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Research Paper

CONTRACTS - II

LEGAL INCIDENTS OF SALE AND HIRE PURCHASE-JUDICAIL

PRONOUNCEMENTS

National Law School of India University

Submitted by:

AADITTYA J. KANSAKAR

ID no. 1540

BA, LLB 1st Year

Submission Date: 20th DECEMBER 2007



TABLE OF CONTENTS

INTRODUCTION

LEGAL INCIDENTS OF SALE

• AGREEMNT OF SALE

• PASSING OF TITLE

• MONEY CONSIDERATION

LEGAL INCIDENTS OF HIRE-PURCHASE

• BAILMENT

• OPTION TO PURCHASE

• SALE

CONCLUSION

• DISTINCTION BETWEEN SALE AND HIRE PURCHASE



INTRODUCTION

The Sale of Goods Act, 1930 and the Hire Purchase Act, 1972 were passed in

their respective years by due recommendations of the Law Commission Report in their

Eighth and Twentieth Reports respectively. The subject matter of both these Acts came

under the Indian Contract Act, 1872 initially but was later sought to be separated due to

the increase in the complexities which arose from the development of trade and

commerce.

The Sale of Goods Act, 1930 repealed and replaced ss. 76 and 123 of the Contract

Act of 1872. This amendment was needed due to the rise of commerce and increasing

arrears arising in the aspect of sale of goods. The Act of 1930 is largely based upon and

reproduces the Sale of Goods Act, 1893 of England. Thus, it is not surprising that the

principles of the Sales of Goods Act,1930 bears similar principles as its English

predecessor.

The provisions of the Act are set against the background of the general law of

Contract and the personal property and lay down special rules of law which are peculiar

to sale of goods.1 However, the provisions of the Indian Contract Act, 1872 unrepealed

by this act continue to apply to contracts for the sale of goods 2.

With the onset of liberalization, there came an increasing demand for capital. Thiswas accompanied by consumerism in most countries. There was an increasing demand on

the banks and other financial institutions for the easy loan repayments. The basic motive

here was to acquire a good immediately and pay the price later in installments. This

system of repayments in installments came to be known as hire purchase as the buyer had

the right to return the goods and stop paying the installments if he did not intend to

purchase the goods anymore. However, complexities regarding the payment and the

possession of the goods along with other issues arose which led to the inclusion of the

hire purchase agreement initially in the Contract Act of 1872 but later separated into an

individual Act. This Act passed in1972, was known as the Hire Purchase Act.

The paper aims to look at the position of the law in India and in England with

regard to sale of goods and hire purchase. Since the Acts on sale of goods and hire

1Justice K. Ramamoorthy, Mulla Sale of Goods Act , pg. 3 (6th edn.; New Delhi; Buterworths India) 2002.2 Id.



purchase were derived heavily from the English Acts on the same topics, there is not

much difference in the laws. However, any differences in the laws are mentioned therein.

The paper also aims to find the difference between a sale of good contract and hire

purchase agreement. Due to the lack of space, the paper limits itself to the essentials of

both the Acts and not much analysis has been done into the Acts. Also the paper aims to

look at the position of the law in the United States of America. The development of the

acts in India has been traced in the Introduction of the paper while the Sale of Goods Act

and Hire Purchase Act are dealt with in their subsequent headings.

LEGAL INCIDENTS OF SALE



“A contract of sale is a contract whereby the seller transfers or agrees to

transfer the property in goods to the buyer for a price. There may be a contract of

sale between one part-owner and another”3.

The essentials of a contract of sale are as follows.4

1. The parties should be competent to contract.

2. There must be mutual assent between the parties.

3. There should be a thing, absolute or general, which is transferred from the seller to the

buyer.

4. A price in money should be paid or promised.

Agreement of Sale

Graff v. Evans5

In this case, the manager of a club supplied intoxicating drinks to members at a

fixed price without a license. This was not held to be a sale because the members

themselves were the joint owners of the club.

State of Gujarat v. Ramanlal S. & Co.6

A partnership firm was dissolved and the surplus assets, including some goods,

were divided among the partners. The Sales Tax Officer sought to impose sales tax on

this transaction. Bhagawati J. opined that the transaction was not a sale and could not,

therefore, be taxed.

3 Section 4(1) of the Sales of Goods Act.4 P. Ramanatha Aiyar, The Indian Sale of Goods Act 21, (2nd edn., Allahabad; The University Book

Agency) 1961.5 (1882) 8 QBD 373.6 AIR 1965 Guj.60.



