The Indian Law Pertaining to Hire-Purchase

-A critical analysis

Author: Abhay Gupta

Institution and Year: National Law University, Odisha and IInd Year

Abstract

This blog is mainly concerned with the Hire purchase agreement with respect to Indian Laws. It tries to answer several questions regarding hire purchase like, what are Hire-Purchase agreements? What are the Indian Laws which govern these agreements? What is the stand of Indian laws on it? How Hire-Purchase agreements are different from each other? And how to identify the differences between them? What are the Differences between Hire purchase agreements and lease agreements? What is the status of Hire Purchase in India? What are the major issues concerning these agreements? And finally the conclusion. This is how this blog will make aware the reader of these agreements and tries to enlighten them through it.

Introduction

Hire purchase is one of the most prevalent practices around the world which is used to finance an asset. This is the type of agreement in which the owner of a good lets the good for hiring for a specific period of time in return for the installments by the person (known as Hirer) who hires the concerned good. It also gives an opportunity to the hirer to purchase that good but it is subjected to the payment of all the installments provided in the agreement and the will of the vendor (owner) of the good.

As per Chitty’s definition, Hire-Purchase is an agreement under which an owner lets chattels of any depiction out on hire and further concurs that the hirer may either restore the products and end the procuring or choose to purchase the merchandise when the installments for hire have achieved an entirety equivalent to the measure of the purchase cost expressed in the agreement endless supply of an expressed total of the agreement.

For taking these agreements under the purview of Indian laws Indian parliament enacted an act known as the Hire-Purchase act of 1972 which came into force on the date of 1st June 1973[i], but soon on 31- 5- 1973 this notification was rescinded by another notification by the government and this act was made ineffective[ii]. And for one more time, this act came into force from 01-09-1973 but this notification was also rescinded by the government notification[iii]. And finally, in the year 2005, this act was repealed by the Hire-Purchase (Repeal) Act (Act 31 of 2005). So we can say that the Hire purchase act never came into existence ‘the form of sale by Hire Purchase’ but its main motive was to define and list out what are the rights and duties of both the parties of a hire-purchase agreement. Presently there is not any specific or separate law is in force in India for covering these agreements. These agreements are mainly covered by the terms and conditions on which both the parties came in consensus for the hire purchase agreement which is subjected to the general principles of the law of contracts and sales contained under the Indian Contract Act, of 1872 and Sale of Goods Act, 1930

Although the Act of 1972 is repealed, it doesn’t mean that it is not pertinent in any way, even today it plays a major role in understanding the nature of the Hire-Purchase agreements.

Hire-purchase agreement and Indian Laws

As per the definition provided in the Hire purchase act of 1972, A Hire-Purchase agreement means 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 and includes an agreement under which

  1. Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical installments, and
  2. The property in the goods is to pass to such person on the payment of the last of such installments, and
  3. Such person has a right to terminate the agreement at any time before the property so passes;

So by going through the above definition, we can easily find that a Hire purchase agreement has two elements, one is the Element of bailment, and the other is the Element of Sale even though it is subjected to several terms and conditions.

These agreements are executory in nature which allows a particular good for hiring and provides an opportunity of buying the respective good as per the terms and provisions mentioned in the agreement.

Although these agreements include the element of sale they are considered as distinct kinds of transactions than the transaction of sale. The main difference between the sale and the hire purchase is that property in goods that means in the sale there is an immediate transfer of ownership right from the seller to buyer irrespective of the way in which payment is done (in full or in Installments): like in sale the transfer of property is accompanied by the transfer of possession, whether immediately or in installments. While in contrast, the transfer of ownership rights passes to the hirer only after the option to purchase is exercised in accordance with the terms and provisions of the agreement at the end of the agreement.

In the year 1960, during one of the significant judgments of Damodar Valley Corporation v. the State of Bihar,[iv] the Hon’ble Supreme Court of India provided several tests for determining the nature of an agreement whether it is of Hire purchase or of sale. These tests are the following-

  1. Firstly it has to be checked that is there any binding obligation held upon the hirer for purchasing the good.
  2. And secondly is there a right which is reserved to the hirer or intended purchaser to return the goods whenever he wants during the subsistence of the contract.

