Hire purchase agreement

Introduction

Purchase and sale of goods under Hire-Purchase system is governed by the Hire-Purchase Act, 1972. This Act was passed on 8th June, 1972 and came into force w.e.f. September 1, 1973.

Here, the word “hire” denotes, the sum payable periodically by the hirer under a hire-purchase agreement.

Under the Hire Purchase System, the owner of the goods lets his goods on hire and gives an option to the hirer to purchase the goods in accordance with a specific agreement called Hire Purchase Agreement .

Agreement includes:-

ϖ Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments.

ϖ The property in the goods is to pass to such person on the payment of the last of such instalments

ϖ Such person has a right to terminate the agreement at any time before the property so passes.

“Hire-Purchase Price” means the total sum payable by the hirer under a hire-purchase agreement in order to complete the purchase of, or the acquisition of property in, the good to which the agreement relates and includes and sum so payable by the hirer under hire-purchase agreement by way of a deposit or other initial payment, or credited or to be credited to him under such agreement on account of any such deposit or payment, whether that sum is to be or has been paid to the owner or to any other person or is to be or has been discharged by payment of money or by transfer or delivery of goods or by any other means; but does not include any sum payable as a penalty or as compensation or damages for breach of the agreement.

“Hirer” means the person who obtains or has obtained possession of goods from an owner under a hire-purchase agreement, and includes a person to whom the hirer’s rights or liabilities under the agreement have passed by agreement or by operation of law.

“Owner” means the person who lets or has let, delivers or has delivered possession of goods; to a hirer under a hire-purchase agreement have passed and includes a person to whom the owner’s property in the goods or any of the owner’s right or liabilities under the agreement has passed by the assignment or by operation of law.

Contents of Hire-Purchase Agreement

According to the Act , every hire-purchase agreement shall state:

ϖ The Hire-Purchase price of the goods to which the agreement relates.

ϖ The cash price the goods, that is to say, the price at which the goods may be purchased by the hirer for cash.

ϖ The date on which the agreement shall be deemed to have commenced.

ϖ The number of instalments by which the hire-purchase price is to be paid, the amount of each of those instalment, and the date, or the mode of determining the date, upon which it is payable, and the person to whom and the place where it is payable.

ϖ The goods to which the agreement relates, in a manner sufficient to identify them.

Right of Hirer to Purchase

The hirer may, at any item during the continuance of hire-purchase agreement and after giving the owner at least 14 days’ notice in writing of his intention so to do, complete the purchase of the goods by paying to the owner the hire-purchase price or the balance thereof as reduced by the rebate which shall be equal to two-thirds of an amount which bears to the hire-purchase charges the same proportion as the balance of the hire-purchase price. ‘Hire Purchase’ charges means the difference between the hire-purchase price and the cash price as stated in the hire-purchase agreement.

Rights of Hirer to Terminate

The hirer has a right to terminate the agreement at any time before the property so passes and the final payment under the hire-purchase agreement falls due, after giving 14 days’ notice and returning the goods. Payments made by the hirer prior to the final payment are treated as payments in respect of hire and are not returned to the hirer in case he does not continue the contract.

Obligation of hirer in respect of care of the goods

The hire-purchaser, during that period when he is in possession of the goods, is supposed to take all such care of the goods as a prudent person does in his own case. He cannot damage, destroy, pledge or sell such good.

Hire-Purchase, Hire & Sale Contracts

Hire-purchase contract is different from:-

¬ Hire

¬ Sale contracts -

In the case of hirer the ownership in property is never transferred to the hirer by the owner, and that is, the property must be returned to its owner. In the case of sale, the ownership in property is transferred to the buyer immediately at the time of the contract, that is, the property cannot be returned to its seller. Hire-purchase contract provides special type of provision which distinguishes it from both hire and sale contracts. In the hire-purchase contract the buyer of goods which is termed as hire- purchaser is given the right of retaining or rejecting the property at his own option.

