Hire Purchase

In ordinary parlance, “Hire purchase” means agreement entered into to buy some goods and subsequently pay by instalments. The hire purchase system was actually designed to avoid the provision of Section 9 of the Act 1889 which enables a person who has bought or agreed to possession if then, to pass good title to an innocent purchaser for value. The main rationale was that when property in the goods has passed, even if the sum had not been paid, the new buyer passes a good title.

DEFINITION: a contract of hire purchase is one under which an owner of goods lets them out on hire to another person the hirer on condition that the hirer to makes stipulated install mental payment called rent, usually with the provision that the hirer will become the owner when he completes payment of the stated instalments or when after completing payment, he exercises an “option to purchase” by paying a nominal option fee.

The case of Helby V. Mathews is an example of hire purchase in this case, the owner of a piano agreed to let it on hire, the badly agreeing to pay monthly instalments. The term of the agreement provided that the bailee might terminate the hiring by delivering up the piano to the owner, the bailee remaining liable for all areas of hire charges. It was also agreed that if the bailee should punctually pay all the monthly instalments, the piano should become his sole property and that until such full payments the piano should continue to be the sole property of the owner. The bailee was given possession of the piano. He paid a few of the installments and then pledged it with a pawn broker as security for an advance.

The House of Lords held that on the true construction of the agreement, the bailee was under no legal obligation to buy but merely had an option ether to return the piano or to become its owner by payment of all the installments. In other words, the bailee has not agreed to buy the goods in the real sense of it.

The basic element on all the true hire purchase agreement is the interaction of bailment of goods and the option open to purchase the goods.

However, the statutory definition as per Section 20 of the Hire Purchase Act , 1965 is that “a bailment of goods in pursuance of an agreement under which the property in goods will or may pass to the bailee” and hire purchase agreement shall be construed accordingly and where by virtue of 2 or more agreements, none of which by itself constitutes a hire purchase agreement , there is a bailment of goods and either that the bailee may buy the goods , or the property therein will or may pass to the bailee , the agreement shall be treated for the purposes of the Act as a single agreement made at the time when the last of the agreement was made.

From the foregoing, a few points are worth nothing about is hire purchase transaction

Hire purchase is a contract of hire not of sale or of agreement to sell
There is no obligation on the part of the hirer to complete the instalmental payment or to buy after payment of installment.
The hirer has not agreed to buy the goods as his in Section 75(2) of the sale of Goods Act 1893. Therefore, he is not a buyer in possession.

The essential features of hire purchase may thus be summarized as follows:

It is a form of bailment
Hirer has an option not an obligation to purchase the goods
It is possession that passes to the hirer not ownership which rests with the owner. Therefore, hirer cannot sell. It is a credit business transaction like:
1. Credit Sale agreements
2. Conditional Credit Sale
3. Loan and Mortgage
4. Hire
5. Pledge

Distinction between Sale and Hire Purchase

The main difference between a hire purchase and a sale agreement is that under the latter, the buyer is under a legal obligation to buy but in a hire purchase agreement there is no such obligation. The agreement will usually provide either that the property in the goods shall pass to the hirers when he has paid all the installments, or that after he has paid all the installments, he may buy the property by paying a nominal sum liberty to return the thing hired without liability to pay further installments is the great inducement to person who enter hire purchase contracts.

In G.B Ollivant V. Alansanya the owner resumed possession of a motor car after the hirer had defaulted in paying the instruments. He sued the hirer not only for the amount of installments outstanding but also the balance of the purchase price. It was held by Butler LLOYD J, that in resuming possession of the motor car, the owner has satisfied himself against the hirer.

*Differences in commercial practice and the existence of separate statues on the two types of transactions made the differences between sale and hire purchase contracts more apparent. No special formalities or procedures are necessary to effect a sale of goods. A sale or agreement to sell can be spelt bout even where the parties express only the bare elements of the contract. In a line purchase contract on the other, care has to be taken in spelling and the intentions of the parties to the contract.

