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Contract of Bailment and Hire-Purchase Agreement

The researcher hereby introduces the work done by him, as the paper is divided into three chapters i.e. Chapter one which consists of Bailment, Chapter two which consists of Hire-Purchase Agreement and Chapter three which consists of the key differences between the contract of Bailment and the Hire-Purchase Agreement.

The researcher is going to discuss about the Bailment in Chapter One, which is a concept which deals with the delivery of goods by one person to another for some purpose, when the purpose is accomplished by the parties to the contract. The person delivering the goods is called the “Bailor and the person to whom the goods are delivered is called the Bailee.

The duties of the Bailor are that to disclose all the faults which will be responsible for the damage which has been caused to the goods or the loss which had been suffered by the Bailee. The Bailor is under the duty to pay the extraordinary expenses incurred by the bailee for such bailment, as it is the duty of the bailor to accept the goods after the purpose for which such goods were bailed when the purpose is accomplished, the duty of the bailor is also to indemnify the bailee for the cost incurred due to the defective title of goods bailed to the bailee. The duties of the bailee is that to take proper care of the goods, which had been bailed from damages, also to check that there is not any unauthorised use of the goods which have been bailed except for the purpose, the bailee also had to keep the goods which are bailed separately for his personal goods.

The researcher is going to discuss about the Hire-Purchase agreement in the second chapter i.e. Hire-Purchase agreements are similar to rent-to-own transactions that give the lessee the option to buy at any time during the agreement, such as cars on rent. Like rent to own, hire purchase can benefit consumers with poor credit by spreading the cost of expensive items that they would otherwise not be able to afford over an extended time period.

It's not the same as an extension of credit, though, because the purchaser technically doesn't own the item until all of the payments are made, because ownership is not transferred until the end of the agreement, hire purchase plans offer more protection to the vendor than other sales or leasing methods for unsecured items. That's because the items can be repossessed more easily should the buyer be unable to keep up with the repayments.

The research is going to discuss about the key differences between Bailment and Hire-Purchase Agreement in the third chapter, highlighting the conceptual differences in the element.

Objective of Study:
The main objective of the paper is to understand the conceptual, theoretical and practical distinctions and contrasts in Contract of Bailment and Hire Purchase agreement. Paper has discussed in detail both the concepts first with the party's rights and obligations along with their termination of the contracts and agreements respectively for better understanding.

Research Questions:
  • What is Bailment?
  • What is Hire-Purchase Agreement?
  • What is the difference between the two concepts, i.e., Bailment and hire-purchase agreement?

Research Methodology:
The researcher has used doctrinal method i.e. reference from available primary sources like Acts, Rules and Regulations to study the present questions in hand. The researcher has also taken reference from secondary sources like books, articles and newspaper reports to understand the issue regarding differences in Contract of Bailment and Hire-Purchase agreement.

Chapter I: Bailment

A mere delivery of a watch to be repaired at a small retail shop to the transfer of a heavy machinery for the use of mining from one company to another for the purpose of mining, these all come under the aspects of bailment. Bailment according to The Indian Contract Act, 1872 is when one party of the contract passes the possession of goods to the other for a specific purpose with the direction to return the possession of the same good after fulfillment of the purpose.[1]

The act of bailment is guided by mainly 3 essential ingredients to consider an act done under the concept of bailment in the Indian Contract Act.

Essentials of Bailment

Delivery of Possession

When read in accordance with the section 148 of the said act, the term used is delivery of the goods by one person to another.

Does this imply complete transfer of goods or for merely taking it under the party's supervision or maybe just a mere transfer of possession of that good?
One of the central themes of the act of bailment is the delivery of possession of the good for bailment.[2] Supervision over a good and the complete authority to have possession over that good is two separate spheres. There is a separating boundary between the two topics as the bailment requires the transfer of possession.

