It is a familiar experience for everyone to wish to possess something and to be unable to find the money to buy it. It may be impossible to save enough to buy a car, scooter, or radio for one’s private use, or a lorry, sewing machine or printing press for one’s business. Therefore a buyer of goods may agree with the seller that they shall be paid for by instalments over a period of time instead of paying the full cash price immediately. In such cases the seller has agreed to give credit to the consumer by accepting late payment.
A purchase may also be made with the help of a loan, perhaps from a bank or very often from one’s employer. The seller is paid the full cash price of the goods immediately and the consumer then repays his bank or employer over a period of time. In this case the seller does not give credit to the consumer and the transaction is an ordinary cash sale. Such loan agreements between a buyer and his bank or employer are not within the subject of this book.
In a typical hire-purchase transaction, or in any other sale on credit terms, the seller sells the goods to the buyer, who pays a deposit towards payment of the price and then takes possession (i.e. physical custody) of the goods. The buyer uses the goods as his own while paying off the rest of the price, perhaps by monthly instalments over two years. As the seller is deprived of the use of his capital while the price is not fully paid, he will charge interest as a percentage on the amount unpaid.
Alternatively the astute seller may not want to part with his capital for so long and will refuse to give credit to the buyer. In this case a finance company’ may provide the capital for the purchase in the following way. The buyer selects the goods he wants at the seller’s business premises. He then completes a proposal form which is an application to the finance company for the provision of money to finance his purchase. If satisfied .with the financial standing of the buyer, the finance company will then ask him to enter into a written agreement with them, either to acquire on hire-purchase or to buy the goods on credit direct from them. When the agreement is signed the finance
‘In Nigeria, Bentworth Finance (Nig.) Ltd. appears most often in the law reports. United Dominions Corporation (Nig.) Ltd. has also litigated a reported case, while other perhaps smaller finance companies are also at present doing business
company will itself buy the goods from the seller, paying him the full cash price for them. Having done this, it will then hand over the goods to the buyer for his own use. The buyer will pay the agreed instalments direct to the finance company, together with interest and charges for documentation and services as agreed. It can be seen, therefore, that the buyer acquires the
– goods not from the original seller but direct from the finance company itself.
By this system the seller will have received from the finance company full payment in cash, the buyer has immediate use and enjoyment of the goods, even though he had not saved the money, and the finance company has entered into a lucrative finance agreement. (A typical agreement is reproduced in the Appendix to this book.) in Nigeria, although there are several finance companies, it is more often the original seller such as a car or lorry dealer who enters into a credit agreement with the buyer?
Sometimes a trader or finance company is not confident that the buyer will be able to make the necessary repayments. The buyer may therefore be asked to find someone to guarantee payment of the instalments. A friend, a business associate, or the buyer’s bank, may sign as guarantor of the agreement. Where a finance company is involved, it may be the dealer who is asked to guarantee the buyer’s performance of the agreement. If the buyer then fails to pay at any time, the guarantor may find himself personally liable to make the payments instead. The seller can thus go some way to protect himself from non-payment by the buyer.
This book will introduce the law dealing with instalment credit agreements such as hire-purchase and credit-sale (which is part of the law sometimes known as “consumer credit”) and in particular will examine the provisions of the Nigerian hire-purchase legislation.
THE NATURE OP Huts-PURCHASE
A person entering into a hire-purchase agreement for the acquisition of a car may imagine that he is buying the car and that it becomes his as soon as he takes delivery and begins to pay instalments. The legal nature of the agreement is very different, however, as he is in law not purchasing the car but is only hiring it while the instalments are being paid. Furthermore, he does not become the owner of the car until payments is complete. In one type of hire purchase agreements the car becomes his when, having paid off the instalments, he exerciser an “option to purchase” contained in the agreement, by
Paying a small option fee.’ In the other type of agreement he may at any time terminate the hiring, but if he does not do so the car becomes his when he actually completes the instalment payments. If the option to purchase is not genuinely optional or if there is no right to terminate prematurely the hiring and repayment, the transaction is not a hire-purchase as there is effectively an obligation to buy. Such an agreement is a sale on credit whose legal consequences, as will’ be seen presently, are significantly different from those of hire-purchase.
As hire-purchase is not a contract of sale and purchase but of hiring, the parties to the agreement are not called seller and buyer but owner and hirer. A car dealer who disposes of cars on hire-purchase is therefore called the owner and the acquirer of the car is the hirer. This terminology is essential to the subject and will be used from here on.
A hire-purchase agreement is a contract of hire paid for by instalments under which the hirer may become the owner of the goods if he completes payment of the hire-purchase price. Although he may stop paying and return the goods if something goes wrong, the hirer almost invariably intends to pay for and purchase the goods. If, however, the agreement obliges the hirer to purchase the car it is a sale, not a hire-purchase. The fact that the parties call it a hire-purchase agreement makes no difference; it is still a sale.” Such sales where payment is postponed, called “credit-sales”, will be considered later.