Other definitions of Hire Purchase

Hire purchase agreement is a contract of hire paid by installments under which the hirer may become the owner of the goods if he completes payments of the hire purchase price
A hire purchase contract is a contract by which goods are delivered to a person who agrees to make provisional payments by way of hire with an option of buying the goods after the stated installments have been paid.

Distinctions between Hire Purchase and similar legal transaction

Credit Sale

Under a credit sale agreement, the seller sells and transfers ownership in the goods to the buyer but agrees to receive installmental payment. The buyer can therefore pass title.

If the buyer defaults payments of instalments, the seller is remedy is an auction for the accrued installment not recovery of possession.

Conditional Credit Sale

Have the buyer agrees to buy the goods and takes possession of them. But ownership is not to pass until the buyer pays all the installments.

Unlike in a hire purchase contract where there is a mere option to purchase; there is an obligation to purchase in conditional credit sale. The seller under a conditional credit sale may recover possession of the goods of the buyer defaults payments. But if the buyer resells the goods to a 3rd party, he transfers good title under SECTION 15 (2) of the Sale of Goods Act 1893.

Hire

Here, there is no option to buy the goods. Money is paid for more use e.g. hire of a taxi or equipment. There is a contract nonetheless. The hirer must why use the goods for the purpose stated and agreed. For as long as this is so, the owner may not review or reposes the goods during the period of time.

Loans and Mortgages

A potential buyer, under this transaction may obtain goods from the seller and if he has no money to pay, the mortgages the goods back to the seller as security for payments of the price under the mortgages, the seller is entitled to repossess and all sell the goods if the buyer makes default in payment.

Alternatively, the buyer may obtain loan from a 3rd party, (e.g. a finance house), purchase the goods outright and mortgage then to the creditor. This type of transaction is human not a very popular form of credit sale because of the requirements of the Bill of Sales Act.

Hire Purchase under Common Law

Hire purchase at common law is based on contract principles parties are free to contract and to import any terms to the contracts. No special form is required for common law. Hire purchase other than the hirer’s option to buy the goods. Where there is no such option, then no hire purchase agreement.

In J. Allen & Co V Sanni Adewale, where the agreement did not give an option to buy, for example, said it is not hire purchase agreement because parties to common law hire purchase agreement are not equals, terms of the contract are usually heavily weighted in favor of the owner of the goods the only bar being that parties cannot exclude the performance of what they contracted to do

In Ogwu V. Levantis Motors Ltd. A procured a new vehicle on hire purchase. What was delivered was, however, an old vehicle the court held that reliance as an exclusion clause cannot avail in this circumstance

Also, at common law, the debtor is not usually regarded as the agent of the owner except in respect of

Receiving offers from the hirer
Delivering goods to him
Receiving notice of revocating of hirers offer.

The common law tends to regard the dealer as agent of the hirer the obligation of the owner under common law hire purchase is merely to supply gives reasonably fit and suitable for purpose even where the hirer relied on the skills of the owner/dealer.

In Stephen Anoka V. SCOA, a man obtained through hire purchase a lorry which and a defective engine which he had to replace to make the lorry function effectively. His attempts to hold the dealer liable for defect failed. It was held that the dealer could not have discovered the fault without dismantling the lorry.

In general, there was a considerable hardship under common law hire purchase because:

Owners usually hire hirers in purchase transaction without explaining to them thoroughly the financial implications of the transaction
hirers were often time not give possession of copies of the hire purchase agreement which they had signed and which were prepared by the owner in the first instance and which tend to exclude all conditions and warranties.
Owner reserved the right to renew the goods in the slight breach using force or entering the hirer’s premises, not minding it cause of hirer’s default
Higher purchase agreements usually contained a minimum payment of clause under which the hirer was obliged to pay a subtotal sum the owner for depreciation on the termination of the agreement.
If the owner repossessed and sold the hire purchase goods, he was not accountable to hirer for any excess reached over the amount outstanding.
The hirer’s payments and rates of interest were fixed at very high levels because there was no regulation.
The right of the owner to seize goods where the hire default is absolute under the common law, we see this in operation in Adeniyi Atere V. Dada Amao where it was held that the owners would seize a lorry even though 995 pounds out of 1000 pounds had been paid to him.

