Kasal Narayan vs An Manala Laxmi Narsimmam

Mohd. Ahmed Ansari, J.—This first appeal is by a defendant against a decree of the Original side of this Court, ordering the appellant to deliver to the plaintiff-respondent one 60 BHP Maximum Robson Cold Starting Crude Oil engine, and to pay Rs. 6708-15-10 as the arrears of hire-money, as well as rent for the use of the engine at the monthly rate of Rs. 405 I. G. from the institution of the suit to the date of its delivery with interest on the decretal amount at 6 per cent, per annum.

The basis of the claim is a written agreement entered into on 17-1-1932, at Bezwada between the plaintiff-respondent described therein as the owner and the appellant as the hirer of the engine, with one Chintala Ramaswamy as the surety. This contract consists of ten paragraphs. The first paragraph says that the owner of the Robson engine has agreed to let and the appellant to take the engine on hire subject to the terms mentioned in the document. Paragraph 2 read with the Schedule to the agreement provides that the hirer prior to the delivery of the engine, must pay a sum of Rs. 3,000 I. G. as the consideration for the option to purchase and credit for it will be given only when the right of option to purchase is exercised.

Under the next clause of the paragraph another sum of Rs. 4,860 I. G. is to be paid by twelve monthly instalments of Rs. 405 beginning from 17-2-1932, and ending on January 17-1-1933. On failure to pay any or all of the said instalments interest at the rate of 12 per cent, per annum is to be charged. The paragraph after mentioning the undertakings by the hirer to keep the machine in good repair and not to sell or pledge it, contains in Cl. (e) an acknowledgment about the hirer holding the engine as bailee and his not having any property in it until the option, to purchase, after the payment of full amount due under the agreement, has been exercised. Cl. (j) of the second paragraph then says that in the event of the engine being returned within the first half of the full period of hiring and the bailment being thus terminated the hirer is to pay the agreed compensation, which with the amount previously paid shall equal the amount payable as hire for the first half of the aforesaid period.

The next paragraph gives the hirer by paying one rupee the option to purchase the engine on his fulfilling all the terms of the contract, and it further allows him the right to terminate the hiring subject to the condition specified in the Cl. (j) of the earlier paragraph. Then paragraph 4 specifies the events in which the owner can terminate the hiring and retake possession. Under the same paragraph the owner in the event of the hiring being so determined becomes entitled to the balance of the amounts payable under the agreement as well as to damages for the breaches of the terms. Paragraph 5 of the document also provides that the engine is to be the absolute property of the owner until whole of the money due under the contract had been paid and the hiring completed by exercise of the right to purchase.

I have given early the above summary of the important parts of the contract, because the main point for decision in this appeal is whether some of its terms are penal justifying any grant of relief against them to the appellant.

It is admitted in the case that Rs. 3,000 had been deposited at the time when the engine was delivered and out of the twelve instalments only one had been paid on 19-4-1932. On Isfandar 10, 1344F., (13-1-1935) the plaintiff-respondent instituted the suit claiming that the contract was a hire purchase agreement, under it he was entitled on default of payment to recover the possession of the engine, the arrears of the instalments with interest and damages; that he should be given after the deduction of the only paid-up instalment I.G. Rs. 5750-9-0 as the arrears of instalments with interest, the engine, or Rs. 6,000 (I.G.) as its value. He further claimed that on the conversion of these I.G. sums into Hali currency the total amounts to Rs. 13,708-15-10; and he should be given damages for the wrongful detention at the monthly rate of Rs. 350 up to the date of the delivery of the engine.

The defence to the suit is manifold. It was pleaded that the Original Side of the High Court had no jurisdiction, as the instalments under the contract were payable in Bezwada, which is outside the area of the Hyderabad State. Then it was asserted that the order was for an engine of 60 to 66 H.P., but the plaintiff fraudulently representing the order to have been complied got the defendant''s signatures on the document and the engine delivered was of 53 to 60 H.P. Moreover, the engine delivered was used and defective. The contract was, therefore, vitiated by fraud and misrepresentation.

