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Hire-purchase agreements are required to -

1. the hire-purchase price, i.e., the total sum payable by a hirer under a hire-purchase agreement in order to complete the purchase of the goods, [sec.3 (b)];
2. cash price of the goods, i.e., the price at which the goods may be purchased by the hirer for cash;
3. deposit;
4. identification of the goods hired
5. the information as per the Schedule to the Act containing important rights of the hirer. [Sec. 3 (2)]

The following shall be implied as conditions/warranties in a hire-purchase agreement :

Implied warranties. - Notwithstanding anything contained in the hire-purchase agreement, there shall be an implied warranty -

1. as to quiet possession of the goods by the hirer;
2. that the goods shall be free from any charge or encumbrance in favour of any third party at the time when the property is to pass. [Sec. 4]

Implied conditions.- The following conditions shall be implied notwithstanding anything in the contract:-

1. as regards the defects of which the owner could not reasonably have been aware at the time when the agreement was made, or
2. as regards defects specified in the agreement, or
3. where the hire has examined the goods, or a sample thereof, as regards defects which the examination ought to have revealed, or
4. if the goods are second-hand goods and the agreement mentions this fact. [ Sec. 4 (2) ]

1. has made known to the owner the particular purpose for which the goods are required, or
2. in the course of any antecedent negotiations has made known the purpose to any other person by whom the negotiations were conducted. [Sec. 4 (3)]

These conditions are by and large similar to the provisions of the UK Hire-purchase Act. There is a long history of rulings under the UK Act or analogous provisions both in UK and outside.

One of the most significant provisions of the above section is the implied condition of fitness and merchantable quality. Read literally, this would mean, for example, that where a hire-purchase company hires out a TV to a hirer, it is the obligation of the hire vendor to ensure that the TV is functional, and satisfies the promises made by the TV vendor. This would, however, exposure the hire-purchase company to absolutely uncontrollable risks, since there is no way the hire-purchase company ensure compliance with the supplier's conditions and warranties, and that too, given the fact that the hirer himself is given full liberty of selecting both the supplier and the product.

Therefore, when it comes to financial hire-purchase transactions, where the hirer is the one who selects both the product and the product supplier, the condition of fitness, quality, or performance of goods can be excluded by an exclusions clause. English courts have discussed this issue at length and the deciding principles were settled in Astley Industrial Trust v. Grimley. The exclusion is premised on the principle that if the hirer's selection of both the product and the product supplier has not been influenced by any representation made by the finance company, there is no way the finance company can be charged or implicated for breach of a condition.

The provisions of the Unfair Contract Terms Act will not come in the way of such an exclusion clause.

Section 5 empowers the Govt. by notification, to regulate statutory charges, i.e., maximum finance charges on hire-purchase transactions. The Govt shall have regard to the prevailing interest rates in the economy while fixing such limit.

This is again a common feature of the UK law, Indian law and Australian law.

The rate of hire-purchase charge limited by the law is what is commonly known as the flat rate, that is, the rate to be charged on the net cash price, that is, the cash price less the deposit.

Obviously enough, this restriction is antiquated, as the flat rate of finance charges has no meaning. With innovative structuring of the hire instalments and the deposit, the flat rate can be brought down. However, the anomaly here is that the law does not make any distinction between a down payment and a deposit, such that even in case of a refundable deposit, the cash price will be reduced by the amount of deposit, which is not the intent of the lawmaker.

The hirer has the following rights, viz.-

1. Option to purchase the goods at any time during the continuance of the agreement after giving the owner not less than 14 days' notice by paying the balance of the hire-purchase price less a rebate equal to 2/3rds of the unpaid hire-purchase charges.[sec.7].
2. Right to terminate the agreement by returning the goods and giving at least 14 days time plus paying the penal charges as provided in the agreement subject to the maximum prescribed in the Act. [sec.8].
3. The hirer may assign his right, title and interest under the hire-purchase agreement with the consent of the owner, and without the owner's consent, if the owner unreasonably withholds such consent. [sec.10].
4. Where the owner seizes the goods let under a hire-purchase, the hirer may recover from the owner the difference between the hire-price already paid plus the value of goods on the date of seizure and the hire-purchase price. [sec.16].

Each of these rights are significant rights and they need some elaboration.

This is a significant feature of hire-purchase contracts, which are statutorily cancellable. The hirer may terminate the hiring the buy up the goods by paying the balance of the hire-purchase price, less the rebate equal to 2/3rds of the remaining finance charges. The idea of rebate is basically to exclude the finance charges element inherent in future instalments. The 1/3rds of the finance charges which is not allowed as the rebate is, therefore, the penalty charged by the financier for pre-mature termination.