Chittoor Motor Co. v. ITO7

A company transferred certain numbers of buses to a partnership firm consisting

of members who were also the members of the company. It was held by the court to be a

sale, as a separate legal entity was involved.

Agricultural Market Committee v. Shaliamr Chemicals Works Ltd.8

A contract as to the dispatch of goods from Kerala to Hyderabad was agreed

upon. The question before the court was whether the sale took place in Kerala or in

Hyderabad for the imposition of sales tax in the appropriate state. The Court held that

since the parties intended the sale to be completed by dispatch, the State of Kerala had

the power to impose the sales tax. Thus, an agreement of sale must be consensual. In the

absence of such consensus of any party, no contract of sale is formed, but a quasi-

contract of sale or implied contract of sale is formed.

It is evident from the above cases, that there should be an agreement to sell the

goods for the Contract of sale to some into force. A mere distribution of drinks at a fixed

price to members of a club or the transferring of property on the dissolution of a firm

cannot be termed to be a sale as there is no such agreement to sell the goods. Also, very

important is the issue of the completion of a sale. The Supreme Court in its decision in

the case of Agricultural Market Committee v. Shaliamr Chemicals Works Ltd has clearly

stated that the sale shall be completed as stipulated in the contract, and if the sale is to be

deemed as completed after the goods are transported to a certain place from where they

shall be picked up, the sale shall be held to be completed at the place where it has been

transported.

7 AIR 1966 SC 570.8 (1997) 5 SCC 516.



Passing of Title

Collector of Customs v. Pednekar & Co.9

The respondents held an import license for industrial sewing machines. They

ordered some goods and pledged them to a buyer, who helped the respondents to secure a

letter of credit and also advanced a certain sums of money. The custom authorities

confiscated the goods, treating it as an actual sale, as the buyer did not have the

appropriate license for an import. The high court rejected the respondent-petitioners plea,

but a Division Bench allowed it. In the Supreme Court, it was held that the transaction

was that of an agreement to sell and not of a sale therefore no passing of the title of goods

had occurred in favour of the buyers as the respondents was the one who had imported

the goods.

United India Insurance Co. Ltd. v. O. Jameela Beevi10

The respondents were the sellers of a lorry who would transfer the goods title to the

buyers on the full payment of the price. However, the lorry met with an accident and thesellers sough to recover from the insurance company. The insurance company however,

contested that the sellers did not hold the title to the goods and therefore could not

recover the insurance claim. The Supreme Court held that the transfer of the title of the

lorry would pass to the buyers only after the full payment of the price and since the

buyers had not paid the full amount as agreed upon, the title of the goods remained with

the buyers themselves.

Popatlal Shah v. State of Madras11

9 (1976) 3 SCC 790.10 AIR 1991 Ker. 380.11 AIR 1953 SC 274.



The petitioner entered into a contract of sale with in the boundaries of the State of

Madras. The transaction was completed outside the same. The Madras Government

sought to impose a Sales Tax upon the transaction under s. 15 of the Madras General

Sales Tax Act, which the petitioner refused to pay. It was held that the sale was

completed only when the property in goods is transferred to the buyer under the terms of

the contract itself and therefore the petitioner was not required to pay the Sales Tax on

the transaction.

Thus, it is evident by the above cases that inorder to constitute a sale, it is

necessary for the title of the goods to shift from one person to another. The goods can

transfer from one legal entity to another as well but in case where there has not been any

such transfer, a sale cannot said to have been taken place. The case of United India

Insurance Co. Ltd. v. O. Jameela Beevi also marks a distinction between a Sale of Goods

and Hire Purchase Agreement. However, the issue shall be dealt with later in the paper.

“ Where under a contract of sale of property in the goods is transferred from

the seller to the buyer, the contract is called a sale, but where the transfer of the

property in the goods is to take place at a future time or subject to some condition

thereafter to be fulfilled, the contract is called an agreement to sell”.

12

Thus arises a distinction between a sale of goods and an agreement to sell. The

former passes the title of goods to the buyer instantly while the latter is just a mere

agreement to sell and cannot be constituted to be a sale. An agreement to sell is a contract

pure and simple whereas a sale is a contract plus conveyance. By an agreement to sell a

jus in personam is created, by a sale a jus in rem also is transferred.13 If an agreement to

sell is broken by the buyer, the normal remedy available to a seller is an action for

unliquidated damages. If an agreement to sale is broken by the seller, the buyer has only

personal remedies against the seller as the goods are still the properties of the seller and

he has a right to dispose off them according to his wish. However, if a contract of sale is

12 Section 4(3) of the Sales of Goods Act.13 Supra note 1 at 80.



broken by the seller, the buyer has personal remedies as well as usual proprietary rights

with respect to the goods themselves.

