February 23 2009
Minimum Payment Clause
A 'hire-purchase transaction' has been defined as "a system of financing where goods are bought by putting down a deposit and then periodically paying off the balance of the purchase price plus interest". The process involves the drafting and signing of an agreement between the hirer (the consumer) and the owner (the lending institution).
Although the process has been beneficial to parties interested in acquiring goods, many of the requirements of such agreements have proven cumbersome. Among these are the minimum payment clause and the requirement for agreements to be registered. This situation calls for a review.
The process of hire-purchase financing has become an alternative option for consumers who want to buy large and expensive items which may otherwise be difficult to afford. The transactions allow the buyer to pay for items without cashing in investments or savings, and to spread the cost of expensive items over an extended period. In such transactions ownership of goods is transferred to a finance company at a discounted price, and the company hires out and then sells those goods to the buyer.
Kenyan law recognizes regulates hire-purchase agreement transactions through the Hire-Purchase Act. However, it is widely felt that the act gives more protection to the hirer of the goods than the owner through the incorporation of a minimum payment clause.
Minimum Payment Clause
Section 12 supports the offending clause by providing that the hirer may terminate an agreement by returning the goods to the owner at any time before final payment, and that the transaction becomes a sale only when the hirer exercises the option to purchase. This position has been supported further by the appeal court decision in Associated Distributors Ltd v Hall (1938), which held that that the courts can enforce the minimum payment clause if the contract is terminated within its terms. In such cases, the operation of the minimum payment clause which binds both parties is quite unfair to the owner of goods where the goods are returned with an intention to terminate the contract.
A review of this clause will protect buyers from unscrupulous hire-purchase dealers who may deliberately encourage consumers to enter into hire-purchase contracts beyond their means with the aim of having them fall into arrears once most of the instalments have been paid, so that the dealer can then 'snatch back' or repossess the goods, thus significantly increasing its profit.
The act also sets out the mandatory requirements for the registration of hire-purchase agreements. Section 5(4)a provides that "every hire-purchase agreement shall be delivered for registration to the registrar within 30 days of its execution".
This requirement is unnecessary because agreements must meet the requirements for a valid contract. The language of Section 5 clearly indicates that an agreement must be in writing, thus upholding the principles of freedom of contract and a meeting of minds. Clauses that restrict the enforcement of agreements against the hirer in circumstances where registration has not been completed must be derogated.
Under the act the hirer is not bound to purchase as provided in Dalpat Rai v Manohar Lal & Sons (AIR 1974 Raj 61). The act gives the hirer the option, but not the obligation, to buy. Thus, where the hirer breaches the contract, it will be up to the courts to decide whether a penalty has been incurred. Furthermore, if the hirer returns the goods as is his or her right, the hirer must pay the owner damages. At this stage, rather than simply enforcing the minimum payment clause, the courts should be called upon to ascertain the extent of damages caused to the owner of the goods.
The law must be reviewed to ensure that contracts are enforced in a manner that protects the interests of both parties to a hire-purchase agreement. The introduction of a third party (the finance company) complicates the transaction further because in a conventional contract of sale, the seller will be liable to the buyer if the representation proves to be false. However, in hire-purchase transactions the owner makes a representation to the finance company which, if accepted, binds the buyer. The agreement becomes legally binding when the finance company signs the document and communicates its acceptance to the hirer. This raises doubts as to the extent to which the interests of the hirer may be taken into consideration.
On the issue of the hirer's attempt to return goods to the owner, the resolution should be treated as a breach of contract by the owner which should seek remedial damages from the hirer. The injured party should be compensated for its loss so that the expectations arising out from the contract are protected, rather than the compensation being based on the terms of the minimum payment clause.
Hence, the provision of the act which allows the hirer to terminate a contract by returning goods to the owner should be replaced by provisions which would compel the hirer to carry out his or her contractual obligations.
For further information on this topic please contact Dan Barango at Njoroge Regeru & Company by telephone (+254 20 271 8482) or by fax (+254 20 271 8485) or by email (firstname.lastname@example.org).
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