This article is written by Devangini Rai, pursuing a Certificate Course in Advanced Commercial Contract Drafting, Negotiation & Dispute Resolution from LawSikho.com. Here she discusses the essentials of the Hire Purchase Agreement.
Hire Purchase Agreement (hereinafter HPA) is an arrangement between a buyer and a seller where the object or asset involved is initially ‘hired’ for a fee. This price is paid for a fixed number of times or instalments until the total price of the good is paid after which the object ‘hired’ becomes the property of the person paying the amount. An agreement encapsulating such conditions of sale will be an HPA. HPA is an arrangement for buying expensive consumer goods, where the buyer makes an initial down payment and pays the balance plus interest in instalments.
The term ‘hire purchase’ is commonly used in the United Kingdom and it’s more commonly known as an instalment plan in the United States.
The concept of hire purchase agreement can be understood better by bringing out the difference between the hire-purchase agreements and other similar instruments in law.
Hire Purchase Agreement and Lease
Higher Purchase Agreement, the subject of the agreement will be leased as long as the total price of the good is not paid in instalments, after which the good becomes the property of the hirer. In a lease, the lessee only has the possession of the leased property till the term of the lease whereas the ownership permanently lies with the lessor.
HPA and Bailment
The point of difference between Bailment and an HPA is that the bailee never becomes the owner of the bailed good in the entire event of bailment. Bailment can be done for different purposes like safe-keeping, or a profitable sale of the good in which the purpose of bailment is complete depending upon the wished of the bailor. In an HPA, the object hired can be owned by the hirer once the HPA fee is paid fully.
HPA and Hypothecation
Hypothecation is specifically collateral in a debt where the object hypothecated does not carry with itself any possession or ownership rights. As distinguished in the case of V. Dakshinamurthi Mudaliar v. General and Credit Corporation (India) Ltd., “a hire-purchase agreement creates a bailment but is a bailment plus an option to purchase. The transaction is compounded of the elements of both the law of hire and sale and it would be clearly wrong to assimilate it to hypothecation of moveable property.
Development of the concept of HPA
HPA was a product of the common law system which was recognized as early as in 1895 in the case of Helby v. Matthews. In this case, a hirer pawned out a piano as security for an advance after paying a few monthly instalments for the good under an HPA. The Latin phrase ‘Nemo Dat Quod Non-Habet’ was upheld, which translates to ‘one cannot give what one does not have’. In the words of the judgement, ‘The terms of the contract did not upon its execution bind him to buy but left him free to do so or not as he pleased, and nothing happened after the contract was made to impose the obligation’. The court held further that by putting it out of his power to return the piano, he had not become bound to buy and therefore had “not agreed to buy goods” within the meaning of the Factors Act and that the owner was entitled to recover the piano from the pawnbroker.
HPAs have generally been involved as a matter of dispute where the nature of a true HPA is distinguished from an agreement to secure a loan by a financier from a customer. In such cases, a financier intervenes between a dealer and a customer by financing the customer to buy the good from the dealer. This is preferred since some dealers cannot deal with limited cash-flows over a period of time and require an immediate amount of money. The customer takes a loan from the financier to pay the money to the dealer and then the good bought is kept as collateral with the financier to pay off the loan. At that stage, the financier became the owner and the customer became the hirer till such time as he carried out the terms of the agreement. Thus in these cases, the dealer completely goes away from the picture and the HPA operates between the customer and the financier.
Nature and Elements of an HPA
The nature of an HPA has been discussed in a number of judgments, the landmark ones being Sundaram Finance Ltd. v. the State of Kerala and KL Johar and Co. v. Deputy, Commercial Tax Officer, Coimbatore III.
In Sundaram Finance, the nature of a transaction between a financing company and the hirer was discussed. The apex court dealt with the question that whether the hire-purchase agreements entered into by the appellant with its customers are transactions of sale of goods or are only documents securing the return of the loans advanced by it to its customers. It was held that such transactions are merely financing transactions with no real intention of sale.
