Hire purchase contracts

CPA-Business-Law-Section-1 BLOCK RELEASE

NATURE OF HIRE PURCHASE CONTRACT

Definition of hire purchase

This is a contract which goods are delivered to a person who agrees to make periodical payments way of hire, with an option of buying the goods after the started hire installments have been paid.

The goods may be returned to the owner at any instance before the option is exercised, on payment of sum stated in the contract. Until the option is exercised there is no guarantee to buy the goods.

These contracts thus contain three parts;
1. Contract of bailment- under which the hirer obtains possession of the goods yet the goods remain in the ownership of the owner
2. Option which entitle the hirer to purchase the goods or hire them
3. Contract of sale which makes the hirer the owner of goods already in his/her possession

DIFFERENCES BETWEEN HIRE PURCHASE AND CONDITIONAL SALE/CREDIT SALE

Hire purchase differs from credit sale agreement and conditional sale in the following ways;

It is important to distinguish hire purchase from credit sale agreement and conditional sale. While all three involve payment via installments, they however differ from higher purchase in the following sense;

Credit sale agreement – This makes it the customer’s legal obligation to buy in that;

1. It is a contract of sale
2. The property in goods passes to the buyer as soon as the 1st installment is made

Conditional sale- This contract makes it the buyer’s obligation to buy but property in goods passes to the buyer only if the conditions that form the subject matter of the sales have been fulfilled.

Hire purchase and other instalment sales

The hire-purchase transaction is intended to protect the owners title to the goods should the hirer (the buyer) decide to sell them to a third party who buys in good faith before full installments is paid.

It is worth noting that this is differs from sale of goods act in which if the buyer is in possession of the goods, with the consent of the seller, sells them to a third party who buys in good faith them property passes to the third party.

Hire purchase therefore gives two options, i.e.
i. purchase the goods or
ii. return them.

Helv. Matthews (1895)
The owner of a piano agreed to let it on hire, the hirer to pay rent on monthly installments, on the terms that the hirer might terminate the hiring returning the piano to the owner but remain liable for all arrears of hire. Also that the piano should remain property of the owner but if the hirer had paid punctual monthly installments, the piano should become his property. The hirer after having paid a few installments pledged the piano to a pawn broker.
Held; the hirer was under no legal obligation to buy but had an option to either return the piano or become its owner payment in full. Therefore, he had not “bought it” and the owner could therefore recover it from the pawn broker.

PROVISIONS RELATING TO HIGHER PURCHASE

1. Before the Hire Purchase Agreement is entered into the owner is bound to notify the prospective Hirer the cash price of the goods.
However, the owner is not bound to do so if:
a. The Hirer has selected the goods or similar goods reference to a catalogue stating the Cash Price
b. The Hirer selected the goods or similar goods from a selection which stated the cash price.

2. The Hire Purchase agreement must be written.

CONTENTS OF THE AGREEMENT

1. A description of the parties.
2. A description of the goods.
3. The cash and Hire Purchase price.
4. Number of Installments.
5. Amount and when payable.
6. It must be signed the Hirer and or on behalf of the owner.
7. Rights of the Hirer.

REGISTRATION OF HIRE PURCHASE AGREEMENT

Sec.4 (1) of the Hire Purchase Act in Kenya establishes the Registry of Hire Purchase. This is a public office which may be held the Registrar, Assistant or Deputy Registrar.

As per the Act every Hire Purchase agreement must be delivered to the Registrar for registration within 30 days of its execution. However the Registrar is empowered to at times extend the duration.

The Registrar may refuse to register a Hire Purchase Agreement if
1. It is not in the English Language
2. It is presented after 30 days of its execution
3. Stamp duty or Registrar fee payable has not been paid

Registration of Hire purchase, serves two purposes:
1. It protects 3rd party who may purport to buy the goods from the Hirer.
2. It is a revenue generation mechanism for the state.

EFFECTS OF NON-REGISTRATION

In the event that the agreement is not registered the following will occur;

1. The agreement cannot be enforced any person against the Hirer.
2. Any contract of guarantee made in relation to the Hire Purchase Agreement is also unenforceable.
3. The owner cannot enforce the right to repossess the goods from the Hirer.

4. Any security given the Hirer under the Hire Purchase Agreement or the guarantor under the contract of guarantee is unenforceable.

