Review of the Hire-Purchase Act 1959

Chapter Five

DISCUSSION OF EVIDENCE

Application of the Act

5.1 In 1959 the Hire-Purchase Act was predominantly the principal consumer credit statute. The Act regulated the hire-purchase agreement, offered various protections and defined rights and responsibilities of the hirer and the owner. Prior to the commencement of the Credit Act 1984 (Vic) and the recent commencement of the Consumer Credit Code in Victoria, the HPA was the primary consumer protection legislation in relation to hire-purchase agreements.[1]

It is one of the earliest examples of a uniform national code to protect consumers and was enacted to regulate all hire-purchase transactions, regardless of the nature or price of the goods.[2]

5.2 Its contemporary application has however increasingly become one of commercial finance. The Act no longer applies to consumer credit transactions. Consumer credit transactions are regulated by the Credit Act 1984 (if entered into before 1 November 1996) or the Consumer Credit Code (if entered into after 1 November 1996). Consequently, the hire-purchase transactions under the Act are now business transactions. It has been submitted to the Committee that the Act regulates transactions it was not intended to regulate.[3]

5.3 In relation to a choice of commercial financing products, hire-purchase is but one.[4] Other transactions include chattels mortgages and leases. These transactions are unregulated. A chattel mortgage is a mortgage over the equipment under which ownership passes to the borrower at the beginning and the financier has a mortgage over the property.[5] In contrast under a hire-purchase agreement, ownership does not pass until the completion of the agreement where the passage of title to the hirer at the end of contract is guaranteed. Under a lease there is no obligation on the lessee or the lessor as to the question of passing of title, rather it becomes a matter of a separate contractual arrangement at the end of the lease.

5.4 The inconsistencies in treatment of farmers and small business may be seen as being based on how a transaction is structured. If the transaction is structured as a mortgage to finance purchase of farm machinery the transaction will not be regulated but if the transaction is structured as a hire purchase transaction it is regulated.[6] Mr Viney commented to the Committee that the transaction costs are what drives the decision about the form of finance.[7] Mr Begg submitted that--

It is irrational to retain the HPA to provide for regulation where credit is required by commercial operators and farmers if, as will be the case, unregulated credit can be provided to commercial operators and farmers by changing the form of transaction to any loan on security, lease or credit sale under which title passes before delivery.[8]

5.5 The Committee considered the view that it makes little sense to have a heavily prescriptive Act governing just one of the three possible choices that are available for financing particular purchases of equipment.[9] Further, the Act applies equally to the transactions of small business and the major transactions of large corporations.[10]

5.6 With the introduction of the Consumer Credit Code on 1 November 1996 all credit transactions undertaken by individuals wholly or predominantly for personal, domestic or household purposes are covered by the Code. These transactions will be excluded from the Hire-Purchase Act 1959.

The upshot is that after 1 November the Hire-Purchase Act will apply only to hire-purchase contracts entered into with corporations as the hirers and hire-purchase contracts entered into with individuals as the hirers where the purpose of a transaction is more than 50 per cent commercial. That will be the remaining reach of the Hire-Purchase Act.[11]

5.7 Therefore, the Code applies to all transactions regardless of monetary amount where the credit provided is wholly or predominantly for personal/domestic or household use. The HPA will then only apply to transactions for the hiring of goods with an option to purchase or the purchase of goods by instalments where: the hirer is a natural person who acquires the goods for predominantly business purposes; the hirer is a corporation (other than a strata corporation); or the credit provider is not in the business of providing credit.[12]

5.8 As the Code has taken effect the question for the Committee's consideration, as posed by Mr Viney, is whether the Act should be retained for the protection of corporate hirers and individuals where the goods are for predominantly business (or investment) purposes.[13]