N.B: The Hire Purchase Act of 1965 was an Act passed to remedy the injustice which was prevalent at common law in respect of hire purchase transactions. Hence, the Act can at best be described as complementary to the common law position on hire purchase agreement in that it wielded out the sharp practices prevalent at common law and more or less confirm the good ones.

Note:

The following features are definite and must be present in a hire purchase agreement for it to be qualified as one.

A hire purchase is a bailment of goods (i.e. delivery of possession of goods). Possession must pass to the hirer.
There is an option to purchase the goods being conferred on the hirer not an agreement to buy at the time of the contract.
Title in the goods therefore remains in the owner; so that if the hirer sells the goods before he has exercised his option to purchase he does not pass good title to the purchaser.

This point is illustrated clearly by the case of Helby v. Matthews. In this case, the owner of a piano hired it to a bailee. The agreement provided that the bailee should pay monthly instalments, he could terminate by delivering the piano to the owner, and if he paid all the instalments punctually, he would become the owner of the piano but until such time, the piano would be property of the owner.

Before paying all the instalments, the bailee pledged the piano with a pawn broker as security for an advance. It was held that the owner would recover the piano from the pawnbroker because the bailee had not agreed to buy the piano; he merely had an option either to purchase the piano by paying all the instalments, or to return the piano. Consequently, he could not pass title to the pawnbroker. See also Olanitan v. C.F.A.O

N.B: It should be clearly noted that in construing the Hire Purchase contracts, the courts have regard to the substance and not to the form of words used by the parties. If the transaction is in substance a sales or an agreement to sell, parties cannot make it a Hire Purchase merely by calling it one.

Formation of Contract of Hire Purchase

Formalities

To be valid and enforceable, the hire purchase contract (like any other contract) must satisfy the essential ingredients for the formation of a valid contract. These include offer and acceptance, consideration, capacity of the parties to the contract, contents, intention to create legal relations etc.

There are no special formalities required in the formation of a Hire Purchase agreement at common law. It may therefore be made under seal, in writing or by the words of the mouth. Although the situation is now different in respect of Hire Purchase transactions that fall within the scope of the Act. Section 2.
Can an infant be held liable as a hirer under hire purchase contracts?
The locus classicus can be seen in the case of Merchantile Union Guarantee Corp. Ltd. v. Ball where an infant was held not liable under a trading contract (which of course is void of an infant) in which he failed to pay the hire instalment due in the Hire Purchase agreement. But where the goods are necessary, the ordinary principles of contract law apply.
Under common law Hire Purchase agreement, the presumption of “consensus ad idem” is a necessary prerequisite of a valid transaction.

Parties to a Hire Purchase Contract

Originally, the two parties to a hire purchase agreement are the OWNER and the HIRER. In other words, a hirer in the hire purchase transaction ordinarily thinks he has entered into an agreement with the owner. This is so in every case where a dealer in goods, as the owner of the goods, lets them out on hire purchase terms to a hirer. But this is not always so in all cases.

A hirer purchase may however involve a finance company, who buys the goods from the owner and let it to the hirer on hire purchase. This can occur in cases of more expensive consumer and industrial goods such as motor vehicles and machineries. In this situation, the owner (dealer) then seeks the assistance of a finance company and who somewhat serves as an intermediary between the hirer, and the finance company is generally known as the dealer.

Essentially, a hire purchase agreement is thus tripartite in nature. There are usually three parties to it:

Finance Company(Owner)--------Dealer-------Hirer

The function of the dealer is mainly to negotiate the terms and conditions of the transaction with the hirer. The takes the deposit or initial payment from the hirer and secures the completion by him of the credit proposal form and hire purchase agreement. The proposal form agreement is usually addressed to the finance company who may accept or reject the offer.

