Hire Purchase Agreements | Law Optional Notes for UPSC PDF Download

Introduction

• Hire purchase agreements represent a contractual arrangement between the owner of a product and the person hiring it. In this arrangement, the hirer obtains the product for a temporary period, making periodic monetary payments, and has the option to eventually own the item.
• In simpler terms, hire purchase agreements involve the hirer taking possession of the goods, either with the prospect of purchasing them, or the option to terminate the agreement, depending on their preference. The transfer of title may occur automatically upon completing the instalment payments and meeting the specified conditions or may require the hirer's further action to exercise the purchase option.
• These agreements originated in 19th century England during the Industrial Revolution, initially applied to sewing machines, and later extended to various consumer durable goods. The hire-purchase concept gained momentum with the rapid growth of the automobile industry, leading to a shift from a two-party arrangement (owner and hirer) to a three-party transaction. Owners began selling their products to prominent financing companies, which, in turn, provided the goods to the hirers. These hire-purchase agreements made their debut in India in the early 20th century, led by the Madras-based Auto Supply Company Ltd. (1920), later known as Commercial Credit Corporation. From 1920 to 1930, several other hire-purchase companies were established, including Motor and General Finance Company and Instalment Supply Company.
• In the post-war era, hire-purchase agreements saw significant adoption, particularly within the automobile and road transport industries, as a means to secure funds for commercial vehicles. Government initiatives, such as committees chaired by Masani and James Raj, recognized and promoted the role of hire-purchase agreements in road transport and various other sectors.
• Despite the widespread use of hire purchase agreements in business and trade, there exists some confusion and a lack of clarity among the public regarding the legal aspects of these agreements. They are often mistakenly conflated with other business transactions, such as sales and credit sales. To fully comprehend the nature of hire purchase agreements, it is essential to distinguish them from sales transactions and credit sales.

Distinguishing Hire Purchase Agreements from Sales Transactions:

• Ownership Transfer: In a conventional sales transaction, ownership of the goods is immediately transferred from the seller to the buyer when the transaction occurs, regardless of the payment duration. Conversely, in a hire purchase agreement, ownership is not transferred upon contract signing but only when all installments are settled, and the final purchase takes place.
• Passage of Property: In a typical sales transaction, property rights in the goods are immediately passed to the buyer. However, in a hire purchase agreement, there is no immediate transfer of property rights, and ownership only transfers when the purchase option is exercised after fulfilling all the agreement's terms.
• Complex Nature of Hire Purchase: The court, in the case of Sundaram Finance v. State of Kerala, emphasized the complexity of hire purchase transactions. In a hire purchase agreement, the hirer is not legally obligated to buy the goods; they have the option to either return the goods, thus discontinuing installment payments and forfeiting the amounts already paid, or become the owner by paying the stipulated hire and purchase price to exercise the option to purchase. In contrast, in sales by installments, as seen in the cases of Lee v. Butler and Helby v. Matthews, the purchaser does not have the option to return the goods post-agreement, as property possession has already been transferred to them. The purchaser is legally obliged to pay the remaining installments and lacks the right to terminate payment, as it would constitute a breach of contract, requiring payment of damages.
• Legal Tests for Classification: The Supreme Court, in the case of Damodar Valley Corporation v. State of Bihar, presented two tests to distinguish between a sales transaction and a hire purchase agreement: a) Whether the hirer is under a binding obligation to purchase the goods. b) Whether the hirer retains the right to return the goods during the contract's existence.

The Court ruled that if there was no binding obligation and the right to return was reserved, the transaction was considered a hire-purchase agreement. Such an agreement grants no title to the hirer but provides an option to purchase contingent on specific conditions being met.

Distinguishing Hire Purchase Agreements from Sales on Credit: 

• In hire purchase agreements, the hirer possesses the right to purchase the goods under specific conditions, and this right is not an obligation. The hirer may choose either to purchase the goods upon meeting certain conditions or to terminate the agreement. In contrast, in transactions involving sales on credit, the buyer lacks the right to terminate the agreement. Doing so would render them liable for breach of contract and the associated damages, as determined by the court in Auto Supply Co. Vs Raghunath Chetti.
• The Halsbury's Laws of England offers a distinction between these two based on the hirer's ability to transfer goods' ownership. In sales on credit agreements, where the hirer is obligated to buy the goods, they have the authority to transfer the title of goods to a third-party buyer or pledgee without conveying the rights of the true owner. However, in hire purchase agreements, the second buyer or pledgee can only acquire the title of the hirer, and nothing more, by making installment payments for the goods.

Hire Purchase Agreements in Different Countries:

• Malaysia: Hire purchase agreements in Malaysia are regulated by the Hire Purchase Act of 1967, which came into effect on April 11, 1968, replacing its coverage under the Contracts Act of 1950. This Act primarily governs a specific form of hire purchase agreements outlined in the Act's 1st schedule, encompassing consumer goods and motor vehicles. The types of motor vehicles covered include invalid carriages, motorcycles, motor cars (including taxi cabs and hire cabs), goods vehicles not exceeding 2540 kilograms in maximum permissible laden weight, and buses (including stage buses).
• Australia: In Australia, hire purchase agreements are also recognized as commercial hire purchase or corporate hire purchase (CHP). These agreements are commonly used by businesses to finance equipment and commercial vehicles. In 1959, Australia introduced a Hire Purchase Act that was subsequently adopted in all states and territories. However, each Australian state also maintains separate legislation on hire purchase agreements, aimed at providing relief to hirers against unconscionable and unfair agreement terms. The laws in each state align with the overall purpose, much like the legislation in India.
• United Kingdom: Hire purchase agreements in the United Kingdom have a history dating back to the nineteenth century. However, prior to the 1938 Hire Purchase Act, English HP agreements were governed only by common law and the contractual terms. The 1938 Hire Purchase Act introduced significant reforms and safeguards to the hire purchase system. These safeguards included provisions for giving hirers appropriate information, granting legal rights to purchasers, and curbing certain vendor abuses. The Act aimed to ensure that hirers received essential details, such as a copy of the agreement and written information about the cash price and installment amounts and dates. It also gave purchasers the right to free themselves from contract liabilities (with exceptions) if the goods were returned and half the purchase price had been paid. Protection from repossession without a court order was provided once one-third of the payments had been made, and it granted the right to have any court case heard in the purchaser's residential area. The Act also addressed abusive vendor practices, such as clauses allowing owners to forcibly enter the hirer's home for repossession and disclaimers of liability for statements or promises made by the retailer.

