KISII UNIVERSITY

SCHOOL OF LAW

GROUP TWO: COMMERCIAL LAW CAT.

NAME REG. MUMBER

1. IVY DELPHINE LA11/00021/21

2. BRIAN OUMA LA11/00056/21
3. NISE APALE LAP11/00056/21
4. JAN KIPKOSGEI LA11/00022/21
5. MERCY WANYAMA LA11/00028/21
6. SAMORA DEDE LAP11/00054/21
7. JOCHEBED KERUBO LA11/00058/21
8. NIMROD KIPKOECH LAP11/00033/21
9. OPANY AGATHA LA11/00034/21
10. ARVIN ODHIAMBO LA11/00001/21
11. SAMSON MOTURI LAP11/00042/21
12. MOLLY MALUVI LAP11/00041/21
13. KHAINJA CELESTINE LA11/00029/21
14. CYNTHIA AKAMURAN LA11/00016/21
Discuss:
 The nature of hire purchase agreements
 Formalities of hire purchase contracts, and;
 Distinctions from other transactions

THE NATURE OF HIRE PURCHASE AGREEMENTS

Hire purchase agreements are governed by Hire Purchase Act, Revised 2017 (1968) which defines
a hire purchase agreement as an agreement for the bailment of goods under which the bailee may
buy the goods or under which the property in the goods will or may pass to the bailee.
In simple terms, a hire purchase agreement is a contract where the owner of goods hires them out to
another person for an agreed periodic rent payable by instalments and gives him the option to
purchase. The option may or may not be exercised.
The goods remain on bailment of hire only and the property in them does not pass to the hirer and
until all the agreed hire purchase instalments have been paid and the option to purchase duly
exercised. The hires rights to use the goods does not affect the propriety rights of the owner unless
and until the option to purchase is exercised in terms of the agreement.
Although the hirer takes physical possession of the goods and puts them to his use during the
agreed period of hirer, ownership or title thereto remain in the owner. Therefore, the hirer cannot
purport to sell or pass goods title thereto even to a bona fide purchaser.
There are 2 basic elements in a hire purchase agreement i.e. the bailment of the hirer and the option
to purchase. This is described in section 2(1) of the 1968 Hire Purchase Act 1998. Which states that
transfer of property in the goods on hire takes place when the hirer exercises the option to purchase
them in accordance with the contract. This means that there is no contract to sell the goods on hire
unless the option to purchase is exercised in accordance with the hire purchase agreement or the
goods are bought at their exhibited or agreed cash price.
The Hire Purchase Act defines a hirer in section 2(1) as a person who takes or has taken things of
another under a hire-purchase agreement, and includes a person to whom the hirer’s rights or
liabilities under the agreement have passed by assignment or by operation of law. Hire purchase
price is also defined in the act as the total sum payable by a hirer under a hire-purchase agreement
in order to complete the purchase of goods to which the agreement relates.the price constitutes any
sum payable by the hirer by way of a deposit or other initial payments or credited or to be credited
to him under the agreement on account of any such deposit or payment.
The Hire Purchase Act, which regulates certain hire purchase agreements is derived from the
English Hire Purchase Act. However, the Act does not apply to or regulate all agreements for hire-
purchase. Certain factors such as the legal position of the hirer and the total amount of the hire-
purchase price, among other factors, determine whether an agreement falls within the Act.
Section 3(1) of the Act restricts application of the Act to the following transactions:
 hire-purchase agreements entered into after the commencement of the Act on 2 November
1970 (which means that the Act does not apply to transactions entered into before its
commencement even, though they meet the definition of hire-purchase contracts)
 agreements in which the hire-purchase price does not exceed the sum of KSH4,000,000
 agreements in which the hirer is not a body corporate
 agreements other than schemes controlled, managed or guaranteed by the government for
the purpose of providing loans to any persons for the purchase of motor vehicles.
The restrictive provisions of the Act are protective in nature. Its application is necessarily limited to
cases involving economically disadvantaged persons who are presumed to be more vulnerable to
exploitation or unfair trading practices by large corporations or unethical businessmen and,
therefore, require special statutory protection. The need for such protection may be appreciated
considering that contracts for hire-purchase are invariably in standard form, which in itself suggests
inequality of bargain. Statutory regulation was considered necessary so as to safeguard the rights
and interests of the inferior party, often individuals of simple means who wish to acquire goods of
little value on hire-purchase.

