This is a contract which goods are delivered to a person who agrees to make periodical payments way of hire, with an option of buying the goods after the started hire installments have been paid.
The goods may be returned to the owner at any instance before the option is exercised, on payment of sum stated in the contract. Until the option is exercised there is no guarantee to buy the goods.
These contracts thus contain three parts;
- Contract of bailment- under which the hirer obtains possession of the goods yet the goods remain in the ownership of the owner
- Option which entitle the hirer to purchase the goods or hire them
- Contract of sale which makes the hirer the owner of goods already in his/her possession
Hire purchase differs from credit sale agreement and conditional sale in the following ways;
It is important to distinguish hire purchase from credit sale agreement and conditional sale. While all three involve payment via installments, they however differ from higher purchase in the following sense;
Credit sale agreement – This makes it the customer’s legal obligation to buy in that;
- It is a contract of sale
- The property in goods passes to the buyer as soon as the 1st installment is made
Conditional sale- This contract makes it the buyer’s obligation to buy but property in goods passes to the buyer only if the conditions that form the subject matter of the sales have been fulfilled.
The hire-purchase transaction is intended to protect the owners title to the goods should the hirer (the buyer) decide to sell them to a third party who buys in good faith before full installments is paid.
It is worth noting that this is differs from sale of goods act in which if the buyer is in possession of the goods, with the consent of the seller, sells them to a third party who buys in good faith them property passes to the third party.
Hire purchase therefore gives two options, i.e.
- purchase the goods or
Helv. Matthews (1895)
The owner of a piano agreed to let it on hire, the hirer to pay rent on monthly installments, on the terms that the hirer might terminate the hiring returning the piano to the owner but remain liable for all arrears of hire. Also that the piano should remain property of the owner but if the hirer had paid punctual monthly installments, the piano should become his property. The hirer after having paid a few installments pledged the piano to a pawn broker.
Held; the hirer was under no legal obligation to buy but had an option to either return the piano or become its owner payment in full. Therefore, he had not “bought it” and the owner could therefore recover it from the pawn broker.