This law also, dating back as it does to the early history of hire-purchase, is unscientific and illogical. Logically, the penalty for termination should be maximum if the termination takes place early in the life of the transaction, because the underlying unrecovered investment is high, and the termination takes place soon after investing money into the transaction. However, since the law spreads the finance charges equally over the term (while in actuality, the inherent finance charges are front-heavy: more to begin with and lesser as the time proceeds), and allows a uniform rebate all through, it leads to an absolutely dichotomous situation as illustrated in the Table below:

Taking a net cash price of Rs. 1000/- and a finance charge of 10% flat for 2 years, the Table below illustrates how the rebate worked on a flat basis results into an extremely anomalous IRR to foreclosure, that is, the rate of return actually earned after charging the foreclosure amount. One may see such IRR to foreclosure being very high in the beginning, going below the original IRR during the middle of the contract and limping back to the original IRR towards the end of the contract. Since it is very unlikely that a foreclosure will take place soon after the deal is done, there is a loss over the original contracted IRR if rebate is calculated as per the formula. That is to say, while the hirer coming for a premature settlement should be put to a penalty for not having carried through the term of the agreement, he is actually being rewarded with a discount on principal.

Notice that the actual IRR in the transaction, carried to its length, is 18.16%, whereas the foreclosure in say, 15^th month, pulls the IRR to as low as 15.43%. This implies that the rebate calculated as per formula exceeds the actual interest future as per the IRR method - this can be seen from the last column of the Table above.

The anomaly as above is the result of the faulty spreading of interest under the straight-line method.

The following graph shows the position of interest spread as per the straight-line method and the actual spreading of interest under the IRR method: the difference is obvious.

This provision of the Act has the effect of shifting to the finance company the entire risk of obsolescence of the asset.

In a usual non-cancellable lease or hire-purchase agreement, the finance company keeps itself limited to only financial risks and does not take any asset-based risks. The transactions is non-cancellable till it is full payout.

The provisions of the Act confer on the hirer an unfettered, unconditional right of termination by returning the goods. The only conditions attached are two:

1. A 14 days' notice; and
2. In case half of the hire-purchase price has not been paid, the hirer may be required to pay a penalty equal to the difference between half of the hire-purchase price and the sum already paid by him.

Notably, "hire-purchase price" includes down payment. Thus, inclusive of the down payment or initial deposit, if the total amount paid by the hirer is already 50% or above of the price payable by him, there is every right with the hirer to return the goods without any penalty.

The above right of the hirer becomes a significant asset-based risk in cases (a) where the item is subject to fast obsolescence or has a new-brand appeal (for example, in case of cars), or where the initial down payment taken by the company is not adequate to cover a possible gap between the value of the goods and the amount outstanding under the contract at any point of time.

In present World of fast obsolescence and consumerism, consumers may be tempted to change their brands entirely at the cost of the finance company. This is what is the feature of an operating lease: the finance company bears the risk of obsolescence. The Act equates a hire-purchase with an operating lease.

Since the risk of obsolescence is a very significant business risk, a finance company must try to adequately protect itself against such risks. The only possible way to protect against such risk is the structuring of a down payment, which should be carefully calculated to fully cover, at any point of time, the gap between the value of the goods and the amount of investment outstanding.

Right of assignment:

Financial contracts are generally personal contracts: the right of assignment of financial contracts is not allowed. Sec. 10 of the Act, allowing the hirer right of assignment makes hire-purchase an impersonal contract. It is almost like taking a risk in the asset, no matter who the user of the asset is. This is what is referred to as asset-based funding, irrespective of the credit of the client.

Though there is a provision for seeking the consent of the Owner, the owner is not allowed to unreasonably withhold his consent.

One of the reasons which the owner may like to stipulate clearly in the contract is the credit worthiness of the client. The owner may stipulate that the hirer shall not have a right of assignment, unless the owner is satisfied with the credit worthiness of the customer.

Right of refund of the excess realisation over hire-purchase price:

Section 16 puts the owner in a position of no profit over the hire-purchase price, in case of a repossession. He, at the same time, stands to a position of loss in case the hirer returns the goods to the owner with a value substantially lesser than the outstanding investment.

The basic provisions in this section are analogous to sec. 17 of the Indian Hire-purchase Act.

What this section means is that the total amount realised by the financier on account of hire-purchase price, plus the value of the goods, cannot exceed the total hire-purchase price as per contract. Notably, the total hire-purchase price as per contract does not include damages or compensation for breach of contract. Apparently therefore, the hire-purchase price does not include overdue interest also. This means that the financier cannot seek to recover his overdue interest by taking a repossession action. This only throws a significant accounting rule: the financier must first give credit for expenses and overdue interest, before giving credit for the hire-purchase price.

The following examples can be taken to illustrate the meaning of this provision:

1. Hire instalment Rs. 1000 per month for 36 months (total Rs. 36000/-). Paid for 20 months. Repossession takes place in 26^th month and the value of the goods (net of expenses for repossession, sale, repairs, etc.) is Rs. 20000/-. The Owner is required to refund [hire price paid Rs. 20000 +value of goods Rs. 20000 - Total hire-purchase price Rs. 36000] Rs. 4000/-, that is, he takes to his credit Rs. 6000/- on account of overdue interest and expenses.
2. Hire instalment Rs. 1000 per month for 36 months (total Rs. 36000/-). Paid for 20 months. Repossession takes place in 26^th month and the value of the goods (net of expenses for repossession, sale, repairs, etc.) is Rs. 10000/-. The Owner is allowed to claim [hire price paid Rs. 20000 +value of goods Rs. 10000 - Total hire-purchase price Rs. 36000] Rs. 6000/- under the law.