Rigidity of the Act

5.9 The Committee considered evidence that the Act was excessively technical,[14] overly prescriptive,[15] rigid and inconsistent with the current philosophy of product innovation,[16] and inconsistent with other laws.[17] Further, it was submitted to the Committee that the way the Act is drafted leads to a loss of business for Victoria.[18] The operation of the Act increases the cost of a transaction because financiers cannot use the same documentation,[19] must use one agreement per asset and are unable to establish a master agreement.[20] In essence, due to requirements of HPA a flexibility in the structuring of business transactions is not permitted.[21]

5.10 The Banking Finance and Consumer Credit Committee of the Law Council of Australia held the view that the application of the Act to business transactions 'interrupts and provides unnecessary barriers to doing business in Victoria'.[22]

5.11 The Committee was advised that the losses incurred by the owner or financier for errors under the Act are prohibitive. The Act provides for the automatic loss of all terms charges for omissions in the documentation. A failure to provide a pre-contractual statement to hirers before the signing of a contract will result in a loss of rights to the term charges. In contrast under the Credit Act 1984 and the Consumer Credit Code 1995 a failure to provide that statement can result in prosecution but not a loss of the term charges. If the term charges were lost there is a mechanism for reinstatement.

It is a serious matter. If you enter a hire-purchase transaction involving goods to the value of, say, $1 million for which the term charges are $400 000, they are gone forever: you cannot get them back. That is serious.[23]

5.12 Mr Begg submitted to the Committee that the Act prohibits variable interest rates, prevents agreements where equipment is to be supplied and installed, and where goods and services are also to be supplied.[24] The problems were identified by Mr Turner of the Commonwealth Bank of Australia as being: the inability to write variable contracts, or to include progress payments; that the goods must be identified; that there was no statutory recognition of variation to the original contract and that a fixed interest rate was chargeable.[25]

5.13 On the other hand, the Committee heard evidence from Mr Niven who gave the opinion that the Act is flexible[26], `simple and certain'.[27]

Continuing relevance of the HPA

5.14 The Committee was advised that although the Victorian Farmers Federation had not used the provisions of the Act in the recent past, it was of value five to seven years ago. According to Mr Manners, in the late 1980s there was `a very significant case was involving some 200 or 300 members'. The Committee was informed that the financier had made a technical error in the calculation of interest which was higher than that permitted under the Act. It was asserted that the existence of protections under the Act may therefore have a future use. Additionally, the protections are seen to provide an opportunity for an organisation such as the VFF `to keep the system honest'.[28]

5.15 A similar point was made by Mr Viney who referred to the fact that in situations where there may only have been a few cases arising under the legislation--

.. it is the existence of that provision that makes a credit provider act reasonably when a debtor has some temporary difficulty. So the provision itself serves a purpose. In fact, it is more effective if it arrives at the right result without the cost of legal proceedings[29]

5.16 On the prevalence of hire-purchase within the rural industry the Minister for Agriculture and Natural Resources, the Honourable Pat McNamara, MP, advised the Committee that hire-purchase arrangements account for some 3.6% of total farm debt in Victoria.[30] Figures supplied to the Committee by the Victorian Farmers Federation indicated that hire-purchase debt for 1988/1989 was 1.4% of total farm debt and increased to 3.6% in 1994/1995.[31] The Committee received evidence that the choice between hire-purchase and other forms of financing is largely one based on the relative taxation benefits rather than any consumer protections.

Protections under the Act

5.17 In evidence to the Committee, Mr Niven identified the Act as performing three important functions: first, by providing important disclosure of information to consumers; secondly, by providing clear and fair rules relating to repossession and enforcement; thirdly, by allowing the reopening of unfair transactions.[32]

5.18 The principal forms of protection to hirers may be identified as being--

• provisions regulating the formation and content of hire-purchase agreements and disclosure requirements, which impose a duty on an owner or a dealer to provide certain information in a prescribed form to a hirer (Part I);
• power of the court to re-open a hire-purchase agreement that is harsh and unconscionable or otherwise inequitable (s 24);
• requirements in relation to repossession (Part II), in particular, power of the court to order that goods repossessed from a farmer be restored if the court is satisfied that the farmer will be able to pay the instalments due and owing within 12 months of the repossession (s 25);
• capping of penalty interest rate at 8% (s 28(d)).[33]

