COMMERCIAL LAW 12012/2013 ACADEMIC YEAR HIRE PURCHASE UGBS, 29TH OCT 2012 Rowland Atta-Kesson Esq.
OUTLINE • The Nature of hire-purchase agreement • History of Hire-Purchase Law in Ghana (pre-1958 to date) • Formation of Hire-Purchase Agreement under the Hire-Purchase Act, 1974 (NRCD 292) • Hirer’s right of termination and liability upon termination. • Restriction on owner’s right to recover protected goods. • Implied terms in hire-purchase agreement. • Rights of third parties in event of wrongful sale of goods by hirer
TUTORIAL • By an agreement between Kofi, a second-hand car dealer and Kwesi, a ‘trotro’ driver, Kofi, let a second-hand Toyota bus to Kwesi on hire purchase. • The hire-purchase price was GH¢10,000.00 of which Kwesi paid an initial deposit of GH¢2,000.00 with the balance of GH¢8,000.00 payable over a period of 8 months at the rate of GH¢1,000.00 a month.
According to the agreement which was signed for Kwesi by his elder brother Kwame, Kwesi was to have the right of seizure in the event of default by Kwesi. • A copy of the said agreement, which omitted to state the hire-purchase price, was sent to Kofi about one month after it had been made. • After using the bus for 4 months, during which he paid his installment regularly, Kwesi discovered certain defects in the bus.
He drew Kofi’s attention to these defects, but Kofi did nothing about them. • On another occasion Kwesi lost his receipt book and his copy of his agreement and therefore wrote to Kofi for a new copy of the agreement and the statement of the account. • But Kofi ignored his request.
Owing to the constant break down of the bus and the lack of spare parts, Kwesi has become disillusioned and is therefore contemplating adopting one of the following causes of action: • move to the neighboring country where he can get spare parts easily and also earn some foreign exchange. • Repair the bus and sell it to Afua. • Terminate the agreement and sue Kofi for the recovery of all the installments so far paid. • Kofi has also heard of Kwesi’s plans and decided to recover possession of the bus from Kwesi. • Advise Kwesi and Kofi.
INTRODUCTION • We focus on 2 credit transactions namely: • HIRE-PURCHASE AGREEMENTS • CONDITIONAL SALE AGREEMENTS • Not concerned about outright sales. • Outright sales are exclusively governed by the SALE OF GOODS ACT irrespective of the mode of payment • [In a contract of sale where the price is not payable immediately, but over a certain period, it is referred to as credit sale. • However this kind of sale is still an outright sale because generally, the property in the goods passes in accordance with the rules of the Act, and the mode of payment of the price does not affect the passing of property.] • These credit transactions HPA and CSA are described as conditional contracts because the passing of property depends on the payment of the price.
THE NATURE OF HIRE-PURCHASE AGREEMENT • COMMON LAW DEFINITION • At common law, a contract of hire-purchase is an agreement under which an owner of goods delivers them on hire to the hirer for certain periodic payments made by the Hirer, and further agrees that the Hirer return the goods and terminate the hiring or elect to purchase the goods at the end of the hiring period.
Bailment, • A hire-purchase agreement may be likened to a bailment transaction, the owner being bailor and the hirer the bailee. • Upon the completion of the agreement, the hirer is given actual possession and use of the goods hired. • The owner retains the property or title to the goods. • The property in the goods remains in the owner until such time that the hirer exercises his option to purchase the goods- by paying the full hire-purchase price.
STATUTORY DEFINITION • Section 24 of the Hire-Purchase Decree defines a HPA as; • “An agreement for the bailment of goods under which the bailee may buy the goods or under which the property in the goods will or may pass to the bailee”
Element of hire • Every HPA involves the bailment of goods by the owner to the hirer in return for certain periodic payments made by the hirer. In other words possession of the goods is always given to the hirer even though the property in the goods remains in the owner until the hirer effectively exercises the option to purchase. • Option to purchase • The second essential element of every HPA is that the hirer has an option either to purchase the goods or to return them and thereby terminate the hiring.
