In a Hire Purchase Agreement, the owner hires goods to the hirer with an option to purchase the goods when he has made the payment of a certain sum. By this system, the purchaser who is unable to pay the full price of the asset at one lump sum gets facilities to acquire an asset and after making the payment of an initial amount called premium, the purchaser pays the balance consideration money in installments. After the payment of all the installments, the property in the goods passes to the hirer. The hirer has an option to return the goods during the period of hire. In a Hire – Purchase Agreement, the hirer has the right to terminate the agreement for hire at his pleasure and is not bound to pay the value of the goods.
Hire Purchase is governed by the Hire Purchase Act In 1972. Hire Purchase agreements are of two types. In the first type goods are purchased by the financier from the dealer and the financier enters into a Hire Purchase Agreement with the customer, under which the customer becomes the owner after paying all the installments for the goods. In the second type of Hire Purchase, the customer purchases the goods and he executes a Hire Purchase Agreement with the financier in which he remains in possession of goods, subject to the payments by the customer to the financier. The financier has the right to seize the goods in the event that the customer fails to fulfill the condition of repaying the financier.
Generally in the case of Hire Purchase Agreements entered into between the hirer and the financier the agreement has to fulfill the legal requirements of the Indian Contract Act 1872 and the Sale of Goods Act 1930. Under the Indian Contract Act the provision of hire purchase is covered in chapter 9 of the Indian Contract Act. A Hire Purchase Agreement is a contact of bailment. In case of breach of Hire Purchase Agreement the owner is entitled to (i) recover the goods by physical repossession or (ii) abandon any claim to the goods and sue for damages.
When the hirer defaults in payment of installments the owner may resume repossession of the goods. However, the use of force while repossessing is not allowed. Use of physical force for resuming physical possession of the goods can result in a criminal action. Possession of goods can be taken by approaching a civil court. In the event that the owner decides not to repossess the goods it has the option to claim damages.
Stamp duty on Hire Purchase Agreement is payable under Article 5 Schedule 1 of the Stamp Act. Registration of Hire Purchase Agreement is not necessary.