PROTECTION OF THE HIRER

The hire purchase act attempts to protect the hirer for exploitation through the following ways;

1. Making some Contents of the agreement to be void if used
2. Implied terms of the agreement
3. Repossession of goods

Contents deemed void if inserted in the hire purchase agreement

1. A provision which allows the owner or his agent to enter upon any premises to repossess the goods let under a higher purchase agreement.
2. A provision whose effect is to relieve the owner from liability for such entry (stated in 1 above)
3. A provision which excludes or limits the Hirer’s right to terminate the Agreement.
4. A provision which deems persons acting on behalf of the owner in the formation or conclusion of the Hire Purchase Agreement as agents of the hirer.
5. A provision whose effect is to relieve the owner from liability for acts of person acting on his behalf in relation to the formation or conclusion of the Hire Purchase Agreement

IMPLIED TERMS (CONDITIONS & WARRANTIES)

The Hire Purchase Act implies both conditions and warranties in all Hire Purchase Agreements.

Conditions
1. Right to sell – an implied condition that the owner will have the right to sell the goods when the property is to pass
2. Merchantable Quality – Unless the goods are second hand and the agreement so provides, there is an implied condition that they would be of merchantable quality.
3. Fitness for Purpose – Where the hirer expressly or implication makes known to the owner the particular purpose for which the goods are, there is an implied condition that the goods would be reasonably fit for the purpose.
4. A condition may be implied any other law.

Warranties

1. Quiet Possession – There is an implied warranty that the hirer will have and enjoy quite possession of the goods.
2. Free from charge or encumbrance – Under sec8(1)(c) of the Act, there is an implied warranty that the goods shall be free from any charge or encumbrance in favour of a third party when property is to pass.
3. A warranty may be implied any other law.

REPOSSESSION OF GOODS

Under sec 15 (1) of the Act, if at any time 2/3 of the hire purchase price has been paid the hirer or any other person on his behalf, the owner cannot repossess the goods otherwise than court action.

This provision was intended to protect the hirer from Common Law practice of “snatch back” under which the owner will reposes the goods at any time.

If the owners posses the good in contradiction to the act then;

a) The agreement terminates
b) The hirer is discharged from all liability under the agreement
c) The hirer is entitled to recover all sums paid under the agreement or the contract of guarantee.
d) The guarantor is entitled to recover any sum paid under the contract of guarantee or under the security given.

The section does not adequately protect the hirer in that:

1. The hirer must pay too much to be protected the section.
2. Property in the goods does not pass to the hirer even after paying 2/3 of the hire purchase price
3. The court may still order the repossession of the goods

DUTIES AND OBLIGATIONS UNDER HIGHER PURCHASES AGREEMENT

Duties of the Owner

1. Duty to notify the hirer of the cash price
2. The owner must send a copy of the Hire Purchase Agreement, to the Hirer within 21 days of execution
3. Duty to put the Hirer in possession of the goods let under a Hire Purchase.
4. Duty to compensate the hirer in the event of defective goods
5. The owner is bound to disclose to the hirer any defects in the goods or in his title

Duties of the Hirer

1. Reasonable care- It is the duty of the hirer to exercise reasonable care in relation to the goods let under a hire purchase agreement. However the hirer is not liable for ordinary wear and tear.
2. Take Delivery-The hirer is bound to take delivery of the goods under hire purchase agreement.
3. Pay Installments
4. Continue Hiring-It is the duty of the hirer to continue hiring the goods for the agreed duration. This obligation does not deny the hirer the right to terminate the agreement.
5. Notice of change of location of goods-It’s the duty of the hirer to inform the owner any change in the location of the goods.

Rights of the hirer

1. He is entitled to be notified of the cash price of the goods.
2. He is entitled to a copy of the Hire Purchase Agreement within 21 days of the execution of the agreement.
3. He is entitled to Indemnity for any loss or liability arising reason of any defect in the goods or of title.
4. He is entitled to quiet possession of the goods let under the Hire Purchase Agreement
5. He is entitled to damages for any breach of contract the owner
6. He has the right to terminate the Hire Purchase Agreement at any time before the final instalment falls due.

TERMINATION OF HIRE PURCHASE

The hirer before the final installment may terminate the agreement by;
1. Giving a written notice of termination
2. Returning the goods

Once this is done the depreciation clause or the minimum payment comes into play in which case the hirer has to pay;
1. All installments due up to the termination day

2. The amount which one half of the hire purchase price exceeds the total amount paid or such lesser amounts as the agreement may provide.
Note;
If the hirer has not taken reasonable care of the goods, he is reliable in damages, the hirer must at his own expense return the goods to the premises from which delivery was taken.

However if the goods are returned elsewhere reason of the owners change of location, any additional expenses are recoverable from the owner.

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