It was also claimed that the terms of the contract were harsh, against public policy, and the document containing the agreement inadmissible in evidence owing to its being insufficiently stamped. Lastly the defendant asserted that the full ownership of the engine had passed to the defendant and the plaintiff was entitled either to the instalments with interest, or to the engine and he cannot ask for both.

The learned Judge of the Original Side on Farwardi 24, 1345F. (26-2-1936) decided three issues in the case, holding that the Original Side of this Court had jurisdiction to entertain the suit, the document containing the terms of the agreement being duly stamped was admissible in evidence, and that the oral evidence cannot be adduced to vary the terms of the written contract except as regards fraud, about which issues Nos. 7 and 8 have been framed and which should be decided after recording of evidence. On Khurdad 10, 1347F. (14-4-1938) another learned Judge decided the remaining issues in the case and allowed the claim as against defendant No. 1 alone. He has held that the agreement sued upon was a hire purchase agreement; that the terms of the agreement though harsh, were not penal; that the plaintiff was under the agreement and according to authorities entitled to recover the unpaid instalments of the hire money together with interests, the engine with its accessories and damages.

Then the learned Judge taking into consideration the fact of the defendants not complaining earlier to the institution of the suit about the engine being old, or defective or not according to order and having used it for a long time concluded that the correct engine was given, there was no fraud, misrepresentation in the case and a decree should be given to the plaintiff for the rent for the use of the engine at the contract rate upto the date of its delivery. He further gave costs to the plaintiff and interest on the decretal amount at the rate of six per cent, per annum.

It appears that because of the ''pendente lite'' awarding of damages the amount decreed against the defendant-appellant was nearly doubled and came to about Rs. 28,058-15-10, on which part the court-fee was paid after filing of the appeal and accepted. Then a Division Bench of this Court being of the opinion that the case involved important questions regarding constructions of hire purchasing agreement, referred the entire case to the Full Bench on Farwardi 11, 1353F. (13-2-1944). At one stage the appeal had abated due to the death of the plaintiff, who was the sole respondent in the case, and his heir not having been brought on the record. But the appeal was later restored on 4-8-1953.

We heard at length the learned argument and its legal consequences. The plea about the agreement being vitiated by fraud was not pressed and therefore abandoned. In these circumstances it appears to me that the only two questions for decision in this appeal are whether the agreement of 17-1-1932, is a hire purchase agreement and if it be held to be such what damages the plaintiff-respondent should get because of the wrongful detention of the engine.

The distinctions between hiring at a rental and the acquisition of goods upon payment of price by instalments are well settled and each has different legal consequences. One of such consequences is that where the transaction is sale, and notwithstanding the proviso about the property in the goods remaining with the original owner until the entire purchase price has been paid,'' a third party can obtain title to the goods against the owner provided he is a bona fide purchaser for value. Indeed, the distinction between the two classes of the agreement was first developed in cases dealing with the title of such third persons. As regards getting of such a title there is no difference between the English and Indian laws; for the proviso to S. 27, Indian Sale of Goods Act, is similar to the English Sale of Goods and Factors Acts and the English authorities have been therefore referred to by all the Courts in this country.

Then the Courts of law have construed seizure clauses, or those forfeiting earlier payments in hire purchase agreements as not being penal, or provisions imposing fresh burden on the normal incidents of the contract. Again chattels under the hire purchase agreements being let on periodic rentals with the proviso, that when the payments have reached a certain sum the property in them would pass absolutely to the hirers, the legal position of the hirers until these payments have been made and option to purchase exercised is that of bailees with all the liabilities of such persons towards their bailors for the return of the things and for damages in case of wrongful detention.

The authorities, laying down the general proposition as to when an agreement is to be treated as a sale with price payable by instalments or a hire purchase agreement with an option to purchase are to be found in connection with the English Factors Act, 1889.

