Through the following research paper it would be an attempt to do a deep study
on what are Hire Purchase Agreements? When and where they were first introduced
and implemented as a law, and how have these agreements evolved through time.
Furthermore, an insight of these agreements as observed in different countries
like India, United Kingdom, Malaysia and Australia will be done; the challenges
that occurred and the reforms that those countries underwent regarding the Hire
Purchase Agreements will also be recorded.
This analysis would lead to a studied
comparison of these agreements as observed in different parts of the world. The
next section of the paper would focus on the situation of Hire Purchase
agreements in the Indian law.
A detailed analysis will be done which would give
the clarification and answers to the following questions:
Which act introduced
and is responsible for governing the hire purchase agreements between the
parties? Which legal requirements as specified under different sets of laws are
needed to be fulfilled by the parties involved in these agreements? What
benefits do the hire purchase agreements provide to the individuals? What are
the disadvantages of these agreements? And lastly, how hire purchase agreements
are applicable in the contracts of bailment?
Hire purchase agreements refer to the arrangement between the owner of a good
and its hirer wherein the good is procured for a temporary period of time by the
hirer in exchange of monetary instalments with an opportunity of owning the
goods at the payment of all the instalments.
In other words, hire purchase are
the types of agreements under which the hirer takes the goods on bailment and
which he could either purchase the good or terminate the agreement at his
option, whether the title is to pass to him on payments of the instalments and
fulfilment of the conditions automatically or on the further exercise of option
by the hirer.
They were first introduced in 19th century England after
Industrial Revolution when for the first time sewing machines were sold through
hiring with an option to purchase and sooner these agreements were being entered
for almost all other consumer durable goods. The rapid growth in automobile
industries gave a new push to hire-purchase agreements and with a little
There began to be three parties in these transactions instead of
previous two i.e. owner and hirer; owners sold their goods to big financing
companies who later provided goods to the hirers. These agreements took place in
India for the first time during early twentieth century by a Madras-based Auto
Supply Company Ltd. (1920) which was later identified as Commercial Credit
Corporation. Between the period of 1920 to 1930, many more hire-purchase
companies initialised such as Motor and General Finance Company and Instalment
The post-war years witnessed a significant enhancement in
hire-purchase agreements incorporated in automobile and road transport
industries for procuring funds for commercial vehicles. Several committees such
as the Masani and James Raj committee have been set up by the government that
acknowledged and encouraged the role of hire-purchase agreements in road
transport and various other industries. 
Although the use of hire purchase agreements in the business and trade has
been immense but the legal aspect of it is unclear to masses and it is often
misunderstood with similar business transactions like that of a transaction of
sale and a transaction of credit sales. To understand the nature of Hire
Purchase agreements, it is necessary to be able to differentiate it with the
transaction of sales and credit sales.
The following section highlights the key differences among these
- Hire Purchase Agreements and Transaction of Sales-
In a transaction of sale, the ownership of good shifts from a seller to buyer
the moment transaction takes place irrespective of duration of payment while in
an agreement of Hire purchase, the ownership is not transferred at the time of
signing the contract but when all the instalment are paid and finally purchase
The second key difference is of the passage of property in the
chattels; in a normal transaction of sale, there is an immediate passage of
property while in a hire purchase agreement; there is no immediate passage and
it only passes when the purchase of good is exercised after all the terms of
agreement are met.
Further, the court in Sundaram Finance v. State of Kerala
stated that a ‘hire-purchase transaction is more complex than that of sale;
here the hirer is under no legal obligation to buy the goods; he has an option
either to return the goods, thus terminating payment of instalments and
forfeiting the amount already paid; or to become their owner by payment in full
of the stipulated hire and the price for exercising the option to
Whereas in the sale by instalments as stated by the court
in Lee v. Butler and Helby v. Matthews that the purchaser does not have the
option of returning the goods after the agreements as the possession of property
is already handed to him. He is legally liable to pay the rest of the instalments and do not have the right to terminate payment otherwise he would be
liable for breach of contract and payment of damages thereof.
The Supreme Court in Damodar Valley Corporation v. State of Bihar put
forward two tests to differentiate and determine whether a transaction is of
sales or of Hire-Purchase:
- Whether there is a binding obligation upon the hirer to purchase the
- Whether there is a right reserved to the hirer to return the goods at
any time during the subsistence of the contract.
It was held that if there was no binding obligation and such right was reserved,
then there was no contract of sale but rather, a hire-purchase agreement. In the
same case, it was stated that such an agreement confers no title upon the hirer,
but a mere option to purchase based on the fulfilment of certain conditions. 
- Hire Purchase agreements and sales on credit
In the case of hire purchase agreements, the hirer has the right to purchase the
goods on certain conditions and such right is not an obligation which means he
may either choose to purchase the goods on fulfilling certain conditions or he
may choose not to purchase it and thereby terminate the agreement. Whereas, in a
transaction of sales on credit the buyer has no such right to terminate the
agreement and if he does so then he would be held liable for breach of contract
and damages as ordered by court in Auto Supply Co. Vs Raghunath Chetti.
