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A Note on Hire-Purchase and Chattels

Mortgage in Kenya

Margaret Rogers

Journal of African Law / Volume 19 / Issue 1-2 / March 1975, pp 155 - 162
DOI: 10.1017/S0021855300006975, Published online: 28 July 2009

Link to this article: http://journals.cambridge.org/

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Margaret Rogers (1975). A Note on Hire-Purchase and Chattels Mortgage in
Kenya. Journal of African Law, 19, pp 155-162 doi:10.1017/
S0021855300006975

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Vol. 19 Nos. 1 & 2 Hire-Purchase and Chattels Mortgage in Kenya 155
subject of hire-purchase, which wasfirstenacted in 1938, is in force in Kenya.
The law to be applied is the law of contract under the Indian Contract Act
and at common law; the Indian Contract Act, as in force in Kenya, makes
no special reference to hire-purchase contracts."
The court went on to decide that the common law of England in regard
to hire-purchase contracts would 1
apply. In 1970, the Kenya legislature
passed the Hire Purchase Act which came into operation on the November
2nd, 1970.2 However, the common law rules will apply to hire-purchase
contracts which fall outside the provisions of the Act and will also apply
where the Act is silent.
At common law, in hire-purchase contracts with an option to purchase,
it is the duty of the owner to deliver possession to the hirer, and to transfer
ownership to him when he exercises his option to purchase. It is the duty of
the hirer to take the same care of the goods while in his possession which a
prudent and reasonable man would take. The hirer will accordingly be
liable for damage caused by his negligence, though not for damage caused by
fair wear and tear.
The hire-purchase contract with an option to purchase is a contract of
bailment and not of sale; the Sale of Goods Act3 does not therefore apply.
In English law, in hire-purchase contracts which do not fall within the
statutory limits, terms are implied which are similar to those applicable to
contracts within the Hire Purchase Act of England. In Kenya, the position
of a hire-purchase contract entered into before the Hire Purchase Act of
Kenya came into force, was considered in the case of Massey-Harris & Co. v.
J. H. Muller.* In that case the court found that the agreement was not a
contract of sale and therefore the Sale of Goods Act did not apply. However,
the Indian Contract Act of 1882, which applied to Kenya at that time, was
silent as to hire-purchase contracts. The court held that section 150 of the
Indian Contract Act implied into the contract a condition or warranty
that the goods which are the subj'ect of a contract shall not be subject to any
fault which materially interferes with the use thereof. Although it was held
that section 16 (2) of the Sale of Goods Act did not apply, the court was of
the opinion that the conditions and warranties embodied in that section
ought to be implied in the transaction which was very closely akin to a contract
of sale. From this judgment it would appear that in hire-purchase agree-
ments which fall outside the Hire-Purchase Act, the courts are prepared to
imply into the agreements conditions and warranties similar to those implied
into a contract of sale. The court in the Massey-Harris case considered the
conditions and warranties which are set out in the Hire Purchase Act, 1938,
of England and appeared to accept that the conditions of fitness for purpose
and that the goods hired will correspond to the description were two essential
conditions.
Generally the courts have been prepared to apply the common law in
regard to hire-purchase in line with English decisions but it was largely the
cases of hardship caused in regard to the question of re-possession of the
goods on termination of the agreement that led to pressure within Kenya
for legislation on hire-purchase.
At common law, on termination of the agreement, the owner is entitled