Assuming that the company approved the transaction, a Hire Purchase contract is signed between the hirer and the finance company. There is therefore strictly speaking, no contractual relationship between the dealer and the hirer. If therefore something goes wrong with the goods therefore entitling the hirer to sue; the hirer would prima facie have no course of action against the dealer. He can only sue the finance company as the owner of the goods. The dealer is not in any respect even considered the hirers agent unless he has express or apparent authority to act on the hirers behalf.

Obligations of the parties under the hire purchase contract

As noted earlier, the parties to hire purchase transactions were the owner and the hirer. But modern hire purchase now have 3 parties involved in the transaction of hire contracts. The dealer ,the Hirers and the Finance Company who becomes the owner of the goods, during the first day of the contract of hire purchase before the option to purchase is exercised by the hirer. It is however clear that irrespective of the parties involved; the whole concept of hire purchase agreement is to enable them to sell and the hirer to eventually buy when he exercises this option. The “Merry-go-round” procedure is adapted to as the provisions of the sales of goods act and the factors. It is no surprise therefore that the whole basis of hire purchase contract has been aptly described as a “legal fiction”

Obligations of the Owner

The obligation or duties of the owner under a hire purchase have to be ascertained from the express and implied term agreement itself and from the provisions of the Hire Purchase Act 1990 in circumstances where the agreement falls within the Act. However, the terms of the hire purchase agreement at common law usually improve the following obligations on the owner.

DELIVERY OF THE GOODS: It is the duty of the owner to deliver the hirer, the goods which he has agreed to let on hire and the hiring commences only when the hirer has accepted the delivery. The prima facie rule is that the place of delivery is the owners place of the business if he has one, and if not, his residence.
The contract may be repudiated by the hirer where the owner fails to deliver the goods as stipulated by the law. For a breach of the obligation to deliver the goods, remedy lies in action for damages not specific performance unless the goods are of a rare kind. In National Cash Company v. Stanley, where the hirer failed to take delivery and the bailor sued for rent and arrears, the court held that the bailor was only entitled to damages for breach of contract.
TITLE TO THE GOODS: There is an implied condition of the contract of hire purchase that the owner is capable of conferring a good title both at the time when the hiring commences (i.e. delivery of goods to the hirer) and at the time when the hirer ceases to exercise his option to purchase.
Breach of this condition may give rise to total failure of consideration. It is therefore the duty of the owner of the goods to ensure that he had a good title to the goods let on hire. If therefore at any time the owners title to the goods is defective, hirer is prima facie entitled to repudiate the transaction and recover from the owner all sums paid as money paid on consideration which has totally failed.
DESCRIPTION OF GOODS: The owner is under a duty to supply goods of the description which he has agreed to let on hire. Where there is letting by description, the goods turnout to the hirer must exactly correspond with the description which may go beyond the physical state of the goods and extend, for example to the way the goods are packed. If the owner fails to satisfy this condition the hirer may reject the goods for the breach of the implied condition or alternatively he may elect to affirm the contract and sue for damages for breach of warranty.
FITNESS AND QUALITY OF THE GOODS: where a hire purchase agreement is entered into upon the strength of an express or implied undertaking given by the owner or his agent as to fitness of the goods for the purpose for which they are hired, the hirer would be entitled to repudiate the agreement or sue for damages upon a breach of that undertaking.
Ordinarily, for the condition to apply, a hirer must have made known to the owner, the purpose for which he wants the goods in circumstances that indicates that he relies on the skill and judgment of the owner.
In Bentworth Finance Company v. DeBank Transport, the court confirmed that where the hirer makes known the purpose for which the goods are required so as to show that he relies on the sellers skill and judgment the term is implied the goods shall be fit and suitable for that purpose as reasonable care and skill can make them. See also Amusan v. Bentworth Finance.
Furthermore, where the defect makes the goods unfit for its purpose is hidden at the time of the agreement, the owner may not be guilty of the breach of this duty. This, in Stephen v. SCOA, the plaintiff bought a lorry on hire purchase from the defendant. The engine was defective and the plaintiff had to replace it with another engine. He defaulted in payment and the defendant seized and sold the lorry.
The plaintiff brought an action demanding inter alia damages for breach of the implied terms for fitness. The court held that in a hire purchase agreement, the implied condition in the fitness for purpose does not extend to hidden defect in the hire article. The only way in which the owner might have discovered the defect was by dismantling the engine and this was more than could reasonably be expected of him. Therefore there was no breach as to the implied term as to fitness.
QUIET POSSESSION: The owner is under a duty not to interfere with peaceful, quiet possession and the enjoyment of the goods by the hirer. Where the owner wrongfully interferes with the hirers’ quiet possession and enjoyment, then there is a breach of warranty as to quiet possession. The hirer in this event can only sue for damages.