Since the essence of this rule also lies in ensuring that the Owner does not end up making a profit over the hire-purchase price, it only ensures recovery of the hire-purchase price. As the transaction matures, the total amount of hire-purchase price payable under contract tends towards the maximum amount receivable under this section, and therefore, the repossessions that take place close to natural expiry of the contract period may be less profitable than those towards the beginning.

The hirer has the following obligations, viz.-

1. To pay the hire in accordance with the agreement.
2. Otherwise to comply with the terms of the agreement. [Sec. 12]
3. To take as much care of the goods as a man of ordinary prudence would take of his own goods. [sec.13].
4. If he puts the goods to any use not permitted by the agreement, he shall compensate the owner for any damage from such user.[sec.14].
5. To inform the owner of the location of the goods. [sec. 15].

The owner has the following rights, viz. -

1. A right to determinate the agreement where a hirer makes more than one default in payment of the hire. [sec. 18(1)].
2. A right to terminate the agreement where the hirer does any act with regard to the goods which is inconsistent with any of the terms of the agreement, or breaks any express condition on the breach of which the owner is entitled to terminate the agreement. [sec. 18(2)].
3. On termination to have the following rights, i.e. -

1. to forfeit the initial deposit;
2. to enter the premises of the hirer and seize the goods;
3. to recover possession of the goods by application to a Court;
4. to claim damages for the time elapsing between termination of the agreement and actual delivery of goods to the owner. [sec. 19].

The most significant right of the Owner is the right of repossession. Very stringent limitations have been put under the Act on right of repossession. These are discussed separately below.

The provisions regarding repossession and re-sale of the asset are contained in sections 16, 18, 19, 20 and 21. These are extremely important provisions as the basic right of the Owner on the property let out by him is affected by these provisions.

The basic right of repossession is conferred by sec. 18, subject to sec. 20. Except in the cases covered by sec. 20, the Owner has a right of taking a "self-help repossession", that is, repossessing the goods directly without judicial intervention. Of course, the right of the hirer to sell the goods and realise the proceeds is also regulated.

The right of repossession of hired goods is a fundamental right of the Owner. In India, the Supreme Court recently held in the case of K A Mathai that the right of taking back hired goods is a fundamental property right which should be protected in all eventualities.

The conditions in which the action for repossession can be taken are as follows:

1. Non-payment of more than one hire instalment, upon 14 days' notice;
2. Doing of an act inconsistent with the terms of the agreement, upon 30 days' notice;
3. Breach of any condition mentioned in the agreement as triggering the right of repossession, upon 30 days' notice.

In case 2 and 3 above, the Owner in the notice must also require the hirer to remedy the act or breach, failing which the right of repossession will arise.

It is notable that the Act requires termination of the hiring before an action for repossession can be taken. "Termination of the hiring" is not the same as "termination of the agreement" - it only means the right of possession and use granted under the agreement is terminated. Naturally, with the termination of the hiring, all amounts payable under the agreement on account of periodical hire will cease to accrue - this is clear from proviso to sec. 20 (1) and sec. 20 (2) of the Act.

Repossession without the help of the Court can be taken where at least 75% of the hire-purchase price has not been paid. Where 75% or more of the hire-purchase price has been paid, action for repossession, that is, Court proceedings are compulsory. Note that the hire-purchase price includes the down payment - therefore, inclusive of the down payment, if the hirer has already paid 75 % of the hire-purchase price, he can safely bask under the protection of the Act, and Court actions take their own time.

Not only will the owner not repossess the goods without the help of the Court, having initiated any action for repossession, the Owner will also not take any proceedings against the hirer for realisation of any of the sums payable under the agreement - sec. 21. The procedure for taking action against the hirer, for registered finance companies, is contained in the Debt Recovery (Special provisions) Act, 1998.

Sec. 16 sets out the statutory provisions for sale of repossessed goods. As the Owner is under obligation to account for the "best sale price" for repossessed goods realised by him, he must be able to establish that he has obtained the best price, for which the onus is upon him - sec. 16 (5). The law requires that the Owner must, within 30 days of repossession, advertise for the best bids in newspapers in English, Sinhala and Tamil. The Hirer may still dispute the value determined as above in which case the person mentioned in the agreement will determine the value - this underscores the significance of a strong arbitration clause in the agreement.

This apart, another significant limitation is set in sec. 29 (a) - there is no power of entry into the residence of the hirer for the purposes of repossession. This significantly reduces the property rights of the Owner on goods which are unlawfully being retained by the hirer.

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