1
1
Cap. 507.
L.N. 181 of 1970.
'Cap. 31.
* ['9591 E.A. 43 "
156 Hire-Purchase and Chattels Mortgage in Kenya [1975] J.A.L.
to re-possess the goods. In the early days of instalment credit in England,
this right of possession was grossly abused. Owners who had received sub-
stantial payments under the agreement could take advantage of the slightest
and most technical default as an excuse to terminate, recover the goods and
make a large profit out of the more than adequate rental already paid by the
hirer for his use of the goods. These practices were known as "snatch backs".
Legislation was introduced in England in the Hire Purchase Act of 1938 and
brought up to date by the Hire Purchase Act of 1965. Under the English
legislation, after one third of the hire-purchase price has been paid or
tendered, then, provided the hirer has not himself determined the agreement,
the owner of the goods cannot enforce any right to recover possession of the
goods from the hirer otherwise than by an action in the county court. Con-
travention of this provision terminates the agreement and the hirer is
discharged from all liability. The Act confers a substantial measure of
protection on a hirer under an agreement within the Act but there are no
restrictions on re-possession in other cases. At common law, when the goods
have been taken back, the hirer has no right to redeem them nor has he any
rights over the surplus resulting from a sale of the goods by the owner.
It was in an attempt to remedy these injustices that the Kenya legislature
in 1970 passed the Hire Purchase Act. This Act differs from the English Acts
in several respects. It applies to all hire-purchase agreements entered into
after its commencement under which the hire-purchase price does not exceed
the sum of eighty thousand shillings other than a hire-purchase agreement
in which the hirer is a body corporate, wherever incorporated. This reference
to body corporate is clearly meant to exclude purchases by co-operative
societies as well as registered companies.
A registry is established1 for the purpose of registering hire-purchase
agreements and every hire-purchase agreement 2 must be delivered for
registration within thirty days after its execution. Failure to register the
agreement renders it unenforceable. As the agreement is not void, a defendant
under an unregistered agreement might waive the section and in such a case
an unregistered agreement would be valid. The protection to a potential
buyer of goods which are already the subject of an unregistered agreement
is therefore limited. The effect of registration is to give notice to a potential
buyer of goods, on inspection of the register, of any registered agreement in
existence. There is no provision in the Act in regard to mere registration
constituting notice of the agreement and to that extent the Act is less
effective than the Chattels Transfer Act.3
Before any agreement is entered into, the owner must make the cash price
known to the hirer.4 This provision is intended to bring to the knowledge of
the hirer the long-term effects of the agreement, viz. that he pays considerably
more in the end for the same goods. There is no provision, however, as in
the Hire Purchase Act of Tanzania, that a Swahili translation of the agree-
ment, should be delivered to the hirer by the owner. Although this provision
in the Tanzania Act has been rendered ineffective by allowing the owner up
to 21 days after the date of the agreement within which to deliver such a
translation, the intention behind the provision is a worthy one and might
well have been improved upon by the Kenya legislature instead of being
completely overlooked. There must be instances of unsuspecting hirers enter-

3 5 ( )
See p. 158 infra.
S. 6 (1).
Vol. 19 Nos. 1 & 2 Hire-Purchase and Chattels Mortgage in Kenya 157
ing into onerous contracts without any clear understanding of their terms.
Section 8 sets out the conditions and warranties which shall be implied
into a hire-purchase agreement as follows:
"(a) a condition that the owner will have a right to sell the goods at the
time when the property is to pass;
(b) a warranty that the hirer shall have and enjoy quiet possession of the
goods;
(c) a warranty that the goods will be free from any charge or encumbrance
in favour of a third party at the time when the property is to pass;
(d) except where the goods are second-hand goods and the agreement
contains a statement to that effect, a condition that the goods shall be of
merchantable quality:
Provided that no such condition shall be implied by virtue of this subsection
as regards defects of which the owner could not reasonably have been aware
at the time when the agreement was made or, if the hirer has examined the
goods or a sample of them, as regards defects which the examination revealed
or ought to have revealed."
In the situation where a hirer has made known to the owner the particular
purpose for which the goods are required, there shall be an implied condition
that the goods will be reasonably fit for that purpose.1 This is a wider pro-
vision than under the Sale of Goods Act2 where the buyer must show not only
that the seller knew the purpose for which the goods were required but also
that he, in buying, relied on the seller's skill and judgment and the goods are
of a description which it is in the course of the seller's business to supply.
However, section 8 (4) clearly states that these conditions and warranties
apply to sales of goods under hire-purchase agreements only and will not
affect sales under the Sale of Goods Act. These conditions and warranties
set out above shall apply notwithstanding any agreement to the contrary.
However, the wording of the section is somewhat obscure as it goes on to
say that the owners shall not be entitled to rely on any provision in the agree-
ment excluding or modifying the condition in regard to fitness for purpose
unless he proves that before the agreement was made the provision was
brought to the notice of the hirer and its effect made clear to him.
The most controversial provision is that in regard to the recovery of
possession. The Act states that where two-thirds of the purchase price has
been paid by the hirer, the owner cannot take any steps to recover the goods
except by court action.3 Two-thirds of the purchase price will in most cases
amount to the full market value of the goods allowing for depreciation. The
English Acts provide that no steps may be taken to recover the goods after
one-third of the purchase price has been paid, except by order of the court,
and one must assume that the legislature were persuaded by the finance
companies, on whom would fall the risk of loss and whose operating costs
would be substantially increased if forced to go to court in most cases in
order to secure re-possession. In Tanzania, where the Hire Purchase Act
contains a similar provision to that in the Kenya Act, the banks and the
finance companies withdrew from hire-purchase financing completely on the
introduction of the Act. There persons seeking to purchase consumer durables
on credit were forced to use chattels mortgage which until then had been an
unpopular form of credit financing. In Kenya, chattels mortgage was much