The Instalment Supply Ltd. v. STO Ahmedabad & othrs.14

It was held in this case that in case of an agreement to sell, if the goods are

destroyed or damaged, the loss as a rule falls upon the seller. On the other hand, in case

of a contract of sale, the loss falls upon the buyer irrespective of the fact whether the

goods came in to the buyers possession or not. Other cases which held the rule were

State of Uttar Pradesh v. Mumtaz Hussein15 and State of Himachal Pradesh v. M/s

Motilal Pratap Singh & Co.16

Thus, these lay down the rule for the risk of the goods for both the seller and the

buyer. In case of perishing of the goods or any kind of damage to them under any

circumstances, which is likely to arise in any kind of transaction. It is evident from the

decision that in an agreement to sell, the onus lies largely on the seller for the

preservation of the goods while in case of a contract of sale, the responsibility is on the buyer for the safe guarding of the goods. However, the provision that the buyer shall be

responsible for the goods and bears the risk of its safeguarding even though the goods

have not come into his possession in case of a contract of sale is not a very valid one, as

the seller can misappropriate this right to the detriment of the buyer.

Money Considerations

14 AIR 1962 SC 53.15 AIR 1979 All 174.16 AIR 1981 HP 8.



Aldridge v. Johnson17

52 bullocks were exchanged at 6 pounds a bullock for 100 quarters of barley at 2

euros per quarter. The case dealt with two issues. Firstly the issue of whether such a

transaction, partly in cash and partly in kind was an exchange or a sale. It was decided

that if the consideration is in any form apart from money, it will be an exchange or barter

and not a sale. Therefore the distinction between a sale and exchange is that in the former

the price is paid in money while in the latter the price shall be paid in kind or any other

form apart from money. However, is the price is paid partly in money and partly in any

other form, the transaction shall be held to be one of sale and not of exchange or barter.18

Esso Petroleum Co. v. Commissioner of Customs & Excise19

A petroleum company distributed coins of special curiosity, which did not carry

any money value, along with every 4 gallons of oil. It was held that it was not a contract

of sale because the consideration for the transfer of the coins was not money payment but

the undertaking by the customer by the customer to enter into a collateral contract to

purchase a certain quantity of petroleum. Such a transaction was not held by the court to

be that of a sale but an instance of a collateral contract.

Cases like Empress v. Joggessur Mochi20 and Moss v. Hancock 21 also deal with

the instances of exchange of currency. Such a transaction of exchange of money

including purchase of foreign currency cannot be termed as a sale. 22 However, the buying

and selling of currencies which are no longer in use but are mere “chattels” constitutes a

sale.23

17 (1857) 7 E&B 885.18 Supra note 1. 19 (1976) 1 All ER 117.20 (1878) 3 Cal. 379.21 (1899) 2 QB 111.22 Avtar Singh, Principles of the Law of Sale of Goods & Hire Purchase, (3rd edn., Allahabad; Eastern

Book Company) 1985.23 Id.



Thus, it is clearly stated by the decisions in these cases that money considerations

are important for a contract of Sale of Goods to come into force. There cannot be a sale

in case of exchange of mere goods but if money is transferred even partly, a sale is

supposed to have taken. The English cases mentioned above set the rule for money

consideration in India as well. Though there have been Indian cases on the same issues,

the position held by the English Courts on these issues are taken to be set precedents.

HIRE-PURCHASE AGREEMENTS

A hire-purchase agreement can be called a hiring agreement coupled with an

option to buy. In such a transaction, a buyer agrees at pay certain amounts as installments



to the seller for the possession of a good. Here the transaction has the aspects similar to a

contract of bailment. On the payment of the due amount as stipulated in the contract, the

title of the goods is transferred to the buyer and the buyer becomes the lawful owner of

the goods. However, the buyer at any point of time can declare his intentions not to buy

the goods through the installments or may declare to buy the goods by full payment of

the stipulated amount in a single transaction only. In case the buyer does not buy the

goods or is unable to pay any installments, the seller has the right to take possession of

the goods.