The Obligation of the Hirer

The terms of the purchase agreement would usually also contain clauses that spell out the obligations towards the owner of the goods. The terms usually contain obligations relating to the following matters:-

ACCEPTANCE OF DELIVERY: It is the duty of the hirer to accept the delivery of the goods which he had contracted to hire. The hirer would be liable to the owner for any loss occasioned by his neglect or refusal to take delivery. This owner is these circumstances may maintain an action against the hirer for non-acceptance.
CARE OF THE GOODS: The contract usually provides that the hirer should have costively and control and not his expense put them in good order and repairs. A hirer must accordingly take reasonable care of the goods and may be liable for loss or damage due to wrongful use. A hirer is generally required to insure the goods in the name of the owner or in the joint names of the owner and the hirer, since both of them have an insurable interest in the goods.
However, where the goods perish without the fault or negligence of the hirer, the hirer purchase agreement may be said to be frustrated and the parties discharged of this obligations. See the cases of Bentworth Finance V. Sam Bakari and Salami V. Bentworth Finance.
If the contract is determined and the hirer returns damaged goods to the owner, he will be liable in damages unless he can prove that he look reasonable care. He is not liable for accidental damage or damages which occurred due to no fault of his.
PAYMENT OF INSTALMENT: A hire purchase agreement usually contains damages as to the hire purchase price i.e. the total sum of the money payable in the transaction. The instalments are usually of the stated number and the hirer is obliged to pay the installment as they fall due punctually. See Animashaun V. CFAO. Defaults may lead to the termination of agreement and repossession of goods. The owner’s right to reposes is not affected by the fact that only a very small sum is left unpaid by the hirer as in Atere v. Amao.
RE-DELIVERY: The hirer is under a common law by to re-deliver the goods to the owner or his agent upon the termination of the hiring. He is not however obliged to send the goods back to the owner unless there is an express term to that effect. But he is obliged to deliver the goods to the owner when he comes for them and not to prevent the owner from collecting his goods. A failure to re-deliver the goods on demand would render the hirer strictly liable for any loss or damage to the goods which occur while his failure continues.

Obligations under the Hire Purchase

Section 4 of the Hire Purchase Act implies additional terms into any hire purchase contract, whether under the Act or at common law. These terms are:-

Quiet possession by the hirer
Right to sell the goods at the time when property is to pass - a right of the owner.
Merchantable quality.

These terms are now conditions not mere warranties. The last - merchantable quality, will not apply however if the goods are second hand and this is stated in the agreement, if the defects are such that the owner would not reasonably have been aware of them, if the hirer has examined the goods or a sample of them and the examination ought to have revealed the defects.

An implied warranty of freedom from encumbrance such as a hirer or storage fee, or tax on the goods.
An implied warranty of fitness for purpose where the hirer makes known the particular purpose for which the goods are required.

General requirements under the Act

SECTION 2 provides for:-

Notification of the actual prices of the goods – It is very important for the exact price of the goods to be known to the hirer, hence the Act requires the owner to state in writing to the prospective hirer the “cash price” of the goods.
Apart from cash price requirement, it is also an essential ingredient of a valid hire purchase contract/agreements for the owner to satisfy the following:- There must be a note or memorandum of agreement signed by the hirer and all the other parties to the agreement of their representatives. This note or memorandum must contain the following:-
1. A Statement of the hire purchase price
2. The amount of each of the instalments
3. The dates or the mode of determining the dates upon which the instalments are payable.
4. A statement of the deposit paid
5. A statement of the true rate of interest as prescribed by the minister from time to time and published in the gazette.