1
S. 8 (2).
Gap. 31.
' S . 15.
158 Hire-Purckase and Chattels Mortgage in Kenya [1975] J-A.L.
more widely used and the banks may have found that the Act will not
noticeably increase the number of hire-purchase transactions.
One interesting feature of the Act is the requirement that all persons
carrying on hire-purchase shall do so only under a current licence. A
licensing officer is appointed under the Act and is given power to grant a
licence on application, or grant it with conditions or to refuse to grant it.
This may be an attempt to control the quality of credit given. No other
provision of the Act does anything towards ensuring that credit is only given
to suitable debtors and for suitable purposes. This may or may not be desir-
able but the licensing provision does at least ensure that, if it is desirable, it
can be done. In Tanzania, with the withdrawal of the finance companies,
the National Bank of Commerce has taken over their functions in regard to
the financing of hire-purchase sales but it appears to be restricting its efforts
to the purchase of capital goods such as machinery and transport vehicles,
rather than consumer goods.
CHATTELS MORTGAGE

What is a chattel ? In the Chattels Transfer Act of Kenya1 the definition

of a chattel is:
"Any movable property that can be completely transferred by delivery and
includes machinery, stock and the natural increase of stock as hereinafter
mentioned, crops and wool, but does not include:
(a) title deeds, choses-in-action, negotiable instruments;
(b) shares and interests in the stock, funds or securities of any government or
local authority;
(c) shares and interests in the capital or property of any company or other
corporate body;
(d) debentures and interest coupons issued by any government, or local
authority, or company or other corporate body."
The most interesting decisions in Kenya have related to the question of
whether or not "chattels", as defined in the Kenya Act, could include houses,
especially those constructed in certain areas of Mombasa. In the case of
Suleman Virji & Sons v. Kassam Amersi,2 the property consisted of a building
of corrugated iron walls and roof erected on a stone plinth. The corrugated
iron sheets were nailed together, the walls resting on the plinth; there were
wooden posts used for supporting the roof and these posts were cemented into
the plinth. The court found as a fact that the defendant had the right to
remove the structure from the land and held that the house was a chattel.
A chattels mortgage in which the house was included was valid.
In Sulenwris case the court did not consider whether the house fell within
the definition of "a movable property, that can be completely transferred by
delivery". However, that point was considered in the later case of Saleh v.
Eliqfri,3 in which BOURKE, J. said:
". . . . I find it difficult to appreciate how a house in the nature of the house
in question can be properly said to be a chattel within the meaning of the
definition. . . . It could only be 'completely transferred by delivery' by reduc-
ing it to pieces of wattle wood and dried mud or daub with particles thereof.
By such a process, the whole character of the thing would be gone and its
state hardly more enviable than that of the late lamented Humpty-Dumpty."
1
Cap. 28.
9 E.A.L.R. 33.
24K.L.R. (II) 17.
Vol. 19 Nos. 1 & 2 Hire-Purchase and Chattels Mortgage in Kenya 159
Although the state of the law in regard to the definition of what is 'movable
property' remains unsettled, it is doubtful if the early Kenya decisions would
