UNIVERSITY OF LUSAKA SCHOOL OF LAW L 200

UNIVERSITY OF LUSAKA SCHOOL OF LAW L 200 – COMMERCIAL LAW UNIT 10: CONDITIONAL SALE & HIRE PURCHASE

STRUCTURE OF THE PRESENTATION • • Introduction Conditional Sale Definition and Nature of Hire-Purchase distinguished from other Transactions

Introduction • Conditional sale and Hire-Purchase are modes or techniques by which credit or credit facility is extended to the customers by suppliers, dealers, traders etc. • There are two methods by which the supplier or dealer may involve or bring in the finance house, that is, the institution willing to finance the sale of the equipment or goods.

Introduction • The first method is for the supplier or dealer to sell the equipment or good to the finance house and arrange for the dealer or supplier to supply it to the customer or buyer on conditional sale or hire-purchase. • From the viewpoint of the finance house this is known as ‘direct’ or ‘direct collection’ business, since the finance company is placed in direct or buyer and overt contractual relations with the customer and collects the

Introduction • The second method is for the dealer or supplier to conclude the conditional sale or hire-purchase agreement with the customer or buyer himself as principal and then sell the contract to finance house. • In this case the finance house is not a party to the conditional sale or hire-purchase agreement, merely a purchaser of the receivables resulting from it and (if so agreed with the dealer) of the title to the underlying goods; and usually it is arranged in away that the dealer shall continue to collect the instalments as an agent for the finance house.

Introduction • The agreements are commonly sold to the finance house at a discount in batches at a time and the transaction is known as ‘block discounting’. • The legal relationships set up by direct collection business are rather different from those involved in block discounting.

Introduction • (i) Direct Collection • D (that is, the dealer), F (that is, the finance house) and B (the business buyer or customer or hirer on hire-purchase). • D concludes an arrangement with F to introduce to F customers of D wishing to acquire his equipment or goods on instalment terms. The arrangements may be recorded in a formal master agreement or more informally by an exchange of letters.

Introduction • D is remunerated for his introductions by a commission, calculated as a percentage of the finance charge made by F under the conditional sale or hire-purchase agreement. • F installs a point of sale on the D’s premises, which generates an agreement document. D then signs up the customer to an agreement, collects any down payment required by F and sends the agreement to F for its approval, together with D’s pro forma invoice incorporating a request to F to purchase the equipment.

Introduction • If F accepts the transaction, it signs the agreement itself, dispatches a copy to the customer and pays D the cash price of the equipment, as stated in his invoice, less the down payment made by B. D then delivers the equipment to B. • The transaction between D and F is referred to as a sale whilst the transaction between F and B is referred to as the conditional sale or hire-purchase agreement. • Unlike the block discounting , in this form of transaction (direct collection) B has no contractual relationship with D at all.

Introduction • D is the physical supplier of the equipment, but B’s contract is with F. • If the transaction is conditional sale agreement, F is the seller for the purpose of the Sale of Goods Act. • Thus if the equipment proves to be unfit for its purpose or not of merchantable quality, F would be held liable.

Introduction • As regards the formation of the contract between B and F, the submission of the agreement signed by B represents an offer by B to take the equipment under the terms of the agreement. • The offer by B does not crystallize into a contract until F has accepted the offer (usually by signing the agreement) and has intimated his acceptance to B. until that point is reached, B is free to withdraw his offer.

Introduction • (ii) Block Discounting • In block discounting F and D conclude a master agreement by which D agrees to offer for sale to F batches of conditional sale and / or hire-purchase agreements made directly between D as seller /owner and the buyers / hirers. • The agreement will provide that if F accepts the agreement offered, it will pay D the collection value of the purchased agreement less a security retention and a discount calculated by reference to the period or average period for which F will be out of its money.

Introduction • D undertakes to collect the instalments as agent for F and to guarantee payment by the debtors under the agreement. • The transaction between D and B is referred to as the conditional sale / hire-purchase agreement, whilst the transaction between F and D is an assignment. • D’s interest in the equipment, encumbered as it is by conditional sale agreement in favour of B, is of no intrinsic value except in the event of B’s default.

Introduction • What F is paying for is the receivables generated by the conditional sale / hirepurchase agreement, not the title to the equipment itself. • Unlike the direct collection, there is no contractual nexus between F and B. The latter’s (B) contract is with D, and D alone. • F is merely a purchaser of the rights vested in D under the conditional sale / hire-purchaser agreement.

