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English law or Roman-Dutch law:

Leasing is an asset renting activity, and is therefore, governed by common law. Sri Lankan elgal system is a mixture of Anglo-Saxon legal system, Roman-Dutch legal system, and local legal traditions called the Kandyan law, as also Islamic law in certain provinces.

In view of the unclear legal heritage, the sources of Sri Lankan common law on lease transactions have not been clear to the author, may be due to lack of proper on-sight study. Steven Gilyeart, an American legal expert who authored the model leasing law for Sri Lanka has done a study of Sri Lankan leasing system particularly in connection with lease transactions, and he feels that in precedents related to leasing, Courts have cited both the English mercantile law as well as the Roman Dutch law. In response to the author's query, D L & F. De Saram, a leading law firm in Sri Lanka confirmed that for the general law of contracts, it is English texts which are followed in Sri Lanka, whereas for matters such as consideration, justa causa, etc., it is the Roman law that prevails.

There is a substantial difference between the English common law, and the Roman Dutch Civil law when it comes to transactions in properties. Roman law places more emphasis on possession of properties than on legal title. Under Roman law, a continued possession of a property by a possessor may even divest the legal owner of his rights over the property. The Roman maxim in this regard is: "longa possessio parit jus possidendi, et tollit actionem very domino" - having long possession produces the right of possession, and takes away from the true owner his action.

Roman law, as also English common law, distinguishes between properties that require a formal process for transferring title therein, and those that do not. The former are called "res mancipi" and the latter are called "res nec mancipi", that is, those properties that require mancipation, and those that do not.

The English law equivalent of this principle is the distinction between movable and immovable property: transactions in movable property do not require any legal conveyancing; while transactions in immovable properties do.

Under Roman-Dutch law, the above principle is not limited to movable properties: it extends to land, slaves and animals (all required for farming).

In context of lease transactions, the basic issue is the ownership rights of the lessor over properties given on lease, and the attributes of a true lease transaction. English common law fully suports the ownership of the lessor over goods leased by him, as a lease is regarded as a bailment transaction. Even with the application of Roman-Dutch civil law in Sri Lanka, it cannot be said that the lessor would have any difficulty in asserting his ownership rights, since the three conditions under which the possessor of a property under Roman law gets clear title are:

  • Possession
  • Adverse possession, that is exclusive rights of possession: the lessees rights are conditional and not exclusive or unconditional
  • Prescription, that is, intent to transfer property: this is sure not the case in case of leases.

Since the lessor unequivocally delivers a lease property to the lessee for use for a certain period, after which to revert the property to the lessor, there is no question of a lessee acquiring any rights other than personal rights in the leased asset. Section 18 of the Sale of Goods Ordinance also provides that property in goods will be taken to pass only when intended by parties to pass. Hence, the Roman-Dutch Law maxims on possession being treated as title do not hold any relevance to Sri Lanka.

Therefore, in view of the author, the leasing law in Sri Lanka, in absence of a specific enactment, will be the English common law as applying to bailments.

These common law principles have been discussed in detail in Chapter 3 of this booklet.

Regulation of hire-purchase transactions

The sweep of the law: takes all HP agreements, leaves all lease agreements:

Sri Lanka enacted the Consumer Credit Act in 1982. It borrows the title from the UK Consumer Credit Act 1974 but the text from the English Hire-purchase Act 1965.

The title is, therefore, misleading. The Act, though titled Consumer Credit Act, is not limited in application to consumer credit only - it applies to all kinds of hire-purchase transactions.

This, in view of the author, is a palpable legislative mistake. In order to understand this point, one as to quickly realise the following:

  • The distinction between lease and hire-purchase, though historically valid, has been becoming unimportant over time.
  • Historically, hire-purchase has been associated with consumer transactions or transactions in vehicles, and leasing with plant or machinery, but that distinction remains no more valid now: there are leases of vehicles and hire-purchase of plant or machinery.
  • The underlying intent in the Hire-purchase legislations in UK, Australia, New Zealand, etc. was regulation of hire-purchase transactions where the consumer was involved.
  • Therefore, though the UK Act of 1965 dealt with all hire-purchase transactions, in 1974, it was merged into the Consumer Credit Act, with application limited to only transactions with consumers.
  • The same is true for the USA: the Truth-in-Lending law regulates only consumer financing transactions.
  • The basic intent of the law is the regulate financial dealings where the consumer is involved: the instrument does not matter - whether lease, hire-purchase, instalment sale or a plain loan.
  • At the same time, transactions in capital goods should not be subject to regulation, as both the parties have equal bargaining power and there is no reason for the State to interfere in such transactions.

