What is the difference between Sale and Hire Purchase?

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.

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).

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.

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.

(d) A contract to take and supply photographs has been held to be a contract of sale of goods (Newman vs Lipman).