File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Hire Purchase Agreements: A Comparative Analysis

Through the following research paper it would be an attempt to do a deep study on what are Hire Purchase Agreements? When and where they were first introduced and implemented as a law, and how have these agreements evolved through time. Furthermore, an insight of these agreements as observed in different countries like India, United Kingdom, Malaysia and Australia will be done; the challenges that occurred and the reforms that those countries underwent regarding the Hire Purchase Agreements will also be recorded.

This analysis would lead to a studied comparison of these agreements as observed in different parts of the world. The next section of the paper would focus on the situation of Hire Purchase agreements in the Indian law.

A detailed analysis will be done which would give the clarification and answers to the following questions:
Which act introduced and is responsible for governing the hire purchase agreements between the parties? Which legal requirements as specified under different sets of laws are needed to be fulfilled by the parties involved in these agreements? What benefits do the hire purchase agreements provide to the individuals? What are the disadvantages of these agreements? And lastly, how hire purchase agreements are applicable in the contracts of bailment?

Hire purchase agreements refer to the arrangement between the owner of a good and its hirer wherein the good is procured for a temporary period of time by the hirer in exchange of monetary instalments with an opportunity of owning the goods at the payment of all the instalments.

In other words, hire purchase are the types of agreements under which the hirer takes the goods on bailment and which he could either purchase the good or terminate the agreement at his option, whether the title is to pass to him on payments of the instalments and fulfilment of the conditions automatically or on the further exercise of option by the hirer.[1]

They were first introduced in 19th century England after Industrial Revolution when for the first time sewing machines were sold through hiring with an option to purchase and sooner these agreements were being entered for almost all other consumer durable goods. The rapid growth in automobile industries gave a new push to hire-purchase agreements and with a little advancement.

There began to be three parties in these transactions instead of previous two i.e. owner and hirer; owners sold their goods to big financing companies who later provided goods to the hirers. These agreements took place in India for the first time during early twentieth century by a Madras-based Auto Supply Company Ltd. (1920) which was later identified as Commercial Credit Corporation. Between the period of 1920 to 1930, many more hire-purchase companies initialised such as Motor and General Finance Company and Instalment Supply Company.

The post-war years witnessed a significant enhancement in hire-purchase agreements incorporated in automobile and road transport industries for procuring funds for commercial vehicles. Several committees such as the Masani and James Raj committee have been set up by the government that acknowledged and encouraged the role of hire-purchase agreements in road transport and various other industries. [2]

Although the use of hire purchase agreements in the business and trade has been immense but the legal aspect of it is unclear to masses and it is often misunderstood with similar business transactions like that of a transaction of sale and a transaction of credit sales. To understand the nature of Hire Purchase agreements, it is necessary to be able to differentiate it with the transaction of sales and credit sales.

The following section highlights the key differences among these transactions:
  • Hire Purchase Agreements and Transaction of Sales-
    In a transaction of sale, the ownership of good shifts from a seller to buyer the moment transaction takes place irrespective of duration of payment while in an agreement of Hire purchase, the ownership is not transferred at the time of signing the contract but when all the instalment are paid and finally purchase takes place.

    The second key difference is of the passage of property in the chattels; in a normal transaction of sale, there is an immediate passage of property while in a hire purchase agreement; there is no immediate passage and it only passes when the purchase of good is exercised after all the terms of agreement are met.

    Further, the court in Sundaram Finance v. State of Kerala stated that a �hire-purchase transaction is more complex than that of sale; here the hirer is under no legal obligation to buy the goods; he has an option either to return the goods, thus terminating payment of instalments and forfeiting the amount already paid; or to become their owner by payment in full of the stipulated hire and the price for exercising the option to purchase.�[3]

    Whereas in the sale by instalments as stated by the court in Lee v. Butler and Helby v. Matthews that the purchaser does not have the option of returning the goods after the agreements as the possession of property is already handed to him. He is legally liable to pay the rest of the instalments and do not have the right to terminate payment otherwise he would be liable for breach of contract and payment of damages thereof.

    The Supreme Court in Damodar Valley Corporation v. State of Bihar put forward two tests to differentiate and determine whether a transaction is of sales or of Hire-Purchase:
    1. Whether there is a binding obligation upon the hirer to purchase the goods.
    2. Whether there is a right reserved to the hirer to return the goods at any time during the subsistence of the contract.