EUNICE KANUGU KING’ORI V NIC BANK LIMITED

The plaintiff and the defendant entered a hire purchase agreement for the purchase of an Isuzu Giga
Truck worth Kshs 4,640,000.
The plaintiff paid a deposit of Kshs 2,320,000 and as per the terms of the agreement, she was to
pay the rest in form of monthly installments worth Kshs 81,580 for a period of 35 months plus a
final installment of Kshs 81,350 plus 2000. The payment period was between 9th October 2009 and
17th November 2010.
Within the period of payment of installments, the plaintiff defaulted and failed to make payment as
per the agreement and the defendant subsequently proceeded to repossess the truck as per their hire
purchase agreement.
The plaintiff filed a petition against the defendant claiming a total sum of Kshs 5,266,738 which
she had paid to the defendant at the time of hire, general damages for breach of contract by the
defendant, the cost of the suit, interests and relief.
The court held that the parties had entered a hire purchase agreement based on the nature of their
agreement. In considering the total amount payable to be Kshs 5,258,656 and a down payment of
Kshs 2,320,000 was paid by the plaintiff leaving a balance of less than 4,000,000 as per the
requirements of section 3 of the Hire Purchase Act which provides that hire purchase agreements
do not exceed Kshs 4,000,000.
It held that he plaintiff’s claim of a total sum of Kshs 5,266,738 was disposable since the plaintiff
lacked evidence to show how she had arrived at this amount. Furthermore as per the terms of
section 15 of the Hire Purchase Act, the defendant was entitled to repossess the vehicle as the hire
purchase price paid was not more than two thirds of the hire purchase price and basically, the
plaintiff was in breach of the contract due to none payment. The plaintiff’s claim on general
damages was not awarded and the court dismissed the suit.
 FORMALITIES OF HIRE PURCHASE CONTRACTS.

There are no formal requirements for a simple contract to be valid at common law. Similarly,
common law imposed no formal requirements that hire-purchase agreements be in writing or in any
prescribed form. Accordingly, an oral agreement was equally enforceable at common law.
However, section 5(2) of the Hire-Purchase Act marks a departure from the common law position
and requires that every agreement for hire purchase be in writing and delivered for
registration to the Registrar within thirty days from the date of execution, whereupon a certificate
of registration is issued in accordance with section 5(3) 795 .
The 1968 Act makes provision for, and regulates registration of, all hire-purchase agreements that
fall within its jurisdiction as specified in section 3.
In the case of Imperial Bank Of Kenya V Kariuki Construction Company Ltd& 2 others HCCC
NO. 51 of 2012, the agreement having not been as registered as required by the Hire Purchase Act,
the court held that the Imperial Bank of Kenya had no right to repossess the motor vehicle which it
financed under the Hire Purchase Agreement.

In addition, the Act prescribes in mandatory terms the language in which the contractual document
must be drawn. It requires that, in order to be registrable and binding, the agreement shall be in
the English language

In addition to the prescribed language and form, the agreement must also be stamped in
accordance with section 5(2) of the Hire Purchase Act . on payment of the prescribed stamp duty,
failing which section 19(1) (as read together with Schedule 1) of the Stamp Duty Act, Revised
2015 (1958) renders it inadmissible in evidence in any civil proceedings to enforce a claim
thereunder.

The requirement as to registration of the agreement is also mandatory. Non-compliance with the
requirements as to registration results in far-reaching consequences. In default of registration,
section 5(4) of the 1968 Act provides that;
(a) no person shall be entitled to enforce the hire-purchase agreement against the hirer or any
contract of guarantee relating to the agreement, and the owner shall not be entitled to recover the
goods from the hirer; and
(b) no security given by the hirer in respect of money payable under the agreement, or given by a
guarantor in respect of money payable under a contract of guarantee relating to the agreement, shall
be enforceable against the hirer or the guarantor by any holder thereof.

