Introduction Hire purchase is a mode of financing the price of the goods to be sold on a future date.

In a hire purchase transaction, the goods are let on hire, the purchase price is to be paid in installments and hirer is allowed an option to purchase the goods by paying all the installments. Hire purchase is a method of selling goods. In a hire purchase transaction the goods are let out on hire by a finance company (creditor) to the hire purchase customer (hirer). The buyer is required to pay an agreed amount in periodical installments during a given period. The ownership of the property remains with creditor and passes on to hirer on the payment of the last installment. A hire purchase agreement is defined in the Hire Purchase Act, 1972 as peculiar kind of transaction in which the goods are let on hire with an option to the hirer to purchase them, with the following stipulations: a. Payments to be made in installments over a specified period. b. The possession is delivered to the hirer at the time of entering into the contract. c. The property in goods passes to the hirer on payment of the last installment. d. Each installment is treated as hire charges so that if default is made in payment of any installment, the seller becomes entitled to take away the goods, and Features of Hire Purchase Agreement Under hire purchase system, the buyer takes possession of goods immediately and agrees to pay the total hire purchase price in installments. Each installment is treated as hire charges. The ownership of the goods passes from the seller to the buyer on the payment of the last installment. In case the buyer makes any default in the payment of any installment the seller has right to repossess the goods from the buyer and forfeit the amount already received treating it as hire charges. The hirer has the right to terminate the agreement any time before the property passes. That is, he has the option to return

the goods in which case he need not pay installments falling due thereafter. However, he cannot recover the sums already paid as such sums legally represent hire charges on the goods in question.

Hire Purchase v/s Installment Sale Though both the system of consumer credit are very popular in financing and look similar, there is clear distinction between the two. In an installment sale, the contract of sale is entered into the goods are delivered and the ownership is transferred to the buyer but the price is paid in specified installments over a period of time. In hire purchase the hirer can purchase the goods at any time during the term of the agreement and he has the option to return the goods at any time without having to pay rest of the installments. But in installment payment financing there is no such option to the buyer. In installment payment, the ownership of the goods is transferred immediately at the time of entering into the contract. Whereas in hire purchase the ownership is transferred after the payment of last installment or when the hirer exercises his option to buy goods. Lease Financing v/s Hire Purchase Financing The two modes of financing differ in the following respect: Legal Framework There is no exclusive legislation dealing with hire purchase transaction in India. The Hire purchase Act was passed in 1972. An Amendment bill was introduced in 1989 to amend some of the provisions of the act. However, the act has been enforced so far. The provisions of are not inconsistent with the general law and can be followed as a guideline particularly where no provisions exist in the general laws which, in the absence of any specific law, govern the hire purchase transactions. The act contains provisions for regulating:

1. the format / contents of the hire-purchase agreement 2. warrants and the conditions underlying the hire-purchase agreement, 3. ceiling on hire-purchase charges, 4. rights and obligations of the hirer and the owner. In absence of any specific law, the hire purchase transactions are governed by the provisions of the Indian Contract Act and the Sale of Goods Act. In chapter relating to leasing we have discussed the provisions related to Indian Contract Act, here we will discuss the provisions of Sale of Goods Act. Hire purchase Lease financing Ownership Financer is the owner, and owner ship is transferred after payment of last installment. Financer is the owner, but ownership is never transferred. Depreciation Hirer is entitled to claim depreciation benefit. The lessor is entitled to claim depreciation benefit. Magnitude Low High Extent Less than 100% (50-75%) Up to 100% Maintenance Hirers responsibility Lessors responsibility Tax benefits Hirer Lessor Sale of Goods Act In a contract of hire purchase, the element of sale is inherent as the hirer always has the option to purchase the movable asset by making regular payment of hire charges and the property in the goods passes to him on payment of the last installment. So in this context we will discuss the provisions of Sales of Goods Act, which apply to hire purchase contract. Contract of Sale of Goods: A contract of sales of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. It includes both an actual sale and an agreement to sell.

Essential Ingredients of a Sale: A contract of sale is constituted of following elements: i. Two parties: namely the buyer and the seller, both competent to contract to effectuate the sale. ii. Goods: The subject matter of the contract. iii. Money consideration: price of the goods. iv. Transfer of ownership: of the general property in goods from the seller to the buyer. v. Essentials of a valid contract under the Indian Contract Act. Sales v/s Bailment: In a sales, there is a conveyance of property in goods from seller to the buyer for a price and the buyer becomes the owner of goods and can deal with them in the manner he likes. In case of bailment (or leasing) there is a mere transfer of possession of goods from the bailor to the bailee. Sales v/s Mortgage, Pledge and Hypothecation: The essence of contract of a sale is the transfer of general property in the goods. A mortgage is a transfer of interest in the goods from a mortgagor to mortgagee to secure a debt. A pledge is a bailment of goods by one person to another to secure payment of a debt. A hypothecation is an equitable charge on goods without possession, but not amounting to mortgage. The essence and purpose of these contract is to secure a debt. All the three differ from sale, since the ownership in the goods is not transferred which is an essential condition of sale. Sale v/s hire purchase: A hire purchase agreement is a kind of bailment whereby the owner of the goods lets them on hire to another person called hirer, on payment of certain stipulated periodical payments as hire charges or rent. If the hirer makes payments regularly, he gets an option to purchase the goods on making the full payment. Before this option is exercised, the hirer may return the goods without any obligation to pay the balance rent. The hirer is however, under no compulsion to exercise the option and purchase the goods at the end of the agreement period. A hire purchase contract, therefore, differs from sale in the sense that: (i) In a hire purchase the possession of the goods is with the hirer while the ownership vests with the original owner.