The first case I would refer to is -- ''Lee v. Butler'', (1893) 2 QB 318 (A), in which certain furniture was let to Lloyd under an agreement whereby he had agreed to pay the sum of �1 on May 6, and a further sum of �96 and 4s. on August 1; the owner had power on default in payment or on removal of the furniture without his consent to take possession and previous sums paid would then be appropriated towards the rent. There was another term in the agreement that if the hirer duly paid all the instalments and performed all other agreements the rent should cease and the goods should then become the property of the hirer. Before all the instalments were paid Llyod''s wife sold and delivered the furniture to the defendant and in an action by the owners'' assignees for the detention it was held that the defendant had a good title within the meaning of S. 9, Factors Act. The Court also held that the agreement amounted to a sale and therefore the purchaser in good faith from the wife was entitled to the goods as against the owner.

The next case I would refer to -- ''Helby v. Mathews'', (1895) AC 471 (B), where the hirer under the agreement undertook to continue paying the instalments until they reached a certain sum, which would cover the greater part of the price, but there was a proviso that he could terminate the hiring at any time by returning the goods and so absolve himself from any other payments. It was held that the agreement was of hire with an option of purchase super-added and accordingly the hirer could not give a good title to a third party, even though such party had bought without notice of the right of the owner.

Since this case the distinguishing mark of a hire purchase agreement both in English and Indian Law has been that where a person has a right to terminate the agreement for hire at his pleasure and is not bound to pay the value of the goods it is a hire purchase agreement. The option, however, must be real one and the hirer must not be compelled to the exercise of the option. I shall not cite any further English cases on this point and would quote the following extract from the Hailsham''s edition of Halsbury''s Laws of England, Vol. 16, in para 754, where the English Law is neatly summarised:

....The test is whether there is or is not a binding obligation on the part of the hirer, to buy. If the agreement does not amount to a binding obligation on the hirer to complete the transaction as a purchase, but is merely an agreement to hire with an option on the part of the hirer to purchase, it is not an agreement to buy within the Factors Act, 1889, or the Sale of Goods Act, 1893, and a purchaser or pledgee from the hirer can in such case obtain no better title than the hirer had, except in the case of a sale in market overt.

If there is reserved to the hirer power to return the goods, either during the hiring thereby determining the bailment, or after the conclusion of the hiring and before the payment of such further sum as is required to complete the purchase, the agreement is not a contract of sale but an agreement to hire with an option to buy, and even if the hirer in such a case by parting with the goods puts it out of his power to return them, he does not thereby become bound to buy.

But an agreement whereby a person agrees to hire goods by paying the owner of them by stated instalments a fixed sum, which is to be the purchase price of the goods, is, in the absence of a provision enabling that person to determine the hiring, an agreement to buy the goods within the provisions of the Factors Act, 1889 and the Sale of Goods Act, 1893.

I will next refer to several authorities of different Courts in this country where the same principle has been followed in determining whether a particular agreement is of sale or hire purchase.

The first case is - The Auto Supply Co. Ltd. Vs. V. Raghunatha Chetty, where a company had agreed to offer a bus on condition that Rs. 1,140/- were to be paid on delivery and thereafter eleven monthly instalments of Rs. 226/-. The owners were also entitled to terminate the contract on default of any monthly instalments. The owners brought a suit for the possession of the bus on default of payment of four instalments and for the arrears of the instalments. The Court below had ordered the plaintiff to give credit for the arrears of instalments out of Rs. 1,140/- deposited and the plaintiff''s appeal was allowed by the High Court. It was pointed out in the case that in a contract of sale for a price payable on instalments the purchaser has no option of terminating the contract and returning the chattel whereas in a contract of hire purchase the hirer has such an option which he may or may not exercise at his pleasure.

The next case is -- Bhimji N. Dalal Vs. The Bombay Trust Corporation Ld., , where in a suit for damages for the conversion of a motor car by the defendants, Wadia J. holding the defendants liable observed that if the agreement imposed an obligation upon the hirer to buy the chattel then the agreement was of sale notwithstanding the use of the words ''hire purchaser'', ''lessor or lessee'', but on the other hand if the hirer was not bound to pay the full amount of the purchase-money or if could terminate the hiring at any time by delivering the chattel the agreement was for hire purchase.