A contract of guarantee is defined in section 2(1) as a contract made at the express or implied
request of the hirer to guarantee the performance of the hirer’s obligations under the hire-purchase
agreement. The guarantee is a special promise given by a third party, who undertakes to assume
liability for performance by the hirer of his contractual obligations under the hire-purchase
agreement, such as payment of the hire-purchase price or any part thereof as may become due and
payable by the hirer. The guarantee is enforceable by the owner of the goods in the event of breach
or default on the part of the hirer. The undertaking constituting the guarantee must be in writing
and addressed to the principal debtor by the guarantor. Notably, an oral promise in this regard is
not enforceable

The effect of section 5(4) is that failure to comply with the formal requirements prescribed by
section 5(2) of the Act invalidates the agreement together with any contract of guarantee relating
thereto and, consequently, no rights or obligations thereby conferred or imposed may be enforced
against the hirer or guarantor, including the right to recover money payable or possession of goods
held on hire-purchase. Default in formal requirements, or in compliance with the mandatory
procedure for registration of the agreement, deprives the owner of all rights under the hire-purchase
agreement and under the contract of guarantee or other security given in relation thereto.

The 1968 Act imposes yet another condition that relates to both form and content of the hire-
purchase agreement. Before making the hire-purchase agreement, section 6 of the Act requires
the seller to inform the hirer in writing the price at which he may purchase the goods in cash.
This may be done in any of the following ways, such as displaying the cash price on a ticket or
label, tag, price list, catalogue or advertisement exhibited for inspection by the hirer, which
effectively discharges the seller from this statutory obligation. According to section 6(2), non-
compliance with this condition deprives the owner of the right to enforce the hire-purchase
agreement or any contract of guarantee relating thereto. The protective purpose of this Act is
served by ensuring that the hirer freely elects either to purchase the goods in cash or on hire, and
that he makes an informed decision either way.
In the case of Yusuf& Anor V Oyetunde& Anor; the owners didn’t state the cash price of the
vehicles and the interest rate before entering into the contract. Subsequently the hirer defaulted in
installment payment, prompting the owners to seize the goods and sell them. When the case got to
court, the actions of the owner were reverted.

In addition to other provisions, the seller complies with section 6 of the Act by furnishing the
hirer with a memorandum in writing containing the following information, namely,
(a) a statement of the hire-purchase price and the cash price of the goods to which the agreement relates (which
gives the hirer the opportunity to purchase the goods in cash or on the proposed terms of the hire-purchase
agreement);
 (b) The amount and the date of payment of each instalment;
(c) A description of the goods sufficient to identify and ascertain them; and
(d) A notice setting out the hirer’s rights under the contract

A copy of the contract must be executed by all parties thereto and sent to the hirer within
twenty-one days from the date of execution. Non-compliance with the foregoing statutory
requirements invalidates the contract and deprives the owner of the right to enforce the agreement
or any contract of guarantee relating thereto. The owner is also disentitled to enforce any right to
recover the goods from the hirer.

In practice, though, not all the requirements of the Act are imperative. The 1968 Act allows the
court to exercise a measure of discretion in enforcing the formal requirements to ensure substantive
justice. With the exception of the obligation to furnish the hirer with a memorandum in writing of
the terms of the agreement, the court may dispense with any of the statutory requirements where it
is satisfied that the hirer has by no means been prejudiced by non-compliance therewith.

DISTICTION FROM OTHER TRANSACTIONS

A hire-purchase agreement differs from a contract of sale on credit terms in that a credit sale

merely permits postponement of the time of payment of the purchase price to a future date,

whether payable in lump sum or by installments. In a credit

sale of ascertained goods, property in the goods passes to the buyer immediately the contract is

made. Accordingly, the buyer can subsequently pass a good title to a bona fide purchaser for

value, even though he himself has not paid or tendered the full price. In contrast, a sale on

credit terms with reservation of property in the seller until payment of the full price operates

as a conditional sale and prevents the property in the goods from passing to a trustee in

bankruptcy of the buyer until the condition as to payment of the price is fulfilled. However,

non-fulfillment of this condition does

not necessarily prevent the property from passing to an innocent third party who buys the goods

in good faith and for valuable consideration. The buyer passes good title to the third party in

view of the fact that he has possession of the goods with the consent of the seller.