Introduction • F does not assume any of D’s liabilities and cannot be sued by B if, for example, the equipment proves defective. On the other hand, F as assignee cannot stand in a better position than D himself. • F takes subject to ‘equities’, that is, to all rights and defences available to B against the original creditor, D. • As long as the assignment is notified, B may know nothing of F’s existence and will

Introduction • But if F gives notice of the assignment to B and calls upon B to pay future rentals to F, then subject to any defences or rights of set-off he may have, B is obliged to respect F’s title to the receivables and pay F direct. • A payment to D after notice of assignment would not be a good discharge of B’s liability for the instalment paid and he could be made to pay again, to F.

Conditional Sale • A conditional sale agreement or contract is an agreement for sale under which title remains in the seller until the purchase price has been paid in full or the buyer has complied with any other conditions prescribed by the agreement for the transfer of the title to him. • The term "conditional sale, " is used to describe a transaction in which a seller of goods parts with their possession to the buyer, but in his contract reserves title for purposes of security.

Conditional Sale • A conditional sale contract or agreement is an arrangement where a buyer takes possession of an item, but its title and right to repossession remains with the seller until the buyer pays the full purchase price (usually in installments stretched over months or years). • This is a common type of agreement or contract used in the financing of machinery and equipment, and real estate.

Conditional Sale • Conditional sale differs from hire-purchase, and its variants such as lease purchase and personal contract purchase, in that the buyer is contractually committed to buying while the hirer has merely an option to buy. • It has been held that even a purely nominal option fee suffices to characterise the agreement as hire-purchase rather than conditional sale. See Close Asset Finance Ltd v. Care Graphics Machinery Ltd [2001] GCCR

Conditional Sale • Apart from the reservation of title clause, a conditional sale agreement has all the normal incidents of a contract of sale, and the provisions of the Sale of Goods Act 1893 apply save in so far as effectively excluded.

Rights and Duties of Buyer • In a typical conditional sale agreement a buyer will be required to do the following: • (i) To maintain punctual payment of the instalments; • (ii) To keep the equipment in his possession, comprehensively insured and in good repair and condition; • (iii) Not to sell the equipment or otherwise dispose of it; • (iv) Not to allow a lien to be created on the equipment, for example for repairs.

Rights and Duties of Seller • In a typical conditional sale agreement a seller will be: • (i) Entitled to terminate the agreement and repossess the equipment in various events, including breach of the buyer’s obligations, levy of distress or execution against his goods by another creditor, bankruptcy etc.

Rights and Duties of Seller • (ii) Require the buyer, in the event of termination of the agreement, to compensate the seller for any loss remaining after repossession and sale of equipment, for example, by paying the unpaid balance of the purchase price less the proceeds of sale of the equipment and a discount to allow for the acceleration of the buyer’s payment liability. • (iii) Entitled to trace proceeds of unathorised dispositions.

Rights and Duties of Seller • The exercise of a right of repossession rescinds or terminates the contract of sale and bars an action for recovery of the price, and the same consequences flow from exercise of the statutory power of resale. • The seller’s right of repossession may be enforced by application to the court or by physical seizure (recaption). • Recaption of business equipment has a number of difficulties such as the seller cannot enter on the buyer’s premises to recover the equipment without the buyer’s consent unless authorized to do so by the agreement.

Rights and Duties of Seller • Furthermore, where the equipment has become part or incorporated into the fabric of the building as a fixture, it becomes part of the freehold (quicquid plantatur solo, solo credit) and while such incorporation would be actionable as a conversion if not expressly or impliedly assented to by the seller, he would have no right to sever the equipment from the premises unless empowered to do so by the conditional sale agreement and would be restricted to a personal claim for damages. • Even a contractual right of entry and severance will be unavailable in certain cases if the premises are

Rights of the Seller against Third Parties • In principle, the seller can assert his title against any third party into whose hands the equipment may pass as the result of an unathorised disposition by the buyer. • However, there are certain exceptions to the nemo dat rule which, if applicable, will lead to the loss of title. • The seller’s title may also be lost as the result of incorporation of the equipment into a building as a fixture or into other chattels as

Terms and Conditions • Common or typical terms and conditions that are found in a Conditional Sale agreement include: Ø Payment Ø Possession and Care of Goods Ø Insurance Ø Use of Goods Ø Title to the Goods Ø Termination by Seller Ø Sums payable by the Buyer upon determination

HIRE-PURCHASE • In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. • When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner.