In the same year there is a case of -- ''Abdul Quader v. Watson & Sons, Ltd.'', AIR 1930 Rang 193 (E), where Cunliffe J. in a suit for damages for breach of warranty has said that the object of parties to a hire purchase agreement is not necessarily to enter into a contract of sale, but to enter into a contract of bailment, ancillary to such a contract is an incomplete agreement to purchase, the bailee may return the chattel and thus may terminate the contract; the retaking of chattel and the retention of the money already paid in such contracts are not separate or extraneous payments imposed on the normal terms of the contract and therefore the seizure clause in a hire-purchase agreement is not a stipulation by way of penalty within the meaning of S. 74, Contract Act.

A Division Bench of Allahabad High Court in - Mahabali Prasad Vs. H.N. Palmer holding the contract in the case to be of sale also relied on the two English authorities cited in this judgment and Young J. held that the difference between the contract of sale at a price payable by instalments and a contract of hire purchase was that in the former the purchaser had no option to terminate the contract and return the chattel whereas in the latter the hirer had and in each case the substance of the transaction must be looked into and not mere words.

Then Grille J. C. in AIR 1934 151 (Nagpur) where a suit was filed against the guarantor for arrears of instalments after the machine had been sold by the owners, held that as the agreement contained a clause by which the hirer was entitled to put an end to the contract by return of the machine at any time it was a contract for hire purchase and there was nothing illegal nor inequitable in the company enforcing its rights under the contract to recover the arrears of instalments, while recovering the machine at the same time.

Then in -- ''Mahomed Ismail v. Provincial Automobile Co.'', AIR 1937 Nag 138 (H), Pollock J. held that as there was no term in the contract enabling the vendee to return the car at any time and thereby relieve himself from any further obligation for the remaining instalments the contract was a contract of sale and not of hire, therefore, the vendee was not entitled to seize and sell the car. Also in G.J. Subbarayalu and Another Vs. A. RM. A.N. Annamalai Chettiar, the contract was held not to be hire purchase as an essential feature for a contract of this nature, viz., the option given to the prospective purchaser to terminate the contract was absent.

It is, therefore, clear that the leading test in English as well as in Indian, authorities for determining an agreement to be of sale or of a hire purchase is whether an option to terminate the agreement has been reserved to the hirer and if such option is given then the agreement is generally held to be of hire purchase. I have already given in the opening part of this judgment the substance of the agreement, and it is clear having regard to paragraphs 2(j) and 3(b) of the agreement that the defendant has been given such an option during the continuance of the agreement to terminate the hiring. Therefore, the learned Judge of the Original Side was right in holding the argument to be such. Consequently the engine continued to be the property of the plaintiff-respondent, and was rightly ordered to be returned to him on the failure to pay instalments which he is also entitled under paragraph 3(b) of the agreement.

Then the appellant having used the engine during the entire period of the hire was correctly held liable to pay the rentals he had agreed to pay under paragraph 2(b) of the agreement together with the interest at the rate mentioned in the aforesaid clause. The judgment of the Original Side of the High Court, as regards these points is correct and must stand.

It was argued before us that the provisions in the agreement relating to the forfeiture of Rs. 3,000 the recovery of the compensation in the event of termination of the bailment by the hire in the first half of hire period and the return of the engine with the liability to pay for the arrears of the instalments are penal and should be relieved against. The learned Judge of the Original Side has also observed that the recovery of instalments as well as the engine were harsh terms. These arguments overlook the fact that the appellant need not have continued the hire a day longer than he desired. But it was argued that he would have been bound to pay compensation equal to instalments for the first half of the period and that is penal.

