Sale and Hire-Purchase Agreement

A transaction of sale has to be distinguished from another apparently similar but different transaction, called hire-purchase ‘agreement’. A hire-purchase agreement is an agreement under which the owner delivers his goods on hire basis to a person called ‘hirer’ and the hirer has the option to buy the goods by paying the 10 agreed, amount in specified instalments.

The hirer, under this agreement, is required to pay every month a particular sum of money, and if he pays in that way for an agreed number of months, the hirer will become the owner of the goods on the payment of the last instalment. But if the hirer fails to pay any particular instalment, the owner can terminate the contract and take away the goods because the ownership continues to remain with him.

The hirer has two options:

i) he may buy the goods after paying all the agreed instalments or

ii) he may return the goods at any time. In case he decides

to return the goods he shall not be liable for further payment of instalments, the amount already paid is treated as hire charges for the use of goods.

A hire-purchase agreement, therefore, entitles the hirer only to possession of the goods. He cannot accordingly pass a good title to any buyer from him. A hire purchase agreement is distinct from ‘sale’ in which price may be payable by instalments. In case of sale, the property in goods passes as soon as the contract is made, though price may not yet have been paid. A hire-purchase agreement, on the other hand, does not result in passing of the property unless the option to purchase is exercised, usually by payment of all the instalments. Till such time, it continues to be a bailment. Thus, it is primarily the option on the part of the hirer to buy or to terminate the hiring that marks the distinction. In K. L. Johar & Co. v. Dy. Commercial Tax Officer, the Supreme Court observed as follows:

The essence of a sale is that the property is transferred from the seller to the buyer for a price, whether paid at once or paid later in instalments. On the other hand, a hire-purchase agreement has two aspects. There is first an aspect of bailment of goods subject to the hire-purchase agreement, and there is next, an element of sale which fructifies when the option to purchase is exercised by the intending purchaser.

You should note that in a contract in which the person taking the goods does not have the option to return the good, it will be an ‘agreement to buy’ and not an agreement of hire-purchase, even though the price is payable in instalments and the seller has the power to take the goods back in case of default. In Les v. Butler, a lady hired certain furniture from the plaintiff. The contract provided that the hirer has no option to return the goods and owner can take the furniture back if any instalment was not paid. Before the last instalment was paid, the lady sold the furniture to the defendant. It was held, that the defendant had acquired a good title, the lady being in possession of the furniture under an ‘agreement to buy’ and not under an agreement of ‘hire-purchase’, because the lady did not have the option to return, but was under compulsion to buy.

Thus, in case of sale by instalment, the buyer cannot terminate the contract and as such is bound to pay the price of the goods. The hire-purchaser, on the other hand has an option to terminate the contract at any stage and cannot be forced to pay the further instalments. Further, if the agreement is an agreement to sell and under it if the buyer obtains possession of the goods, with the consent of the seller, he can validly sell or pledge the goods and thereby give the transferee or pledgee a good title on the goods provided they have acted in good faith. However, in a contract of hire purchase, the hirer cannot transfer ownership to such buyer even if the latter acts in good faith, because the position of the hirer is that of a bailee only. He becomes the owner when all the instalments are paid. In this connection the following points should also be noted:

i) A hirer cannot claim the benefit of implied conditions and warranties (you will read about these in the next unit) unless it becomes a sale. However, conditions implied under Hire-Purchase Act, 1972 do apply.

ii) Sales-Tax is not leviable on a hire-purchase until it becomes a sale.

iii) A contract of sale may be made orally or in writing, but the hire-purchase agreement must be in writing.

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