5.19 As to the question of why protection is needed, the Consumer Credit Legal Service submitted that protection is needed because 'small business and farmers need to compare credit products and to be able to shop around'.[34] The view was also put to the Committee that the ability to shop around for the best commercial product actually increases competition.[35]

Loss of Protections

5.20 The Victorian Farmers Federation expressed concern for the loss of the protection the Act provides to farmers when purchasing equipment, farm machinery and the like under hire purchase arrangements.[36] It was anticipated by the VFF that--

In a deregulated system, and without the protection of the Hire Purchase Act, finance companies may well treat farmers adversely and exploit their power over farmers, particularly at certain times of the year and in certain crisis situations they face from time to time.[37]

Similarly, Mr Viney made the comment that--

The one area of loss for the small business community and farmers is the loss of the right to reopen a contract. If hire-purchase agreements become completely deregulated so that they have no statutory restrictions at all, in my view there is no guarantee that the forms of agreement will not deteriorate from the point of view of the rights of the hirers - and it would be possible for quite harsh terms to be included in them.[38]

5.21 The Committee was referred to comments made by Mr Justice Else-Mitchell and Professor Parsons, the authors of the main text on hire-purchase law in Australia, Hire-Purchase Law who described the operation of hire-purchase agreements before the existence of statutory protections--

A stock form of hire-purchase agreement was used and in general it had to be signed by every hirer notwithstanding that it involved an exclusion of virtually every benefit, and little or no variation was allowed to suit the circumstances of each particular hirer who was permitted the barest possible rights consistent with the purpose of the agreement. It was not every owner who exercised the stringent powers which were conferred by the normal hire-purchase agreement, but the unscrupulous trader did not shrink from subterfuge and extortion and often exercised his rights with the utmost vigour.[39]

5.22 Mr Niven, in evidence to the Committee, commented that a repeal of the Act would mean that there were no requirements for disclosure, no requirements on repossession and repossession notices, and a limited ability to reopen unfair transactions.[40] Chief Parliamentary Counsel also stated in her advice to the Committee that if the HPA were repealed there would be no disclosure requirements applicable to hire-purchase agreements in respect of goods for a business related activity entered into after 1 November 1996.[41]

5.23 In contrast the Australian Bankers Association submitted that the suggestion that the Act should be retained to protect farmers and small business was misplaced because the Act is prescriptive and imposes additional costs of compliance on credit providers which outweigh any benefit to the hirer in the commercial context.[42] The Australian Finance Conference conveyed to the Committee that it does not agree that the provision of specific sectoral protections (as under section 25 providing farmers with a 12 month moratorium facility) are sound policy or warranted. Further to this argument the AFC put that recourse to this provision has been minuscule.[43]

5.24 The Wimmera Rural Counselling Service informed the Committee that amongst solicitors, accountants, finance brokers and rural financial counsellors for the district there was very little active concern about section 25 of the Act which provided a 12 month moratorium of the repossession of a farmers equipment. The Committee was advised that in the opinion of the accountants hire-purchase was a better finance product than leases. However, the finance brokers for the area considered that the existence of the 12 month moratorium provision is the major reason why hire-purchase is little used in rural areas. This view was also shared by the rural financial counsellors. Nevertheless, the overriding view of the organisation was that--

.. farmers and small business are as unsophisticated in their dealings with financial institutions as most consumers. As consumers receive general protection across the whole range of financial products, so should farmers and small business.[44]

5.25 The Committee was advised by the Minister for Fair Trading, the Hon. Jan Wade, MP, that her main concern regarding the repeal of the Act would be the resulting lack of protection for farmers and small business. The Minister wrote--

The new Consumer Credit Code (which will replace the Credit Act later this year) will regulate hire purchase agreements, but only where the credit is provided wholly or mainly for personal, domestic or household use. Farming and commercial vehicle transactions will be excluded. In the absence of the credit act regulating farming hire purchase agreements after it is replaced with the Consumer Credit Code, the Hire-Purchase Act would be the only credit legislation existing for these agreements. This protection will be removed in the event that the Hire-Purchase Act is repealed.