It was established that when in an agreement there is not any binding obligation and the aforementioned right is reserved then, in that case, such an agreement will not be determined as an agreement of sale but rather it will be termed as a Hire-Purchase agreement. And it was also stated in this case that these Hire-Purchase agreements do not confer any title to the hirer, but they merely provide an option to purchase the concerned good which is also subjected to fulfillment of some specific conditions.

The hire-purchase agreement is also distinct from the lease agreement. There are several differences among them which are the following-

  1. In a lease agreement, ownership is never transferred from the lessor to the lessee whereas, in a Hire-purchase agreement, the ownership is transferred after payment of the last installment.
  2. In the case of operating lease, depreciation is claimed by the lessor, whereas in the case of hire-purchase depreciation is claimed by the hirer.
  3. In the case of an operating lease, lease rent is an expenditure for the lessee, whereas in the case of hire-purchase only interest is considered as an expenditure while the principal amount is the cost of assets.

As with time these agreements got significance and gained popularity, then another form of these agreements became prevalent. Initially, it was a dual-party agreement where the only owner and the hirer were the parties. But with time these agreements evolved to a tri-partite agreement where the financier is added as a third party where it plays a vital role between the other two parties. Many times it happens that sellers are not willing to be financiers on their own and do not want to supply credits to a hirer. So consequently what happens is that the seller sells his good to a financing company that means first the transaction of sale happens, and then subsequently the financial company lets its good for hiring to the hirer and a contract of Hire-Purchase happens between the financer and hirer. So, there is not any direct contractual relationship is established between Seller and Hirer. That’s why the hirer has not any burden of keeping eye on the hirer for payment for recovering the balance price, and the financer can undertake recovery by paying the balance money. In this way, the goods are sold to the financer by the seller, who later obtains the contract of Hire-Purchase with the Hirer or intended purchase. And the hirer can exercise his option of buying the good and become the owner of the good by paying the nominal amount. In these ‘Hire- purchase finance’ agreements the whole work of financing as per the agreement is done by the finance company. And in these cases, the hirer is entitled to the ownership of the good. And the finance company never becomes the owner of the good. The finance company is only empowered to seize the good in case the loan is not paid. That’s why it is not the ‘hire purchase’ agreement rather it is ‘hire-purchase finance’.

What is the status of Hire Purchase agreements in India?

As I mentioned above the Hire purchase agreements are mainly regulated by the Hire-Purchase Act, 1972. While the hire purchase finance companies come under the purview of non-banking finance companies (NBFCs) and these are regulated by section 45[i] of the Reserve Bank of India Act.

Major issues associated with the Hire-Purchase agreement

  1. It costs more in comparison with the normal buying option.
  2. It does not provide absolute ownership during hiring, and the owner has the right to repossess the goods if the hirer fails to pay the installments as per the agreement.
  3. Usually, the hire purchase agreements have long and stringent durations.
  4. Initial payment of a certain amount which usually is a big sum, accompanied by installments on which both parties are agreed. This makes a hire purchase agreement a high costing agreement.
  5. The issue with the claim of insurance money, because it happens that even if the respective commodity or good is insured and if it faces some damages one cannot claim for insured money until he/she does not become the owner of the property. And consequently, the compensating money for damages adds to the installments and has to be paid by the hirer and makes the whole agreement more expensive.

Conclusion 

By going through the above research we can conclude several things which are the following.

  1. Need of a specific law-as we have already seen above that the Hire-Purchase act of 1972 was repealed in 2005[v]  and from then not any legislation was enacted which can govern all the aspects of this agreement. It is like today we are regulating it with multiple laws.
  2. High costing agreements- as we have already seen how these agreements cost more than the usual buying options. Then it becomes an exclusionary agreement which excludes the peoples who normally cannot afford it. So there is a need for some reforms in these agreements which can lessen their cost and make these agreements more inclusive.
  3. Helpful for hiring expensive things- even after some issues with it, these agreements are very helpful for someone who needs to hire an expensive article which usually he is not able to buy immediately.

Lack of awareness regarding it- even though these agreements are prevalent in India and around the world but then also it is only limited to some big companies and there are very few common people who know this is also an option for boosting their businesses without immediate


[i] GSR 222(E) dated 30th April 1973

[ii] GSR 288 (E) dated 31st May, 1973

[iii] GSR 402 (E) dated 30th August, 1973

[iv] 1961 AIR 440, 1961 SCR (2) 522

[v] Hire-Purchase (Repeal) Act, 2005

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