Hire-Purchase Price

Hire-Purchase price must not be confused with cash retail price or cash price. Cash retail price is arrived at by the hire-vendor by adding profit to the cost price of goods. Hire purchase price, on the other hand, is arrived at by adding:-

¬ Profit

¬ Interest to the cost price of goods. Hire- vendor charges interest partly for the credit granted by him and partly for covering the risks attached to the business. Thus, hire purchase price is more than retail price.

Case-Laws

In K.L. Johar & Company v/s. Deputy Commercial tax officer

It was held that a hire-purchase agreement is distinct from a sale in which the price is to be paid later by instalments. In the case of sale in which the price is to be paid by instalment, the property passes as soon as the sale is made even though the price has not been fully paid and may later be paid by instalments. The distinguishing feature of a hire-purchase agreement is that the property does not pass when the option is finally exercised after complying with all terms of the agreement.

In other words, a hire-purchase agreement has two elements:-

ϖ Element of Bailment .

ϖ Element of Sale, in the sense that it contemplates an eventual sale when all the terms of the agreement are satisfied and the option is exercised by the intending purchaser, a sale takes place of the goods which till than had been hired.

The previous decision in the case of P.V. Sadasivan v/s. Industrial Credit & Syndicate Limited

It was held that under the agreement the owner would always remain as owner till the entire hire purchase charges are paid. There was a seizure of vehicle for non-payment of instalments on sale of the vehicle; the owner would be entitled to retain the sale price. Amount received from sale of vehicle cannot be adjusted towards the amount due from hire.

In Jaya Bharat Credit & Investment Company Limited v/s. C.S.T

It was reiterated that Hire Purchase Agreement has two elements.

Now, the question which aroused before the court to decide was whether the agreement is a hire purchase agreement or a loan agreement. This was decided in the case—

InSundaram Finance Limited v/s. State of Kerala

It was held that the true effect of a transaction may be determined from the terms of agreement considered in the light of the surrounding circumstances. This case briefly highlights the distinction between a transaction for hire purchase and a transaction for sale.

The same parameter was followed in the case of Tarun Bhargava v/s. State of Haryana

Here, in this case it was decided that, when a customer enters into an agreement with a finance company for purchase of a vehicle and the vehicle is purchased in the name of customer, the ownership remains with the customer only and the intention of the parties in such case is to secure payment, the agreement would be a loan transaction even though it is referred to as hire purchase finance agreement.

In the case of Mass v/s. Pepper

It was held by the House of Lords that the circumstances showed that the transaction in question was merely colourable and was a loan on the security of the hire purchase agreement.

In the case of Polsky v/s. S and A Services Limited

Lord Goddard , C.J. held that the court is to look through or behind the document and to get at the reality and if in reality the documents are only given as a security for money then they are bills of sale.

In the case of The Instalment Supply Limited v/s. Sales Tax Officer

The question aroused before the court was to decide, when Sales Tax does takes place under a Hire-Purchase Agreement.

Here, the petitioner is a limited company with its registered office located at New Delhi. It carries on business of financing the purchase of motor vehicles. The person desiring to purchase a motor vehicle enters into a hire purchase agreement with the petitioner company. It may be useful to give within a short compass the terms of the agreement. The company charges the hirer can initial deposit by way of premium as a consideration for granting the lease of the vehicle, which deposit becomes the absolute property of the company, the premium charged as aforesaid is a substantial amount, being usually 25 % of the prices in respect of new vehicles. The hirer undertakes to pay the instalments and when all instalments are paid, the vehicle becomes the property of the hire at his option, on payment of rupee one to the company, as a consideration for the option, until all the stipulated instalments have been paid, the vehicle becomes the property of the hirer at his option, of the company as owners. The hirer is delivered possession of the vehicle and he remains responsible to the company for damage or destruction or loss. The hirer has to pay interest at the rate of one per cent per mensem on all sums overdue until the option of purchase is exercised by the hirer; he is at liberty to return the vehicle.