Possession is separate from custody. Possession is the right of a party to exercise control over a thing and exclude others from the utilization of it whereas, custody is where a party takes care and control of a good for inspection, security or preservation.
A mere parking for a car of a person by the valet of the hotel or a person merely taking a good as the security for the owner cannot be taken as the delivery of the possession from one party to the other, there must be the right to control over that good.[3]

Specific Purpose and Return
The term for purpose in section 149 of the act clearly specifies there should be a purpose for the delivery of the goods for the bailment. The delivery of the good and transfer of possession of the good from one party to the other if is done without the purpose of using it, the act does not qualify as bailment.[4] In accordance with the section of bailment, if the purpose for which the good has been accomplished, the bailee then has to return the said good to the bailor and/or act in his directions on the disposal of the good.

Possession to be Returned and Under the Contract

After the work done for the specific purpose is done, the section obligates the person in contract to return the good used for bailment or dispose it of under the directions of the bailor. The silence in the contract of not to return the good from the bailee to the bailor is implied if not clearly expressed. When there is no contract of bailment, no intention to form a bailor and bailee and there being no intention to return the possession of goods to return to the bailor from the bailee.[5] The English law recognizes the bailment is recognized without a contract[6] and the bailment being a contract, bailment can be implied or expressed.

Major Rights and Duties of Bailor

Rights of Bailor against the Bailee

The goods are obligated to return upon the bailee to return to the bailor after the use of the goods for the specific purpose for the bailment. The concept of bailment has one of the core concepts to return the good of bailment after the use of it and is a right of bailor.[7] The bailor is also entitled for compensation if the goods are used in an unauthorized fashion[8], that is not in accordance to the conditions of the bailment.[9]

In the case of gratuitous bailment[10], the bailor has the right to take the good of bailment any point of time to his pleasure since there is no right to compensation and the gross negligence to prove on bailee is the only way to compensate and if there is a case where the benefit derived is less than that of the profit made.[11]

Sometimes the contract is silent on the deeds of the profit which is made from good of the bailment. In those cases, the bailor is entitled to receive any profit made from the good at his discretion unless provided contrary to the contract of it.[12] However there are certain cases where there can be a mix up of goods depending upon the consent of the bailor and involving damages, in such cases the contract act clearly lays out the sections for dealing with those matters.

Rights against the Third Party

The possible acts of the third party to affect the goods of bailment and the act of bailment is when a third person deprives the bailee the utilization of that good or an injury is made to that good, the bailor has the right to bring an legal action against him.[13] The legal action brought against the third party by either the bailor or bailee, together or not, they cannot ask for the compensation which is beyond the value of the goods and anything adding or extra damages with the good, and the bailor has the right to do so.[14]

Duties of the Bailor

When a bailor gives the bailee a good, there is a duty imposed[15] upon the bailor to let the bailee know the material facts of that good which are in fault with it and which may cause an interference or cause a risk beyond which a good of a purpose can cause.[16] However this duty comes with a condition that the fault is supposed to be known to the bailor or by a reasonable man can be known to the bailor. The bailee is free to assess the good and satisfy any doubts he has with it, in general, excluding the liability of the bailor.

Another duty for the bailor in cases where the goods of the bailment are kept by the bailee to work, be carried or made a certain amount of work done upon them, there will certainly be an expense made for that purpose by the bailee[17]. The bailee would hence be required to be compensated, which is the duty of the bailor.[18] This would also be the same in the cases when there may be a loss sustained by the bailee that was not planned or purpose of the bailment reasonably.[19] The duties of the bailor towards the bailee end when the goods have been returned to the bailor after the expiration of the bailment period from the bailee. The duty to accept the return of the good of the bailment is also one of the duties of the bailor.

