Hire purchase is a contract of hire which is paid for by installment after which the hirer may become the owner of the goods if he completes payment of the hire purchase. A Hire purchase contract can also be defined as a contract where goods are delivered to a person who agrees to make periodical payments with an option to buy the goods after paying up the installments. The goods may be returned to the owner at any time before the full payment is exercised as stated in the contract, but until then, there is no express agreement to buy the goods.
According to S20, Hire Purchase Act, hire purchase is the bailment of goods in pursuance of an agreement under which the bailed may buy the goods or under which the property in the goods will or may pass to the bailee. In Jajira v. Northern Brewery, it was held that even though the terms of an agreement are drafted as hire purchase, the court will not treat it as such if good evidence shows its as otherwise. The court will look at the reality not merely the legal formality.
Mr. Henry Moore, the Bishop Gate Piano maker claimed to have invented the hire purchase trading system in England in 1846. This trading system soon gained ground with the advent of the Sewing machine made by Singha Manufacturing Company which let out machine to its customers under a hire system containing an option to purchase. The hire purchase trading system was given Judicial approval in the case of Helbye v. Matthews (1859) A Cat pg.471.
The decision in the case undermined the provisions of S9, Factors Act 1889, and attempts were made to reverse the decision by a statute in 1912 but the attempts were not successful because of the persistent abuses of the system by the dealers and because of the little protection afforded the hirer by the system, demand for legislation regulating the hire purchase transactions increased and after several unsuccessful attempts, the Hire Purchase Act was passed in 1930 to regulate hire purchase transactions.
How does a Hire Purchase System Work?
In a hire purchase, the owner delivers the goods to the hirer on credit. The hirer makes a deposit and then takes custody of the goods. A hirer uses the goods and pays the rest of the price in instalments and the owner usually charges an interest over the amount unpaid for being deprived of the use of his capital. In some cases, instead of the owner parting with his goods on credit, a finance company may be brought in for the provision of money to finance the purchase. The finance company would want to satisfy itself of the financial standing of the hirer. If satisfied, it will enter into an agreement with the hirer for the hirer to take the goods on hire purchase. Also, sometimes where the dealer or finance company is not sure of the financial standing of the hirer, the hirer is asked to provide someone who will guarantee the payment of installment as at when due. If the hirer defaults, the guarantor may find himself personally liable to make the payment instead of the hirer.
The hire purchase trading system has been adopted in commercial practice to protect the owner's title to the goods if the hirer, in breach of his undertaking sells the goods to a third party.
Distinction between Hire Purchase and Similar Transactions
1. Contract for Sale of GoodsHere, the seller transfers or agrees to transfer the property in the goods to a buyer for a money consideration called "the price" - S1, Sale of Goods Act. In this case, the buyer is bound to buy the goods but in hire purchase, the hirer may or may not buy the goods.
2. Bill of Sale
3. Conditional Sale AgreementHere, the goods are sold with an express provision preventing the property from passing to the buyer until he has paid his installment. Meanwhile, the buyer has immediate possession of the goods.At common law, if before completing his instalment under a conditional sale, the buyer sells the goods to a good faith purchaser, the later will get a good title - S9, Factors Act and S25, Sale of Goods Act. The hire purchase agreement does not involve the hirer in the legal obligation to buy the goods. If the hirer disposes off the goods before completing the instalment, the owner can recover the goods from the good faith purchaser.
4. Money Lending
How to Form a Contract of Hire Purchase
Basic rules of contract apply in common law. As such, there are no formal or rigid requirements for the law of hire purchase. Written and formal agreements are valid and binding.The parties must have capacity to enter into a hire purchase agreement. The terms of hire purchase must be stated precisely such that the court will be able either from express terms of the agreement or by reasonable implication and reference to identifiable documents ascertain the intention of the parties. Again, before creating a contract, there should be a consensus adidem between the parties, the acceptance must match the offer but there are cases when dispute may arise as to the facts contained in the hire purchase agreement at common law. This was always due to sharp practice on the path of the dealers. Sometimes also, there may be a misrepresentation as to the name of the document which the hirer had signed.In such situation, if the hirer believes that the document involved is essentially different from what he signed,the hirer may be able to set up a plea of non est factum and thereby escape liability. - Mushkan Financeco. Ltd v. Howard. Also, hire purchase from its inception is void abinitio and all monies paid under it are recoverable. This is known in the general principle of contract law as lex non cogit ad impossiblia.