The Halsbury’s Laws of England puts forward a distinction among these two on the
basis of the capacity of transferring the goods held by the hirer. In an
agreement of sales on credit, the hirer possessing an obligation to buy the
goods is entitled with the authority to transfer the title of goods to a buyer
or pledgee without informing the rights of true owner. On the other hand, in the
case of hire-purchase agreements, the second buyer or pledgee can obtain only
the title of hirer and nothing else by paying the instalments for goods.
- Hire Purchase Agreements in different countries
The following section talks about the situation of hire purchase agreements,
there origin, transformation and implementation in different countries:
The main litigation that governs the hire-purchase agreements in
Malaysia is the Hire Purchase act 1967. An act which came in effect on 11th
April 1968 prior to which it was covered under the contracts act 1950. The
Malaysian market usually deals in a particular form of hire purchase agreements
that are specified in the act’s 1st schedule including all consumer goods and
motor vehicles ( from invalid carriages, motorcycles, motor cars including taxi
cabs and hire cabs, good vehicles on which the maximum permissible laden weight
does not exceed 2540 kilograms, and buses including stage buses).
Similarly, in Australia, Hire purchase is also recognised as
commercial hire purchase or corporate hire purchase (CHP) where such agreements
are commonly used by businesses to fund purchases or business equipment and
commercial vehicles. The 1918, National conference of Commissioners on Uniform
State Laws put forward a ‘Uniform Conditional Sales Act’ that gave regulations
of Hire-purchase agreements to be adopted by most of the states of Australia.
Later, the hire purchase act for Australia was introduced in 1959 and was
adopted in all the states and territories thereafter. However, every state of
Australia also enjoys a separate legislation for it on the matter of
hire-purchase agreements; the purpose being the same like that in India i.e.
providence of platform for giving relief to hirers against unconscionable and
unfair terms of agreements.
On the other hand, in Britain the hire purchase agreements
began to be observed around the nineteenth century and instead of performing the
statistical study of instalment amount and its varieties as directed by the
United Nations, United Kingdom used to collect sparse data from different
sources of hire purchases which was of no use due to no recording of trades and
theories at that time.
However, occasional trade estimates indicate very rapid
interwar growth and the study further estimates that hire purchase trading
increased in volume around 1918 and 1938. 38. HP was used by both consumers and
producers, though consumer HP was by far the most important, accounting for
around 84-87 per cent of turnover for the leading HP finance houses. Hire
purchase agreements sooner started covering more than 70 per cent of the sales
for cars and bicycles as stated by the data released by the board of Trade in
late 1930s. Prior to the 1938 Act, English HP agreements were governed only by
the common law and the terms of the contract.
The 1938 Hire Purchase Act passed through the Commons and Lords with almost no
parliamentary opposition and few trade objections concerning anything other than
its details.'26 The Act introduced a variety of safeguards; while traders
subsequently found ways of circumventing some of them, they were viewed at the
time as important reforms. Some were intended to ensure that the hirer was given
appropriate information, such as a copy of the agreement and written details of
the cash price and the amount and date of instalments.
Some conferred legal
rights to the purchaser, such as the right to free himself or herself of
liabilities under the contract (with some exceptions) if the goods were returned
and half the purchase price had been paid; protection from repossession (in the
absence of a court order) once a third of payments had been made; and the right
to have any court case heard in the area where the purchaser lived. Other
provisions limited certain abuses by vendors, such as making void the notorious
clauses which allowed the owner forcibly to enter the hirer's dwelling to
repossess goods, and which obviated liability for any statements or promises
made by the retailer.’
With the following clarification about the Hire purchase agreements, the
subsequent section will discuss the Hire Purchase Act as given under Indian
constitution and the relevance of the same in Indian trades.
Hire Purchase Agreements as under Indian Legislation
Special legislation for Hire-purchase agreements was needed in India and in
England for several purposes. Because firstly, the legislation would not only be
a regulatory statute but would also be a platform for providing relief and
settling disputes in certain cases like elimination of penal and exorbitant in a
situation where the hirer wants to terminate the agreement.
discretionary power of seizing the goods on default of instalments even after
payment of prerequisite amount in some cases resulted in exploitation and
injustice to hirers. These matters required for a separate legislation that
could provide guidelines and regulations for every circumstance that could
arouse in the path of hire purchase agreements.
Therefore, The Hire-Purchase Act
of 1972 was enacted for performing these functions. This act adopted several
declarations and guidelines provided in the legislations adopted by several
states of Australia. However, for the framing of this act, major preference was
given to the English Hire-purchase Act of 1938, the law commission’s report of
1961 pointed out some of the procedures that the Indian legislation should not
adopt for the better functioning and implementation of the act in Indian
These differences include:
- The first difference between the two is that the English legislation
includes the credit sales transaction under the Hire purchase act of 1938
whereas the same transaction of credit sales are not included in the hire
purchase act of 1972 but are given under sales of goods act of 1930.