“ “hire-purchase agreement” means an agreement under which goods are let

on hire and under which the hirer has an option to purchase them in accordance

with the terms of the agreement and includes an under which-

a) Possession of goods is delivered by the owner thereof to a person on

condition that such persons pays the agreed amount in periodical installments, and

b) the property in the goods is to pass to such person on the payment of the

last of such installments, and

c) such person has the right to terminate the agreement at any time before

the property so passes;”24

The three main characteristics of a hire purchase agreement are as follows-

1. the element of bailment

2. the option to the buyer to purchase the goods, and

3. the element of sale

Bailment

“ A “bailment” is the delivery of goods by one person to another for some

purpose, upon a contract that they shall, when the purpose is accomplished, be

24 Section 2(c) of the Hire Purchase Act.



returned or otherwise disposed of according to the directions of the person

delivering them. The person delivering the goods is called the “bailor”. The person

to whom the goods are delivered is called the “bailee”.”25

Helby v. Matthews26

The appellant let a piano on hire to Brewster on terms of a Hire-Purchase.

Brewster was liable to pay certain amounts to the appellant for a fixed period at an

interval of one month. After 36 monthly payments, the title of the piano passed on to

Brewster. However, after a few payments, Brewster pledged the piano with Matthews,

who acted in good faith. The appellant sued Matthews for the piano. It was held that

Brewster had no right as to the title of the goods so as to pledge them, as the Hire-

Purchase agreement did not transfer the title of the goods to him. Thus, the piano could

not have been deemed to be the property of Brewster under the agreement as the title of

the piano transferred only on the full payment of the installments.

Jay Bharat Credit & Investment Co. Ltd. v. CST 27

The appellants carried on the business of Hire Purchase of vehicles. The normalterms of the agreement entered between a hirer and the appellant contemplated the

purchase of a vehicle by the appellant and taking of the same by the hirer on hire-

purchase. The Sales Tax authorities sought to tax such transactions. It was held that, in

case of a hire purchase transaction, the title to goods does not pass to the hirer, and

therefore such transactions cannot be called a sale.

K. L. Johar & Co. v. Deputy Commercial Tax Officer 28

The appellant company, a financing firm, carried on the business of advancing

money by entering into hire-purchase agreements. The appellants advanced money to a

25 Section 148 of the Contract Act.26 (1895) AC 471.27 (2000) 7 SCC 165.28 AIR 1965 SC 1082.



care dealer on behalf of the hirer. The latter paid the price in monthly installments. He

also had the option to determine the agreement by paying the rent up to date and

returning the machine over.

However, a change in the position of the law arrived with the case of Whitley Ltd.

v. White29, the facts of the case being the same as that in Helby v. Matthews30, the court

held that the buyer from the hirer was under no obligation to return the goods, provided

that the latter paid the due amount to the actual owner of the goods. This position was

upheld by the Madras High Court in D. E. Kasisah v. N. T. Engineer 31 , and laid down

that a Hire-Purchase agreement confers two distinct sets of rights on the hirer, namely,

the right to use the goods and the option to purchase.32

Thus it is evident from the above cases that the presence of a contract of bailment

is necessary for a Hire-Purchase transaction to arise. Such a presence should not merely

be that on paper but the courts of law have to look into the contract substantially and

decide whether the essence of bailment is present in the contract or not.

Option to Purchase

In a contract of Hire-Purchase, the hirer has the option to terminate the agreement

at any given point of time, before the final payment falls due, given that all the

installments till date are paid accordingly. The hirer must notify the seller of his

intentions at least 14 days before such termination is to take place. Under s. 10 of the

Act, the hirer may also be liable to pay a sum stipulated in the agreement as payable on

such termination. However such payments are restricted as follows-

1). Where the hirer has paid an amount which exceeds the amount which is still

due under the agreement.

29 (1918) 2 KB 808.30 Supra note 26.31 AIR 1965 Mad. 257.32 Supra note 22.



2). If the amount already paid is less than half of the total price, the hirer

becomes liable to pay either the named sum or the difference between the paid up amount

and one half of the total price, whichever is less.

The section also regulates the minimum payment which can be used as a strategic

device to impose a penalty on the hirer.

Bridge v. Campbell Discount Co.33

A van was let under a Hire-Purchase agreement. The agreement provided that the

hirer, in case of the termination of the agreement before he became the owner, shall pay

the seller, by way of compensation for the depreciation of the vehicle, which would along

with the paid sum amount up to two-thirds of the total value of the vehicle. The hirer

could not pay the minimum amount of compensation stipulated in the agreement and the

owner of the vehicle sued the two-third amount being due. The Court of Appeal allowed

the recovery on the principle that it was the exercise of the option of terminating the

agreement. The House of Lords however, disagreed and were of the opinion that the

hirer’s inability to pay was a breach of a contract and not a termination of the same. Thus

the amount being in the nature of a penalty was struck down as it was in no relation to theactual depreciation of the price of the vehicle.