HIRE-PURCHASE • Hire-purchase, therefore, comprises agreement for the delivery of goods under which the recipient pays a small deposit to the owner of the goods with an undertaking to pay certain sums in instalmets, usually each month, in consideration of being granted possession and use of the goods and an option to purchase them after a stipulated total sum. • In some jurisdiction, a hire purchase is termed an installment plan or closed-end leasing or rent to own.

Nature of Hire-Purchase Agreements • A hire-purchase agreement may be defined as an agreement or contract where the owner of the goods hires them out to another person for an agreed periodic rent payable by instalments and gives him the option to purchase. • Hire-purchase may also be defined as an agreement for the delivery of goods by the owner to a person (that is, the hirer) under which the latter is granted an option to purchase those goods. • The option may or may not be exercised by the hirer.

Nature of Hire-Purchase Agreements • The goods remain on hire only and the property in them does not pass to the hirer unless and until all the agreed hire -purchase instalments have been paid and the option to purchase exercised on payment by the hirer of a specified nominal amount usually forming part of, and normally paid together with, the final instalment. • It is worth noting that the fact that all hire-purchase instalments are paid by the hirer does not mean that the goods have become his. Thus, until the property passes by reason of due exercise of the option, the goods remain the property of the owner who can repossess, sell or otherwise deal with them.

Nature of Hire-Purchase Agreements • The hire purchase received first judicial approval in the case of Helby v. Matthews (1895) AC 471. In that case the owner of a piano agreed to let it on hire to H at a monthly rent of 10 shillings 6 pence. The agreement gave possession of the piano to H and permitted him to return it to the owner at any time subject to the payment by him of all instalments due at the date of return. It further provided that if and when the instalments paid by H totalled 18 guineas, the piano would become his property, but that until such payment, it remains the property of the owner, who would be entitled to resume possession of it, if H defaulted his instalment payments or failed to keep the piano at a given address.

Nature of Hire-Purchase Agreements • H took possession of the piano and paid some instalments. H then pledged the piano with a pawn broker as security for a loan. The owner of the piano brought an action against the pawn broker to recover the piano, arguing that H had no right to pledge the piano as it was not his property. • The House of Lords found for the owner of the piano. It held that since H could, under the agreement return the piano before the sum of 18 guinea had been paid he was not a person who had bought or agreed to buy the piano.

Nature of Hire-Purchase Agreements • Lord Herschell, L. J. (at p. 479)stated as follows: • “All that he undertook was to make the monthly payment of 10 shillings, 6 pence so long as he kept the piano. He has an option no doubt to buy it by continuing the stipulated payments for a sufficient length of time. If he had exercised that option he would have become the purchaser. I cannot see under those circumstances how he can be said either to have bought or agreed to buy the piano. The terms of the contract did not upon its execution bind him to buy but left him to do or not as he pleased. ”

Essentials of a Hire-Purchase Agreement • Hire-purchase as a method of acquiring property has the following distinctive features: • (i) It is a bailment of goods. The goods are let out to the bailee (hirer). The owner of the goods is not selling them but merely hiring them out. • (ii) The hirer is obliged to pay a monthly or other periodic rent for the use of the goods. • (iii) The hirer has no obligation to buy / purchase the goods. He can determine the agreement at any time and return the goods.

Essentials of a Hire-Purchase Agreement • (iv) If the hirer defaults, on the payment, or breaches a material term of the agreement the owner of the goods can terminate the agreement and retake the goods. • (v) Once the agreement is determined or terminated the hirer has no claim for past rentals, nor can the owner claim future rentals. • (f) A hire purchase agreement normally contains clause which allows the hirer to either return the goods or purchase them at the end of the payment of rent. The hirer has an option to purchase the goods.