OPTION TO PUCHASE • Generally, by granting the hirer the option to purchase, the owner is said too have made as irrevocable offer to sell the goods to the hirer if the conditions set out in the agreement are fulfilled. (i.e. if the hire-purchase is paid in full). • On the hirer’s part however, he is under no obligation to purchase the goods. • He may exercise the option to buy, i.e. he may accept the offer to sell by completing the payments scheduled under the agreement; or • He may also elect to terminate the hiring and return the goods t the owner without buying them
The essential features of a hire-purchase agreement at common law were identified in the case of HELBY v. MATTHEWS  A.C 471 • “At common law, a HPA is a contract of hiring , which is terminable at the will of ht hirer, coupled with a condition in the hirer’s favour, that he may elect to retain the goods and make full payment for it, or he may return it.” • OPTION TO PURCHASE MAY BE DRAFTED IN ONE OF TWO WAYS:
First, after the payment of all the installments, the hirer may be entitled to buy the goods upon payment of an additional and usually nominal sum called the Option fee. • Here the hirer makes the payments punctually until the end of the hiring period. He then exercises his option to purchase by paying the Option fee, after which the hirer becomes the owner of the goods.
Secondly, the stated installments payable by the hirer under the agreement may include the Option fee, so that at the end of he hiring period, no new or additional payment is required. In this case, upon due payment of all the scheduled installments, the property in the goods will automatically vest in the hirer. • Here the hirer exercises his option to purchase by paying all th installments up to the of the hiring period. • Note however that in practice, hirers enter into the hire-purchase agreement with the intention of exercising the option to purchase; and in most cases in fact do so.
CONDITIONAL SALE AGREEMENTS • The is the second kind of credit transaction governed by the provisions of the Hire-Purchase Decree. • A conditional sale agreement is defined as an agreement for the sale of goods under which the purchase price or part of it is payable by installments, and the property in the goods is to remain in the seller even though the buyer is in possession of the goods, until certain conditions specified in the agreement are fulfilled by the buyer. • Section 24 of the Decree
A conditional sale agreement therefore is essentially a sale transaction under which the price is payable in installments, and the seller retains the property in the goods, until certain specified conditions,(usually the full payment of the price) are fulfilled by the buyer.
Differences between the Hire-Purchase agreement and Conditional Sale Agreement. • a conditional sale agreement is an agreement for the sale of goods whereas a hire-purchase agreement is an agreement for the bailment of goods under which property may pass to the bailee. • the hire-purchase agreement differs from the conditional sale agreement in that in the case of a hire-purchase agreement, the hirer has the right to elect whether or not to buy the goods, i.e. the buyer simply has an option to purchase but is not legally bound to do so; whereas in the case conditional sale agreement the buyer by virtue of the terms of the contract is bound to purchase the goods.
The buyer in a conditional sale agreement therefore has an obligation and not a mere option to purchase the goods. • Since a person who takes goods under a conditional sale agreement has a binding obligation to purchase the goods, the parties to a conditional sale agreement are rightly described as the seller and the buyer; whilst the parties to a hire-purchase agreement are described as hirer and owner.
It is interesting to note however that most of the legislation that have been passed in England dealing with Hire-Purchase Agreement also apply to Conditional Sale Agreements. • The two have traditionally been treated as identical probably because the features of both kinds of transactions tend to be very similar. Under the Hire-Purchase Decree, 1974 (N.R.C.D. 292) hire-purchase agreements and conditional sale agreements are to all intent and purposes treated as equivalents and most of the provisions apply equally to both hire-purchase agreements and conditional sale agreements.
ORIGIN AND DEVELOPMENTS IN HIRE-PURCHASE TRADING • Hire-purchase trading is believed to have first started in England in the second half of the nineteenth century. • This mode of obtaining credit became very popular with the introduction of the Singer sewing machine. • The Singer Manufacturing Co. is said to have let out its machines to its customers under hiring agreements which included an option to purchase and the sums paid by way of hire-rent were treated as part of the purchase price where the purchaser exercised the option to purchase.