be followed at the present time.
One further oddity in the definition of chattels within the Act is that in
terms of s.2(a), choses-in-action are specifically stated not to be included
within the definition. On the other hand, s.26(i) provides that book or other
debts shall be deemed to be chattels. In the case of Rubia Ram v. Karsan
Murji,1 Chief Justice Paul said:
"Now 'book or other debts' are undoubtedly choses-in-action so that there
is obviously an inconsistency between s.27 and the definition of 'chattels'
in s.2. That inconsistency, however, though it is an example of untidy
draughtsmanship, gives me no trouble, as the very definite and specific
enactment contained in s.26 must prevail over the definition, by which s.2
only applies 'unless the context otherwise requires'."
In discussing the form of a chattels mortgage, Mr. Justice Farrell in the
case of Kressman v. LakhanP quoted with approval a passage from the judg-
ment of Lord Halsbury in the case of Charlesworth v. Mills at p. 235:
"That the Bills of Sale Acts of 1854 and 1878 were intended to prevent
false credit being given to people who had been allowed to remain in possession
of goods which apparently were theirs, the ownership however, of which they
had parted with, is manifest enough by the language of those statutes. The
Acts intended, in a case with creditors, that if people were allowed to remain
in possession of goods, of which nevertheless the ownership was no longer
theirs, those goods and chatdes should be subject to the execution of bona fide
creditors who ought not to have been induced to give credit by the apparent
ownership of the goods being in those persons, and who were therefore entided
to have their debts satisfied when by the default of the assignees of those goods
they had been allowed to continue in possession of persons to whom the
property no longer belonged. That was the intended policy; and for such
purposes it is manifest that the legislative would desire to give the widest
possible interpretation to every one of the documents by which the ownership
was really intended to be practically changed, while the goods still remained in
the apparent possession and dominion of the persons from whom the ownership
had nevertheless really passed away."
Although Lord Halsbury's intentions and sentiments are clear, Mr. Justice
Farrell, that master of the succinct and logical judgment, must have found it
hard to approve of that passage of the most inelegant English.
Unlike a bill of lading or a bill of exchange, a chattels transfer instrument
(or a bill of sale as it is still commonly called) has no particular form.
However, it must not materially depart from the form prescribed in the
Schedule to the Act in that it must include the amount of the sum advanced,
a description of the security, the rate of interest payable and the attestation
of the owner of the goods. A most important decision in the history of Kenya
law was given in 1970 on a case involving the attestation of an instrument
within section 15 of the Chattels Transfer Act. The case is Dodhia v. National
& Grindlays Bank, Ltd. and Another* The facts in the case were relatively
simple. On June 24th, i960, and later, on November 19th, 1961, National
& Grindlays Bank, Ltd. granted overdraft facilities to Dodhia on the security
of the goods in the ownership or disposition of the mortgager which might
from time to time be brought into the three shops detailed by Dodhia in the
instrument of hypothecation. By clause 9 of the agreement, the Bank, or any