Hire-Purchase Act • The hire-purchase is regulated by the Hire-Purchase Act, Cap 399 of the Laws of Zambia. • The Hire-Purchase Act to make provision for the regulation of hire-purchase agreements and certain instalment sales, and for other purposes incidental to the foregoing. • The Act defines "hire-purchase agreement" as • (a) any contract whereby goods are sold subject to the condition that notwithstanding delivery of the goods the ownership in such goods shall not pass except in terms of the contract and the purchase

Hire-Purchase Act • (b) any contract which provides for the hiring of goods whereby the hirer has the right • (i) to purchase such goods after two or more instalments have been paid in respect thereof; or • (ii) after two or more instalments have been paid in respect thereof, to continue or renew from time to time such hiring at a nominal rental, or to continue or renew from time to time the right to be in possession of the goods, without any further payment or against payment of a nominal amount periodically or otherwise;

Hire-Purchase Act • (c) any other contract which has, or contracts which together have, the same import as either or both the contracts defined in paragraph (a) or (b) of this definition, whatever form such contract or contracts may take; • The Act defines "instalment sale agreement" as any contract of sale under which • (a) the ownership in the goods sold passes either before or upon delivery; • (b) the purchase price is to be paid in instalments, of which one or more are payable after delivery; and

Hire-Purchase Act • (c) the seller is entitled to the return of the goods sold if the purchaser fails to comply with any provision thereof; and includes any other contract which has, or contracts which together have, the same import, whatever form such contract or contracts may take;

Formalities • Unlike other forms of contract, hire-purchase agreements must comply with certain laid down requirements imposed by the Hire-Purchase Act. • To be valid, HP agreements must therefore be in writing and signed by both parties. • Section 5 of the Hire-Purchase Act provides that every agreement shall • (a) be reduced to writing and signed by or on behalf of all the parties to the agreement; • (b) contain a statement of the cash price.

Formalities • If an agreement does not comply with the provisions of subsection (1) • (a) the goods which are the subject of the agreement shall be deemed to have been sold to the purchaser • (i) without any reservation as to the ownership of the goods or, as the case may be, without any stipulation as to the seller's right to the return of the goods; and • (ii) on credit at a price, payable in the same manner as that stipulated in the agreement, which is twenty

Formalities • (b) the seller shall not be entitled to enforce any contract of suretyship, indemnity or guarantee relating to the agreement except, in the case of an agreement which has been the subject of a cession or assignment, against a surety or guarantor who was the original seller under the agreement.

Hire-Purchase Distinguished from a Conditional Sale • Conditional sale (CS) agreements and other forms of credit, such as a loan or credit card, the goods you buy belong to you straight away, you will own the goods once all your instalments have been paid. There will be no extra fee to pay at the end. • However, when you use Hire-Purchase Ø You don't legally own the goods until you've paid back all the money you owe. This means that you cannot modify or sell them without the lender's permission.

Hire-Purchase Distinguished from a Conditional Sale Ø Your contract is with a finance company (not the retailer) who will own the goods until the final payment is made Ø The finance company can take the goods back if you don't keep up your repayments Ø You will be liable for any damage caused to the goods during the contract period.

Hire-Purchase Distinguished from a Conditional Sale • Under a hire purchase (HP) agreement, you pay an initial deposit followed by monthly payments (a portion of the money you borrowed plus interest) over an agreed period. • At the end of this period, you have the option of owning the goods outright, although your lender may require you to pay a fee

The Seller and the Owner • If the seller has the resources and the legal right to sell the goods on credit (which usually depends on a licensing system in most countries), the seller and the owner will be the same person. But most sellers prefer to receive a cash payment immediately. • To achieve this, the seller transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is this company that hires and sells the goods to the buyer. This introduction of a third party complicates the transaction.

The Seller and the Owner • Suppose that the seller makes false claims as to the quality and reliability of the goods that induce the buyer to "buy". • In a conventional contract of sale, the seller will be liable to the buyer if these representations prove false. But, in this instance, the seller who makes the representation is not the owner who sells the goods to the buyer only after all the installments have been paid. • To combat this, some jurisdictions, make the seller and the finance house jointly and severally liable to answer for breaches of the purchase contract.

Standard provisions • Section 7 of the Hire-Purchase Act prescribes the contents of every purchase agreement. These are as follows: • (i) the amount of the purchase price of the goods in question; • (ii) the amount paid or to be paid by the purchase; • (iii) the amount of each of the instalments by which the purchase price is to be paid; • (iv) the mode of payment of such instalments;

Standard provisions • (v) the date or mode of determining the date on which each instalment is payable; and • (vi) the rate of interest, which shall not exceed the maximum rate of interest, chargeable upon an instalment in arrear; • (vii)a description of the goods let, sold or delivered under the agreement and of any goods delivered to the seller which is sufficient to identify them; • (viii) the terms as to the reservation and passing of ownership of the goods or as to the seller's right to the return of the goods, as the case may be.

