SC:Repossession of vehicle by financier on default is no deficiency in service

The Hon’ble Supreme Court, on 1st October 2020, in the matter of  M/s Magma Fincorp Ltd. vs. Rajesh Kumar Tiwari pronounced that the repossession of a vehicle under hire, in accordance with the terms and conditions of a hire purchase agreement, upon default in payment of hire instalments and refusal to release the same on mere assurance of the hirer to clear outstanding arrears of hire instalments, and pay future instalments in time, does not constitute ‘deficiency’ in service.

Questions before the Hon’ble Supreme Court

Whether the Financier is the real owner of the vehicle which is the subject of a hire purchase agreement, and if so, whether there can be any impediment to the Financier, taking repossession of the vehicle, when the hirer does not make payment of instalments in terms of the hire purchase agreement ?

Whether service of proper notice on the hirer is necessary for repossession of a vehicle which is the subject of a hire purchase agreement, and if so, what is the consequence of non-service of proper notice ?

The Hon’ble Supreme Court observed that:

The Consumer Protection Act, 1986 has been enacted to protect the interests of consumers, by making provisions for the establishment of Consumer Councils and other fora for speedy redressal of consumer disputes and for matters connected therewith. (Para 21)

The for a constituted under the Consumer Protection Act, 1986, are quasi judicial bodies, required to observe the principles of Natural Justice and to award relief of a specific nature and to award wherever appropriate, compensation to consumers. (Para 22)

The repossession of a vehicle under hire, in accordance with the terms and conditions of a hire purchase agreement, upon default in payment of hire instalments and refusal to release the same on mere assurance of the Complainant to clear outstanding arrears of hire instalments, and pay future instalments in time, does not constitute ‘deficiency’ in service. (Para 31)

The object of a notice before taking possession of a vehicle on hire under a Hire Purchase Agreement, is to enable the hirer, to make a written request to the Financier to revive the hire purchase agreement, upon payment of all outstanding dues together with damages, as might be mutually agreed upon. (Para 34)

A notice also draws the attention of the hirer to the alleged breaches of agreement on the part of the hirer, on the basis of which, the Financier claims to be entitled to take possession. Such notice gives the hirer an opportunity to show that the hirer had not, in fact, committed any breach of agreement. For example, the hirer might be able to show that the Financier had erroneously omitted to give credit to the hirer for payments made, or had not presented a cheque in its possession for payment, even though there were sufficient funds in the concerned bank account of the hirer, to honour the cheque. (Para 35)

Many self employed hirers, operate vehicles taken on hire, to earn a livelihood. Such vehicles are often run over long distances. A notice ensures that the hirer is not taken by surprise and has time to stop operating the vehicle, so that third persons using the vehicle on payment of charges are not put to sudden inconvenience by reason of re-possession of the vehicle. (Para 36)

No adverse inference could have been drawn against the Financier for not producing the Hire Purchase Agreement before the District Forum, when there was no allegation in the complaint of breach by the Financier of the Hire Purchase Agreement, in taking possession of the vehicle. (Para 43)

New case cannot be made out by way of evidence, when there are no pleadings to support the same. (Para 44)

The Consumer Protection Act, 1986 does not override the Contract Act, 1872, and other enactments in force, applicable to the service availed by the consumer from the service provider. (Para 56)

Punitive damages are not generally awarded in cases of breach of contract unless the act is so reprehensible that it calls for punishment of the party in breach, by imposition of punitive and/or exemplary damages. (Para 62)

Compensation which is compensatory, has to be assessed taking into account relevant factors, such as the loss incurred by the claimant, though some amount of guess work and/or estimation may be permissible. (Para 62)

The Financier continues to be the owner of the goods under a hire purchase agreement. The hirer simply pays for use of the goods and for the option to purchase them. The finance charge, representing the difference between the price and the hire purchase price represents the sum which the hirer has to pay for the privilege of being allowed to pay the purchase price in instalments. Where the hirer had defaulted in payment of instalments and the agreement specifically provided that the Financier was entitled to repossess the vehicle in case of default, no case was made out against the Financier. (Para 65)

An owner of goods, who purports absolutely to convey or acknowledges to have conveyed goods, and specifically purports to hire them under a Hire Purchase Agreement, is not estopped from proving that the real bargain was a loan on the security of the goods. (Para 73)

