
'Where it appears from the contract that the party who receives possession of goods receives them under an agreement that he is to retain them for a definite period, and that if, at or before the expiration of that period, he pays for them, he is to become the owner, otherwise to pay for their use, the transaction is merely a bailment, and title to the property, even as against creditors, remains in the bailor until the price is paid.
'It is also generally recognised that a bailment with privilege of purchase, as distinguished from an absolute or a conditional sale, may be created by a contract whereby personal property is let for hire or 'leased' for a term of use, with the further provision that upon the payment of a certain amount by the so-called lessee, title to the property shall vest in him.
'Frequently, however, such contracts appear to involve elements both of conditional sale and of bailment, and it is often a matter of difficulty to determine to which class the transaction belongs. The guiding principle, of course, is the intention of the parties as ascertained from the whole transaction, considered with reference to the object sought to be achieved, rather than drawn merely from the language used................:' (Herryford v. Davis, (1880) 102 U. S. 235 : 26 Law Ed. 160; Hervey v. Rhode Island Locomotive Works (1877) 93 U. S. 664 : 23 Law Ed. 1003).'
The essential distinction between hire-purchase agreements and transactions under English Bills of Sale Acts, covering mortgages of moveable, is well brought out in Fisher and Lightwood's law of Mortgage, Seventh Edn. p. 58:
'Hire-purchase agreements, by which a tradesman or manufacturer agrees to hire out a chattel to a customer at a certain rent, with a proviso that if the rent is punctually paid for a certain period, then, and not till then, the chattel shall become the property of the customer, do not fall within the Acts. Although substantially these agreements are intended to enable a man to sell goods on credit, while retaining a security on the chattel for the price, they are nevertheless not bills of sale within the meaning of the Acts, as the goods remain the property of the manufacturer or tradesman, and the power to retake them on default is not a power to seize as security for a debt. The essence of the validity of these transactions is that the property in the chattels does not pass to the purchaser until the money is paid. There is, therefore, no security created on the debtors' goods. Where on the contrary, there is a sale of goods passing the immediate property to the purchaser, and then a provision for payment of the purchase money by instalments, and interest is charged on the unpaid purchase money, the document is a bill of sale, and unless (as would seem to be impossible) it complies with the conditions of the Act, it will be void in toto.'
The Indian case law on hire-purchase agreement is thoroughly sparse and has been collected in a valuable monograph recently published by the Law Company, Allahabad 1958 under the title R. B. Sethi's law of hire and Hire Purchase wherein the learned author has discussed the following cases: Bhimji N. Dalal v. Bombay Trust Corpn. Ltd. : AIR1930Bom306 : Mahabali Prasad v. H. N. Palmer : AIR1932All607 ; Auto Supply Co. Ltd. v. Raghunatha Chetty, AIR 1929 mad 884; Balmakund v. Mahesh Narayan Singh ; S. S. Tiwari v. Remington Rand incorporated ; Anand Singh v. Commercial Credit Corporation Ltd. AIR 1935 Lah 861; Manikchand v. Berar Motor Supply Co. AIR 1938 Nag 18. These constitute one staple Indian Case Law on the subject.
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 used in a wider sense to include agreements 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.
(11) Bearing these principles in mind, if we examine the facts of this case, there can be no doubt that the instant case is a case of hire-purchase agreement. The learned appellate Judge has rightly pointed out:
'These are several circumstances to show that Ex. A. 1 is really a hire-purchase agreement as it purports to be. Both in chief-examination and in the re-examination P.W. 1 deposed that the plaintiffs-corporation do not lend moneys but only take hire-purchase agreements. Nothing was elicited in cross-examination to discredit his statement. The plaintiffs sent several letters stating that they would take steps to repossess the machinery on account of the defaults committed by the first defendant.
But the first defendant did not question the right of the plaintiffs to do so or put forward a plea that Ex. A-1 was only a mortgage. Thus, in Exs. A-19, A-20 and A-25 the plaintiffs have threatened to take possession of the Cinema set. The plaintiffs have sent Exs. A-21 and A-26 giving notice that they authorised their representative to take possession of the set. The first defendant put forward the plea that Ex. A-1 really represented a mortgage transaction for the first time in his advocate's reply notice Ex. A-33.'
(12) In this connection, both the Courts below have rightly examined the following three decisions throwing light on the latter. In Yorkshire Railway Wagon Co. v. Maclure (1882) 21 Ch. D 309 it was held that the transaction concerned in that case was not a borrowing of money but a bona fide sale, Lindley, J. observed at page 317:
'I understand the view that the learned Judge took was this, that the transaction of hire was a mere device or cloak to conceal a loan if that had been the view I took of the facts I should have come of course to the same conclusion. I should disregard or throw aside the cloak, and look at the real transaction alone. But for reasons I will give presently I am satisfied that the purchase and hire transaction was the real transaction, in this sense--that the parties meant it to operate according to its tenor as comprised in the deeds. It was not intended by them as a mere blind or cloak for something behind, it was a transaction substituted for another but bona fide substituted, and intended to be acted upon according to its purport and apparent effect.'
It is clear from the above observations that if the agreement was only a device or cloak to conceal a loan, it would be open to the Court to ascertain the real transaction. Manchester Sheffield and Lincolnshire Railway Company v. North Central Wagon Co. (1888) 13 AC 554 supports the contention that where the respondents have taken possession of the plaint C Schedule properties in the exercise of the rights reserved to them, the agreement was at an end and that the first defendant cannot claim to redeem the said properties.
In : AIR1930Bom306 it was pointed out that in construing a hire-purchase agreement the substance of the agreement must be considered as a whole, not the substance apart from the language used, nor the mere word divorced from the substance, but the substance which must be gathered from the true meaning of the language in which it is sought to be expressed. This has been done here.
(13) In the result, this second appeal, totally devoid of merits, has got to be dismissed and is hereby dismissed with costs.
(14) Appeal dismissed.