In view of the above, the entire thrust of the Sri Lankan Consumer Credit Act is mistaken: it ignores who the beneficiary of the contract is, and it chooses a wrong basis of regulation, based on the nature of the instrument involved. In today's commercial world, infinite variations of consumer financing transactions are being used. For example, there is no denying the fact that many of the lease transactions are substantively similar to hire-purchase transactions: therefore, the Consumer Credit Act regulating hire-purchase transactions and leaving aside all lease transactions does not serve the purpose of the law.

At the same time, the present sweep of the law covering all hire-purchase transactions makes hire-purchase an unfit instrument in transactions with a business entity.

It would be noteworthy that in line with UK, Australia and New Zealand, India also tried enacting a hire-purchase regulation way back in 1972. The law was enacted, but never enforced. It lies in suspended animation for last 26 years, and no one has any cause of concern. No one's interest has been put to jeopardy by reason of the enactment not being there. On the other hand, it is felt that if the law were there, it would have created scope for litigation, created inflexibility in structuring hire-purchase transactions, and generally proved to be unproductive.

Conditions of the Act override agreement between parties:

Though it is understandable that statutory rights and liabilities cannot be contracted out, that is, a clause in a contract cannot take away a right vested by law, the provisions of the Consumer Credit Act have been fortified by the Unfair Contract Terms Act, 1997.

Hire-purchase always implies commodity risk:

Section 31 of the Act defines a hire-purchase agreement as an agreement for hiring of goods such that

  1. the hirer pays the periodical instalments of hire; and
  2. (i) either the hirer has the option to buy the goods in accordance with the terms of the agreement; or

(ii) the ownership in goods is transferred upon the hirer making the last of the instalment payments.

At a first glance, the above definition leads to a significant difference between English law of hire-purchase and the Sri Lanka Consumer Credit Act. Under the English law, as also in the Indian Hire-purchase Act, there is a distinction between hire-purchase and conditional sale. Conditional sale is one where the hirer shall automatically become the owner of the hired goods upon the payment of the last instalment.

However, the part of the definition which seems to include a conditional sale as a hire-purchase transaction is only illusory, because sec. 8 (1) incorporates a statutory condition entitling the hirer to return the goods at any time and thereby terminate the contract of hire. Therefore, basically, the meaning of a hire-purchase agreement in Sri Lanka remains the same as in English law.

This is distinct from hire-purchase where the hirer merely has an option, not obligation to buy the goods. The essential feature of a hire-purchase agreement which distinguishes it from a conditional sale or credit sale is that the hirer is given an option to purchase the goods but is under no obligation to do so. Unlike the buyer under a conditional sale, he is not committed to paying the full price but may terminate the agreement without exercising his option to purchase. In K Narayan v. Laxmi Narsimman AIR 1955 Hyd. 104 (FB), it was held that the distinguishing mark of a hire-purchase agreement both in India and England has been that where a person has a right to terminate the agreement for hire at his pleasure and is not bound to pay for the value of the goods, it is a hire-purchase agreement. The Rajasthan High Court further observed that the option should be a real one, and should not compel the hirer to buy the goods - the obvious indication of the High Court is towards an option to terminate, where the penalty payable for termination would make the option impractical. [Dalpat Rai v. Manohar Lal and Sons AIR 1974 Raj. 61; see also Bhimji N Dalal v. Trust Corporation Ltd. AIR 1930 Bom. 306; Damodar Valley Corporation v. State AIR 1961 SC 440]

The above distinctive feature of a hire-purchase transaction leads to a basic difference between hire-purchase and plain lending transactions. In plain loans, the lender does not take any risk or reward in the value of goods. In a hire-purchase transaction, the owner-financier assumes asset-based risks by allowing the hirer a right of returning the goods without completing the transaction. In other words, a hire-purchase agreement cannot statutorily be non-cancellable whereas there is no such condition in case of leases, for which no such regulation exists. This underscores a very significant need to seriously look at leases as an alternative to hire-purchase, in cases where goods risk is significant.

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