Hire-purchase transactions were later extended to cover the sale of such items as wagons, furniture, motor cars and even false teeth. • In later years hire-purchase trading became a very popular means of obtaining goods on credit and was available for the acquisition of a wide range of consumer goods. • It must be observed that in all these years when hire-purchase trading was in force, the rights, duties and obligations of the parties were governed solely by the common law, i.e. the general contract law.
ABUSES • Unfortunately, the expansion of hire-purchase trading brought with it certain abuses and unscrupulous practices which the common law was incapable of remedying. • The lack of statutory control of hire-purchase transactions created a situation where owners of goods, by reason of their stronger bargaining power were free exploit hirer.
SIGNING OF BLANK FORMS • Hirers induced to enter into HP they did understand • Signed blank forms and owner later filled in • No relief at common law but non est factum • Non est factum is very difficult to prove
SNATCH-BACK DEVICE • Some unscrupulous owners encouraged hirer s to take on hire-purchase commitments, which were well beyond their means. • The decision in CRAMER V. GILES (1883) 1 Cab & El 151 did not help the position of the hirer. In that case the court held that it could not intervene to protect a hirer in default.
WIDELY DRAWN EXCLUSION CLAUSES • Another abuse of the hire-purchase system was the practice of many hire-purchase dealers (owners) of incorporating into the hire-purchase agreement widely drawn exclusion clauses excluding all conditions, warranties or duties in respect of the quality of the goods, or their fitness for any purpose. The result was that hirers had goods foisted on them which were unfit for their intended purpose, but which they were nevertheless obliged to pay
WIDELY DRAWN EXCLUSION CLAUSES • Another abuse of the hire-purchase system was the practice of many hire-purchase dealers (owners) of incorporating into the hire-purchase agreement widely drawn exclusion clauses excluding all conditions, warranties or duties in respect of the quality of the goods, or their fitness for any purpose. • The result was that hirers had goods foisted on them which were unfit for their intended purpose, but which they were nevertheless obliged to pay
HIRER LIABILITY UPON TERMINATION • As already noted a hirer in a hire-purchase agreement is not legally bound to complete the payments to the end of the hiring period, but may elect to return the goods to the owner and thereby terminate the hire-purchase agreement. • However, owners of goods inserted in the hire-purchase agreement certain clauses known as “minimum payment clauses”, which required the hirer to pay upon termination, exorbitant charges for depreciation of the goods etc. • These charges which were payable on termination were so prohibitive that most hirers were discouraged from attempting to terminate the agreement.
NO REQUIREMENT FOR STATEMENT OF CASH PRICE • Another drawback associated with the application of the common law was that there was no obligation imposed on the owner to indicate to the hirer how much interest he was paying for the credit extended to him. • There was no obligation on the owner to state the cash price to the hirer-(the price he would have paid if he purchased the goods outright). • [cash price is the price at which the goods would be sold for cash; the hire-purchase price is invariably higher than the cash price; the difference representing the interest that is paid for obtaining the goods on credit.] in the absence of any obligation to state the cash price, owners could charge an excessive rate of interest without the hirer being aware of it. • These drawbacks associated with the application of the common law to hire-purchase transactions motivated the introduction of hire-purchase legislation to deal with these abuses of the hire-purchase trading system.
FORMAL REQUIRMENTS FOR THE FORMATION OF A HIRE-PURCHASE AGREEMENT UNDER THE HIRE-PURCHASE DECREE
First of all, before a HIRE-PURCHASE AGREEMENT or CONDITIONAL SALE AGREEMENT is made, the owner or seller shall state orally and in writing, to the prospective hirer or buyer, the cash price and the either the hire purchase price or the total purchase price. See section 2
Secondly, for the HIRE-PURCHASE AGREEMENT or CONDITIONAL SALE AGREEMENT to be enforceable, it must be in writing, and signed by the hirer or beer, and by or on behalf of all the other parties to the agreement. • Section 1(1) (a) • Note that the hirer is required to sign personally. This is to ensure that he takes a direct interest in the formation of the contract and its terms.