In certain circumstances, a mistake by one or more of the parties to an agreement (as to the terms of the agreement or the identity of the other party) may render the agreement void. Also, the court will not enforce an illegal hire purchase agreement because it is an invalid contract - Pearce v. Brooks
Duties/Obligations of the Owner in Common Law
- Title: The person letting out the goods has title to dispose the goods. In Karflex Ltd v. Poole, the plaintiffs who were hire purchase dealers bought a car from the defendant with an option to purchase on payment of all installment.The defendant paid the deposit and took possession of the car but he defaulted on the first installment and the plaintiffs commenced proceedings against him. It transpired that the car seller had never been the owner of the car at all but the plaintiffs paid off the true owner and proceeded with their action against the defendant. It was held by a divisional court that the action must fail because the plaintiffs were in breach of an implied condition that they had a right to sell the goods at the date of delivery of the car, they had no such right. The defendant who had defaulted on payment of the first installment was entitled to repudiate the contract and recover all deposits despite the fact that he had not been evicted by the true owners and that by the time the case came up for trial, there was no possibility of eviction because the original owner had been paid off.
- Correspondence with sample or description: Where goods are let on hire purchase by description, it is implied condition that the goods correspond with the description. Also, where the goods are let by reference to sample, it is an implied condition that the bulk must correspond with the sample and that the hirer will have a reasonable opportunity to compare the bulk with the sample and that the goods are free from any defect, rendering the goodsunmerchantablewhichwouldnotbe apparent on reasonable examination of the sample. The goods must correspond with the description, else, the hirer is entitled to reject them, even if the deviation is only minor and does not affect the value. Though, purely trivial may be ignored - Arcos Ltd v. E.A Rommasel & Sons
- Delivery: The owner must transfer possession of the goods from himself to the hirer. Hiring does not commence until the goods are delivered and the hirer is not obliged to accept them unless they appear as described in the contract. - Karsales (Arrow) Ltd v. Wallis. Unless it is agreed to the contrary, the place of delivery is the owner's place of business if he has one or if not his residence. If there is no stipulation as to time in the agreement,the owner must send the goods to the hirer within a reasonable time.When the owner is readyand willing to deliver the goods,and he requests the hirer to take delivery, the hirer is obliged to do so within a reasonable time or else he will be liable in damages for breach of contract. Delivery is normally effected by a physical transfer of possession of the goods from the owner to the hirer. However,the goods may also be delivered through other methods e.g, if constructive possession is given to the hirer.
- Quiet Possession: An implied warranty where the owner, in addition to putting the hirer in possession of the goods must leave him in peaceful possession of them. The warranty is broken if the hirer’s enjoyment of possession is interfered with either by the owner or the lawful act of a third party. This obligation as to quiet possession is a mere warranty and its infringement entitles the hirer only to damages (it does not relieve him of his duty to perform his part of the agreement). However, where the interference with the hirer’s possession arises as a result of a defect in the owner’s title, it will be to the hirer’s advantage to base his claim on a breach of an implied term as to title since it is a condition that entitles the hirer to repudiate the contract if breached. If the owner wrongfully repossesses the goods in defiance of the hirer’s right, the fact that the term of quiet possession is only a warranty and not a condition is irrelevant. The owner has by conduct, wrongfully repudiated the agreement and the hirer is entitled if he so desires to treat that repudiation as discharging him of performance of his obligations under the contract.