Conversely, the terms of a hire-purchase agreement point to an intention to enter into an

agreement to hire coupled with an option to purchase. Such an agreement is

not a contract of sale or an agreement to sell upon a condition. Rather, it is a contract that

binds the owner to enter into a contract of sale if the hirer decides to accept the offer or

exercise the option. accordingly, property in the goods held under a hire- purchase agreement

does not pass to the hirer or to third parties from the hirer.

Before the buyer exercises the option to purchase, goods in his possession are held under

a bailment of hire. They cannot, therefore, be detained or seized under a judicial execution,

re-sold or appropriated by or vested in the hirer’s trustee in

bankruptcy. However, they may be held in lien to enforce payment of repair or storage

expenses payable to a bailee for that purpose by the hirer or the owner of the goods. For

instance, when goods are deposited for work to be done, repair or improvement, or other

purpose stated in section 3 of the Disposal of Uncollected Goods Act, the hirer or owner

thereof is bound to pay the charges incurred in that regard. Refusal

or failure to pay and collect the goods gives the bailee the right to sell them in accordance with

the Act.

The effect of a conditional sale without express reservation or defect of title

was demonstrated in Lee v Butler. The plaintiff let furniture on a “hire and purchase

agreement” to X. X was to pay £1 at once and the balance of £96 in monthly installments

from May to August. The furniture was to become X’s property only when the last

installment was paid. It was also agreed that if X defaulted in payment or removed the

furniture from her home, the plaintiff could recover possession of the goods without notice.

Before this condition was satisfied, X sold and delivered the furniture to the defendant, who

bought them in good faith and without notice of the plaintiff’s rights.

The Court of Appeal held that, on the proper construction of the agreement, X

was under an absolute obligation to pay all the installments, and that she had therefore “agreed to

buy” the furniture. In other words, the conditional sale did not fall within
the scope of the transactions contemplated by parties to hire-purchase contracts. Accordingly,

X had passed a good title to the defendant, who could not be sued by, or relinquish possession of

the goods to, the plaintiff. X had obtained possession of the goods with the consent of the seller,

and the condition on which the goods were sold could not stand in the way of a bona fide

purchaser who obtained the goods from X for

value and without notice of the express reservation or defect of title.

A hire-purchase agreement is distinct from a conditional sale. In certain cases, an agreement

purported to be for hire-purchase may, on proper construction, amount to a conditional sale

under the Sale of Goods Act. Accordingly, any condition intended to reserve property in the

seller would be ineffectual as against a third party who buys the goods for value and in good

faith without notice of such reservation. Failure on the part of the buyer to fulfill the condition

in question would by no means invalidate the subsequent sale as against the bona fide

purchaser.

Though termed as a “hire and purchase” contract, the transaction in Lee v Butler

was found on the evidence to be one for purchase on a specified condition that could not stand

in the way of a bona fide purchaser obtaining the goods for value without notice of such

condition. X had agreed by this hire and purchase agreement to buy the goods, and they were

put into her possession with the owner’s consent. She had sold the goods to the defendant

without notice that they were not hers, and he, acting in good faith and with no notice of the

plaintiff’s right, received them for valuable consideration.

In a hire-purchase agreement, property in the goods vests and remains in the owner until

such time as the contract is discharged on payment by the hirer of the

hire-purchase price in full and in exercise of his option to purchase. Before then, there is no

agreement to buy or sell, as would be the case in a credit sale. The hirer only has an option to

purchase, which he may or may not exercise. In the words of Lord M’Naghten in Helby v

Mathews,

“It was the intention of the parties, an intention expressed on the face of the contract itself,
that none of those monthly payments until the very last in the series was reached nor all

of them put together without the last should confer upon the customer any proprietary

rights in the piano or any interests in the nature of a lien or any interest of any sort or any

kind beyond the right to keep the instrument and use it for a month to come.”