If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into, was to raise money. If the real transaction is a loan transaction, secured by a right of seizure of the goods, the property passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer’s title, and confer a licence to seize. (Para 73)

A hire-purchase is, however a more complex transaction where the owner enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase, exercisable by the customer on payment of all the instalments of hire, arises when the instalments are paid and not before. In such a hire-purchase agreement there is no agreement to buy goods; the hirer being under no obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire-purchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire-purchase agreement with the financier, but in substance evidences a loan transaction, subsequent to a hiring agreement, under which the lender is given the license to seize the goods. (Para 74)

Goods are let out on hire under a Hire Purchase Agreement, with an option to purchase, in accordance with the terms and conditions of the Hire Purchase Agreement. The hirer simply pays for the use of the goods and for the option to purchase them. (Para 77)

Until the option to purchase is exercised by the hirer, upon payment of all amounts agreed upon between the hirer and the Financier, the financier continues to be owner of the goods being the subject of hire purchase. Till such time the hirer remains a trustee and/or bailee of the goods covered by the Hire Purchase Agreement. (Para 78)

The Financier continues to remain the owner of a vehicle, covered by a hire purchase agreement till all the hire instalments are paid and the hirer exercises the option to purchase. Thus, when the Financier takes re-possession of a vehicle under hire, upon default by the hirer in payment of hire instalments, the Financier takes re- possession of the Financier’s own vehicle. (Para 79)

When the agreement between the Financier and the hirer permits the Financier to take possession of a vehicle financed by the Financier, there is no legal impediment to the Financier taking possession of the vehicle. When possession of the vehicle is taken, the Financier cannot be said to have committed theft. (Para 80)

Whether the transaction between a Financier and a purchaser/hirer is a hire purchase transaction, or a loan transaction, might be determined from the terms of the agreement, considered in the light of surrounding circumstances. However, even a loan transaction, secured by right of seizure of a financed vehicle, confers licence to the Financier to seize the vehicle. (Para 81)

Financier is the real owner of the vehicle, which is the subject of a Hire Purchase Agreement. (Para 87)

The Financier being the owner of the vehicle which is the subject of a Hire Purchase Agreement, there can be no impediment to the Financier taking possession of the vehicle when the hirer does not make payment of instalments/hire charges in terms of the Hire Purchase Agreement. However, such repossession cannot be taken by recourse to physical violence, assault and/or criminal intimidation. Nor can such possession be taken by engaging gangsters, goons and musclemen as so called Recovery Agents. (Para 87)

Whether the service of proper notice on the hirer would be necessary for repossession of a vehicle, which is the subject matter of a Hire Purchase Agreement, would depend on the terms and conditions of the Hire Purchase Agreement, some of which may stand modified by the course of conduct of the parties. If the hire purchase agreement provides for notice on the hirer before repossession, such notice would be mandatory. Notice may also be necessary, if a requirement to give notice is implicit in the agreement from the course of conduct of the parties. (Para 87)

If the hirer commits breaches of the conditions of a hire purchase agreement which expressly provides for immediate repossession of a vehicle without further notice to the hirer, in case of default in payment of hire charges and/or hire instalments repossession would not be vitiated for want of notice. (Para 89)

In a case where the requirement to serve notice before repossession is implicit in the hire purchase agreement, non service of proper notice would tantamount to deficiency of service for breach of the hire purchase agreement giving rise to a claim in damages. The Complainant consumer would be entitled to compensatory damages, based on an assessment of the loss caused to the complainant by reason of the omission to give notice. Where there is no evidence of any loss to the hirer by reason of omission to give notice, nominal damages may be awarded. (Para 90)

Punitive damages should, however, be granted only in exceptional circumstances, where the action of the Financier is so reprehensible that punishment is warranted. To cite an example, where a Financier erroneously and/or wrongfully invokes the power to repossess without notice to the hirer, causing thereby extensive pecuniary loss to the hirer or loss of goodwill and repute, a forum constituted under the Consumer Protection Act may award punitive damages. (Para 91)

Copy of judgement: Judgement_01-Oct-2020

-Adv. Tushar Kaushik 

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