- Fitness for Purpose: There is a warranty where the hirer expressly or impliedly informs the owner (or his agent) of the particular purpose for hiring the goods. To show that he relied on the owner’s skill and judgment, there is an implied term that the goods are reasonably fit for that purpose. This term cannot be claimed by the hirer unless the particular purpose for which the goods were required was made known to the owner before or when making the agreement. Communication to the dealer is not sufficient since he is not the agent of the owner to receive and transmit to the owner such a communication. Also, what is required to attract the implication of this term as to fitness is the hirer’s reliance on the skill and judgment of the person letting the goods on hire purchase. In Bentworth Finance v. DeBank Transport (1968), the court confirmed that where the hirer makes known the purpose for which the goods are required so as to showthathe relies on the owner’s skill and judgment, it is implied that the goods are as fit and suitable for that purpose as reasonable care and skill can make them. However, in Anokav.SCOA*(1955-56) WRNLR113, the court said that the hirer cannot complain of any defect in the goods which could not have been discovered by due care and skill on the part of the owner.
- Merchantable Quality: This was defined in Bristol Tramways Carriage Co Ltd v. Fiat Motors (1910) 2KB831 to mean quality such that a reasonable man acting reasonably would after full examination, accept the goods in the performance of his offer to buy them. This term, in absence of an agreement to the contrary, will be implied in favour of the hirer where the goods are let by description and where the owner is one who manufactures the goods or the dealer of the goods of that description. If the hirer by himself, examines the goods before entering the agreement, the owner will not be liable for defects.
- Accept Payment Offered: The owner is impliedly obliged not to refuse installments validly tendered by the hirer except for reasonable cause e.g. where the hirer is in breach of his duties.
- Repairs: Unless the agreement provides, the owner has no duty to keep the goods in repair after delivery except if repairs are necessitated by breach of the implied condition of fitness. If there is no provision in the agreement requiring the owner to maintain goods after delivery and the hirer makes repairs, he is not entitled to reimbursement by the owner. If there is a provision intheagreementrequiringtheownertocarryoutrepairs andtheownerfailstodosoafter receiving reasonable notice fromt hehirer, the hirer can repudiate the agreement or make repairs and recover reasonable cost from the owner.
- Insurance: In the absence of an agreement to the contrary, there is no duty imposed on the owner to insure the goods. Most hire purchase agreement impose an express obligation on the hirer to insure.
- Maintenance of goods up to the time of delivery: There is an implied term that the owner shall deliver the goods in as good a state as they were at the time the agreement was made. If the hirer has examined the goods before the date of the agreementandmakesan application for hirepurchase,onthebasisofhisexamination,itistheowner’sresponsibilitytoseethat the goods are on the same condition as when first seen by the hirer. Karsales(Harrow)v. Wallis (supra). In the case, the defendant inspected a car owned by a car seller, founditin goodcondition,andwishedtotakeitonhirepurchase.The carsellerthereaftersoldit to the plaintiff who in turn resold it to a hire purchase company .The defendant made a contract with this company. The contract contained a term that‘ no condition or warranty that the vehicle is road worthy or astoitscondition of fitness for any purpose is given bythe owner or implied therein.’ One night , a ‘car’ was left outside the defendant’s premises.It looked like the car in question but it was a mere shell. The cylinder head was broken, all the valves were burnt, two pistons were broken and it was incapable of self propelling. The defendant refused to accept it or pay the hire purchase instalment and when sued for this, he pleaded the state of the car. The plaintiffs relied on this exclusion terms in their reply to the defendant’s case.The Appeal Court held that the item delivered was not the item contracted for so, the exclusion clause did not avail the plaintiff and judgment was given to the defendant.
Duties/Obligations of the Hirer in Common Law
- Acceptance of the Delivery of Goods: The hirer is obliged to accept delivery of goods he agreed to take under the hire purchase agreement. If he wrongfully refuses to accept delivery, the owner’s remedy is to claim damages for breach of contract. - National Cash Company v. Stanley (1921) - when 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.