It is necessary for farmers' hire purchase transactions to receive protection. In the event the hire-Purchase Act is repealed, it would be appropriate therefore, for the protective mechanisms currently existing in the Act concerning, for example, repossession and enforcement, to be retained in some form, perhaps in a new act with rural finance.[45]

5.26 A further matter identified by the Minister for Fair Trading related to implied terms. The Minister wrote and advised the Committee--

The Hire-Purchase Act places limitations on the exclusion of implied terms in hire purchase agreements. It is understood that implied terms could be so excluded under common law or, in certain cases, the Goods Act 1958. Repealing the Hire Purchase Act could result in reduced protection in this regard, and would require careful consideration.[46]

5.27 The Minister for Small Business, the Hon. Louise Asher, MLC, advised the Committee that the use of hire-purchase finance, particularly by small business, is uncommon. The Minister's discussions with employer organisations indicated that leases and borrowing arrangements are more prevalent within the business community. The Minister commented--

The fact that these types of financing arrangements are largely unregulated should indicate that preserving legislative protections for hire-purchase agreements need not be a priority for small business.[47]

The Minister however, distinguished the matter for farmers in recognition of the existing protections under the Act.

Re-opening of transactions

5.28 Commenting specifically on section 24 of the Act which provides for the reopening of hire-purchase transactions which a court considers harsh and unconscionable, Ms Lanyon informed the Committee that the provision is outdated and old fashioned.[48] The development of principles of equity mean that the legislative provision so framed is redundant. The provision governs the reopening of agreements but does not provide a list of factors which may be taken into account by a court when determining what is unjust or unconscionable and if there are to be changes in the equitable position what those changes might be.[49] She suggested that some of the issues as outlined by the High Court in the Amadio [50] case allow for the reopening of harsh and unconscionable transactions.

5.29 In the Amadio case, the High Court held that two elderly migrants unfamiliar with the written English language were under a special disability when they executed a mortgage in favour of the bank to secure an overdraft for their son. The disability was sufficiently evident to the bank to make it prima facie unfair or unconscientious for it to be allowed to rely on the guarantee. The Court discussed at length the notion of special disability for the purposes of the doctrine of unconscionable dealings. The New South Wales Court of Appeal in determining a matter of setting aside a guarantee on the grounds of unconscionability and undue influence, under the Contracts Review Act 1980 (NSW) stated that the applicable law relating to unconscionability was as stated by the majority of the High Court in Amadio, namely that relief for a transaction procured by unconscionable conduct was available where the injured party under the transaction established that the special disability was "sufficiently evident to that other party".[51]

5.30 Mr Gilbert of the Australian Bankers Association also commented to the Committee that the protections in the Act relating to contracts that are harsh or unconscionable are such that with the development of the law of equity, equity would grant relief. Thus, section 24 simply embodies common law concepts.

5.31 Mr Begg added that in 30 years of practice within the consumer and credit areas he had had no experience of section 24 being used.[52] Yet, Mr Viney considered that the extension of a minimal level of protection to small business from harsh or unconscionable contracts is of real importance.[53]

5.32 Ms Lanyon asserted that banks will prefer to vary a contract rather than enforce it. She advised the Committee that banks currently are only enforcing 10 per cent of contracts and are seeking variations of agreements with the aim that agreements will go to finality. Further she commented that most institutions are concerned with quality standards and their voluntary codes of conduct have sophisticated negotiation procedures.[54]

