Hire purchase agreements as security for loans

Hire Purchase Generally

1. A hire purchase agreement (HPA) is defined under the Hire Purchase Act 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. The Act came into operation on 2^nd November, 1970 and its preamble, states in part, that it is:

An Act of Parliament to make provision for the regulation of certain hire purchase agreements…

2. The word “certain” would mean that the Act does not cover all hire purchase agreements or in other words, some hire purchase agreements are outside the scope of the Act.
3. The Act further states that where there are two or more agreements none of which individually constitutes a hire purchase agreement and the bailee may exercise the option of purchasing the goods or property will or may pass to the bailee, then the agreement shall be treated as a single agreement for the purposes of the Act and the date of the agreement shall be at the time when the last of those agreements were made.
4. The hirer pays installments in consideration of using a particular good or product and gets ownership upon paying the last installment. Therefore, property passes to the hirer upon payment of the final installment. Customarily the hire purchase price of a good is higher than its cash price as interest is charged on the cash price.
5. Ownership of goods under Hire Purchase Agreement only passes to Hirer upon payment of all sums due to the owners as expounded by Chitty on Contracts 2, Sweet and Maxwell 199;

The absence of any property in the goods in the hirer means that a general rule, he can pass no title to a third party. Any purported conveyance of the goods, as by way of sale, pledge or execution of a bill of sale will not cause the property in goods to vest in a third party for nemo dat quod non habet.

 Licensing of Hire Purchase Business

6. Under Section 18 of the Act, no person after the appointed day shall carry on hire purchase business, except under and in accordance with the terms of a current licence authorizing him to do so.
7. Lack of a licence is an offence and punishable by a fine not exceeding two hundred thousand shillings or to imprisonment for a term not exceeding one year, or to both.
8. Under Section 23, the holder of a licence shall ensure that the licence or a copy thereof is at all times conspicuously displayed in every premises in which he carries on hire-purchase business, and if he fails to do so he shall be guilty of an offence and liable to a fine not exceeding one thousand shillings.

 Agreements outside the ambit of Hire Purchase Act

9. Section 3 (1) of the Act states as follows:

3 (1) This Act applies to and in respect of all hire-purchase agreements entered into after the commencement of this Act under which the hire-purchase price does not exceed the sum of four million shillings other than a hire purchase agreement in which the hirer is a body corporate wherever incorporated; but that monetary limitation does not apply so as to affect the definition of “hire-purchase business” in section 2 (1).

10. The above section was interpreted by the Court of Appeal in Taawawa Supermarket Limited v Fina Bank Ltd [2010] eKLR to mean that corporations which are hirers are not within the scope of the act. S.E.O. Bosire, E.M. Githinji and, P.N. Waki, JJA held

We find in the circumstances that the intention of Parliament was to exclude purchases made by co-operative societies and registered companies from the operation of the Act, and not merely to remove the monetary threshold for corporations.

11. Also, the Act does not regulate agreements where the hire-purchase price exceeds four million shillings.

 Requirements for the enforceability of a Hire Purchase Agreement

12. Under the Hire Purchase Act, certain requirements have to be met for a hire purchase agreement to be enforceable against the hirer or guarantors of the hirer. They include that:
    • The hire purchase agreement has to be registered by the Registrar of Hire Purchase Agreements. A certificate of registration is issued to signify that the registration requirements under the Hire Purchase Act have been met.
    • The owner must inform the hirer of the cash price of the good either in writing, or it may be indicated on a price tag of the good where the hirer has an opportunity to inspect the good before purchase or alternatively or it may alternatively be indicated in a catalogue or price list where the buyer is to select the good from such a list.
    • The agreement is signed by the hirer and, by or on behalf of all other parties to the agreement.
    • The agreement stipulates the cash price and hire purchase price of the goods, the number of installments through which the hire purchase price is to be paid and when they are due or the mode of determining when they are due and a description of the goods sufficient enough to identify them.
    • The agreement should contain a statement of the rights of the hirer in a position as prominent as the rest of the contents of the agreement and a copy of the agreement should be sent by the owner to the hirer within twenty-one days of the date of the agreement.
13. However, the Court may dispense with any of the above-mentioned requirements if it does not prejudice the hirer and if it would be just to do so.

 Failure to register

14. Failure to register will not render the HPA void as it will be interpreted as a contract. This was the finding in Taawawa Supermarket Limited v Fina Bank Ltd [2010] eKLR, where the Court of Appeal held

We may add that failure to register did not render the agreement void or the result that the company would be refunded all the money it paid under the agreement. It retained its validity as a contract inter se and was enforceable as such – see Walsh v Lonsdale [1982] 21 Ch. C.9, Clarke v Sondhi [1963] EA 107 and Meralli v Parker [1956] 29 KLR 26.

 Owners’ rights Vis a vis Lienee’s

15. In common law, a lienee has never enjoyed a power of sale over goods deposited with him, whether for carriage, repair, improvement or safe custody. A sale will only occur after a court order.
16. A repairer or bailee without notice has right of possessory lien over the chattel that triumphs owners’ rights so long as the possession by the hirer was proper. The repairer could lawfully exercise its right to dispose of the same under the provisions of the Disposal of Uncollected Goods Act. Diplock L.J. in Tappenden vs Artus & Another [1963] 3 ALL ER 213-221 stated;

whereas Clause F of the Hire-Purchase Agreement provided that the 2^nd Defendant could not pledge the owner’s credit or permit any to be created over the subject vehicle, such right did not affect the rights of a repairer.

