Contracts of sale resemble contracts of hire purchase very closely, and

indeed the real object of a contract of hire purchase is the sale of the goods
ultimately.-Nonetheless, a sale has to be distinguished from a hire
purchase as their legal incidents are quite different.

Under hire purchase agreement, the goods are delivered to the hire
purchaser for his use at the time of the agreement but the owner of the
goods agrees to transfer the property in the goods to the hire purchaser
only when a certain fixed number of installments of price are paid by the
hirer.

Till that time, the hirer remains the bailee and the installments paid by him
are regarded as the hire-charges for the use of the goods. If there is a
default by the hire purchaser in paying an installment, the owner has a
right to resume the possession of the goods immediately without refunding
the amount received till then, because the ownership still rests with him.
Thus, the essence of hire- purchase agreement is that there is no agreement
to buy, but there is only a bailment of the goods coupled with an option to
purchase them which may or may not be exercised.

It may be noted that mere payment of price by installments under an

agreement does not necessarily make it a hire-purchase, but it may be a
sale. For example, in the case, of “Installment Purchase Method,” there is
a sale, because in this case the buyer is bound to buy with no option to
return and the property in goods passes to the buyer at once.

The main points of distinction between the ‘sale’ and ‘hire-purchase’

are as follows:
1. In a sale, property in the goods is transferred to the buyer immediately
at the time of contract, whereas in hire-purchase, the property in the goods
passes to the hirer upon payment of the last installment.

2. In a sale, the position of the buyer is that of the owner of the goods but
in hire purchase, the position of the hirer is that of a bailee till he pays the
last installment.

ADVERTISEMENTS:

3. In the case of a sale, the buyer cannot terminate the contract and is
bound to pay the price of the goods. On the other hand, in the case of hire-
purchase, the hirer may, if he so likes, terminate the contract by returning
the goods to its owner without any liability to pay the remaining
installments.

4. In the case of a sale, the seller takes the risk of any loss resulting from
the insolvency of the buyer. In the case of hire purchase, the owner takes
no such risk, for if the hirer fails to pay an installment, the owner has the
right to take back the goods.

5. In the case of a sale, the buyer can pass a good title to a bonafide
purchaser from him but in a hire-purchase, the hirer cannot pass any title
even to a bonafide purchaser.

6. In a sale, sales tax is levied at the time of the contract whereas in a hire-
purchase, sales tax is not leviable until it eventually ripens into a sale (K.L.
Johar & Co. vs. Dy. Commercial Tax Officer).

ADVERTISEMENTS:

Hire purchase and an agreement to sell:

A contract of hire-purchase may also be distinguished from “an agreement
to sell” (or “an agreement to buy” from buyer’s point of view). As already
observed, a hire-purchase agreement initially is merely an irrevocable
offer for sale, that is, under it, the owner is bound to sell the goods later if
the hirer pays all the installments as agreed, but on the part of the hire
cannot be compelled to buy. ‘An agreement to buy’, on the other hand,
imports a legal obligation to buy and therefore there is no option available
to the buyer to buy or to terminate the contract in this case. Again, in a
hire-purchase agreement, delivery of goods to the hire-purchaser is
necessary whereas it is not so in an ‘agreement to sell.’

Sale Distinguished from Contract for Work and Labour :

A distinction has to be made between a contract of sale and a contract for
work and labour mainly because of taxation purpose. Sales tax is leveled
only in the case of a contract of sale. When property in the goods is
intended to be transferred and goods are ultimately to be delivered to the
buyer, it is a contract of sale even though some labour on the party of the
seller of the goods may be necessary. Where, however, the essence of the
contract is rendering of service and exercise of skill and no goods are
delivered as such, it is a contract of work and labour and not of sale. In
fact, the difference between the two is very minute.

ADVERTISEMENTS:

Illustrations :
(a) A dentist agreed to make a set of false teeth for a lady and fit it into her
mouth. Held, it is a contract for the sale of goods (Lee vs Griffin).
(b) An order for making and fixing curtains in a house is a contract of sale
of goods, though it involves some work and labour in fixing the same
(Love vs Norman Wright (Builders) Ltd.)

(c) G engaged an artist to paint a portrait and supplied the necessary

canvas and paint. Held, it is a contract for work and labour as the
substance of the contract is the application of the skill and labour in the
production of the portrait (Robinson vs. Graves). If the canvas and paint
are also to be supplied by the painter, it will become a contract of sale of
goods.

Lee vs Griffin

Crompton J stated the following: “The main question which arose at the trial
was, whether the contract in the second count could be treated as one for
work and labour, or whether it was a contract for goods sold and
delivered. The distinction between these two causes of action is sometimes
very fine; but, where the contract is for a chattel to be made and delivered, it
clearly is a contract for the sale of goods.
 