5.33 The Code of Banking Practice[55] seeks to foster good relations between banks and their customers and to promote good banking practice by formalising standards of disclosure and conduct which banks that adopt the Code agree to observe when dealing with their customers. The Code provides for disclosure of terms and conditions; principles of conduct and resolution of disputes. In his submission to the Committee, Mr Viney indicated that the standard of disclosure of voluntary Code of Practice is higher than that required under the Act.[56] The Rural Finance Corporation made a submission to the Committee stating that industry codes of practice were more appropriate to provide protections than those within legislation. The Corporation also stated that lease financing is now widely used as an alternative to hire purchase.[57]

Protections extended

5.34 In evidence before the Committee it was argued that the protections currently available to farmers may be extended for small business. Mr Begg commented that--

I find it hard to see why it is only the farmers who need the protection. There are plenty of other small business people in the community who would be equally deserving. .... If the protection is worth while, it should be available to everybody across a wide range of contracts, as it is in the credit area, where an equivalent provision in the new Credit Code is applicable to all debtors.[58]

5.35 Mr Viney put a similar view to the Committee stating that some reopening mechanism ought to be created which should be applicable to all financing instruments.

If it is felt that small business people and other people deserve the right to reopen agreements which are harsh and unconscionable, they should be able to do that with respect to any class of financing, not merely those that happen to be in the form of hire-purchase agreements. [59]

Speaking of the advantages of reopening provisions, Mr Viney stated--

It enables a consumer to ask a tribunal to interfere with the terms of a contract where circumstances existing at the time the contract is entered into, and possibly the terms of the contract itself, are such that the court is of a view that the whole circumstances are so unjust as to be unable to remain as they stand.[60]

5.36 There are no statutory provisions for reopening of leases or chattel mortgages except that the Contracts Review Act in New South Wales does enable consumers, farmers and possibly truck drivers to seek to reopen a contract. Business generally cannot avail itself of the Contracts Review Act.

Availability of other legislative protections

There are existing protections under the Goods Act, the Fair Trading Act and the Trade Practices Act which are applicable in a majority of cases. The Trade Practices Act in relation to commercial vehicles provides protections without any monetary limit at all. Those provisions cannot be excluded by the contract and they apply to all transactions within the ambit of the Acts.[61]

5.37 The Australian Finance Conference submitted that there have been major changes in legislative protections since 1959 regarding disclosure, fair trading and unconscionable dealings which are regulated by Fair Trading Act (1985) and Trade Practices Act (1974) with conditions and warranties in consumer transactions being regulated by Trade Practices Act (1974) and Goods Act (1958).. The Committee heard that given the increased range of fair trading and warranty protections the narrower provisions under the Act are redundant and out of step with modern financial market practices.[62] This view was shared by Australian Equipment Lessors Association who submitted that trade practices and fair trading legislation is more appropriate for regulating commercial dealings.[63]

5.38 Ms Lanyon[64] and Mr Viney[65] pointed out the existence of an overlap and inconsistency between the protections of the Act, the Goods Act (1958) and Trade Practices Act (1974).

5.39 In comments to the Committee, Chief Parliamentary Counsel considered that--

If the Hire Purchase Act 1959 is repealed, implied conditions and warranties in hire-purchase agreements would be covered by the Part IV of the Goods Act (if the cash price of the goods is $20,000 or less) and Division 2 of Part V of The Trade Practices Act (if the goods are $40,000 or less or are a commercial road vehicle and acquired from a corporation). However, there would be no implied conditions and warranties in hire-purchase agreements for farm-machinery, unless the price of the machinery is less than the prescribed amount in the relevant Act.[66]

Similar views were put to the Committee by the Australian Finance Conference,[67] the Consumer Credit Legal Service Inc.,[68] Ms Lyn Boxhall,[69] Professor Duggan and Ms Lanyon[70] and by Mr David Turner.[71]

Principles of Uniformity

5.40 The Australian Bankers Association submitted to the Committee that a lack of uniformity in law adds to costs of providing finance.[72] The retention of the Act at a policy level was also regarded by the ABA as inconsistent with the move toward uniform credit legislation, and at a commercial level represents the only form of regulation of commercial finance.[73] It was submitted that banks, as do other financiers, operate nationally and rely upon uniformity of laws for consistency of approach, cost efficiency and management of risk.[74]

