Hire-Purchase Agreement – Meaning, Form, Contents & Distinction from Sale

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Hire-Purchase Agreement – Meaning, Form, Contents & Distinction from Sale

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1. Introduction

A Hire-Purchase Agreement is a special kind of contract widely used in modern business, especially for buying cars, machinery, and household goods. It combines elements of bailment and sale — the hirer initially takes the goods on hire and later gets an option to purchase them by paying all the agreed instalments.

This concept is governed in India by the Hire-Purchase Act, 1972, and, where not inconsistent, by the Indian Contract Act, 1872 and the Sale of Goods Act, 1930.

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2. Meaning of Hire-Purchase Agreement

A Hire-Purchase Agreement is a contract in which the owner of the goods (the bailor) lets out the goods to another person, called the hirer (the bailee), on the condition that:

1. The hirer pays the goods in periodical instalments; and
2. The hirer has an option to purchase the goods after paying all instalments; and
3. Ownership remains with the owner until the last instalment is paid.

So, the agreement gives possession to the hirer but ownership remains with the seller (owner) until full payment.

Example:
A hires a motorbike from B on a hire-purchase agreement to pay ₹2,000 per month for 24 months. Ownership passes to A only after the last instalment is paid.

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3. Legal Nature

A hire-purchase agreement is not a sale, but a bailment with an option to buy.
The hirer is a bailee, and the owner retains the title until the contract is completed.

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4. Form of Hire-Purchase Agreement

According to the Hire-Purchase Act, 1972, a valid hire-purchase agreement must be in writing and signed by both parties.

Form Includes:

• The agreement must specify:
  1. The description of goods;
  2. The cash price of the goods;
  3. The amount of each instalment and the total hire-purchase price;
  4. The date and manner of payment;
  5. The right of the hirer to terminate the agreement before ownership passes;
  6. The rights of the owner to repossess goods in case of default.

Purpose:
To ensure transparency and prevent exploitation of the hirer by the owner.

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5. Contents of a Hire-Purchase Agreement

A detailed hire-purchase agreement usually includes the following clauses:

1. Parties to the Agreement – Names and addresses of the owner and the hirer.
2. Description of Goods – Details like model, number, and condition.
3. Hire-Purchase Price – Total amount payable including interest or charges.
4. Instalment Terms – Number, amount, and due date of instalments.
5. Ownership Clause – Ownership remains with the owner until all instalments are paid.
6. Delivery and Possession Clause – When and how the goods are delivered.
7. Termination Clause – Hirer’s right to terminate the agreement before completion.
8. Default Clause – Rights of the owner to repossess goods if hirer fails to pay.
9. Option to Purchase – The hirer’s right to become the owner after paying all dues.
10. Insurance and Maintenance – Responsibility for upkeep and insurance of goods.

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6. Rights and Duties of the Parties

(a) Rights of the Hirer:

• Right to use goods as per agreement.
• Right to terminate the agreement at any time.
• Right to purchase goods after full payment.
• Protection from unfair repossession by owner.

(b) Rights of the Owner:

• Right to receive periodic instalments.
• Right to repossess goods if hirer defaults.
• Right to claim damages for misuse of goods.

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7. Distinction between Sale and Hire-Purchase Agreement

Basis	Sale	Hire-Purchase Agreement
Ownership	Ownership passes immediately to buyer at the time of sale.	Ownership remains with seller until last instalment is paid.
Possession	Buyer gets both possession and ownership.	Hirer gets only possession, ownership remains with owner.
Nature of Contract	It is a contract of sale.	It is a contract of bailment with an option to buy.
Transfer of Property	Transfer of property takes place at once.	Transfer takes place after full payment.
Right to Dispose	Buyer can sell or pledge goods as owner.	Hirer cannot sell or pledge until ownership passes.
Return of Goods	Buyer cannot return goods unless seller agrees.	Hirer can terminate agreement and return goods.
Risk of Loss	Risk passes with ownership.	Risk usually lies with the hirer once possession is given.
Legal Control	Governed by the Sale of Goods Act, 1930.	Governed by the Hire-Purchase Act, 1972.

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8. Important Case Laws

1. Helby v. Matthews (1895) AC 471

Facts:
A piano was let out on hire-purchase. The hirer sold it to a third party before paying all instalments.

Issue:
Did ownership pass to the third party?

Judgment:
No. The hirer had only possession, not ownership. Therefore, he could not transfer valid title.

Legal Principle:
A hire-purchase agreement does not transfer ownership until the hirer pays the full amount.
Relevance:
Confirms the difference between sale and hire-purchase.

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2. K.L. Johar & Co. v. Deputy Commercial Tax Officer (1965) AIR SC 1082

Facts:
The issue was whether a hire-purchase transaction amounts to a sale for the purpose of sales tax.

Judgment:
The Supreme Court held that it is not a sale until the hirer exercises his option to buy after paying all instalments.

Legal Principle:
A hire-purchase is a bailment plus an option to purchase, not an outright sale.
Relevance:
Important Indian case distinguishing hire-purchase from sale.

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3. Sundaram Finance Ltd. v. State of Kerala (1966) AIR SC 1178

Facts:
The question was whether hire-purchase transactions could be taxed as sales under the Kerala Sales Tax Act.

Judgment:
The Court held that a hire-purchase agreement is not a sale until ownership transfers; however, if the real intention is sale under the guise of hire, tax may apply.

Legal Principle:
Hire-purchase is a conditional sale — title passes only on fulfilment of conditions.

Relevance:
Clarifies how hire-purchase differs from sale in tax and legal interpretation.

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9. Conclusion

A hire-purchase agreement serves as a bridge between hiring and sale — giving possession to the hirer while retaining ownership with the seller until all conditions are met.
It provides flexibility to consumers and security to sellers.
The distinction between sale and hire-purchase is crucial: in sale, ownership transfers immediately; in hire-purchase, it transfers later, conditionally.

Thus, this concept protects both parties and ensures fair dealings in instalment-based purchases.