Thirdly, according to section 3 of the Act , for a hire-purchase to be valid and enforceable, it must contain the following; • A statement of the cash price and the hire-purchase price of the goods to which the agreement relates. • A statement of the amount of each instalment to be paid by the hirer and the dates or the mode of determining the dates on which each instalment becomes payable.
Thirdly, the hire-purchase or conditional sale agreement must contain a description or a list of the goods to which the agreement relates • Fourthly, the agreement must contain a notice, prominently displayed in the agreement along the lines of what is contained in the first and second schedules to the Decree
The notices in the 1st and 2nd schedules contain a statement acknowledging; • the hirer’s right to terminate the HIRE-PURCHASE AGREEMENT and a statement of his liability upon termination; and • a statement acknowledging the statutory restriction on the owner’s right to recover the goods. • Fifthly, the owner is required in section 3(2) to deliver a copy of the HIRE-PURCHASE AGREEMENT to the hirer within 14 days after the making of the agreement.
DISCRETION OF COURT TO DISPENSE WITH SPECIFIC REQUIREMENTS; • According to section3 (3), where the parties fail to comply with the requirements in section 3(1)(b) and (c) and section 3(2), the court can exercise its discretion and still hold the agreement enforceable if it considers it just and equitable to do so and if it is clear that the omission of those requirements has not prejudiced the hirer in any way.
The effect of section 3(3) therefore is that where the parties fail to include in the agreement amount of each instalment or date and the description of the goods, or where the owner fails to deliver a copy of the agreement to the hirer within the stipulated period of 14 days, the courts may, in exercise of their discretion, nevertheless hold the agreement enforceable if it is clear that the non-compliance with these requirements has not in any way prejudiced the position of the hirer. • Mensah v. Osei  1 GLR 261
SCOPE OF DISCRETION • It is important to note that the discretion of the court can be exercised only when the parties fail to comply with the specific provisions mentioned in section 3(3). • The discretion of the courts does not include the power to dispense with the requirement of statutory notice (section 3(1)(d)), the statement of the cash price and hire-purchase price (section 3(1)(a)) or the requirement that the HIRE-PURCHASE AGREEMENT must be in writing. • U.T.C v Johnson Okoro  C.C. 54
In effect therefore for a HIRE-PURCHASE AGREEMENT to be enforceable by the owner the following mandatory requirements must be fulfilled: • the hire-purchase must be in writing and signed by or on behalf of both parties; • the hire-purchase must contain the following information; • statement of cash price and hire-purchase price; • statutory notices on the hirer’s right to terminate; and the restriction on the owner’s right to recover the goods.
EFFECT OF NON-COMPLIANCE WITH THE MANDATORY REQUIREMENTS STATED IN SECTIONS 1-3 • Section 1 of the Decree provides that if the HIRE-PURCHASE AGREEMENT does not comply with the requirements stated in sections 1-3, the agreement so made shall be unenforceable by the owner. • Note that the section makes it clear that it is the owner and not the hirer who is disabled from enforcing the agreement in the event of non-compliance with section 1-3. • Section 1(1) states: • where goods are let under a HIRE-PURCHASE AGREEMENT or sold under a CONDITIONAL SALE AGREEMENT, the owner or seller shall not be entitled to enforce the agreement unless the mandatory requirements are complied with. Therefore where the HIRE-PURCHASE AGREEMENT does not comply with the mandatory requirements stipulated in sections 1-3, the owner is not entitled to enforce the agreement against the hirer, but the hirer is allowed to enforce it against the owner. • Yayo v. Nyinase  1 GLR 422
CONSEQUENCES OF UNENFORCEABILITY; SECTION 1(2) • Section 1(2) of the Decree goes on to state the further consequences of the owner’s inability to enforce the HIRE-PURCHASE AGREEMENT. • WHERE the owner or seller is disentitled from enforcing the agreement; • he is also not entitled to enforce any contract of guarantee relating to that agreement.; • secondly, the owner cannot enforce any security given by the hirer or a guarantor in respect of money payable under the agreement;