“The House of Lords did not specifically strike down every clause designed to

compensate the owner for the depreciation of the gods let on hire, but it is unlikely that

any such clause will now be upheld if it purports to give the owner a sum expressed as a

proportion of the Hire-Purchase price.”34

Thus the right of the hirer to terminate the agreement cannot be taken away by

any term in the agreement, nor can any greater liability be imposed upon the hirer for

exercising his right of termination than that stated in the section. However, such right of

33 (1962) AC 600.34 Chitty on Contracts, pg. 240 (24th edn., 1977).



the hirer can be regulated by contract. This was up held by the court in the case of

Wadham Stringer Ltd. v. Meaney.35

In this case, the agreement provided that incase of a default in the payment of the

hire, the owner would give 10 days notice and, if the default was not made good, the

whole amount would become due. The owner gave such a notice and the default could

not be made good. The owner instituted a suit for the breach of contract. The hirer

purported to exercise his right to terminate the agreement and to pay only the

installments due. The court held that the whole payment having fallen due, the statutory

right of termination was lost.

Sale

The hirer becomes the owner of the goods after the payment of the last

installment. However, it is a sale without there ever being an agreement to sell because

the hirer always had the option of terminating the hire-purchase agreement at any time.

CONCLUSION

Distinction between Sale and Hire Purchase

Tarun Bhargava v. State of Harayana.36

35 (1981) 1 WLR 39.36 (2003) 3 KLT 397.



A consumer entered into an agreement with a financial company for purchasing a

vehicle. The vehicle was purchased in the name of the consumer and the ownership was

also with him. The transaction was described in the finance agreement as a Hire-Purchase

transaction. However, the Court held that the transaction was a loan transaction and not a

hire purchase transaction. The principle behind this ruling being the absence of the option

of the buyer to terminate the agreement anytime between the contract and also the

absence of the aspect of bailment in the agreement. Thus it is necessary for the

agreements to be Hire-Purchase in substance and not on paper alone.

However, the difference between a sale and a hire-purchase is best defined by the

case of Helby v. Matthews37 . Here the court opined that that under a contract of hire-

purchase, the ownership of the goods do not pass immediately to the hirer, but only on

the subsequent payment of the last installment. Thus the pledging of the piano by the

hirer to a third party was not held to be viable, and the court held that the owner of the

piano could recover the goods from the third party.

In India, the same principle was applied by the Supreme Court in the case of K. L.

Johar & Co. v. Deputy Commercial Tax Officer 38 where a financing firm carried on the

business of advancing money by entering into hire-purchase agreements. The contentionof the Sales Tax authorities to tax the purchase of the vehicles was upheld by the Madras

High Court. However, the Supreme Court reversed the decision, laying down clearly the

distinction between a sale and hire-purchase. The learned judges also held that such an

agreement would amount to sale only if the hirer exercises his option to purchase the

goods.

Thus the basic distinction between a hire-purchase agreement and a contract of

sale is the transfer of the title of the goods to the buyer. In a contract of sale, even in the

case of a loan purchase, the title of the goods passes to the buyer immediately, while in

the case of a hire-purchase agreement, the transfer of the title of the goods takes place

only after the last due installment is paid.

37 Supra note 26.38 Supra note 28.



However, the judgement regarding to the recovery of the property by the owner

from the third party was subsequently changed in Whitley & Co. Ltd. v. Hilt 39 where the

judges held that the third party could retain the goods if they paid the remaining of the

due installments. The principle taken by the House of Lords in the above mentioned case

was upheld by the Supreme Court of India in D. E. Kasisah v. N. T. Engineer 40 where

the third party was allowed to retain the goods. The court also held that the hirer could

not be prohibited from assigning his rights to a third party, thus making the third party

the trustee of the goods.

The second major distinction arises on the aspect of the Contract of Sale being

binding on both the parties, while the hire-purchase agreement being binding on the

owner of the goods only. This aspect of the owner being bound to the contract and the

hirer not being so in a hire-purchase was said to be so crucial by the Law Commission in

its Twentieth Report, that it made a distinction between a hire-purchase and a credit sale

agreement.41

39 Supra note 29.40 Supra note 31.41 Twentieth Report of the Law Commission of India(Law of Hire Purchase) 4 (1961).

Contracts 2 Final Draft

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