The owner of a piano agreed to let it on hire, the hirer to pay a rent by monthly

instalments, on the terms that the hirer might terminate the hiring by delivering up the piano

to the owner, he remaining liable for all arrears of hire; also that if the hirer should punctually

pay all the monthly instalments, the piano should become his sole and absolute property, and

that until such full payment the piano should continue the sole property of the owner.

The hirer received the piano, paid a few of the instalments, and pledged it with a pawnbroker

as security for an advance. The House of Lords held that, upon the true construction of the

agreement, the hirer was under no legal obligation to buy, but had an option either to return

the piano or to become its owner by payment in full. By putting it out of his power to return

the piano, he had not become bound to buy. He had therefore not “agreed to buy goods” so as

to enable him to transfer property in them. Accordingly, the owner was entitled to recover the

piano from the pawnbroker.

Since the hirer had not agreed to buy the piano, he incurred no legal obligation

to buy. All he undertook was to make the monthly payments of the agreed rent so long as he

kept the piano. In addition, he had an option to buy it by exercising the option to purchase on

completion of all the stipulated monthly payments. If he had exercised that option, he would

have become the purchaser with the right to transfer good title to the defendant. On the other

hand, the hirer having only an option under

the contract to buy (provided he complied with the prescribed conditions), could not

convert himself into a purchaser as against the owner by violating the conditions of the

contract.

There was, in the opinion of Lord Shand, an agreement of hiring only with an

option to the hirer to become the purchaser. Even though there was an obligation to sell if the

hirer should avail himself of the right of option to purchase, there was no obligation or

agreement to purchase. In his judgment, the learned Judge had this to say on the matter:

“I cannot hold that there is such an agreement on the part of one who having the beneficial

use of the property of another agrees to pay instalments described as rent or hire instalments, and

which he is entitled to treat as payments for hire only, because it is

also stipulated that by continuing to make the payments for a certain time he shall acquire

the property, he having at the same time the power at any moment and at his own will by

returning the property to the owner to put an end to any obligation to pay any further instalments."

The court explained the meaning of the expression “a person having agreed to buy goods” as

to mean a person who has bound himself by agreement to buy, and does not include a person

who has an option to buy, the owner being bound to sell if that option is exercised.

Accordingly, the Sale of Goods Act did not apply (with reference to the exceptions to the

nemo dat principle), and no title passed to the defendant.

Similarly, the interests of an owner of goods acquired under a hire-purchase agreement by a hirer

who is subsequently adjudged bankrupt are protected as against claims

by the general body of creditors. They cannot, therefore, be treated as his assets for
realization and distribution amongst his creditors. The usual course of events is that when a

hirer is adjudged bankrupt, all his property, except that in respect of which

he is a mere trustee or bailee, and all goods in his possession in his trade or business with the

consent of the true owner, vests in his trustee in bankruptcy for sale and distribution among

his creditors. This includes goods sold on credit, unless such sale is conditional with an

express reservation that property shall pass upon payment of the price in full. Property in the

goods held under a hire-purchase agreement does

not vest in the trustee in bankruptcy of the hirer in view of the fact that they do not belong to

him. Property or title vests and remains in the owner until payment in full of the hire-purchase

price and the exercise by the hirer of the option to purchase. Only then does property pass to

him absolutely.

A hire-purchase agreement also differs from a simple hire. A contract of hire is

one whereby the hirer obtains an article or goods for use in consideration for payment of a

periodic rent. He holds them under a bailment of hire only, and on condition

that they shall be returned to the owner at the expiration of the stipulated period of hire

during which the hirer enjoys no proprietary rights or interests in them. Neither is a hire-

purchase agreement similar to a pledge or chattels mortgage under which a chattel may be

given as security for repayment of money advanced to the pledger or mortgagor. In

default of payment, the chattel may be sold to redeem the debt, whereupon the pledgee or

mortgagee passes valid title to the buyer.

REFERENCES:

 The Hire Purchase Act, Chapter 507, Laws of Kenya.

 Kibaya I Laibuta, Principles of Commercial Law, Chapter Six.