- Care of the goods: A strict duty of care is imposed on the hirer, rendering him liable for loss or damage to the goods irrespective of negligence. In the absence of a provision on the standard of care, the hirer is under implied obligation to take reasonable care of the goods during the currency of the hire purchase agreement. The hirer is liable for his negligent acts and those of his servants or agents acting within the scope of their authority. The hirer's duty to take good care of the goods is an independent promise and not a condition precedent to the owner’s obligation to leave the hirer in quiet possession of the goods during the agreement. Therefore, a breach by the hirer of his duty of care will not justify the owner in seizing the goods and terminating the agreement unless the agreement it self empowers him to do so or unless the hirer’s neglect is to indicate that he hirer is repudiating all his obligations e.g. where he willfully abandons the goods. In the absence of one of these grounds of termination, the owner’s remedy is to sue for damages either for a breach of contract or in tort for conversion.
- Use of the goods in accordance with the terms of hire: The hirer is impliedly obliged not to do any act in relation to the goods contrary to the terms of hire. If he does, e.g selling the goods as in Whiteley Ltd. v. Hilt (1918) 2K B808 or pledging them as in Belsize Motor Supply Company v . Cox (1914) 1K B2 44 or using the goods for a purpose different from the stipulated as in Burnard v. Haggis (1863) 1 4C BS 45, the owner becomes entitled to have immediate possession of the goods and if may decide to terminate the whole agreement.
- Repair: Apart from his duty of reasonable care, there is no implied duty on the part of the hirer to repair the goods hired. Where the agreement expressly provides that the hirer shall keep the goods in repair during the hiring, this amounts to an implied authority to the hirer to arrange for the execution of repair either by himself or by a third party as at when due.
- Payment: The hirer has a duty to pay the sum stipulated in the agreement at a time and in a manner laid down in the agreement. Unless the agreement otherwise provides, the rules as to payment are those applicable to contracts generally. For the agreement to be enforceable at all, the time of payment must be stipulated with reasonable precision either in the agreement itself or in some other collateral agreement, verbal or otherwise. However, time of payment is not of the essence unless the agreement otherwise indicates that a mere delay in payment does not entitle the owner to treat the agreement as repudiated - S10 (1) of the Sale of Goods Act 1893. Where no place for payment is stipulated in the agreement, the hirer must seek the owner and pay him wherever he may be found. In practice, most agreements specify the ways payment should be made by the hirer.
- Insurance: The hirer has no implied obligation to insure the goods but the agreement requires him to take a comprehensive policy on them.
- Protection of Owner’s Title: The hirer has no obligation to give notice of an adverse claim to the person who supplied him with the goods on hire. He has prospective proprietary interest in the goods and he is
entitled to rely on the implied condition as to title on the part of the
person who has let the goods out to him on hire and to continue payment
to such person under the hire purchase agreement notwithstanding that he
knows of an adverse claim by a third party .- Warman v. Southern Counties Car Finance Corporation Ltd. (1949) 1A l l ER7 11. However, in bailment, the bailee is under a duty to protect his bailor’s title by informing the bail or as soon as it is reasonably practicable of any adverse claim to the goods bailed.
- Re-delivery: The hirer must re-deliver the goods at the end of the hire period if he does not exercise the option to purchase within the stipulated time. Where delivery becomes impossible through no fault of the hirer e.g. through accidental destruction of the goods, he will be discharged from his obligation to return the goods unless the terms of the agreement indicate that the risk of accidental destruction or loss is to be borne by the hirer and that the obligation to re-deliver is a strict liability independent of negligence.
- Information and Document: Hire purchase requires the hirer to notify the owners of any change of address and to produce on request certain classes of documents which will enable the owner to see that the goods are covered by insurance and are not liable to be in jeopardy at the hands of a third party. Documents normally specified include receipt for insurance premium in respect of insurance on the goods and receipts for rent, rates and taxes payable in respect of the premises where the goods are kept. In agreements relating to motor vehicles, the hirer may also be required upon termination of the agreement or the hiring , to surrender to the owner the log book of the car and all licenses andi nsurance policies and certificates relating to the car.