      It was held that if there was no binding obligation and such right was reserved, then there was no contract of sale but rather, a hire-purchase agreement. In the same case, it was stated that such an agreement confers no title upon the hirer, but a mere option to purchase based on the fulfilment of certain conditions. [4]
  • Hire Purchase agreements and sales on credit
    In the case of hire purchase agreements, the hirer has the right to purchase the goods on certain conditions and such right is not an obligation which means he may either choose to purchase the goods on fulfilling certain conditions or he may choose not to purchase it and thereby terminate the agreement. Whereas, in a transaction of sales on credit the buyer has no such right to terminate the agreement and if he does so then he would be held liable for breach of contract and damages as ordered by court in Auto Supply Co. Vs Raghunath Chetti.[5]

    The Halsbury�s Laws of England puts forward a distinction among these two on the basis of the capacity of transferring the goods held by the hirer. In an agreement of sales on credit, the hirer possessing an obligation to buy the goods is entitled with the authority to transfer the title of goods to a buyer or pledgee without informing the rights of true owner. On the other hand, in the case of hire-purchase agreements, the second buyer or pledgee can obtain only the title of hirer and nothing else by paying the instalments for goods.
  • Hire Purchase Agreements in different countries
    The following section talks about the situation of hire purchase agreements, there origin, transformation and implementation in different countries:
The main litigation that governs the hire-purchase agreements in Malaysia is the Hire Purchase act 1967. An act which came in effect on 11th April 1968 prior to which it was covered under the contracts act 1950. The Malaysian market usually deals in a particular form of hire purchase agreements that are specified in the act�s 1st schedule including all consumer goods and motor vehicles ( from invalid carriages, motorcycles, motor cars including taxi cabs and hire cabs, good vehicles on which the maximum permissible laden weight does not exceed 2540 kilograms, and buses including stage buses).

Similarly, in Australia, Hire purchase is also recognised as commercial hire purchase or corporate hire purchase (CHP) where such agreements are commonly used by businesses to fund purchases or business equipment and commercial vehicles. The 1918, National conference of Commissioners on Uniform State Laws put forward a �Uniform Conditional Sales Act� that gave regulations of Hire-purchase agreements to be adopted by most of the states of Australia. Later, the hire purchase act for Australia was introduced in 1959 and was adopted in all the states and territories thereafter. However, every state of Australia also enjoys a separate legislation for it on the matter of hire-purchase agreements; the purpose being the same like that in India i.e. providence of platform for giving relief to hirers against unconscionable and unfair terms of agreements.

United kingdom:
On the other hand, in Britain the hire purchase agreements began to be observed around the nineteenth century and instead of performing the statistical study of instalment amount and its varieties as directed by the United Nations, United Kingdom used to collect sparse data from different sources of hire purchases which was of no use due to no recording of trades and theories at that time.

However, occasional trade estimates indicate very rapid interwar growth and the study further estimates that hire purchase trading increased in volume around 1918 and 1938. 38. HP was used by both consumers and producers, though consumer HP was by far the most important, accounting for around 84-87 per cent of turnover for the leading HP finance houses. Hire purchase agreements sooner started covering more than 70 per cent of the sales for cars and bicycles as stated by the data released by the board of Trade in late 1930s. Prior to the 1938 Act, English HP agreements were governed only by the common law and the terms of the contract.

The 1938 Hire Purchase Act passed through the Commons and Lords with almost no parliamentary opposition and few trade objections concerning anything other than its details.'26 The Act introduced a variety of safeguards; while traders subsequently found ways of circumventing some of them, they were viewed at the time as important reforms. Some were intended to ensure that the hirer was given appropriate information, such as a copy of the agreement and written details of the cash price and the amount and date of instalments.

Some conferred legal rights to the purchaser, such as the right to free himself or herself of liabilities under the contract (with some exceptions) if the goods were returned and half the purchase price had been paid; protection from repossession (in the absence of a court order) once a third of payments had been made; and the right to have any court case heard in the area where the purchaser lived. Other provisions limited certain abuses by vendors, such as making void the notorious clauses which allowed the owner forcibly to enter the hirer's dwelling to repossess goods, and which obviated liability for any statements or promises made by the retailer.�[6]

With the following clarification about the Hire purchase agreements, the subsequent section will discuss the Hire Purchase Act as given under Indian constitution and the relevance of the same in Indian trades.

Hire Purchase Agreements as under Indian Legislation
Special legislation for Hire-purchase agreements was needed in India and in England for several purposes. Because firstly, the legislation would not only be a regulatory statute but would also be a platform for providing relief and settling disputes in certain cases like elimination of penal and exorbitant in a situation where the hirer wants to terminate the agreement.

The owner�s discretionary power of seizing the goods on default of instalments even after payment of prerequisite amount in some cases resulted in exploitation and injustice to hirers. These matters required for a separate legislation that could provide guidelines and regulations for every circumstance that could arouse in the path of hire purchase agreements.

Therefore, The Hire-Purchase Act of 1972 was enacted for performing these functions. This act adopted several declarations and guidelines provided in the legislations adopted by several states of Australia. However, for the framing of this act, major preference was given to the English Hire-purchase Act of 1938, the law commission�s report of 1961 pointed out some of the procedures that the Indian legislation should not adopt for the better functioning and implementation of the act in Indian continent.