Void Provisions(Section 3)

SECTION 3 OF THE ACT voids any provision in a Hire Purchase agreement which

Empower owner or his agent to enter the hirer’s premises and remove goods.
Excludes or restricts hirer’s right to terminate the agreement.
Makes anyone acting on behalf of owner or seller in connection with the hire purchase the agent of the hirer.
Imposes on the hirer the services of an insurer or repairer or any such person.
Subjects the hirer to any liability over and above the liability he would have incurred had he terminated the agreement himself.

Conditions and Warranties(Section 4)

UNDER SECTION 5 OF THE ACT, THE MINISTER IS VESTED WITH CERTAIN POWERS OF REGULATION TO BE PUBLISHED IN THE FEDERAL GAZETTE IN RESPECT OF THE HIRE PURCHASE TRANSACTIONS.
APPROPRIATION OF PAYMENT UNDER THE HIRE PURCHASE AGREEMENTS

Section 7

DUTIES OF PARTIES TO FURNISH INFORMATION (SECTION 6 (1) & (2))
RIGHT OF HIRER TO DETERMINE HIRE PURCHASE AGREEMENT (SECTION 8)
RECOVERY OF GOODS (SECTION 9)
POWER OF COURT IN ACTIONS TO RECOVER GOODS (SECTION 10) TERMINATION OF HIRE PURCHASE AGREEMENT

Termination of Hire Purchase Agreement

The ordinary rules of termination of simple contracts apply to hire purchase agreement. Again, because it falls squarely under some specialized contract, it can also be terminated under certain peculiar circumstances. The well-known forms of terminating hire purchase agreements are as follows:-

Performance

So long as the parties to the transaction perform their own side of the bargain, and bearing in mind that the essence of this transactions for the hirer to ultimately purchase the good involved, it stands to reason, that the most obvious way of terminating this type of agreement is through performance of the contract. Hence, once the hirer exercises his option to purchase, the contract is brought to an end by performance.

By Agreement

Whatever the stage the agreement has reached, it is noted clearly that the transaction can be terminated at any time (whether it is executory or executed) so long as the parties consent to the terms of the termination; i.e. there must be mutual agreement to terminate.

By Repudiation

This may occur where either party breaches certain conditions of the contract, or of course it entitles the innocent party to repudiate and go further to claim damages since the contract is treated because of such breach as having ended.

By Notice

Both under the term of the agreement and under the Hire Purchase Act. It is usual for the agreement to provide for the hirer to terminate the contract before the end of the hire purchase transaction since the essence of hire purchase is to ensure that his freedom to choose whether to purchase or not is not fettered or rendered illusory.

By Frustration

Where according to the doctrine of frustration the goods are lost or destroyed by any of the frustrating events e.g. fire, theft, act of God etc which is not due to the fault of the parties to the agreement, the hire purchase transaction automatically ceases to have any legal effect, since the contract has because impossible of performance.

In Bentworth Finance V. Sam Bakari, a hired vehicle was destroyed in an accident and the destruction was not shown to be due to the default of the hirer. It was held that the contract was frustrated and the hirer discharged from all liability arising after the frustrating event, namely the hire arrears and unpaid balance of the hire purchase. See also Salami V. Bentworth Finance.

By Judgment of a Court

The Courts as well, have wide powers to terminate a hire purchase contract, due to the fault of either the hirer or the owner. Where such a judgment is validly passed, it automatically brings the hire purchase transaction to an end.

Option to return the Goods

Hire purchase agreement usually gives the option to buy or to return the goods. If the buyer decides to return, he must pay the outstanding arrears of instalment and perhaps compensation for depreciation where this is enforceable. He is under no obligation to deliver the goods at the owner’s business or private address. All he is required to do is to hold them ready for collection at his own address - and this takes effect as soon as the hirer gives notice to the owner of his decision to terminate

Option to Buy

The agreement may be terminated by the hirer exercising his option to purchase the goods. Where the hirer exercises this option, he is liable to pay the sum stipulated as the option price.