Reception of Hire Purchase AgreementThere is no statute of general application for Hire Purchase in Nigeria. The first English statute on Hire Purchase was the Hire Purchase Act 1938 which formed the basis of the first Nigerian statute on the subject. Before 1965, the common law on Hire Purchase governed the subject in Nigeria, dealing with the formation of the agreement, information of what the parties have agreed and the general law of contract. The first Nigerian legislation on the subject was the Hire Purchase Act 1965 which was applicable in the Federal Capital Territory of Lagos alone. Its application was extended to the rest of the country by the Hire Purchase (Application) Decree No. 42 of 1966. The Hire Purchase system in Nigeria did not have immediate effect but came into force on 1st October 1968 by the Hire Purchase (Appointed Day) Order of 1968. The development of Hire Purchase in Nigeria has been slow and affected by similar factors as present when the system was developing in England. The expansion of the Hire Purchase system brought in abuse and injustice which were beyond the purview of the law of contract. Many were induced to enter into written agreements which they did not understand and suffered in consequence. The more unscrupulous Hire Purchase dealers deliberately encouraged their customers to incur commitments beyond their means with the object of allowing them fall into arrears towards the end of the hire period after most of the instalments had been paid so that the dealers would then exercise their power of possession commonl y called the snatch back and thus secure for themselves a considerable profit from the goods which they supplied without parting with the goods themselves. Matters were made worse with the rule laid down in Cramer v. Giles that the court would not intervene to protect the hirer in d e fault so that even if he has defaulted on the last instalment only having punctually paid all the previous installments, the owner will still been titled to terminate the agreement and repossess the goods immediately the default has arisen without having to return any part of the money hehad received. In Atere v. Dada Amoo (1957) WR N L R1 76, the plaintiff took a lorry on hire purchase from the defendant and he completed repayment of 995 pounds out of hire purchase price of 1000 pounds. He then failed to pay the final instalment of 5 pounds when it was due. This breach of contract terminated the agreement and the owner was held entitled to recover possession of the lorry. Although repossession and resale of the vehicle enabled the owner to recover more than his actual loss of 5pounds,thecourtstill held that the owner was not obliged to account to the hirer for the excess recovered. This and other factors made the hire purchase system unattractive. The abuse and injustice of the hire purchase system in common law against the hirer include that:
- The hirer had no right to redeem the hired goods after default in his instalmental payment.
- If the hirer wrongfully returned the goods to the owner, before expiration of the hire period, he may remain liable to pay substantially the rent for the entire hired period. - J.O Lawrence v. Bentworth Finance Co Ltd (1966)NMLR87.
- There was no transfer of property or property interest in the goods to the hirer until he has exercised his option to purchase the goods even though he may have made substantial sums of payment toward the agreement. - Dictum of Lord Macnaghten in Helby v Matthews (supra)
- The Hirer has no legal interest in thegoodsrepossessedbytheownerdespitethefactthat Theirsubsequentsaleby the owner may yield substantial surplus over the hire purchase price.- Dictum of Butler Lloyd ACJ in D.O Williams v. U.A.C Ltd.
- The hirer may become liable to pay excess under the minimum payment clause on termination of the agreement. - Amusan & anor v. Bentworth Finance(Nig) Ltd (1966 ) NMLR 276.
Remedies of the Owner
- Right to bring an action for repossession S9(1 and 2), HPA: In common law, the owner has a right to reposses at default. However, under the Hire Purchase Act, the owner can only reposses if the hirer fails to pay up. This is exercisable when there are several defaults by the hirer. The right of the ownertoreposses is only enforceable by court action - Civil Design Construction Nigeria Ltd v. SCOA Nigeria Ltd. Failure to institute a court action before exercise of the right of recovery of possession would determine the agreement. Upon the termination of the agreement, the hirer is released from all liability and he is entitled to recover in an action all sums paid under the agreement: and the guarantor is also liable to recover all sums in an action for moneys had and received
- Right of to interim possession: This is exercisable during dependency of an action to recover possession. In S9(5), HPA, this is exercisable in respect of motor vehicles where 3/5 of the hire purchase price has been paid and the Act allows the owner to remove such vehicle pending the determination of the court action for recovery of possession and the owner will be liable to the hirer for any damage caused by such removal. This right is exercisable when there is a pending action in court - Ebohime v. Nigeria Tech company
- Damages for failure to take care of goods: S8(2), HPA provides that the owner may be entitled to damages where the hirer fails to take care of the goods.