In hire-purchase agreements the hirer has immediate possession and use of the goods but does not have property in the goods (i.e. does not own them) until the instalments are fully paid and the option exercised. The reasons why the peculiar legal device of hire-purchase has developed in this way can best be understood by examining the leading case of Helby V. Matthews and then comparing it with other types of credit transactions.
Hire-purchase was not created by parliament but was a convenient form of agreement which became so widely used by traders selling on credit that it soon became a recognised legal device closely defined and regulated by the courts. The advantage to an owner of the hire-purchase type of agreement was not settled until the case of Helby. Matthews in 1895. In that case, Helby, a piano owner, disposed of a piano to one Brewster who signed an agreement to hire it for a certain period at the end of which, having duly paid the instalments, it would become his. A clause in the agreement read as follows: “The owner agrees:- A. That the hirer may terminate the hiring by delivering up to the owner the said instrument.” In other words, at any time, Brewster, the hirer, could hand back the piano to the owner and stop paying the instalments. If he completed the payments, the piano would become his.
It happened that before all the instalments had been paid Brewster pledged” the piano to a third party called Matthews, from whom Helby then tried to recover it. Matthews claimed that Brewster had transferred a good title to him as pledge, and that he was entitled to retain it. Section 21 of the Sale of Goods Act 189312 lays down the general rule that a non-owner (such as Brewster) has no power to transfer any title to goods to a purchaser. Matthews, however, argued that by section 9 of the Factors Act I882’ if a purchaser who has agreed to buy goods but has not yet become the owner of them, sells or pledges the goods and delivers them to another person, that person will take a good title to the goods, if he took them in good faith, not knowing that the seller was not entitled to sell.” The court agreed that Brewster was a non-owner who had pledged and delivered the goods, but it did not accept that he had agreed to buy them as he could at any time terminate the agreement and send them back to the owner. Section 9 did not therefore empower him to transfer a good title to Matthews who accordingly was obliged to return them to Helby the owner.’
Furthermore, the court said that the Sale of Goods Act does not apply to such hire-purchase agreements at all for the similar reason that the act applies only to transactions in which the seller transfers or agrees to transfer the property in goods to the buyer.’ The law applicable was the common law whose general rule is that a non-owner such as a hirer cannot pass title in goods to a third party.’ An owner letting goods on hire-purchase can there fore be sure that if the hirer sells the goods he can usually recover them or claim damages from the person who buys them from him,’ as the hirer is not empowered to transfer any tide to another person.
The position is different if the transaction is not in strict law a hire- purchase but is a sale or agreement to sell on credit terms, for the reason that the person acquiring the goods is obliged to complete the agreement and pay for them in full. In such a sale the seller transfers or agrees to transfer the property in goods to the buyer, and therefore the Sale of Goods Act 1893 applies in full. By section 25(2) of that act or section 9 of the Factors Act, a credit purchaser who sells the goods before they have become his can pass a good title to the third party who buys them in good faith. This is because in the terms of these sections the credit purchaser has bought or agreed to buy the goods and not merely to hire them. The subsequent buyer may therefore get a good title, and the owner can not recover them from him. Helby v. Matthew settled the law to the advantage of the owner in cases of hire-purchase be not credit-sale) that if the hirer, for instance, stops paying instalments the owner may be able to recover the goods even though the hirer has sold and delivered them to an innocent buyer. Clearly this is an attractive advantage to the owner disposing of goods on credit terms. Every trader selling goods on credit knows that he runs the risk that he will not be paid and that he will be unable to recover the goods. Once he has delivered the goods to the buyer a credit seller will normally only be able to sue in the courts for payment of the price. A suit in the court is inevitably slow and expensive, and even when the seller obtains a judgement for the money owing, the buyer will probably be unable to pay, as shortage of ready money is a usual attribute of credit purchasers. It is often important, therefore, for the trader disposing of goods on credit to be able to have some legal right to recover the goods from the buyer or from a subsequent purchaser in case the buyer fails to pay instalments promptly. This is why hire-purchase can be advantageous because if the hirer defaults in his payments the terms of the agreement will enable the owner to repossess the goods from the hirer. The owner can avail himself of the simple remedy of seizing the goods, or suing for possession or damages, and is not confined to suing for the price. Even if the hirer has sold the goods, the owner may still be able to recover them or claim damages from the unfortunate buyer.
The problem in instalment credit agreements where a seller hands over the goods and agrees to accept payment of the price at a later date is that he risks not being paid and losing the goods. What he needs is some sort of security over the goods, a right to recover some of his loss by repossessing the goods when the buyer fails to pay. The hire-purchase type of agreement gives the owner such a right, though this is not the only reason why hire-purchase became popular with traders engaging in credit transactions. The other reasons will be made clearer by examining a number of other ways in which goods may be sold on credit terms, and by comparing their respective advantages and disadvantages with those of hire-purchase.