Such argument is not supported by the case of the -- ''Associated Distributors Ltd. v. Hall'', (1938) 1 All ER 511 (J), where an agreement about paying to the owner half the price of the bicycle in case of terminating the hire purchase agreement was held as legal. Again -- ''In re Apex Supply Co., Ltd.'', (1941) 3 All ER 473 (K), she same view was taken. I am, therefore, of opinion that Cl. 2(j) of the agreement is not penal. As regards the non-return of Rs. 3,000 in case of breach of the contract I do not hold it to be penal. The amount is the consideration for the option to purchase and I have already referred to the case of AIR 1929 Mad 384 (C) where credit against such a deposit had been disallowed. Therefore, non-return of such an initial deposit is legally valid.

As regards the liability to pay arrears of instalments and return the engine, if the transaction was of bailment and I am of opinion that on failure to exercise the option it is of this nature, there is no harshness, in the owner getting his property and the bailee being made to pay the money for the use of the chattel. In such circumstances, I cannot give any relief to the appellant. The learned advocate for the appellant has referred us to a large number of cases where provisions in contract have been held as penal. But I do not think any useful purpose will be served by discussing these authorities, for all of them are, of sale and not of hire purchase agreement.

Having come to the conclusion that the agreement was of hire and as the appellant had made defaults of payments it necessarily follows that the plaintiff-respondent is entitled to the engine and its continued wrongful retention after the period has expired, entitles him to damages. The next question which arises in this connection is what should be the measure of such damages.

In -- Masseys (1930), Limited Vs. C.R. Krishnaswami Aiyar, , it was held that the proper basis for the assessment of such damages was the monthly rent agreed upon and that the owner was entitled to such rental upto the date of the delivery of the chattel. The decision is supported by -- Strand Electric and Engineering Co. Ltd., v. Brisford Entertainments Ltd., (1952) 1 All ER 796 (M). In this case it was held that in detenu where the defendants have used a profit earning chattel, they must pay by way of damages a fair sum for the use, & they cannot as wrong-doers have the use of the chattel for less than a fair price for their hire, otherwise they would be benefiting by the wrong use.

There are, therefore, authorities to support the decision of the learned Judge of the trial Court when he gave damages at the instalment rate of the agreement. But the plaintiff in paragraph 6 of his plaint has asked for a lesser rate of Rs. 350 per month and nothing more than what he had claimed can be allowed to him. I, therefore, modify the decree of the Original Side and order that the plaintiff should get from the date of the institution of the suit to the date of the delivery of the engine to him damages at the monthly rate of Rs. 350 only.

There is another error in the decree of the Original Side, which requires correction. In paragraph 3(a) of the plaint, the respondent has said that in case of the engine being returned to him the defendant is entitled to credit for such sum as in the opinion of the respondent the reasonable value of the engine. Then in the note appended at the end of his prayers in the plaint he has again expressed his readiness to credit the appellant as against the decretal amount given to the respondent for such sum as according to him is the reasonable value of the engine. These concessions are in accordance with the last part of paragraph 4 of the agreement. In these circumstances, I think that the learned Judge of the Original Side when directing the delivery of the engine ought to have ordered the respondent to give such a credit to the appellant as against the decretal amount.

It is said that in the execution application a sum has been credited. But whether it is reasonable or not should be determined in the proceedings. I therefore, direct the respondent to give credit to the appellant as against the amount allowed by the decree for the reasonable value of the engine on the date of its delivery to him after deducting therefrom the cost of taking its possession and sale, etc., according to the terms of the agreement of 17-1-1932.

The last correction I would make in the decree of the Original Court is the disallowing of the interest from the date of the suit to the date of the payment of the decretal amount at the rate of 6 per cent, per annum. I think the appellant should have some consideration in the rate of interest allowed to him, inasmuch as a large sum has been allowed against him. Therefore, I direct that the rate of interest of 6 per cent, given by the trial Court on the decretal amount from the date of the suit to the time of its realisation be reduced from 6 to 2 per cent and the decree is accordingly modified.

Accordingly, the appeal is partly allowed subject to the three modifications mentioned earlier in the judgment and the decree of the Original Side subject to such modifications will stand. The parties will pay costs of this appeal in proportion to their success or failure.

Qamar Hasan J.

I agree.

Deshpande J.

I agree.