National University of Lesotho

L3309 – Law of Special Contracts

Lesson 3 Notes – Law of Hire Purchase

Two main forms of hire purchase are:

a. Pactum reservati domini (hire purchase contract)

This type of agreement involves a sale of reservation of ownership.

This type is very common and here the seller allows the buyer to

take possession of the goods sold but retains ownership until all the

due instalments are paid. Ownership is reserved with the owner until

the buyer has paid off the goods. The retention of ownership

provides the seller with the security for the unpaid portion of the

price. These transactions are described by the hire purchase Act as

hire purchase agreements.

b. SALE WITH A REVERSION OF OWNERSHIP (INSTALMENT

SALE AGREEMENT).

Here both possession and ownership pass to the buyer but the sale

is subject to resolutive condition that the ownership shall revert to

the seller I the event that of the buyer being unable to fully pay off
 (is at default). The Hire Purchase Act describes such transactions as

instalment sale agreements. In this kind of transaction, the seller

can prohibit the buyer from dealing with the goods sold without his

approval. Furthermore, the agreement may provide that should the

buyer breach the clause, the full purchase price shall become

immediately payable.

Notwithstanding these, the difference between hire purchase

agreement and instalment agreement is that with the latter, the seller

may pass title in the goods under certain circumstances that the

buyer agrees to adhere to.

Example 1

Suppose Thabo purchases a stove under a contract of hire purchase

from company X. He then sells it to his neighbor the notorious Mr

John Vuli Gate who does not know of the hire purchase

agreement/transaction. Company X as the owner of the under

puctum reservati dominii will be entitled to recover it from John

Vuli Gate if the Thabo has not paid all the instalments due. If
 however Thabo purchased the stove under a “sale with reversion of

ownership” Company X will not be entitled to recover the goods

from John if he purchased in good faith, for value and without

notice. But if Thabo’s sale to John “Pisotolo” (as he normally calls

him) falls under one of the nemo dat rule exceptions, John will be

entitled to retain the goods even if Thabo has not paid all the

instalments.

Both types show two common characteristics:

a) Immediate delivery of the goods to the buyer.

b) Grant of credit by the seller to the buyer for the purchase price.

In both the types, there may be a clause in the contract which

entitles the seller to cancel the contract on default of payment of

any instalment on the due date. Such a clause is called a lex

commissoria. It is often accompanied by a penalty clause entitling

the seller, on cancellation, to retain instalments already paid and

even to claim those that are in arrears. Such a penalty clause may

be valid in common law hire purchase agreement but it may not

will follow.

LEGAL NATURE

The usual form of a hire purchase agreement provides for the

retention of ownership in the goods sold with the seller. There has

been some controversy in South Africa if it is legally permissble to

retain ownership by the seller in any contract of sale. Hire Purchase,

it is argued, is only a species of a contract of sale.

Puctum Reservati domini is basically a device to protect the seller

who sells his goods on credit. The legal validioty of such a device

has been accepted both by the courts and section 6(1)g of the Hire

Purchase Act. Under common law, so long as both the seller and

buyer have agreed on the pactum reservati domini in the sense that

it clearly reflects the common intention of the parties, the clause is

valid and binding. As far as the Hire Purchase Act is concerned,

parties must specifically include such as provision in the agreement

(section 6(1)g).
A regards to the legal effect of such as clause, there two views. Some

argue that pactum clause is akin to a suspensive condition. It

suspends the not only the ownership but the whole contract of sale

until the fulfillment of the suspensive condition, to wit, the payment

of the price in full. Most of the South African decisions take this

view.

Another argument is that this is a completed sale and only passing

of ownership is suspended, until the payment is made in full. A few

decisions of the South African courts and most of the scholars,

particularly Diemont, take this view. He argues that in Roman-

Dutch Law, ownership need not pass on the completion of sale as in

the English Law; ownership passes when the goods are delivered.