Major Duties and Rights of Bailee

Duties of the Bailee

When the bailee is in the position of the goods of the bailment, he is expected to handle that good in the most reasonable manner as a reasonable man would.[20] His liability can only be excused in the cases where there was loss for the bailor by the course of the bailment of the goods of bailment like when there was loss despite reasonable care, and which could have not been foreseen or which was not within the control of the bailee.[21]

This can also be avoided when there is a special contract enforced between the parties of the bailment, and cannot be denied in the case where there is a clause for excluding the liability of the bailee[22]. The degree of care is very subjective and depends upon the facts of each case and the parties of each case. A reasonable man's degree varies from the purposes of each act and as in this case, with each purpose of bailment.[23]

Sometimes, the bailee may not act in accordance with the instructions of the bailor or the terms of the bailment, in which the power to declare the bailment void lies with the bailor. The bailee is hence obliged to compensate for the loss which is faced by the bailor from the inconsistency of the bailee and is a valid ground for the termination of the contract.[24] However there are certain cases where there can be a mix up of goods depending upon the consent of the bailor and involving damages, in such cases the contract act clearly lays out the sections for dealing with those matters and explains the duties of the bailee also and the duty to return the profit of the goods bailed is in consistent to the right of the bailor to collect it.

The bailee also has the duty to return the goods which he has been under the possession of the bailment and if he fails to do such a duty, he is liable under the Act for any negativity which has been caused to the good of bailment and that does not give him the right over the good. However, section 171 of the Indian contract act also lays down exceptions to which the right of lien is exercisable.

Rights of the Bailee

Briefly, the rights of the bailee can be categorized into 3 rights; right to recover any expense which the bailee has spent in order to carry, provide custody or work on it, right to recover compensation of the loss faced by the bailee for which he had no concerned intention from bailment and the right to lien.

The first two rights are consistent with the duties of the bailor. The right to lien gives the bailee a right to hold the good of bailment upon which he has exercised some labor or skill till he has been provided for that service. This right to lien is to achieve the purpose of basic right to receive the compensation for the duty which has been performed and which has lead to the improvement of the good bailed.[25]

Termination of Bailment

The bailment's obligations between the bailor and the bailee ends when the purpose of the bailment has been made or when the time period has been reached. The termination can also be made from the side of the bailor whether the bailee's act is inconsistent with the bailment[26]. If the act is inconsistent with the bailment, it is voidable at the option of the bailor and when the will of the bailor is to terminate the bailment, he can do so but must compensate the bailee for the loss he faces.

Along with these cases mentioned above, a contract of bailment can also be terminated on the basic grounds of any other contract under the Indian contract act and if there is death[27] of the bailor or the bailee involved. The liability of the bailee's estate however, is not exempted in his lifetime.[28]

Chapter II: Hire Purchase agreement

The concept involved in our day to day lives and practiced throughout the world and regulated by the act The Hire-Purchase Act of 1972, gives a regulating law for hire-purchase agreements.
An agreement in which the hirer has a choice to obtain the good which was let on hire according to the terms of agreement.

There are only three essentials necessary to term the agreement enforced as an hire-purchase agreement which are; there is payment of periodic installments for the good on hire, the good's property right can be passed to the hirer when the payment of the last installment has been made and lastly[29], hirer holds the right to terminate the agreement at any point of time before the right to property passes.[30] The right to property in normal cases transfers when the hirer has paid the hire purchase price, the price which includes total sum in order for the good of the hire excluding any damages or compensation or penalty.

The agreements made for hire purchase includes two parties: hirer and the owner. The hirer is the party which pays periodic installments for the good obtained by him through the agreement and has the right to property of that good after he has made the final installment for that hire. The owner is the party to which the goods and their property rights belong to initially.

They receive the payment made in installments by the hirer and transfer the property rights at the end installment. The hire purchase agreement must be signed by all the parties of that contract and the contract must be expressly stated. The hire to purchase agreement is not only an agreement to hire but also an agreement to sale.[31]

What should the Agreement Contain?

In accordance with the section 4 of the Hire-Purchase Act, it lays down what should be contained in a hire-purchase agreement. The contract should contain the total and final price of the hire-purchase good (hire-purchase price), date on which the agreement has been enforced and also the date on which agreement shall commence, details of how much should the installments be and on which date they should be paid by the hirer including the place and person to be paid to and the goods of the agreement which would lead an easy recognition thereof. If there is absence of any requirements as stated above, the agreement can be cancelled.

