Hire Purchase

Many people drive cars and use equipment that they do not yet own. They pay for the goods in instalments, and the legal owner is a finance company or a dealer. That arrangement is hire purchase. The law treats it as something quite different from a sale, and it gives the hirer protections that a buyer on credit might not have.

Hire purchase appears in the exam almost every year, usually as a list question (the duties of the owner, the ways of terminating the agreement) or as a short problem about repossession.

This topic covers the nature of hire purchase and why it exists, the elements and form of the agreement under the Hire Purchase Act, the passing of ownership, the relevant proportion principle, the duties and rights of owner and hirer, the position of third parties, termination, and the remedies of the parties.

The nature of hire purchase

Definition

A contract of hire purchase is a contract in which the owner of goods transfers possession of them to the hirer in consideration of the payment of a certain amount periodically, which gives the hirer an option to purchase the goods at the end of the period or after paying the agreed instalments. In short it is a contract of hire of goods with an option to purchase. This was tested in November 2020 (2 marks) and November 2023.

• Until the hirer exercises the option, he has not bought the goods. All payments are rental payments.
• Even if the hirer decides not to exercise the option, the owner cannot refuse to sell once the hirer has paid all the instalments due.
• It starts as a lease and may crystallise into a purchase. During the hire, either party is free to terminate.

Andrew Hicks gave the illustration in his book Nigerian Law of Hire Purchase. A person who acquires a car under a hire purchase agreement may think he is buying it, but in law he is only hiring it while the instalments are paid. He is not the owner until payment is complete.

If the option to purchase is not genuinely optional, or if there is no right to end the hiring early, the transaction is not hire purchase, because there is effectively an obligation to buy.

Why parties use hire purchase

The syllabus gives three reasons for the system:

1. it allows credit to a person who cannot pay cash, who pays a deposit and then the balance in instalments at a stated rate of interest;
2. it is a third-party transaction: a finance company that neither owns nor produced the goods enters the agreement, so that the privity rules do not stand in the way; and
3. it makes possible evasion of the money lenders law.

The law grew out of the common law, to fill the gaps in the Factors Act and the Sale of Goods Act, and to prevent injustice to hirers. The Hire Purchase Act (Cap H4) advanced the hirer’s cause, and it gives definitions, form and contents.

Hire purchase and sale compared

November 2017 asked for the distinction between a contract of sale and hire purchase (5 marks). The consideration for hire purchase is the instalment payments (November 2020 Section A).

Elements and form of the agreement

The Hire Purchase Act requires that:

1. the owner must state in writing to the prospective hirer the cash price at which the goods may be purchased;
2. the amount of the instalments must be stated in the agreement;
3. the memorandum containing the cash price must be signed by the hirer and the owner or his authorised representative;
4. any term entitling the owner to enter the hirer’s premises to repossess the goods is void (section 3);
5. the owner must give information on the parties when required (section 7); and
6. the hirer has the power to terminate the agreement at any time before the final instalment and return the goods, failing which the owner may recover them by court action.

November 2023 asked for five elements of a hire purchase agreement (5 marks).

The hire purchase memorandum

One of the innovations of the Hire Purchase Act is the memorandum evidencing the agreement. November 2014 asked for two items it must contain (5 marks), and the examiners listed:

• the cash price, with the currency;
• the hire purchase price, which differs from the cash price and is the cash price plus interest;
• the dates of the instalments, so that the hirer knows when he may exercise his option;
• the deposit paid, so that the hirer knows the balance;
• the true rate of interest, so that the hirer can work out the total cost; and
• a list of the goods to which the agreement relates.

Passing of ownership

Passing of property is the moment when title moves from owner to purchaser. A hire purchase is not a sale from the beginning, so the question of passing of property does not arise until the hirer exercises his option to purchase. Property in the goods under a hire purchase agreement is in the owner until then (November 2014 Section A tested this).

