In the Industrial sector, purchase of machinery etc is also financed by this method of hire purchase.
The basic principle underlying the transaction is that the installment determined is taken as hire ( rental ) till the time the agreement envisages such payments. On determination of the said period, the Hirer ( Purchaser ) has the option of paying a nominal amount to become the owner of the goods.
- In a hire-purchase agreement, the owner hires goods to the hirer with an option to purchase the goods when he has made the payment of a certain sum.
- By this system, the purchaser who is unable to pay the full price of the asset at one lump sum, gets facilities to acquire an asset and after making the payment of an initial amount called premium, the purchaser pays the balance consideration money in installments.
- After the payment of all the installments, the property in the goods passes to the hirer.
- The hirer has an option to return the goods during the period of hire. In a hire-purchase agreement, the hirer has the right to terminate the agreement for hire at his pleasure and is not bound to pay the value of the goods.
- A hire-purchase agreement is a form of bailment; the hirer is given the right to purchase the goods on certain conditions. That, however, is an
- Option, not an obligation to purchase.
- The hirer may elect to purchase the goods and when he does so, after he fulfills all the conditions prescribed in the agreement, the title to the goods will pass to him. But he may elect not to do so, and in that event, he is entitled to return the goods and terminate the agreement in the manner provided therein.
Forms of Hire-Purchase Agreements
Hire-purchase agreements are of two forms.
- In the first form the goods are purchased by the financier from the dealer and
- the financier obtains a hire-purchase agreement from the customer,
- under which the customer becomes the owner of the goods
- on payment of all the installments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price.
- The owner gets his money from the financier, who recovers the cost from the customer.
- In other form
- the customer purchases the goods and he executes a hire-purchase agreement with a financier,
- under which he remains in possession of goods, subject to payment of amount paid by the financier on his behalf to the owner.
- The financier gets a right to seize the goods in the event of non-fulfillment of conditions of hire-purchase agreement by the customer.
NATURE OF AGREEMENT- The true nature of the transaction is determined from the terms of the agreement and the court, unless prohibited by statute, can go behind the documents to determine the true nature of the transaction.
If the purchaser desiring to purchase the goods, who is not having sufficient money for purchasing the same, borrows the amount from a third party and pays it over to the vendor, the transaction between the customer and the third party will be a loan transaction.
The true nature of the transaction will not change if the lender himself is owner of the goods and he accepts the promise by the purchaser to pay the balance money due against delivery of goods.
Termination of Hire-Purchase Agreement
The hire-purchase agreement can be terminated in any of the following ways:-
- In terms of the agreement-The hire-purchase agreement stipulates the circumstances in which the agreement can be terminated. The agreement is generally terminated by return of the goods by the hirer, notice of termination by the owner on account of hirer's breach of conditions or notice of termination by the hirer.
- By performance- The hire-purchase agreement is terminated by performance on the exercise of the option to purchase the goods by the hirer.
- By renewal-The parties to an agreement may enter into a fresh agreement terminating the hire-purchase agreement, which has not already been terminated.
- Notice by either party-The hire-purchase agreement can be terminated by notice given by either party.
- By acceptance of repudiation by other party-An agreement is terminated, when a party to an agreement renounces his future obligations under the agreement or commits a breach of the agreement, which indicates that he does not want to remain bound by its provisions, and the other party accepts the renunciation or breach as discharging the contract.
- By release-Where one party to an agreement releases the other party from the performance of the obligations by him under the agreement, the agreement comes to an end.
- By frustration-When performance of the agreement becomes impossible by reason of some act or event occurring subsequent to the formation of the agreement, the agreement comes to an end and the parties will be discharged from further obligations under the agreement e.g. when the goods are destroyed during the currency of hire-purchase agreement without negligence on the part of the hirer, the agreement comes to an end.
- By efflux of time-When the hirer is given time to exercise option to purchase the goods within a stated period and he does not exercise the option within the said period, the agreement comes to an end.
Remedies in Case of Breach
In case of breach of the hire purchase agreement, the owner is entitled to (i) recover the goods by physical repossession; or (ii) to abandon any claim to the goods and sue for damages.
The registration of a hire purchase agreement is not necessary, as no immovable property is conveyed thereby to the hirer.
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