Rights and Obligations of a Hirer:

Rights of a Hirer

During the process of the hire-purchase agreement, during a time if the hirer feels to purchase the product anytime during the agreement, he can do so by paying the hire-purchase price or either completing paying of the remaining balance of the agreement, and by giving the owner of such hire-purchase good a notice of 14 days.[32] In the cases where the hirer wants to terminate the order and does not wish to purchase it, he can return the good with the accrued amount to him towards the owner and with same time period of notice, i.e., with 14-day notice.
The right to appropriate the payments under the hire-purchase agreement is also one right benefiting the hirer where the owner of 2 or more hire purchase agreements is the same. In those cases, the hirer can appropriate the payments[33] and if he fails to do so, the Hire-purchase act can be read and be used to deal with the according situation.

Sometimes in a hire and purchase agreement, the goods may be seized by the owner.[34] If that seizure is done not in accordance to the law of hire-purchase, the hirer can take back the amount which has been accumulated till the day of the seizure or the value of the goods at the day of the seizure, within the time period of 30 days.

The hirer in the course of hire-purchase agreement holds the right to assign his right, title[35] and interest under the agreement with the owner's consent and if that consent is withheld unreasonably due to the circumstances, it can be made so without the consent as well. He can assign his rights to another person and thus he can become the hirer in place of the original hirer and be the part of hire-purchase agreement.

Obligations of hirer:

Any party to a contract should fulfill their obligations and be within the ambit of the contract. The hirer's primary obligation is to pay for what he was bounded by the agreement in order to hire the pay in accordance of the agreement and comply with the terms of it.[36] The noncompliance of such agreement terms will lead to a breach in the contract.[37] Another standard implied obligation is the hirer to take reasonable care for the goods of hire as an ordinary prudent man would.

He has a condition thereto as well, i.e., if the care was reasonable enough and the damage still occurs the hirer is not liable to compensate for the loss which was made. Whereas if the goods which was assigned under the hire-purchase agreement was not used in accordance with the terms of the agreement then the hirer shall be liable for damages.

Obligation as to give information regarding where the goods are and its information at that period on the request of the owner is upon the hirer to provide so. The hirer with the reasonable cause must give the information within 14 days from the notice.

Rights of an Owner

In a contract when the parties must fulfil their obligations in regular terms at a regular interval, in case one party fails to fulfil such an obligation within a reasonable period the contract is said to breached. In the cases of Hire-Purchase agreement, the owner has the right to terminate the agreement in case there is a default of the payment[38], with a general notice of 2 weeks. Same goes as when the hirer is inconsistent with the terms of the agreement of hire-purchase or when the hirer breaks an expressed condition, then the right to terminate the agreement vests with the hirer.

After the termination of the hire-purchase agreement has been made, the owner then has the right to recover his possession of the hired good which is with the hirer of the terminated agreement. With this right to get back the possession of the hired good, the owner also gets the right to the initial deposit which was made, to recover the damages from the date of seizure was into effect till the goods were delivered to the owner and in order to get the possession back from the hirer, the owner is also vested with the right to enter the premise of the property and take the good back. These rights, however, are subject to restriction.

Obligations of the owner:

As any other owner of a shop or as a seller, the owner under the hire-purchase agreement has a few obligations[39]. One of the obligations is to provide free of any monetary amount a hire-purchase copy immediately post-agreement. The owner is also obliged to provide information regarding the instalments and the outstanding amount which is to be paid, by the hirer to the owner before the final payment is made.

Termination of Hire-Purchase Agreement

From the very basics of the hire-purchase agreement, an agreement can be said to be terminated in the cases when there is a return of the hired good, the performance of the contract by both the parties has been executed or by the renewal of the contract according to the general basic process of contracts. Aside from these basic ways to discharge the agreement of hire and purchase, the agreements can also, be terminated by reliving the other party from their obligations and in the cases of frustration of the contract.

The termination of the hire-purchase agreement contract, the agreement can be terminated by either party sending the notice to the other and by the efflux of time, i.e., when the hirer is given an option to buy the good, which is his choice[40], within a period of time but the hirer does not do so, the agreement is said to come to an end.