thirdly, the owner or seller shall also not be entitled to enforce his right to recover that goods from the hirer or buyer. • These rules are designed to ensure that the owner’s compliance with the statutory requirements for the formation of a HIRE-PURCHASE AGREEMENT. These formal requirements are primarily designed to protect the hirer from possible fraud by the owner and also to ensure that the hirer receives all the pertinent information relating to the transaction. • The consequences of the owner’s failure to comply with the requirements appear to be very drastic. However, these consequences could be said o flow naturally from the fact that non-compliance with the statutory requirements renders the HIRE-PURCHASE AGREEMENT itself unenforceable. • Generally, a guarantor undertakes to pay a debt in the event of the principal debtor’s default. If it turns out that the agreement under which the debt was incurred is itself unenforceable, the contract of guarantee is also unenforceable. • Coutts & Co. v. Browne-Lecky & Others  KB 104
PROHIBITION OF SPECIFIED CLAUSES-SECTION 4 • For reasons of public policy, section 4 of the HIRE-PURCHASE AGREEMENT Decree stipulates that certain clauses, if contained in a HIRE-PURCHASE AGREEMENT or CONDITIONAL SALE AGREEMENT shall be void and of no effect. According to section 4 of the Decree, the following clauses, if included in the hire-purchase agreement or conditional sale agreement shall be disregarded
These prohibited clauses include the following; • any provision which confers on the owner the right or the authority to enter into any private land or premises for the purpose of taking possession of goods which have been let under a HIRE-PURCHASE AGREEMENT or sold under a CONDITIONAL SALE AGREEMENT; or any provision which relieves the owner from liability for any such entry. • [section 4(a)] • [This provision is important because of the statutory regulations which limit or control the owner’s right to recover the goods]
secondly, any provision which restricts or excludes the hirer’s right to terminate the HIRE-PURCHASE AGREEMENT which is conferred on the hirer by section 5 is also void and of no effect. [see section 4(b)] the owner is not allowed to impose any conditions on the hirer’s of termination or to exclude it entirely.
any provision which imposes on the hirer a liability upon termination which is greater than that stated in section 6 of the Decree is also void and of no effect. [Section 6 provides that upon termination, every hirer shall be liable to pay to the owner the difference between the total amount already paid and 50% of the hire-purchase price]. Any provision which requires the hirer to pay an amount of money, which exceeds this shall be void.[section 4(b)] Also section 6 stipulates certain liabilities with respect to the goods themselves-eg if the goods are damaged through the hirer’s failure to exercise reasonable care the hirer shall be liable to pay for such damage. Any provision which imposes on the hirer strict liability for the care of the goods upon termination, regardless of negligence would be void and of no effect. [e.g. provision which imposes on the hirer the liability for any damage caused to the goods with or without the negligence of the hirer]
Any provision which imposes on the hirer, in the event of the agreement being terminated in a manner different from that stated in section 5, a liability which is greater than that stated in section 6, shall also be void and of no effect. [Section 4(c)]. Section 5 stipulates that the hirer shall exercise his right of termination at any time before final payment is due, by tendering to the owner a written notice of his intention to terminate the agreement.
The effect of Section 4(c) therefore is to render void any provision in the HIRE-PURCHASE AGREEMENT or CONDITIONAL SALE AGREEEMENT which subjects the hirer to additional liability (than that stated in section 6) on the ground that the agreement was terminated in a manner different from that stated in section 5-for example, by the hirer’s breach. • Any provision whereby any person acting on behalf of the owner or seller in connection with the HIRE-PURCHASE AGREEMENT is deemed to be the agent of the hirer shall also be void and of no effect.[section 4(d)]
Section 4(d) must be read together with section 12 of the Decree which states clearly that with regard to any representation relating to the condition of the goods, made by a dealer or salesman to the hirer, the dealer or salesman shall be deemed to have made them as agent of ht seller or owner and not as as agent of the hirer or buyer.
Finally, section 4(e) renders void any provision which seeks to relieve the owner or seller from liability for acts of default of any person acting on his behalf in connection with the HPA or CSA. Section 4(d) and (e) are designed to render ineffective the device employed by owners to escape liability for misrepresentations and breaches of warranties made by dealers or salesmen acting on their behalf.