5.41 The Committee heard the argument that uniformity is a desirable end in itself when there are no compelling reasons against it and that retention of Act is an obstacle to this uniformity.[75] In addition, it was stated that if the HPA were repealed then financiers would be able to use the same documentation and procedures across various Australian states. Consequently this would lead to a reduction in costs for financiers and to a reduction in the cost of hire purchase financing.[76] The Banking Finance and Consumer Credit Committee of the Business Law Section of the Law Council of Australia submitted that the repeal of the HPA would be in the best interests of all parties concerned and would foster the move towards consistency of business laws among the States and Territories.[77]

Competition policy

5.42 Legislation was introduced into the Victorian Parliament on 6 September 1995, for the purpose of applying certain laws of the Commonwealth relating to competition policy as laws of Victoria.[78] The Act was a direct result of the agreements reached on 11 April 1995 between the Premiers, the Prime Minister and the Chief Ministers to implement the proposals of the National Competition Policy Review Committee chaired by Professor Hilmer.[79] As part of the reform of competition policy governments have agreed to review legislation so as to identify and remove sections which may discourage competition.

5.43 The Committee considered the view that the ability of consumers to shop around for the best financial product to suit their needs increases competition in the market place.[80]

SUMMARY

5.44 The Committee heard evidence that the contemporary application of the Act has increasingly become one of commercial finance. The Act no longer applies to consumer credit transactions as it was intended. Consumer credit transactions if entered into prior to 1 November 1996 are regulated by the Credit Act 1984 (Vic). Agreements entered into after this date are covered by the Consumer Credit Code. The Committee is of the view that the HPA is over prescriptive and outmoded as a means of regulating commercial financing transactions. Evidence was presented to the Committee that due to the rigidity of the Act, large transactions, particularly those entered into by national companies are taken interstate, outside the jurisdiction of the Victorian HPA. This may result in a substantial loss of business for Victoria.

5.45 Hire-purchase is just one of a number of credit instruments available to finance the purchase of goods and equipment for business purposes. The Committee heard evidence questioning the rationale of maintaining the statutory regulation of only one means of commercial financing whilst alternative forms of commercial financing remain unregulated. The Committee is of the view that the continuation of this situation distorts the market for credit and stifles innovation.

5.46 Sections 24 and 25 of the HPA offer protections for small business and farmers not included in more recent consumer focused legislation. The policy of regulating credit provided for personal, domestic or household purposes is now provided in the Consumer Credit Code, while the HPA exclusively regulates credit for business purposes.

5.47 Some examples of overlap and inconsistency with the Goods Act 1958 (Vic), the Fair Trading Act 1985 (Vic) and the Trade Practices Act 1974 (Cth) were outlined to the Committee.

5.48 A repeal of the HPA would result in the loss of implied terms for hire-purchase contracts relating to business transactions. A statutory right to the re-opening of harsh or unconscionable contracts would also be lost where goods are acquired for commercial or business purposes. However, the view was put to the Committee that the development of equitable principles of unconscionability, as in the Amadio case examined in this chapter, allow for the re-opening of harsh or unconscionable transactions without a need for a statutory right of protection. A contrary view was considered by the Committee being that there may be a case for facilitating by statute a right to the re-opening of all finance contracts which are harsh and unconscionable particularly if the contracts are otherwise unregulated.

5.49 The Committee was advised that the repeal of the Act would result in a loss of a farmer's right to a twelve month moratorium on the repossession of goods acquired under a hire-purchase agreement. Concerns were raised about the loss of such a protection even though no evidence was produced that indicated the provision had been relied upon by farmers. The Committee heard submissions that specific sectoral protections are inconsistent, unsound policy and are therefore unwarranted. At a general level Industry Codes of Practice were considered as being consistent with a climate of deregulation and competition policy. These should aim to ensure customer choice, balanced negotiation between the parties and principles of disclosure.

Last update 12/8/99 ©Parliament of Victoria