1
(1947) E.A.G.A. 1.
[1964] E.A. 249.
3
[1970] E.A. 195.
160 Hire-Purchase and Chattels Mortgage in Kenya [1975] J.A.L.
person authorised by the Bank was empowered at any time or times to enter
any place where the goods might be and "take or retain possession of the
goods hereby hypothecated or any of them and all or any promissory notes
or bazaar chits for the time being held by us for the proceeds of the said
goods heretobefore sold by us". By clause 10 the Bank was empowered, if
repayment of the amount outstanding was not made on demand, to sell the
hypothecated goods. None of these letters of hypothecation was attested or
registered as required by the Chattels Transfer Act.
On 14th and 15 th July, 1962, the Bank entered upon the shop premises
and seized the goods therein and locked the shops; on the subsequent day,
Messrs. Peck & Barber as transporters for the Bank, entered upon the
premises and carried away the goods. These goods were subsequently sold.
The plaintiff filed a suit against the Bank claiming, inter alia, a declaration
that the letters of hypothecation were wholly void, and damages for trespass
and conversion of the goods; the Bank counter-claimed for the amount
owing to it by the plaintiff; the plaintiff also filed a separate suit against the
Bank and the transporters, claiming an account and damages.
Sir Charles Newbold, President of the Court of Appeal, gave judgment
on November 21st, 1969, the case having been stood down to await judgment
of the Privy Council in an earlier case on similar facts. He said:1
"The first issue is whether the letters of hypothecation are totally invalid
by reason of lack of attestation. If they are, then clearly the Bank and the
Transporters are liable in Trespass in entering the premises and seizing the
goods. As the decision of the Privy Council in the case of Dharamshi Vallabhji v.
National & Grindlays Bank, Ltd? given at a time when it was the final court of
appeal from Kenya, to the effect that unattested letters of hypothecation are
valid inter partes would in the past have been binding on this Court, this issue
raises the question of judicial policy as to the extent to which this Court, now
that it is the final court of appeal for Kenya, and indeed, also for Tanzania
and Uganda, will continue to apply the principle of stare decisis. . . . If there
is to be any relaxation of the principle, then there will fall for consideration
the nature of the decision of the Privy Council given at a time when it was the
final court of appeal, whether that decision was wrong and whether, even if
it was wrong, this Court should now depart from it.
This Court, when it was a subordinate court of appeal, has always con-
sidered itself bound by the principle of stare decisis. . . .
It is, I think, beyond dispute, that since this Court became thefinalcourt
of appeal for the sovereign countries of Kenya, Tanzania and Uganda, no
decision of the Privy Council or of any English court or of any foreign court is
binding on this Court. Indeed, no such decision would be binding on any
court in Kenya, Tanzania or Uganda, unless it was a decision of the Privy
Council on an appeal from any of those countries, though in so far as any
decision sets out what is the English law, the High Courts of Kenya, Tanzania
and Uganda would normally accept such to be the position and this Court
would, I have no doubt, have regard to any decision of an English court
setting out what is the English law. It would however, always be a matter for
the courts of Kenya, Tanzania and Uganda to decide what is the law of those
countries. Even where English law is applied in any such country, its applica-
tion would be subject to such modifications as the circumstances of the country
and its inhabitants required; and it would be for the courts of such country to
determine what those modifications, if any, would be in any particular case
in order to determine what is the law of such country."
Sir Charles went on to re-iterate the need for certainty and uniformity