Delivery involves transferring the possession of goods from the

seller to the buyer. Juristically this requires not only the physical

delivery of goods but also the mental element (animus), namely, the

seller must intend to make the buyer the owner and the buyer must

intend to acquire ownership. Diemont contends that in a hire

physical delivery of the goods.

If the first view is taken, the following will be the consequences:

a) Unless there is an agreement to the contrary, the risk will only

pass to the buyer when the last instalment has been paid.

b) Prescription shall begin from the date of the last instalment.

c) Aediltian remedies for defects of the goods will not be available

to the buyer until the payment of the last instalment.

If the second view is taken, the following will be resulting

consequences:

a) The risk will pass forthwith to the buyer.

b) Prescription shall begin from the date of the sale.

c) Aedilition remedies shall begin from the date of sale.

d) Forfeiture and cancellation clauses shall be essential to take care of the

situation where the buyer fails to make the necessary payments.

Diemont argues that even in the absence of such clause, the seller can

be protected by lex commissoria – a resolutive condition which is

contract shall become voidable at the option of the seller.

As far as hire purchase Act is concerned, in our opinion, it incorporates

the former view.

PLEDGE, LEASE AND LAY-BY

Hire purchase agreements are often disguised to avoid the application

of the Hire Purchase Act. But no matter the phraseology is used by the

parties, the court always looks to the true substance of the agreement

as opposed to the mere form which may take the guise of a pledge or

lease or any combination thereof. A contract of pledge is the bailment

or delivery of goods by the pledger (debtor) to the pledgee (creditor)

as a security for loan. If the debtor is entitled to get pledged goods back

on payment of the debt, it is regarded as a pledge transaction. In a

pledge, whole possession of the goods passes from the pledger to the

pledgee, the ownership remains with the pledger. The goods are

pledged as a security either for the payment of a debt or performance

of any obligation owed to the pledgee. Unlike the pledgee, the seller
 in a hire purchase agreement is the owner of the goods and is not

obliged to sell them to recover the sums owed.

LEASE:

The lease agreement is similar to a hire purchase agreement in that the

owner transfers possession to the lessee who makes use of the goods.

Moreover, in both types of agreements the ownership of the goods

remains with the owner. The two however differ in that in a genuine

lease agreement the parties at the time of contract do not contemplate

the hirer or lessee becoming the owner irrespective of the number of

installments he has paid. For instance, the hirer of a car from AVIS

does not become the owner of the car even if the aggregate of the rent

paid exceeds the value of the car. If the lessee becomes an owner at

some stage, it may be regarded as a hire purchase transaction. Section

2 of the hire purchase Act makes a special provision for the hire

purchase agreements disguised as leases.

The lay-by sale is similar to the hire purchase agreement in that the

buyer has to pay periodic instalments and becomes the owner once the

entire purchase price has been paid in full. The difference here is that,

not only does the buyer retain ownership of the goods, he also retains

possession to them until the entire purchase price has been paid off. A

lay-by sale in law can be regarded as a concluded sale where the transfer

of ownership is suspended until the payment of the purchase price.

Since possession is not transferred to the buyer, this transaction may not

be considered as a hire purchase agreement. Since ownership remain

with the owner, it may also not be regarded as a sale installment

agreement either. However, be that as it may, Regulation 10 of the Hire

Purchase Regulations of 2002 stipulates that the provisions of the Act

shall apply to lay-by agreements. This is obviously to extend protection

to buyer under lay-bye agreements. It is inspired by the recognition that

an increasing number of buyers tend to purchase goods under lay-by

arrangements and the need to protect this class of buyers as well. There
is also some doubt if the regulations can be validly used to make the

Hire Purchase Act apply to lay-by agreements in a manner which is

clearly consistent with the spirit and words of the Act. It would have

been better if a separate and comprehensive provision dealing with

exclusively with lay-by sale as in South Africa were included in the Act

itself.