17. The Court of Appeal further held as follows: –

the artificer was entitled to a common law lien on the van in respect if the repairs which he had effected because the bailee, when entrusting the van to the artificer, was lawfully in possession of it under a contract with the owner, the motor dealer and in giving possession of it to the artificer for the purposes of effecting repairs necessary to render it roadworthy the bailee (notwithstanding that the motor dealer was himself a motor mechanic ) was acting within his authority since the act was reasonably incidental to the bailee’s reasonable use of the van…

18. In Bowmaker vs Wycombe Motors Limited – [1946] 2 it was held that: –

An arrangement between the owner that the hirer shall not be entitled to create a lien does not affect the repairer. A repairer has a lien although the owner has purported to limit the hirer’ authority to create a lien in that way…

19. The position would change where a hirer is in unlawful possession of the chatter, for instance when the hirer is hiding the chattel to avoid repossession or the chattel has been stolen. In Bowmaker Limited vs Wycombe Motors Limited (Supra), it was held as follows: –

the authority of the hirer, P, had been duly determined under the terms of the agreement and at the time when he took the car to the appellant’s garage, he had no more right to the car than a thief would have; in those circumstances the appellants could not establish a lien on the car against the owners who were no parties to placing it with them for repairs.

20. Also, where the hire-purchase agreement prohibits the creation of a lien and the worker/repairer had notice of the prohibition. He will not be allowed to exercise a lien. There is no doctrine of constructive notice in relation to commercial transactions involving chattels. Hence the notice contemplated in common law must be actual notice. In Manchester Trust V Furness: Ca [1895] 2 QB 539 Lindley LJ said:

in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions, we should be doing infinite mischief and paralyzing the trade of the country.

 The Owner is not liable for costs caused by the Hirer

21. Where a hirer in possession causes the chattel to undergo repairs or to be stored by a third party or in any other way incurs costs incidental to such possession, then the hirer is required to bear such costs.
22. In NIC Bank Limited v General Motors East Africa Limited & another [2014] eKLR the court rendered itself thus;

The Plaintiff’s interest over the said subject vehicle as a financier could not defeat the 1st Defendant’s said lien for as long that the said Hire-Purchase Agreement had not been determined herein. However, that is not to say that the Plaintiff was under any obligation to meet the repair charges that were levied by the 1^st Defendant.

23. It is noteworthy that the owner’s interest is only the security which would crystalize at the time of default or breach of the agreement. It is not an agent-principal relationship. This was restated in Jane Wangui Kairu vs Gusii Deluxe Limited HCCC No 178 of 2001; [2001] LLR 7527 (HCK) by Anganyanya J thus: –

Once a Hire Purchase company provides necessary facilities for the hirer to buy and take away his/her property like a motor vehicle its interests is to receive monthly instalments whether or not the vehicle is operated. It has no custody or control over such motor vehicle or those operating it including the hirer or the driver. That its name is included in the registration is no more to secure its financial interest in the motor vehicle and this is why after full repayment of the loan have been made, its name is removed therefrom. It is not a servant or agent of the hirer.

 Lienee’s /Bailees Power of sale

Sale under the Disposal of Uncollected Goods Act

24. The Disposal of Uncollected Goods Act will entitle a person in possession of another’s goods to sell or apply to a court for an order authorizing him to sell the goods, provided he can establish that he is in the possession or under the control of a custodian under a contract—to repair, treat or work on the goods; to value, survey or give an estimate relating to the goods; for custody or warehousing of the goods for reward; for carriage of the goods; for hire of the goods; for gratuitous deposit or gratuitous loan of the goods; for pawn of the goods, or under any other contract of bailment, express or implied.
25. The application of the Act may be expressly modified or excluded by the terms of the contract. This would be the contract with the bailee.
26. Under Section 5 of the Disposal of Uncollected Goods Act, where a custodian has accepted goods for repair, treatment or work on the terms, valuation, survey or estimate, notice to take delivery may be given at any time after the repair, treatment or work has been completed.
27. The Bailee may then sell the goods either with or without court order provided that they obtain the best price and act in good faith. They are required to account for the proceeds to the owner after defraying costs.

 Sale under common law

28. In common law, for perishable goods, or where the price of the commodity is liable to fluctuation, a lienee may sell the good to prevent further wastage. In Larner v. Fawcett, the England Court of Appeal, acting under this rule, ordered the sale of a racehorse, not because it was perishing or its value diminishing, but in order to save increasing expenses for the horse’s keep pending the resolution of the parties’ dispute.

 Interim moratorium when application for administration order has been made under Insolvency Act

29. Under Section 561 of the Insolvency Act, where an application for administration in respect of a company has been made and the application has not yet been granted or dismissed; or the application has been granted but the administration order has not yet taken effect a moratorium against repossession by owner is placed.
30. This section also applies from the time when a copy of notice of intention to appoint an administrator under section 523 is lodged with the Court until either the appointment of the administrator takes effect; or seven days from and including the date of lodgment without an administrator having been appointed.
31. It also applies from the time when a copy of notice of intention to appoint an administrator is lodged with the Court under section 546(1) until the appointment of the administrator takes effect; or the period specified in section 547(2) expires without an administrator having been appointed.
32. When this happens:
33. a person may take steps to enforce security over the company’s property only with the approval of the Court;
34. a person may take steps to repossess goods in the company’s possession under a hire purchase agreement only with the approval of the Court

 Conclusion

33. Whereas the hire purchase agreements are a convenient and easy way to register security on chattels by a financial institution, they do not shield banks from losses occasioned by claims from lienees. Banks have also been sued alongside manufacturers and distributors of motor vehicles by ambitious hirers who want to frustrate the bank from realizing the debt. It is prudent that the banks execute a hire purchase alongside other securities such as guarantees and indemnities to have a fall back in case of claims by 3^rd parties.
    

Note that this alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.

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