The relevant proportion principle

The Hire Purchase Act sanctions the seizure of hire purchase goods without an order of court if it can be ascertained that a “relevant proportion” of the price has been paid. This page follows the current syllabus. (The November 2020 marking guide took the opposite view, that the owner must take legal action once the proportion is paid, so older answers may differ.) Section 9(4) defines the relevant proportion as:

• for goods other than motor vehicles, one-half of the price; and
• for motor vehicles, three-fifths of the total hire purchase price.

So under the current syllabus, once the hirer has paid the relevant proportion the owner may repossess the goods without going to court. A contract term allowing him to enter the hirer’s premises to do so is still void (section 3).

Under section 9(5), for motor vehicles, if the hirer owes three or more instalments, the owner may remove the vehicle to premises under his control pending the outcome of any action. He is liable to the hirer for any loss or damage from the removal. The hirer may terminate the agreement at any time before the final payment.

Duties and rights of the parties

Duties of the owner

These are implied terms under the Act. May 2018 asked for the owner’s rights and May 2024 for four duties of the owner. The owner must:

1. disclose the cash price of the goods to the hirer at the start;
2. have valid title to the goods;
3. give the hirer quiet possession;
4. deliver the goods to the hirer;
5. accept instalment payments;
6. deliver the exact quantity of goods agreed; and
7. not repossess the goods except as the Act permits.

Rights of the owner

1. to information about the goods from the hirer;
2. to repossess the goods where the hirer ends the agreement, by court action; and
3. to repossess a motor vehicle, for safety, even where a relevant proportion has been paid, without going to court.

Duties of the hirer

The hirer must: accept the goods; take reasonable care of them; pay the instalments as they fall due; and give the owner information about the goods when required. November 2015 Section A asked which are duties of the hirer, and May 2015 asked for them as a list.

Rights of the hirer

May 2016 asked for three rights, and May 2022 for two (6 marks). The hirer has the right to:

1. use the goods;
2. quiet possession and enjoyment of the goods;
3. know the exact instalments and the cash price; and
4. choose the insurance and the garage that maintains the goods or vehicle.

The third party in a hire purchase contract

As a general rule there is no privity between the parties to a hire purchase agreement and third parties. The hirer cannot pass valid title in the goods until he has purchased them. The exceptions are where:

1. the hirer sells the goods and immediately pays off the outstanding instalments, which exercises his option and validates what would have been a defective transfer;
2. the sale is by court order in execution of a writ of fieri facias;
3. the purchase was made in market overt, a public and legally constituted market; or
4. the owner is estopped by his conduct from denying the seller’s authority to sell, under the sale of goods law.

Rights against a third party who has no good title

May 2018 and November 2020 asked for the owner’s rights (Section A in November 2020: the owner may recover the goods from the third party). The owner may:

• recover the goods by peaceful means, or by an action for detinue, that is, a demand for return followed by refusal;
• recover the goods or sue for conversion or damages;
• claim damages for conversion where the third party has interfered with the owner’s or the hirer’s possession or use; and
• sue for negligence and recover damages.

Termination of the agreement

May 2021 (five ways, 6 marks), November 2022 (four), May 2023 (four) and May 2024 (four, 6 marks) asked for these. A hire purchase agreement ends by:

1. mutual agreement of the parties to rescind it;
2. performance of all the obligations under it;
3. a provision allowing the hirer to terminate at any stage, without prejudice to his option to purchase;
4. supervening circumstances such as fire, destruction or an act of God, outside the parties’ control;
5. repudiation by the aggrieved party, who may sue for breach of an express or implied term and also repudiate; or
6. an order or judgment of court for conversion or detinue, which may end the agreement.

Remedies for breach

The remedies are usually fixed by the terms of the agreement itself.

Remedies of the owner

1. Where the hirer ends the contract after taking delivery, the owner may sue for damages. Section 8 provides that the hirer is liable to pay what brings his total payment to one-half of the price.
2. If the owner retakes the goods because of the hirer’s breach, he is entitled to the true arrears of rental.
3. Where the hirer fails to take possession of the goods after the agreement, the owner may sue for damages at common law.