(ii) There is no agreement to buy but only an option is given to hirer to buy the goods under certain conditions, and (iii) The ownership in the goods passes to the hirer when he exercises his option by making the full payment. Goods: The subject matter of a contract of sale is the goods. Goods mean every kind of movable property excluding money and auctionable claims. Besides, growing crops, standing trees and other things attached to or forming part of land, also fall in the meaning of goods, provided these are agreed to be severed from land before sale or under the contract of sale. Further, stocks, shares, bonds, goodwill, patent, copyright, trademarks, water, gas, electricity, ships and so on are all regarded as goods. Destruction of goods before making of contract: Where in a contract for sale of specific goods, at the time of making the contract, the goods, without knowledge of the seller, have perished or become so damaged as no longer to answer to their description in the contract, the contract is null and void. This rule, however, does not apply in case of unascertained goods. Destruction of Goods after the Agreement to sell but before sale: Where in an agreement to sell specific goods, if the goods without any fault on the part of the seller, have perished or become so damaged as no longer answer to their description in the agreement, the agreement becomes void, provided the ownership has not passed to the buyer. If the title to the goods has already passed to the buyer he must pay for the goods though the same cannot be delivered. Document of Title to goods: A document of title to goods is one which entitles and enables its rightful holder to deal with the goods represented by it, as if he were the owner. It is used in the ordinary course of business as proof of ownership, possession or control of goods, e.g. cash memo, bill of lading, dock warrant, warehouse keepers or wharfingers certificate, lorry receipt, railway receipt and delivery order. Price: The price means the money consideration for transfer of property in goods from the seller to the buyer. The price may be ascertained in any of the following modes: i. The price may be expressly stated in the contact. ii. The price may be left to be fixed in manner provided in the

contract. iii. Where the price is neither expressed in the contract nor there is any provision for its determination, it may be ascertained by the course of dealings between the parties. iv. It may be a reasonable price. v. It may be agreed to be fixed by third party valuation. The most usual mode is however, by expressly providing price in the contract. EM or security deposit: In certain contract the buyer pays an amount in advance as earnest money deposit or as a security deposit, for the due performance on his part of the contract. Though the amount of earnest money is adjustable towards the price of the goods, it differs from the price in the sense that while payment towards the prices is recoverable, EM is liable to be forfeited if the buyer fails to perform his part and the contract goes off. Doctrine of Caveat Emptor (Let the Buyer Beware): If the buyer relies on his own skill and judgment and takes the risk of the suitability of the goods for his purpose, it is no part of the sellers obligation to caution the buyer of the defects in the goods or to give to the buyer an article suitable for his purpose. If the buyer relies on his own skill and judgment and the goods turn out to be defective, he cannot hold the seller responsible for the same. This is known as the doctrine of caveat emptor or let the buyer beware. This applies to all sale contracts invariably, except in following cases: a. When the buyer makes known to the seller the particular purpose for which he requires the goods and relies on the sellers skill and judgment. b. When the goods are sold by description by a manufacturer or seller who deals in goods of that description, the seller is bound to deliver the goods of merchantable quality. c. When the purpose for which the goods are purchased is implied from the conduct of the parties or from the nature or description of the goods, the condition of quality or fitness for that particular purpose is annexed by the usage of trade. d. When the seller either fraudulently misrepresents or actively

conceals the latent defects. Transfer of Property in goods: The property in goods is said to be transferred from the seller to the buyer when the latter acquires the proprietary rights over the goods and the obligations linked thereto. The transfer of property in goods is the essence of a contract of sale. The moment when the property in goods passes from the seller to the buyer is significant from the point that risks associated with the goods follow the ownership, irrespective of the delivery. If the goods are damaged or destroyed, the loss is borne by the person who is the owner of the goods at the time of damage or destruction. The two essential requirements for transfer of property in the goods are a. Goods must be ascertained and b. The parties must intend to pass the property in the goods. Performance of a sale contract: Performance of a sale contract implies, as regards the seller to deliver the goods, and as regards the buyer to accept the delivery and make payment for them, in accordance with the terms of the contract. Unless there is a contract to the contrary, delivery of the goods and payment of the price are concurrent conditions and are to be performed simultaneously. Delivery of goods: Delivery means voluntary transfer of possession of goods from one person to another. Delivery may be (a) actual (b) symbolic or (c) constructive. Delivery is said to be actual when the goods are handed over physically. A symbolic delivery takes place where the goods are bulky and incapable of actual delivery e.g. a car is delivered by handing over the keys to the buyer. A constructive delivery is a delivery by attornment which takes place when the person in possession of the goods acknowledges that he holds the goods on behalf and at the disposal of the other person. Acceptance of Delivery: The buyer is said to have accepted the goods, when he signifies his assent that he has received the goods under, and in performance of the contract of sale. A buyer cannot reject the goods after he has accepted them. A buyer is deemed to have accepted the goods, when: a. He intimates to the seller, his acceptance or

b. He retains the goods, beyond a reasonable time, without intimating to the seller that he has rejected them or c. He does any act in relation to the goods which is consistent with the ownership of the seller. .