There are some cases in which the supply of the materials is ancillary to the
contract, as in the case of a printer supplying the paper on which a book is
printed. In such a case an action might perhaps be brought for work and labour
done, and materials provided, as it could hardly be said that the subject-matter
of the contract [276] was the sale of a chattel: perhaps it is more in the nature
of a contract merely to exercise skill and labour. Clay v. Yates  (1 H. & N.
73) turned on its own peculiar circumstances. I entertain some doubt as to the
correctness of that decision; but I certainly do not agree to the proposition
that the value of the skill and labour, as compared to that of the material
supplied, is a criterion by which to decide whether the contract be for work
and labour or for the sale of a chattel. Here, however, the subject matter of the
contract was the supply of goods. The case bears a strong resemblance to that
of a tailor supplying a coat, the measurement of the mouth and fitting of the
teeth being analogous to the measurement and fitting of the garment.”
Blackburn J further clarified the point:
 
“I think that in all cases, in order to ascertain whether the action ought to be
brought for goods sold and delivered, or for work and labour done and
materials provided, we must look at the particular contract entered into
between the parties. If the contract be such that, when carried out, it would
result in the sale of a chattel, the party cannot sue for work and labour; but, if
the result of the contract is that the party has done work and labour which
ends in nothing that can become the subject of a sale, the party cannot sue for
goods sold and delivered.”

 Newman vs Lipman

Facts

Lipman agreed to sell a property to Jones for £5,250, but subsequently changed his
mind. He then formed his own company, which had £100 in capital, and made
himself the director and owner. He then transferred the land, which he had agreed to
sell to Jones, to this sham company for £3,000. To enable such a transaction, Lipman
had borrowed over half the money needed by way of a bank loan, and the remainder
was owed to other sources. Under the Rules of the Supreme Court Order 14A, the
purchaser applied for specific performance to be carried out against the vendor and
the vendor’s company for the transfer of the property in question.

Issue

The court was required to decide if an order of specific performance could be

enforced in the circumstances. Specifically, it was important for the court to assess
the company that Lipman had created and the transaction of the sale of the property
to see if it was equitable. The court also had to establish whether it was appropriate
for the Rules of the Supreme Court to be applied to the circumstances.

Held

Firstly, the court held that the Rules of the Supreme Court could apply to the
circumstances. Further to this, it was found that the defendant’s company was
created by the defendant as ‘a mask to avoid recognition by the eye of equity’ (at
p.836) and on this basis, a requirement of specific performance could not be avoided.
It was clear that the defendant had control of the sham company which held the
property, and therefore Lipman was the only individual who could perform the
agreement.

Love vs Norman Wright (Builders) Ltd.

Robinson vs. Graves

 DIFFERENCE BETWEEN HIRE PURCHASE AND INSTALMENT
SALE

Problem Does all hire purchase agg. Have Financier?

There are 3 parties in Hire Purchase trade namely the seller, the financier and
the buyer. There are only 2 parties involved in Instalment sale namely the seller
and buyer.

2. There are 3 agreements in a hire purchase, namely between the (a) seller and
financier. (b) financier and buyer and (c) buyer and seller. But in Instalment
sale, there is only one agreement between the buyer and seller.

3. Hire purchase is an agreement to hire and later to buy. Instalment is an

agreement to buy.

4. In hire purchase, the ownership transfers from the seller to the financier and
then to the buyer on the payment of the last instalment. In Instalment sale, The
ownership transfers on the first instalment from the seller to buyer.

5. In hire purchase, when there is a default in payment, the financier will take
back the goods from the buyer. In instalment sale, if there is a default of
payment, the seller cannot take back the goods, but can only sue the buyer.

6. In Hire purchase, any damage to the goods will only lead to claiming of
insurance by the financier from the insurance company since the ownership has
not been transferred. In instalment sale, any damage to the goods will be
claimed by the buyer from the insurance company.

7. Buyer cannot sell the goods to any third party until he pays the last instalment
to the financier in hire purchase. In case of instalment sale, the buyer can sell to
any third party as he is the owner of the goods.

8. The interest rate in hire purchase will be on a flat rate basis and is included in
the instalment and recovered as equated monthly instalment (EMI).
Example: Car finance by Sundaram Finance. The interest rate in instalment sale
is on a declining basis as every instalment paid will reduce the principal amount
and hence the total interest payable is lesser than H.P scheme. Example: Bank
finance for purchase of consumer goods.

I. DISTINGUISH BETWEEN SALE AND HIRE PURCHASE :

SALE
1. It may be made either orally or in writing.
2. It is governed by the Sale of Goods, Act, 1930.
3. The ownership of the goods is transferred from seller to the buyer as soon
as the contract is made.
4. After sate- buyer cannot return the goods.
5. The buyer becomes the owner and gets all the rights of an owner i.e. right to
pledge, resale, etc.
6. If price is paid in installments, each installment paid is regarded as part of
payment of price.
7. In a sale, sales tax is levied at the time of the contract.

Hire Purchase Agreement

1. It must be in writing.
2. It is governed by the Hire Purchase Act, 1972.
3. The ownership of the goods is transferred from the seller to the hire only
when all the agreed number of installments are paid.
4. The hire had an option to terminate the agreement at any stage. He may or
may not but the goods. After the termination of agreement, the hire cannot
be compelled to pay the remaining installments.
5. The hire does not become the owner. His position is that of a bailed only.
He becomes the owner after the payment of last installment.
6. The installment paid is considered as the hire charges for the use of the
goods. However, if the hire exercise the option to purchase the goods, then
each installment is regarded as the part payment.
7. Sales tax is not payable on hire purchase are until it becomes sale.