Chapter III: Difference between Bailment & Hire and Purchase Agreement

Contract of bailment is a genus for the species of the contract of hiring, but there is a point of difference when it comes to the contract of hire-purchase agreement.[41] Some key differences are highlighted in this chapter for the purpose of understanding the boundaries between bailment and hire-purchase agreement.

When there is a question of bailment, there is only transfer of possession and it's right there to the bailee. In the concept of bailment, there is only a transfer of possession, but the ownership and the title of goods remains with the bailor. There is no intention ab intio to transfer the property rights of the goods. The property rights are the complete transfer of the rights of the goods including the rights to use them, re-sell them etc. and which is not transferred in this case as property right[42] but simple possessory rights.

The transfer of property has always been an option for the hirer to buy the good of hire when the payment is final and/or at the end of the payment of all the instalments. In the contract of hire-purchase, there is always an option vesting in the hands of the hirer whereas in the case of bailment there is never an intention from the bailee towards the bailor to buy the property or the goods of bailment.

The good of bailment is always only for a specific purpose and when the purpose is accomplished, then it becomes an obligation for the bailee to return the good.[43]
Also, during the cases of hire-purchase, the instalments are an obligation for the hire-purchase agreement and not the use of specific purpose, unless inconsistent with the contract terms and condition.

The test laid down in the case of Damodar Valley Corpn. v. State of Bihar, there laid down two tests for determination whether the contractual agreement existing between the two parties is a contract for hire and purchase or not. By looking at the substantial matter of the contract, is to look at the fact that the good being hired is for the purpose of hiring or gives a buyer an option to buy it after the completion of the instalments.[44] The next question in the same case to be answered with the test was given by checking the fact if there is an intention to return the good after the agreement and instalments are paid.[45]

The contract of bailment has the main principle is the return of the goods after the purpose of the good has been obtained and to be returned to the bailor. The contract of hire-purchase is an option. When it is an no option but an obligation to the party to return in the contract of bailment and hence it is a differentiating one from the contract of hire-purchase.
The contract of bailment also differs within the elements from that of the hire-purchase.

The contract of hire-purchase has the element of the sale of the good for which the hire-purchase agreement has been come under by the parties. The sale term is defined as “A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.”[46] When the contract of bailment is identified with the element of sale as to the conditions of the contract and the property rights of the contract, the said agreement is said to differ from the contract of bailment and shifted to the contract of hire.[47]

Such a transaction involving the sale of the good of the contract is in the nature of the contract and contributes to the agreement of the hire-purchase of the agreement. Although one must not forget the fact that there is no obligation upon the hirer to buy the said good under the hire-purchase agreement.[48]

However, in any case the contract of bailment elements will always be in held with the additional element of contract to sale where the result would be the sale of the good under the act of the contract. The transfer of mere possession is never a complete sale of the good under the agreement and the only way by which a good under the contract of hire-purchase will be transferred when the party, the hirer, pays all the instalments and completely settle the claim of the agreement.

Finally, the two types of agreements also have a main difference regarding their termination aspect. A contract of hire-purchase agreement gives a right to the hirer to terminate the agreement at any point of time in the agreement and return the said good to the owner of the good. However, there are some conditions to it. The hirer when giving back the good at that date, he should make all the payments up to the date of return and any pending once till that date.[49] When there is no sale completed, i.e., which is one of the main purposes of the completion of the contract[50], till then the hire-purchase agreement can be terminated by the hirer.

The seizure of the property under the hire-purchase agreement also states under the act by obligating and the rights of each party. There is no termination of bailment by the right vested upon the bailee, therefore there is abruption legally justified to terminate the agreement of bailment.

The main differences highlighted in the third chapter makes distinguishes the two concepts. The distinctions are surrounding the elements of both the concepts. The duties of the parties to each agreement and the obligations upon them in an agreement are briefly explained the contrasts. The concepts have been made to be explained in a detailed broad version which is also contrasted in the broad terms. The differences have been made with the elements and hence have made a difference in the paper by stating that contract of hire-purchase had to be put separately from the Indian Contract Act and away from the Sales of Goods Act as well.