Supreme Court distinguished two classes of contract-

An agreement to sell is a pure contract whereas; a sale is a contract plus conveyance. By an agreement to sale is jus in personance and is caused by a sale a jus in rem which is also transferred. Where goods have been sold and buyer makes the fault than the seller may sue for the contract price on the count of ‘goods bargained and sold’ but when an agreement to buy is broken, the seller‘s normal remedy is an action for illiquidity damages. If an agreement to sell be personal remedy against the seller. The goods are still the property of the seller, and he can dispose of them as he likes, but if there has been a sale and a seller breaks his engagement to deliver the goods, the buyer has not only a personal remedy against the seller but also the usual proprietary remedies in respect of the goods themselves. In many cases, too, he can follow the goods into hands of third parties. Again, if there be an agreement of sale and the goods are destroyed, the loss as a rule falls on the seller, while if there has been a sale, the loss as rule falls upon the buyer though the goods may have come to his position.

In the case ofShogun Finance Ltd v Hudson

It is acontract law decided in the House of Lords, on the subject of mistaken identity as a basis for rescission of a contract. The case has been the subject of much criticism in failing to effectively clarify the area of mistake to identity.

There was a rogue who went to buy a Mitsubishi Shogun on hire purchase. The rogue told Shogun Finance Ltd that his name was Mr Patel and produced Mr Patel’s driving licence. The finance company did a credit check on Mr Patel, finding no problems, and the rogue drove away. Then, the rogue sold the car to Mr Norman Hudson. Under Section 27 ofHire Purchase Act 1964 a non-trade buyer of a car who buys in good faith from a hirer under a hire purchase agreement becomes the owner, so Mr Hudson would have been the owner if the hire purchase agreement were valid. Shogun Finance argued that it was not on the basis that there was a mistake as to identity. They therefore claimed against Mr Hudson for conversion.

It was held by the majority that there was no contract (rescission) of hire purchase between Shogun Finance and the rogue, so that the car was not Mr Hudson’s.

This followed the principle established Cundy v Lindsay that written agreements do not infer a presumption to sell to the immediate purchaser, where identity is of key importance to contracting.

But Lord Nicholls and Lord Millett dissented.

The judgments of Lord Nicholls and of Lord Millett are of interest, in their arguments to overrule Cundy v Lindsay, in effect protecting the third party purchaser:

It was held that–

“If the law of contract is to be coherent and rescued from its present unsatisfactory and unprincipled state, the House has to make a choice, either to uphold the approach adopted in Cundy v Lindsay and overrule the decisions, or to prefer these later decisions to Cundy v Lindsay.

They both considered the latter course is the right one, for a combination of reasons. It is in line with the direction in which, under the more recent decisions, the law has now been moving for some time. It accords better with basic principle regarding the effect of fraud on the formation of a contract. It seems preferable as a matter of legal policy”. As between two innocent persons the loss is more appropriately borne by the person who takes the risks inherent in parting with his goods without receiving payment. This approach fits comfortably with the intention of Parliament in enacting the limited statutory exceptions to the proprietary principle of nemo dat non quod habet.”

This would mean that in all cases of mistake to identity, contracts would be voidable, rather than immediately void. Therefore, should the original seller not repudiate the contract before the goods have been sold on, the third party would be protected.

The result of Shogun Finance Ltd v Hudson is that the area of mistake to identity retains the ‘face to face’ distinction. This is that contracts of immediate vicinity differ from contracts made over distance. Such a distinction has been labelled “artificial and unfair to third parties, who bear the entire loss, where at least in the instant case, it is argued that Shogun Finance Ltd had far better means to uncover the rogue’s fraud, than the independent purchaser; in any case, the original seller is usually in the better position to protect and insure against such risks.

Conclusion

In today’s world, asset based financing has formed an integral part of the Financingscenario. This is because firms today can’t afford to buy theequipment’s and machineries outright. At present not all firms are that financially sound. Firms find it extremely difficult to obtain the financial aid from the normalsources. Firms that have the financial capacity prefer to hire or lease the equipment’s, it releases the financial burden as well as provides tax benefit of depreciation.Especially, Project financing has come of age as most of the banks today are intoproject financing. Earlier, it was chartered accountants who indulged into projectfinancing but now it is more of bank involvement. But today the growth in Project Finance is low whereas lease and hire purchase are on an upward trend with more and more companies providing their products onhire.So in the changing economic and financial environment of India, hire purchase financing has assumed an extremely important role.