Hire-Purchase Agreement

In an increasingly consumerised world, customers are wooed by sellers in scores of innovative ways, for instance by offering discounts, EMI and other facilities for credit to name a few. This, in turn, increases consumption and keeps the sales and profits ticking. Not just end consumers, even business consumers are offered easy methods of payment. Hire Purchase is one of the ways in which sellers try to increase sales. It is a way of offering products on installment payment basis.

What Is Hire Purchase?

A hire purchase (HP) is a contract in which the ownership of a product is passed on from the owner to the hirer on payment of the rent for a certain period or a number of times. In Hire purchase, the ownership changes only after completion of all the installments.

In simple terms, it is a system of which culminates in a sale. A product is supplied to the consumer on installment without taking the entire consideration for the same. The purchase shall officially take place only when all the stipulated installments are paid.  A hire-purchase can be regarded as a contract of bailment and is governed by the provisions of Chapter IX of the Indian Contract Act, 1872. To be specific, it is a contract of bailment with an option to purchase.

Is Hire Purchase Regarded As Sale?

Legally speaking, a Hire Purchase Agreement is not sale. It may contain an option of the hirer to purchase the article hired.  This is in conformity with the definition of sale in section 4 of the Sale of Goods Act, 1930 in which the seller transfers the goods to the buyer for price. This is in contrast to an agreement for sale where the sale takes place on a future date. The difference lies in the fact that in sale, the ownership is transferred from the seller to the buyer immediately whether the price is paid at once or paid later, unlike a hire purchase agreement where ownership vests only after the term of hire and payment of all the installments.

What To Include In A Hire Purchase Agreement?

Date And Details

The date from which the hire purchase takes effect needs to be mentioned along with details of the parties. The person who owns the product should be referred to as the owner and the person who procures it should be called hirer.

Terms And Conditions

Letting Out

The primary condition is the letting of goods by the owner to the hirer for a specific term and for a specific price. The goods shall be well described in a schedule. The duration may be expressed in months or years subject to termination clause which needs to be mentioned in the agreement as well.

Payment

The initial payment made by the hirer should be acknowledged. It may be a sum of one month’s rent or any other decided amount. The mode of future payments should also be detailed along with the date by which installments need to be paid.

Hirer’s Obligations

Until all payments have been made, It shall be the duty of the hirer to maintain the goods in good condition and to preserve the goods from damage – whether accidental or otherwise. In such an event, the hirer may be required to make good the damage caused to the owner. Normal wear and tear due to reasonable usage shall be exempted. The owner may be permitted to inspect the goods or cause them to be inspected. If the goods are damaged permanently due to any cause, the hirer would be required to pay the remaining installments of the hire purchase.

The hirer would need written consent of the owner to remove the goods from the address specified by the hirer in the agreement. It shall be at the discretion of the owner whether to provide such consent.

The hirer shall not sell, assign or encumber the goods to any third party unless all installments have been paid.  All payments including the installment and other dues payable to any authority with regard to the goods shall be paid by the hirer regularly. In case of non-compliance, the agreement can be terminated by the owner at his/her discretion.

Hirer’s Rights

Apart from the obligations mentioned above, the hirer may be given the right to terminate the agreement by surrendering the goods to the owner at any time in good condition after paying a penalty for the same.

The Hirer may also choose to become the absolute owner of the goods at any time by paying the entire outstanding amount at once. A discount may be provided to the hirer based on the number of installments given in advance.

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