This article is written by Sorbhi Sharma who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Hire-Purchase agreements are a kind of agreement whereby the owner of the goods allows a person (the hirer) to hire goods by paying a monthly installment. In this agreement, there is an arrangement for buying expensive consumer goods like motor vehicles, television, heavy machinery, etc. The hire-purchaserer can purchase goods by paying an initial down payment and the rest of the payment can be made in installments. After the last installment is paid, the hire-purchase then becomes the owner of that good. Many industries finance their heavy machinery through these agreements.
It is used in situations where the buyer cannot afford to buy the good by paying a lump sum amount but could afford the good by paying for it in installments at regular intervals.
The seller would ask for a down payment equal usually up to 20-25% of the original price of the good plus interest to be paid in equal installments. If the hire-purchaser defaults in making payment, the owner/seller repossesses the goods.
The hire-purchase agreement is not a contract of sale but an agreement of bailment, where the hire-purchaser has the right to use the goods but not to own them till the agreement subsists and the full payment is made for the good.
As held in Charanjit Singh Chaddha and others v. Sudhir Mehra,
“Hire-purchase agreement in law is an executory contract of sale and confers no right in rem on hire until the conditions of transfer of property to him have been fulfilled. Therefore, the repossession of goods as per the terms of the agreement may not amount to a criminal offence.”
In India, all the hire-purchase finance organizations are governed by the Hire-Purchase Agreements Act, 1972. However, In 1989, a bill was introduced that made amendments in the Act but the bill has not been passed yet.
Such agreements however have two elements involved:
- Bailment – governed under Chapter IX of the Indian Contract Act, 1872 all hire-purchase finance agreements like the purchase of motor vehicles, televisions, and refrigerators come under this act.
- Sale – hire-purchase agreements are also covered under the Sale of Goods Act, 1893. The law commission in its eighth report on the sale of goods act mentioned that there should be a separate enactment for this kind of agreement as no proper laws were governing such transactions and so came the Hire-Purchase Agreement Act, 1972.
Contents of the Hire-Purchase Agreement
According to Section 4 of this act, the contents of a hire-purchase agreement are as follows:
- The hire-purchase price of goods to which this agreement relates.
- The price at which the goods can be purchased in cash by the hire-purchaser.
- The commencement date of the contract.
- The number of installments, amount to be paid on each installment, the date, and the mode of determining the date, the place, and to whom the amount is to be paid.
- The goods concerning this agreement and the method of identifying them.
- The method of payment whether the lump sum amount to be paid in cash or cheque. In case the part payment has to be paid in cash or by cheque, the hire-purchase agreement must mention it.
Types of Hire-Purchase Agreements
There are two types of Hire-Purchase Agreements:
- Under the first type of agreement, a third entity is involved who is called the financer who purchases the goods from the seller on behalf of the hirer and transfers it to the hirer on payment of the last installment. Here, the financier owns the ownership of the goods, pays the purchase price to the seller, and can get it recovered from the hire-purchaser. In this case, the financer can seize the goods in case of non-payment. Presently, In India, hire-purchase agreements are tripartite that includes the seller, financier and the hire-purchaser. Most sellers arrange a hire-purchase through the finance companies with the hire-purchaser.
- Under the second type of agreement, the hire-purchaser himself gets into an agreement with the seller, pays the purchase price and on the payment of the last installment becomes the owner of the goods. Here, the seller can seize goods in case of non-payment.
Example on the working of the Hire-Purchase Agreement
When a motor vehicle is purchased through a hire-purchase agreement, the finance company hypothecates the same in the Registration Certificate Book and also mentions the same in the insurance policy. When all the installments are paid by the hire-purchaser, the finance company gives a certificate to the purchaser on the completion of the amount. The Regional Transport Office is informed and the RTO office then cancels the hypothecation from the R.C book with effect from a particular date. This will then be informed to the insurance company, which in turn will cancel the hypothecation by making an endorsement in the insurance policy. That is when the ownership gets completely transferred to the hire-purchaser.
Conditions to be kept in mind while entering into a Hire-Purchase agreement
- Before entering into such an agreement, the hire-purchaser must enquire as to the rightful owner of the asset because it may so happen that the goods are lent on hire by someone who is not the rightful owner.