- Action in tort for trespass, detinue, conversion or adverse possession - S14 (1) of the Act. The owner' s right to recovery can be exercised without court order where:
- the hirer exercises his right to terminate
- the substantial part or relevant proportion of the hire purchase price is unpaid
- the hirer voluntarily consents to return the goods
- the goods are in possession of any person other than the hirer
- the goods are abandoned or may be reasonably inferred to be abandoned.
Remedies of the Hirer
- Exercise of Right to terminate: S8 of the Act provides that a hirer shall at any time before final payment as agreed be entitled to give a notice of termination in writing to any person entitled to recover any sums payable under the agreement - Incar Motors Nig. Ltd v. Elias Bus Transport Ltd, Amusan & Thomas v. Bentworth Finance Nig. Ltd, * Yeomancredit v. Apps. The conditionas stated for which the hirer may exercise his right to termination is said to be fundamental breach and the time is any time before final payment. When the hirer exercises this right, he must give a notice of termination to the owner or his authorised agent. He must have paid at least half the purchase price and other outstanding sums and must hand the goods back to the owner. The liability of the hirer after termination extends to all outstanding sums as well as any amount by which half of the hire purchase price exceeds the total sum paid and due immediately before termination or such less amount as specified in the agreement.
A hire purchase Agreement may be terminated by:
- performance- when both parties have fulfilled their obligation in the contract.
- subsequent agreement: the relationship of an owner and a hirer was initiated by an agreement and may also be ended by a fresh agreement. In the course of the first agreement, the parties may enter a fresh agreement to terminates the former, provided that the former is still executory. The consideration for the new agreement would consist in the covenant by both parties to release each other from their existing obligations under the former contract. In this case, it is said that the new arrangement has yielded the old for the new.- Abdulkareem v. Incar Nig.Ltd and Morris v. Baron & Co
- a notice to terminate - S8(1): In common law, the agreement may be terminated by a notice given by any party to the other expressing his intention to terminate. Under the Act, the hirer's statutory right to terminate requires that he gives a notice in writing to the owner or any person entitled or authorized to receive money payable under the agreement.
- breach & repudiation from either parties: If a party renounces his obligation under the agreement or breaches any fundamental term in a way to show an intention to no longer be bound by the agreement, the other party is entitled to sue for such a Breach.Wherein the case of an owner, the hirer commits the fundamental breach, the owner is entitled to determine the agreement and claim his outstanding payment from the hirer
- frustration. This occurs where the subject matter seizes to exist without fault on both parties.- Bentworth Finance Ltd v. Alhaji Sanni Bakore
- the express terms of contract - where parties have inserted into the term of contract that it would be terminated on certain conditions.
- judgement of a court of competent jurisdiction
This happens when the buyer is to remit money for cost of insurance and freight
Duties of Parties under CIF Contract
The duties of the seller are:
- to ship the goods attheportofshipmentascontainedinthecontract.
- to procure on behalf of the buyer a contract of carriage
- to arrange for insurance of the goods on terms which would benefit the buyer
- to prepare an invoice of the goods in a form acceptable in the tradd
- to tender all documents to the buyer in order to effect payment, obtain delivery or recover from the loss as the case may be.
Here, the selleragreestopaycostoffreight.
- paying up cost up to the pointofdeliveryonboardtheship
- obtaining export licence and bill of lading
Insurance of FOB Contract
Generally, it is the seller's obligation to give notice to the buyer to insure the goods during transit.- S32(2), Sales of Goods Act. Where the seller fails to give such notice, the goods are deemed to be at his risk during transit. - Wimblesons & Co Ltd v.Rosenberg & Sons Ltd
Bill of Lading
The bill of lading serves three purposes as:
- an evidence of a contractofcarriage
- a receipt of the goods
- a document of title