In KL Johar, the validity of a clause in the Madras General Sales Tax Act was questioned where Explanation I to Section 2(h) defined sale as
“A transfer of goods on the hire-purchase or another instalment system of payment shall, notwithstanding the fact that the seller retains the title in the goods as security for payment of the price, be deemed to be a sale.”
The apex court struck down the impugned clause since “the essence of sale under the Sale of Goods Act is that the property should pass from the seller to the buyer when a contract of sale is made except in a case of conditional sale. Therefore, any legislation by the State legislature making any agreement or transaction in which the property does not pass from the seller to the buyer, a sale would be beyond its legislative competence. What Explanation I [impugned clause] does is to lay down that a hire-purchase agreement shall be deemed to be a sale in spite of the fact that the property does not pass at the time of such agreement from the seller to the buyer.”
Thus, the following characteristic elements which define an HPA arise:
- Bailment and a Sale- The HPA has features of both a bailment and a sale. It acts as a bailment where the hirer is the bailee and the owner is the bailor till the time the instalments are not paid. It gets converted to a sale once after all the instalments are paid, the ownership passes into the hands of the hirer
- The option of the hirer to leave the HPA- The hirer at any point of time stop hiring the good and not pay the instalments. Both the acts should take place as a corollary of the other or else it will amount to a breach of the contract by either party.
Essential clauses of an HPA
An HPA thus has the essentials of both a bailment and a sale. Following are the essentials of an HPA.
All agreements carry certain standard clauses which include but not limited to
- Name of Parties
- Date of Agreement
- Place of Agreement
- Method to resolve the dispute.
Subject of Agreement
An HPA should clearly define the subject of the HPA i.e the object of hire and the basic relationship between the hirer and the owner defined with respect to the object.
The distinguishing factor of an HPA is the payment to be done in the form of instalments.
Responsibilities and Obligations
It is essential to delineate the responsibilities and obligations of the parties involved to avoid any confusion or dispute. The various responsibilities of the hirer and the owner can be as follows-
- To regularly pay monthly instalments as agreed
- To not sublet, mortgage or sell the object to a third party or any such act done which makes the hirer devoid of the possession of the object of hire.
- To maintain the object in a good position and keep it in proper repair.
- To deliver the possession of the object of hire
- To have a good title to the object of hire
- To keep the object of hire in a good condition at the time of hire
- To not interfere with the possession of the object of hire in good condition at the time of hire.
Termination of the contract and events to follow post-termination
It is important to state the events which will lead to termination of the contractual relationship between the parties and the events which will follow post-termination. One of them includes that if a breach is committed by the hirer, the owner will have a right to take back the object of hire.
Application of HPAs
The commercial viability of an HPA can be seen through the working of heavy-duty industries in financing them. HPAs are used to buy machinery required in construction, manufacturing or such functions which require heavy financing that cannot be done in one lump sum amount. Hire Purchase Financing Companies to come under Non-Banking Financial Corporations. Hire-purchase finance companies are the public or private limited companies or partnership firms engaged in giving credit for acquiring durable goods. National Small Industries Corporation (NSIC) is a central government initiative which has been established under the Ministry of Small and Medium Enterprises (MSME). It helps the small entrepreneurs for the lack of funds in establishing a business by letting out the required machinery on a hire purchase basis. Apart from letting out goods, NSIC caters to the needs of the owners of Small Scale Industries by dealing with government regulations, financial assistance, training to workers, boosting their exports, procuring raw materials and selling them at reasonable prices etc.
- Well Kenton, Hire Purchase Agreements, Investopedia, Apr. 18, 2019, available at https://www.investopedia.com/terms/h/hire-purchase.asp
- AIR 1960 Mad 328
- (1895) AC 471
- Cecil McCarthy, Everyday Law: History behind hire purchase, Nation News, Mar. 11, 2015, available at https://www.nationnews.com/nationnews/news/64653/everyday-law-history-hire-purchase
- Sundaram Finance Ltd. v. the State of Kerala, (1966) 2 SCR 828
- KL Johar and Co. v. Deputy, Commercial Tax Officer, Coimbatore III, AIR 1965 SC 1082
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