- Keeping a check on the cumulative installment amount as the cumulative installment must not exceed the actual amount of the asset.
- Both the parties to the agreement must have a copy of the agreement.
- There must be transparency and the agreement should be mutually agreeable to both the parties.
- The Hire-purchase is such an agreement that can be changed as per the convenience of both the parties as long as the parties’ consent to it.
Merits of the Hire-Purchase Agreement
- There is convenience in making payments for the goods. The hire-purchaser can become the owner of the goods on payment of installments.
- The Seller also benefits from this kind of transaction as this increases the volume of sales and the profit from the sales.
- The amount that the seller gets from the installments includes the original price and interest. The interest is calculated in advance and added to the installment price to be paid by the hirer.
- From the point of view of the seller, in case there is a default in payment by the hire-purchaser, the goods shall be returned to him.
Demerits of the Hire-Purchase Agreement
- The hire-purchaser has to pay a higher price for the asset as compared to buying the product outright. The cost price includes the rate of interest.
- The duration of most of the hire-purchase agreement is usually long and stringent.
- Hiring never comes with actual ownership in the event of default, the seller repossesses the goods.
- The hire-purchase agreement creates an artificial demand for the asset. The hire-purchaser is tempted to purchase the goods even when he cannot afford to buy it.
- The seller also runs a heavy risk under this system though he has the right to take back the goods in the event of default of payment. The second-hand goods fetch a little price and few customers.
- It has been observed that the sellers don’t always get easy recovery of the goods nor do they get installments paid on time. They have to waste a lot of time and effort to get the recovery of the goods and leads to serious court battles between the seller and the hire-purchaser.
Difference between Hire-Purchase Agreement and Sale on Installments
- In a sale on installments, the purchaser becomes the immediate owner whereas, in hire-purchase agreements, the hire-purchaser gets immediate possession of the goods but becomes the owner only after all the installments are paid.
- A sale on installments is a contract of sale. The ownership of goods is transferred immediately and the buyer has the right to do what he wants with the goods including disposing of goods. It is not the same in the case of hire-purchase agreements, the relationship between the hire-purchaser and seller is of the bailor and bailee which does not allow the hire-purchaser to dispose of the goods in any manner.
- As in the case of installments, the buyer becomes the owner immediately after signing the agreement and in the event of any loss or damage to the goods, the buyer shall solely be responsible for it whereas in the case of the hire-purchase agreement the hire-purchaser is not the owner yet so any kind of loss or damage shall be compensated by the seller only if due care was not taken by the hirer.
- In the event of any default of payment, the only remedy is suing the buyer for the unpaid amount and the seller cannot repossess the goods whereas in hire-purchase agreements, it gives a license to the seller to repossess the goods in case the terms of the agreement are not abided by the hire-purchaser as held in K.L Johar and Co v. Deputy Commercial Tax Officer
- In the case of installments, the buyer cannot terminate the agreement as and when he wishes to whereas, in the hire-purchase agreement, the hire-purchaser can terminate the agreement and return the goods without further paying for the installments.
- The agreement can be terminated according to the terms of the agreement. The agreement usually mentions the circumstances under which the agreement stands terminated. It is either through the return of the goods or notice of termination either by the seller in case of a breach on the part of the hire-purchaser or a notice of termination by the hire-purchaser.
- The agreement can be terminated through the performance of the agreement that is when the hire-purchaser purchases the goods from the seller after paying all the installments.
- The agreement also stands terminated when the parties agree to renew the agreement or enter into a new agreement by terminating the already existing agreement.
- The agreement can be terminated through frustration. When the performance of the agreement becomes impossible due to some act or event occurring after the formation of the agreement. For example, the goods getting destroyed without any fault on the part of the hire-purchaser.
Stamp duty on hire-purchase agreements is payable under Section 5 of the Stamp duty Act. In India, every state has a different charge on stamp duty. However, registration of hire-purchase agreements is not mandatory.
As stated above, we conclude that the hire-purchase system is the best way one can hire goods that are generally expensive to buy and later own them if one wishes to but as a matter of fact, such agreements turn out to be more expensive as they include interest added to their installment amount.
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