At p. 198.
1
[1964] E.A. 442.
Vol. 19 Nos. 1 & 2 Hire-Purchase and Chattels Mortgage in Kenya 161
in the law but concluded that there was a need for greater flexibility in a
final court of appeal than there is in any other court in the judicial hierarchy.
He noted that the Privy Council, when it was the final court of appeal for
Kenya, Tanzania and Uganda, never considered itself bound by its own
decisions. He went on to say:
"For these reasons, I am satisfied that as a matter of judicial policy this
Court, as the final court of appeal for Kenya, Tanzania and Uganda, while it
would normally regard a previous decision of its own as binding, should be
free in both civil and criminal cases to depart from such a previous decision
when it appears right to do so. It will, of course, exercise this power only
after careful consideration of the circumstances of the particular case, and I
would not seek to lay down any more detailed guide to the circumstances in
which such a departure should take place as the matter would be best left to
the discretion of the Court at the time it was up for consideration."
Having come to that conclusion, the President then had to decide whether
it made any difference that the previous decision which fell for consideration
in the instant case was that of the Privy Council and decided that as the
Court had now taken over the functions of the Privy Council, decisions of the
Privy Council were on the same footing as previous decisions of the Court of
Appeal itself. However, he had much more difficulty in deciding whether the
decision in Vallabhji's case was clearly wrong. In that case the Privy Council
had reversed a unanimous decision of the Court of Appeal with Sir Charles
himself presiding and which had concluded that lack of attestation rendered
the letters of hypothecation totally invalid. He reviewed the reasoning of the
Privy Council in Vallabhji's and quoted with approval the following passage
from the dissenting judgment of Lord Morris of Borth-y-Gest:
"In regard to section 15 where there is a mandatory direction in a section
dealing with the validity of instruments I consider that the provision as to
attestation is a positive and obligatory one: failing obedience to it, an instru-
ment is not a valid instrument. That being so, it seems to me that in failing to
have the instrument attested the Bank failed to secure a valid instrument."
However, Sir Charles went on to observe that although he considered the
decision of the Privy Council to be wrong, it was not an unreasonable one
and that it was up to the legislature to rectify the statute if the construction
was not justifiable. The Court held that the letters of hypothecation were
justifiable inter partes.
The President went on to consider the effect of the letters of hypothecation
and the rights which arose under them. He said:
". . . . Hypothecation of goods, at least in the sense in which the letters of
hypothecation were given, is a means of pledging the goods as security for a
debt or demand without the pledgor parting with the possession of the goods.
There is very little case law in England and virtually none in East Africa, on
the nature of the rights created by hypothecation but it seems that the Bank
not infrequently makes use of this form of security. As regards goods in existence
at the time of the hypothecation, since they are pledged as security an interest
in them must be created by the act of hypothecation; but as possession of the
goods remains with the borrower, the lender does not by the mere act of hypo-
thecation acquire any right to take possession of the goods nor any right to sell
them, but merely a right by judicial proceedings to realise the value of the
goods. If the lender seeks to obtain rights, such as a means of enforcement of
the security without recourse to litigation, additional to the rights created by
the act of hypothecation, then he must obtain those rights by agreement with
the borrower. That is what the Bank did, as the letters of hypothecation, in
162 Hire-Purchase and Chattels Mortgage in Kenya [1975] J-A.L.
addition to hypothecating the goods, gave to the Bank a means of enforcement
without recourse to the courts by conferring upon the Bank a power of entry
upon the premises, a power of seizure of the goods, a power of sale of the seized
goods and a power of applying the proceeds of sale towards the satisfaction
of the debt "
The Court considered the English law in regard to the nature of the interest
which would be created in future goods by the letters of hypothecation and
concluded that immediately these goods were acquired by the plaintiff an
interest in rem in them was created in favour of the Bank. This interest
precluded the plaintiff from withdrawing his licence to the Bank to seize the
goods contained in the letters of hypothecation. The result was that in respect
of both the future goods and the existing goods, the Bank, when it exercised
the power of seizure, was exercising a power given for valuable consideration
to enforce a pre-existing interest in rem in respect of the goods hypothecated.
The last point for consideration was whether the Bank had a sufficient
interest in the goods which would entitle it to enter the plaintiff's shop and to
use reasonable force in order to obtain possession of the goods. The Court
re-stated the English law on the point as that while certain licences create no
interest in property and are revocable, a licence coupled with an interest
is irrevocable, in the sense that it cannot effectively be withdrawn
unilaterally until the interest is served. The President held that the licence
of the Bank given by the letters of hypothecation was a licence coupled with
an interest, as it was a licence intended to give effect to the Bank's rights in
rem in the hypothecated goods. Consequently it could not effectively be
revoked by the plaintiff. The Bank was entitled, subject always to no major
breach of the peace being caused, to use force in order to seize the goods,
notwithstanding that the plaintiff had purported to withdraw the licence and
notwithstanding that the plaintiff resisted the entry and seizure, so long as
only reasonable force which was not excessive in the circumstances was
used. The plaintiff had not shown that excessive force was used and this onus
was on him. Judgment in favour of the Bank was upheld.
Failure to register an instrument under the Chattels Transfer Act renders
the instrument void as against:
(a) the official receiver or trustee in bankruptcy of the grantor;
(b) the trustee of an assignment for the benefit of the creditors of the
grantor;
(c) an execution creditor of the grantor.
The instrument is void in respect of the chattels comprised therein which
are in the possession, or apparent possession, of the grantor at the date of the
bankruptcy, assignment or execution.1 So long as the instrument continues
to be registered, the chattels comprised therein shall not be deemed to be in
the possession, order or disposition of the grantor within the meaning of the
Bankruptcy Act. All persons are deemed to have notice of an instrument
registered within the terms section 4 of the Act so soon as registration takes
place. This is an important provision and makes the Act much more effective
than the Bills of Sale Acts in England.

'S. 13.