From the point of view of the financier, the owner under a hire purchase agreement will have the following rights. He can receive the price of the vehicle in installments by way of what may be called “hire or rental price of the vehicle”. The Financier remains the owner of the goods and he can claim repossession of the goods from the hire purchaser without the intervention of the court in case there is default in the payment of the agreed hire or installment money. He can also claim any arrears of hire purchase from the hire purchaser. However, he cannot require the hire purchaser to buy the goods at the end of installments. When there is no binding obligation on the hire purchaser to purchase the goods but only a right to purchase (option ) the owner cannot sue for price of the goods. However, he can retain all the hire purchase money he received so far against the goods (this is because this sum is consideration for goods given on hire purchase ).The owner has a right to repossess goods which have althrough this time remained his goods without the need to approach the court of law.
On the flip side, the hire purchaser on default and repossession of the goods will forfeit all the money already paid to the owner by way of hire purchase sum.
In case of hypothecation, the borrower becomes the owner of the goods. The financier merely provides loan against the security of the goods. In case of default, it gives him the right to cause the goods of the owner to be sold with the intervention of the court. He cannot directly seize the goods unless there is a clause in the contract to the contrary as they are owned by the borrower. However, he can recover the price of the goods (loan amount) from the borrower if the proceeds from the sale of goods do not cover the loan amount. This is because there is a debt incurred by the borrower unlike a hire purchase where there is no debt incurred by the hire purchaser.
Hybrid Hire Purchase Agreements
However, in modern practice, financier of goods drafts agreements which have some elements from the hypothecation and some from the hp agreement. The intention of financier is to avail both the remedies available under these agreements. Courts on the other hand, atleast in India have been consistently interpreting the contract to be either hp or hypothecation so as to let the financier avail only one set of remedies as against others.
In these agreements, one part of the agreement states that the financier is the owner of the goods and on payment of last installment the owner becomes absolute owner of the goods. In other parts, these agreements require the hire purchaser to execute a promissory note binding himself personally to pay the entire price of the goods. Many times these agreements do not give an option to the hire purchaser to not purchase the goods. These agreements also require a sale letter by the hire purchaser in favour of the financier but the same is not required under the agreement to be registered (see Central Motor vehicles Act). In simple terms, if the court decides the agreement is hire purchase the financier has no option to recover the price of the goods ( since it is not loan amount incurred by the hire purchaser). He can retain whatever amount has been paid towards the hire purchase. This would leave the financier in a situation where he had sunk capital by way of payment s made to the dealer of goods but he cannot recover the full cost of the goods from the hire purchaser. On the other hand, if the court decides the agreement to be hypothecation, financier can recover the whole of price of the goods both through sale of goods and also personally from the hire purchaser. However, since ownership in goods is with the hire purchaser, any repossession and sale requires intervention of the court.
And in cases where the agreement does not give the hire purchaser an option to purchase but an obligation to purchase the goods, financier cannot sue for price of goods once the goods are repossessed (if the ownership has not passed) and he cannot sue for possession of goods (if the ownership has passed)but merely for price of the goods.
Brief History of Hire Purchase Law in India
1961- Law commission of India Report on hire purchase in India
This contains draft of proposed bill on hire purchase in line with then existing British law.
1972-Hire purchase Act, 1972 was passed
2005- Hire Purchase Act (Repealing Act), 2005