Standard provisions • The Hire-purchase Act prohibits the inclusion of certain provisions in the Hire-Purchase Agreement. • This is intended to protect the purchaser of goods under the hire-purchase agreement who is naturally in a weaker position compared to the owner of the goods. • The owner of the goods, for example, cannot easily repossess the goods, nor disposess the hirer of goods his right to terminate the hire-

Standard provisions • The certain provision which are excluded for inclusion in the hire-purchase agreement are contained in section 8 of the Act. • Section 8(1) provides that an agreement shall not be of any force or effect if it provides whether expressly or impliedly that • (a) the seller or any person acting on his behalf is authorised to enter upon any premises for the purpose of taking possession of goods which are the subject of any agreement, or is relieved from liability for any such entry; • (b) the right conferred on a purchaser by this Act to determine the agreement is excluded or restricted;

Standard provisions • (c) any liability, in addition to the liability imposed by this Act, is imposed on a purchaser by reason of the termination of the agreement by him under this Act; • (d) a purchaser, after the termination of the agreement in any manner whatsoever, is subject to a liability which exceeds the liability to which he would have been subject if the agreement had been terminated by him under this Act; • (e) any person acting on behalf of a seller in connection with the formation or conclusion of an agreement is to be treated as or deemed to be the agent of the purchaser;

Standard provisions • (f) a seller is to be relieved from liability for the acts or defaults of any person acting on his behalf in connection with the formation or conclusion of an agreement; • (g) the purchaser shall pay interest on an instalment in arrear at a rate which exceeds the maximum rate of interest.

Implied Conditions and Warranties • The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the following are usually present: Ø the hirer will be allowed to enjoy quiet possession of the goods, i. e. no-one will interfere with the hirer's possession during the term of this contract Ø the owner will be able to pass title to, or ownership of, the goods when the contract requires it

Implied Conditions and Warranties Ø that the goods are of merchantable quality and fit for their purpose, save that exclusion clauses may, to a greater or lesser extent, limit the Finance Company's liability Ø where the goods are let by reference to a description or to a sample, what is actually supplied must correspond with the description and the sample.

Implied Conditions and Warranties • Section 12 of the Hire-Purchase Act that in every agreement there shall be: • (a) an implied warranty that the purchaser shall have and enjoy quiet possession of the goods; • (b) an implied condition on the part of the seller that he is not and will not be precluded from passing the ownership of the goods to the purchaser at the time when the ownership is to pass; • (c) an implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party at the time when the ownership is to pass; and such warranties and conditions shall be implied notwithstanding any agreement to the contrary.

Implied Conditions and Warranties • (d) Every agreement shall be deemed to contain any warranties or conditions implied in a contract for the sale of goods. • (e) The seller shall not be entitled to rely on any provision in the agreement excluding or modifying any warranty or condition referred to in subsection (2) unless he proves that, before the agreement was made, the provision was brought to the notice of the purchaser and its effect made clear to him.

The hirer's rights • The hirer usually has the following rights: Ø To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate. Ø To return the goods to the owner — this is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value

The hirer's rights Ø With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating Ø Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost.

The hirer's rights • Basically hirer have following rights- 1 -Rights of protection 2 -Rights of notice 3 -Rights of repossession 4 -Rights of Statement 5 -Rights of excess amount

Hirer's Duties or Obligations • The hirer usually has the following obligations: Ø to pay the hire-purchase instalments as they fall due Ø to take reasonable care of the goods in his possession (if the hirer damages the goods by using them in a non-standard way, he or she must continue to pay the installments and, if appropriate, compensate the owner for any loss in asset value)

Hirer's Duties or Obligations Ø to inform the owner where the goods will be kept, and not to remove or permit the removal of the goods from the premises where they are ordinarily located without the consent of the owner. Ø To take delivery of the goods Ø To continue hiring the goods for the agreed period and not to re-let, sell or part with possession.

Owner's rights • The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner: Ø to retain the installments already paid and recover the balance due Ø to terminate the agreement and repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid) Ø to claim or sue for damages for any loss suffered.

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