- The English act imposes a maximum limit on which the legislation will
apply, that limit being 1000 pounds for transactions of livestock and 300
pounds in rest of the cases whereas there’s no such limit in the Indian act.
The reason for this as given under report for hire purchase in 1961 was that
India was about to enter into an era of industrial expansion and putting a
limit on these transaction would mean restriction on expansion of this
With these changes Hire purchase act of 1972 gave a new definition to the
hire-purchase agreements in its Section 2(C) that states ‘hire-purchase
agreement as an agreement under which goods are let on hire and under which the
hirer has an option to purchase them in accordance with the terms of the
The agreement between the parties is self explanatory in the sense that it
states the nature of the agreement, duties of the parties, duration and amount
of instalments, and the terms for termination of the agreement. These terms is
usually returning of goods by the hirer or notice of termination given by either
of the parties.
Apart from that, the agreement can be terminated by any of the following
Prior to payment of all the instalments, the hire-purchase agreement can be
terminated by exercising the option of purchasing the goods.
- Issuance of Notice:
The owner can terminate the agreement by issuing
notice in case of breach of any terms of agreement by the hirer and similarly
the notice for termination can be given by the hirer.
Hire-purchase agreement can be terminated by the parties if they
decide to enter into a new agreement and thus renewing the agreement between
One party of the agreement can release the other from the
obligations given to him as per the agreement, thus termination the contract.
If either of the party fails to perform his obligations or
renounces his future obligations which indicates his reluctance to the
agreement, and if the same is accepted by the other party then the agreement
If a situation occurs before the formation of agreement
where it becomes difficult to perform the obligations, then the parties get
discharged from their duties and the agreement gets terminated. Fr ex- if the
good that is being hired gets destroyed due to some event or act with no
negligence on part of hirer then the agreement between the parties will get
- Expiration of time period:
The agreement will automatically get terminated if the hirer does not
exercise his option of purchase in the stated time period as decided in the
The act also provides for relief to parties in case of breach of agreement.
Under section 21 of the act, the hirer is provided with the relief of
non-payment of hire in case of termination of the hire-purchase agreement by the
owner of the good as according to section 18 of the act. Section 22 of the
Hire-purchase act provides relief against termination for unauthorised act or
breach of express condition as stated in the clauses and sub clauses of the
section. The reliefs provided to the owner include recovery of goods,
abandoning of claims of ownership or any other right over goods by the other
party and an opportunity of claiming damages.
Disadvantages of the Hire-purchase agreements
- Cost of procuring goods by entering into a hire-purchase agreement
becomes more than the cost of goods paid in a usual transaction of sales.
- The hirer does not get the absolute ownership over the goods in these
transactions till the full payment and owner has the power to repossess the
good at a single incident of default of payment.
- The duration of such agreements is very long and the hirer might not
remain in the same financial condition so as to afford the payment of
installments in this time duration.
- The cost of entering into hire-purchase agreement also makes the
transaction difficult as it is usually more than the amount of installments.
- If the good gets damage in the duration of its functioning, the hirer
cannot claim for insurance money even if the good is insured as he does not
have the ownership right over the good, and in the meantime the cost of
damage also gets add up in the remaining amount of instalment due.
Through the following paper, the journey of hire-purchase agreements from its
origin in 19th century Britain to the Hire-Purchase Act of 1972 has been
studied. The need for such legislation was very much important to provide for
grievance redressal platform to the hirers and repossession of good to the
owners at the same time. The act was enacted after adopting the salient features
from the legislations of different nations namely United Kingdom, Australia and
However, the disadvantages of these agreements that have been
mentioned and discussed in this paper still persist which ring the bells on the
minds of law makers and legal analyst that there is still a need for making
amendments and give forward a reformed version of laws that could make the
functioning of a hire purchase agreements easier and more accessible to the
individuals and businesses in India and worldwide.
- 20th Report. Law Commission of India, 1961
- Asthana, Subodh. 2019. “Analysis and Explanation of Hire Purchase
Agreement.” IPleaders. June 8, 2019. https://blog.ipleaders.in/analysis-hire-purchase-agmt/.
- Sundaram Finance v. State of Kerala 1966 AIR 1178, 1966 SCR (2) 828
- Damodar Valley Corporation v. State of Bihar, 1961 AIR 440, 1961 SCR (2)
- Auto Supply Co. Vs Raghunath Chetti121 Ind Cas 593, (1929) 57 MLJ 618
- Scott, Peter. 2002. “The Twilight World of Interwar British Hire
Purchase.” Past & Present, no. 177: 195–225. https://www.jstor.org/stable/pdf/3600882.pdf
- Section 2(c), Hire Purchase Act, 1972
- Hire Purchase Agreements. n.d. Latest Laws.. https://www.latestlaws.com/library/legal-documents/hire-purchase
- Section 21, Hire Purchase Act, 1972
- Section 22, Hire Purchase Act, 1972
- Hire Purchase Agreement: An Analysis of the Essentials & Parties to It.
IPleaders. February 14, 2020. https://blog.ipleaders.in/hire-purchase