Remedies of the hirer

1. He may repudiate the contract.
2. Where the breach is a defect in the owner’s title, he may sue for damages and recover his deposit.

Working through the rules

Can the owner repossess without a court order?

The hirer’s liability on early termination

A bus costs ₦3,600,000 (taken here as the price) payable in ten monthly instalments of ₦360,000. The hirer pays two instalments (₦720,000) and ends the agreement. Under section 8 he is liable to pay what brings his total payment to one-half of the price. One-half is ₦1,800,000, so he must pay a further ₦1,080,000.

Property and risk

Worked problems

Problem 1: Ronke and the Nissan Micra

1. The rule. For a motor vehicle, the relevant proportion is three-fifths of the hire purchase price. The current syllabus says the Act sanctions seizure without a court order where it is ascertained that the relevant proportion has been paid.
2. The application. Three-fifths of ₦1,000,000 is ₦600,000. Ronke paid ₦900,000, so the relevant proportion has been paid. Fred seized the car in the street and did not enter her premises under a contract term.
3. Advice. On the current syllabus, Fred was entitled to repossess without a court order. Ronke should note that the older November 2020 marking guide advised that she could sue to recover her instalments, so if a question gives different instructions, follow them.

Problem 2: Kabir and the bus

1. Nature. It is a hire purchase agreement: hire of goods with an option to purchase, with ownership remaining in the owner until the last instalment and the option.
2. Ways to terminate. Mutual agreement; performance; a clause allowing the hirer to terminate; supervening circumstances; repudiation; and a court order.
3. Kabir’s position. He may terminate at any time before the final instalment and return the bus, but is liable to pay what brings his total payments to one-half of the price.

Problem 3: the hirer who sold the car

1. The rule. The hirer cannot pass valid title until he has purchased the goods.
2. The exceptions. If the hirer pays off the instalments immediately, he exercises the option and the sale is valid. A sale by court order, in market overt, or where the owner is estopped, also gives title. None appears here.
3. Advice. The owner may recover the car from Dele peacefully, or by an action for detinue or conversion. Dele may sue the hirer.

Problem 4: Bola’s rights

1. Rights. He may use the car, have quiet possession and enjoyment, know the exact instalments and the cash price, and choose his insurance and the garage that maintains the car.
2. Protections. The owner cannot enter his premises to repossess, and after the relevant proportion has been paid the owner needs a court order.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Using the older view that an owner always needs a court order once the proportion is paid. The current syllabus says seizure without a court order is sanctioned.
• Saying property passes to the hirer on delivery. It passes on exercise of the option after the last instalment.
• Calling the parties buyer and seller. They are owner and hirer.
• Mixing up the relevant proportions: one-half for goods, three-fifths for motor vehicles.
• Forgetting that an owner may not enter the hirer’s premises to repossess, and that such a term is void.
• Saying the hirer is bound to buy. He has an option, but the owner must sell once all instalments are paid.
• Saying the hirer can pass good title. He cannot, apart from the exceptions.
• Listing too few ways of termination. Learn all six.
• Applying the section 9(5) three-instalment rule to goods other than motor vehicles.

Quick revision

• Hire purchase: hire with option to buy. Property passes on exercise of the option after the last instalment.
• Act: written cash price and instalments, signed memorandum, premises-entry term void (s.3), information (s.7), hirer may terminate.
• Relevant proportion (s.9(4)): half; three-fifths for motor vehicles. Once it is paid, the syllabus allows seizure without a court order. Three or more instalments owed on a vehicle: owner may remove it (s.9(5)). Early termination: total payment to one-half (s.8).
• Owner’s duties: disclose cash price, title, quiet possession, deliver, accept instalments, exact quantity, no repossession except under the Act. Hirer’s duties: accept, care, pay, inform. Hirer’s rights: use, quiet possession, know price, choose insurance and garage.
• Termination: agreement, performance, termination clause, supervening events, repudiation, court order.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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