With an understanding of hire purchase agreements in different countries, the next section will delve into the Hire Purchase Act as defined by the Indian constitution and its relevance in Indian trade.

Hire Purchase Agreements under Indian Legislation:

The enactment of special legislation for hire-purchase agreements in India was essential to serve multiple purposes. Firstly, this legislation needed to act as a regulatory statute and provide a platform for resolving disputes and offering relief in specific situations. For instance, it was important to eliminate penal and exorbitant charges when a hirer wished to terminate the agreement.

One of the key issues was the discretionary power of owners to seize goods in cases of default in installment payments, even after the prerequisite amount had been paid. Such situations led to exploitation and injustices against hirers. Consequently, a separate legislation was required to establish comprehensive guidelines and regulations for various circumstances that might arise in the context of hire purchase agreements.

To address these needs, the Hire-Purchase Act of 1972 was enacted in India. This legislation drew inspiration from laws adopted by several Australian states but predominantly relied on the English Hire-Purchase Act of 1938. A report by the Law Commission in 1961 highlighted specific provisions that the Indian legislation should avoid to ensure the effective implementation of the act in India.

These differences include:

• In contrast to the English legislation, which includes credit sales transactions under the Hire Purchase Act of 1938, the Indian Hire-Purchase Act of 1972 does not cover credit sales transactions, which are instead governed by the Sales of Goods Act of 1930.
• The English act imposes maximum limits on its applicability, such as £1,000 for livestock transactions and £300 for other cases. However, the Indian act does not specify such limits. This variation was justified in the 1961 report on hire purchase as India was entering an era of industrial expansion, and imposing limits on these transactions would have restricted the growth of the industrial sector.

In light of these distinctions, the Hire Purchase Act of 1972 introduced a new definition of hire-purchase agreements in Section 2(C), which states that a "hire-purchase agreement is an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement."

Termination of Hire Purchase Agreements:

The terms of the agreement are typically clear and include details about the agreement's nature, the parties' responsibilities, duration, installment amounts, and conditions for termination. Termination options are usually outlined, such as the return of goods by the hirer or the issuance of a termination notice by either party.

Additionally, the agreement can be terminated in the following ways:

• Performance: The hirer can terminate the hire-purchase agreement by choosing to purchase the goods before paying all the installments.
• Issuance of Notice: The owner can terminate the agreement by providing notice if the hirer breaches any of the agreement's terms, and similarly, the hirer can issue a termination notice.
• Renewal: The parties can terminate the hire-purchase agreement if they decide to enter into a new agreement, effectively renewing their arrangement.
• Release: One party can release the other from their obligations as specified in the agreement, resulting in the termination of the contract.
• Breach: If either party fails to fulfill their obligations or expresses an unwillingness to continue with the agreement, and the other party accepts this breach, the agreement is terminated.
• Frustration: If a situation arises before the agreement is formed that makes it challenging to fulfill the obligations, both parties are relieved from their duties, and the agreement is terminated. For example, if the hired goods are destroyed due to an event or act without any negligence on the hirer's part, the agreement ends.
• Expiration of Time Period: The agreement automatically terminates if the hirer does not exercise their purchase option within the specified time period as agreed in the contract.

Reliefs

The Hire-Purchase Act also offers remedies for parties in the event of a breach of the agreement. Section 21 of the act provides relief to the hirer by exempting them from paying hire charges if the owner terminates the hire-purchase agreement in accordance with Section 18 of the act. Additionally, Section 22 of the Hire-Purchase Act outlines relief against termination due to unauthorized acts or breaches of express conditions, as specified in its clauses and sub-clauses. The reliefs afforded to the owner include the recovery of goods, waiving claims of ownership or any other rights over the goods by the other party, and the option to claim damages.

Disadvantages of Hire-Purchase Agreements:

• The cost of acquiring goods through hire-purchase agreements is often higher than the cost of purchasing them through a standard sales transaction.
• The hirer does not obtain full ownership of the goods in these transactions until the full payment is made, and the owner can repossess the goods upon a single instance of payment default.
• The duration of these agreements can be quite lengthy, and the hirer's financial situation may change during that time, making it difficult to afford installment payments.
• The cost of entering into a hire-purchase agreement is typically higher than the sum of the installments.
• If the goods become damaged while in use, the hirer may not be eligible to claim insurance money because they do not have ownership rights over the goods. Consequently, the cost of repairs is added to the remaining installment amount.

Conclusion

In this paper, we have explored the journey of hire-purchase agreements, from their origins in 19th century Britain to the enactment of the Hire-Purchase Act of 1972. The need for such legislation was essential to provide a platform for resolving grievances for hirers and ensuring the repossession of goods for owners. The act was formulated by drawing on key features from the legislations of various nations, including the United Kingdom, Australia, and Malaysia.