  1. Section 148 of The Indian Contract Act, 1872.
  2. New India Assurance Co Ltd. V DDA, (1991) 2 PLR (Del) 82
  3. Ultzen v Nicols, (1894) 1 QB 92.
  4. Gangaram v Crown, AIR 1943 Nag 436.
  5. Mohd Murad Ibrahim Khan v Govt of U.P., AIR 1956 All 75.
  6. R. v MacDonald, (1885) LR 15 QBD 323, 326.
  7. Supra Note.1
  8. Section 154 of The Indian Contract Act, 1872.
  9. Alias v E.M. Patil, AIR 2004 Ker 214.
  10. Gratuitous Bailment Law and Legal Definition,, Last accessed 11/1/19.
  11. Section 159 of The Indian Contract Act, 1872
  12. Section 163 of The Indian Contract Act, 1872.
    Illustration: “A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as well as the cow to A.”
  13. Section 180 of The Indian Contract Act, 1872
  14. Karnataka Electricity Board v Halappa, 1987 1 TAC 451.
  15. Section 150 of The Indian Contract Act, 1872.
  16. Hyman and Wife v Nye and Sons, 1881 LR 6 QBD 685.
  17. Story on Bailments, Ss. 256 and 273.
  18. F F Campbell and Co. v Board of trustees of Port of Bombay, (2015) 1 SCC 228.
  19. Section 164 of The Indian Contract Act, 1872
  20. Marty vs London County Council, 1947 KB 628.
  21. Section 151 and 152 of The Indian Contract Act, 1872
  22. Canara Bank v. Bhavani Oil Co., Chemmannur AIR 2004 Ker. 273
  23. Calcutta Credit Corporation Limited v. Prince Peter of Greece, AIR 1964 Cal 374
  24. Section 153 and 154 of The Indian Contract Act, 1872.
  25. Section 170 of The Indian Contract Act, 1872.
  26. C.P. Automobile Engineering Co., Ltd. v. Ramanchandran Viahwanath, AIR 1926 Nag 259
  27. Section 162 of The Indian Contract Act, 1872.
  28. Municipal Board of Lucknow v Abdul Razzak, (1929) 5 Luck 220.
  29. Sendaram Finance Ltd. v. State of Kerela, (1966) Ker LJ 408.
  30. Section 2 (d) of the Hire-Purchase Act, 1972.
  31. Installment Supply Ltd. v. STO, (1974) 4 SCC 739.
  32. Section 18 of The Hire-Purchase Act, 1972.
  33. Section 11 of The Hire-Purchase Act, 1972.
  34. R. Kumar v S.P. Muthukumarswamy, (2000) 1 LW 848 Mad.
  35. Ganga Hire Purchase Ltd. v. State of Punjab, AIR 2000 SC 449.
  36. Section 13 of The Hire-Purchase Act 1972.
  37. Bhadra Advancing Ltd. v. Assistant Commissioner of Income Tax, (2008) 219 CTR 447.
  38. Suryapal Singh v. Siddha Vinayak Motors, (2012) 12 SCC 355.
  39. Tarun Bhargava v. State of Haryana, (2002) 3 RCR (Cri) 312.
  40. Commissioner of Income Tax v. A.P. Paper Mills, 1997 225 ITR.
  41. Helby v. Matthews. 1895 AC 471.
  42. Allen, Douglas W. (1991), ‘Homesteading and Property Rights; or “How the West Was Really Won”, 34 Journal of Law and Economics, 1-23.
  43. Damodar Valley Corpn. v. State of Bihar, AIR 1961 SC 440.
  44. Damodar Valley Corpn. v. State of Bihar, AIR 1961 SC 440.
  45. Ibid.
  46. Section 4 of The Sales of Goods Act, 1930.
  47. Halsbury's Laws of England, Third Edition, Volume 19, paragraph 823, at pages 510-511.
  48. Instalment Supply (P) Ltd. v. Union of India. (1962) 2 SCR 644.
  49. Property, Title and Debt in Sale of Goods; 29 NLSI Rev 21 (2017).
  50. Book Review: Law of Sale of Goods, (2010) 3 NUJS L Rev 543.

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