These differences include:
  1. The first difference between the two is that the English legislation includes the credit sales transaction under the Hire purchase act of 1938 whereas the same transaction of credit sales are not included in the hire purchase act of 1972 but are given under sales of goods act of 1930.
  2. The English act imposes a maximum limit on which the legislation will apply, that limit being 1000 pounds for transactions of livestock and 300 pounds in rest of the cases whereas there�s no such limit in the Indian act. The reason for this as given under report for hire purchase in 1961 was that India was about to enter into an era of industrial expansion and putting a limit on these transaction would mean restriction on expansion of this industrial sector.

With these changes Hire purchase act of 1972 gave a new definition to the hire-purchase agreements in its Section 2(C) that states �hire-purchase agreement as 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�[7] .

The agreement between the parties is self explanatory in the sense that it states the nature of the agreement, duties of the parties, duration and amount of instalments, and the terms for termination of the agreement. These terms is usually returning of goods by the hirer or notice of termination given by either of the parties.

Apart from that, the agreement can be terminated by any of the following ways:
  1. Performance:
    Prior to payment of all the instalments, the hire-purchase agreement can be terminated by exercising the option of purchasing the goods.
  2. Issuance of Notice:
    The owner can terminate the agreement by issuing notice in case of breach of any terms of agreement by the hirer and similarly the notice for termination can be given by the hirer.
  3. Renewal:
    Hire-purchase agreement can be terminated by the parties if they decide to enter into a new agreement and thus renewing the agreement between them.
  4. Release:
    One party of the agreement can release the other from the obligations given to him as per the agreement, thus termination the contract.
  5. Breach:
    If either of the party fails to perform his obligations or renounces his future obligations which indicates his reluctance to the agreement, and if the same is accepted by the other party then the agreement gets terminated.
  6. Frustration:
    If a situation occurs before the formation of agreement where it becomes difficult to perform the obligations, then the parties get discharged from their duties and the agreement gets terminated. Fr ex- if the good that is being hired gets destroyed due to some event or act with no negligence on part of hirer then the agreement between the parties will get terminated.
  7. Expiration of time period:
    The agreement will automatically get terminated if the hirer does not exercise his option of purchase in the stated time period as decided in the agreement.
The act also provides for relief to parties in case of breach of agreement. Under section 21 of the act, the hirer is provided with the relief of non-payment of hire in case of termination of the hire-purchase agreement by the owner of the good as according to section 18 of the act. [9]Section 22 of the Hire-purchase act provides relief against termination for unauthorised act or breach of express condition as stated in the clauses and sub clauses of the section.[10] The reliefs provided to the owner include recovery of goods, abandoning of claims of ownership or any other right over goods by the other party and an opportunity of claiming damages.

Disadvantages of the Hire-purchase agreements
  1. Cost of procuring goods by entering into a hire-purchase agreement becomes more than the cost of goods paid in a usual transaction of sales.
  2. The hirer does not get the absolute ownership over the goods in these transactions till the full payment and owner has the power to repossess the good at a single incident of default of payment.
  3. The duration of such agreements is very long and the hirer might not remain in the same financial condition so as to afford the payment of installments in this time duration.
  4. The cost of entering into hire-purchase agreement also makes the transaction difficult as it is usually more than the amount of installments.
  5. If the good gets damage in the duration of its functioning, the hirer cannot claim for insurance money even if the good is insured as he does not have the ownership right over the good, and in the meantime the cost of damage also gets add up in the remaining amount of instalment due.[11]

Through the following paper, the journey of hire-purchase agreements from its origin in 19th century Britain to the Hire-Purchase Act of 1972 has been studied. The need for such legislation was very much important to provide for grievance redressal platform to the hirers and repossession of good to the owners at the same time. The act was enacted after adopting the salient features from the legislations of different nations namely United Kingdom, Australia and Malaysia.

However, the disadvantages of these agreements that have been mentioned and discussed in this paper still persist which ring the bells on the minds of law makers and legal analyst that there is still a need for making amendments and give forward a reformed version of laws that could make the functioning of a hire purchase agreements easier and more accessible to the individuals and businesses in India and worldwide.

  1. 20th Report. Law Commission of India, 1961
  2. Asthana, Subodh. 2019. �Analysis and Explanation of Hire Purchase Agreement.� IPleaders. June 8, 2019.
  3. Sundaram Finance v. State of Kerala 1966 AIR 1178, 1966 SCR (2) 828
  4. Damodar Valley Corporation v. State of Bihar, 1961 AIR 440, 1961 SCR (2) 522
  5. Auto Supply Co. Vs Raghunath Chetti121 Ind Cas 593, (1929) 57 MLJ 618
  6. Scott, Peter. 2002. �The Twilight World of Interwar British Hire Purchase.� Past & Present, no. 177: 195�225.
  7. Section 2(c), Hire Purchase Act, 1972
  8. Hire Purchase Agreements. n.d. Latest Laws.. agreements
  9. Section 21, Hire Purchase Act, 1972
  10. Section 22, Hire Purchase Act, 1972
  11. Hire Purchase Agreement: An Analysis of the Essentials & Parties to It. IPleaders. February 14, 2020.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly