Hire-Purchase Transaction Taking a Triangular Form

[easyazon_block add_to_cart=”yes” align=”left” asin=”1112044760″ cloaking=”default” layout=”left” localization=”default” locale=”US” nofollow=”default” new_window=”default” tag=”thecorpro-20″]The Law Relating to the Hire-Purchase System : With An Appendix of Forms[/easyazon_block]The term “hire-purchase” relates to two different transactions rolled up into one: a hire and a purchase. It is a commercial transaction which has some similarities with other commercial transactions such as bailment, credit-sale, loan and mortgage, equipment lease, and conditional sale, etc. In spite of its similarities with those other commercial transactions, a hire-purchase transaction is clearly distinct from those other commercial transactions.

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Ordinarily, there are two parties involved in a hire-purchase transaction. However, this is not always the case in some situations as some hire-purchase transactions take what may be referred to as the “triangular form”. This is aptly illustrated in the diagram below.

HP TriangleThe diagram above depicts a scenario of a hire-purchase transaction involving a motor vehicle as its subject matter. In other words, circumstances may arise in which the owner of the goods does not have the resources necessary to finance a hire-purchase transaction. This is particularly true in the car trade. In such cases, the services of a finance company are used. The finance company finances the transaction for a consideration (the finance charge) that is included in the total hire-purchase price and thus has to be borne by the hirer.

In law, the transaction takes a very different form: the car dealer sells the car to the finance company for the cash price less the deposit which is paid directly to the car dealer by the hirer. Thereafter, the finance company lets the goods on hire-purchase to the hirer for the cash price plus hire-purchase charge (interest) usually at somewhat substantial rate. In such situations, there are, therefore, at least three possible contractual relationships. These are namely: the relationship between the finance company and the hirer; the relationship between the car dealer and hirer; and the relationship between the finance company and the car dealer. This is evident in the diagram above.

In practical terms, therefore, where the services of a finance company are used, the hire-purchase transaction takes the following triangular form:

  1. The original owner of the goods, for example, the car dealer, sells the goods to the finance company under an outright contract of sale. The car is immediately transferred to the finance company which becomes the subsequent owner of the car. The finance company pays the cash price for the car to the original owner. Assuming the property involved is a car and the dealer accepts the buyer’s car in part exchange, he will give the finance company credit for the car taken in part exchange.
  2. The finance company, as the new owner of the car, then enters into a hire-purchase contract with the person who intends to purchase the car (the hirer). The hirer pays directly to the finance company installments which will include finance charges. If, however, he exercises his option to purchase the car after the payment of the last installment, title to the car will pass from the finance company to the hirer.
  3. No contract of sale or hire-purchase exists between the original owner (the car dealer) and the hirer. However, their relationship might not be entirely devoid of legal effect. It is possible that a collateral contract of warranty may exist by virtue of which the original owner has undertaken a warranty relating to the car to the hirer in consideration of the latter entering into the hire-purchase contract with the finance company.

Hence, the three parties to the hire-purchase transaction in this instance play vital role in the unique nature of the hire-purchase transaction different from other commercial transactions. Where a car dealer has connected the hirer to a financial company, he is paid the full cash price by the finance company which becomes the new owner, and subsequently enters into a hire-purchase agreement with the hirer which entitles the hirer to the possession and use of the car. Thus, the parties to the hire-purchase agreement are still two: the owner and the hirer.

The owner, hirer, and the third party who most times may be finance companies are in some situations key factors in hire-purchase agreements. In this case, the hire-purchase transaction takes a triangular form, which additionally underscores the distinction between a hire-purchase and other commercial transactions.

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[easyazon_block add_to_cart=”yes” align=”center” asin=”1112044760″ cloaking=”default” layout=”left” localization=”default” locale=”US” nofollow=”default” new_window=”default” tag=”thecorpro-20″]The Law Relating to the Hire-Purchase System : With An Appendix of Forms[/easyazon_block]

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32 comments on “Hire-Purchase Transaction Taking a Triangular Form
  1. Semirah OKWILAGUE says:

    A very brilliant piece. Does this triangular form of hire-purchase make the parties to the agreement three?

  2. NWAKA ADAORA says:

    @Semirah, No it does not.This is because the finance company in this situation buys the goods from the original owner and becomes the new owner who subsequently enters into the hire-purchase transaction with the hirer. So, the parties to the hire-purchase agreement stil remain two: the Hirer and the Owner.

  3. NWAKA ADAORA says:

    Impressive work Isioma, but I refuse to align myself with the assumption that circumstances may arise in which the owner of the goods does not have the neccessary resources to finance a HP agreement. My reason being that it is the Hirer who in some circumstances may not have the financial capacity to enter into the contract and this is where the Finance company comes in and becomes the new owner who enters into a hire-purchase agreement with the Hirer. Hence, this still makes the parties to a HP agreement two, i.e., the owner and the hirer.

  4. bossdemuyi says:

    In reply to Semirah’s question I will say a yes and no, reason been that at the initial stage when the finance company steps in to help the hirer in acquiring the hire-purchase goods in question from the owner, this makes the parties to the hire-purchase transaction three. However, the outright purchase of the hire-purchase goods by the finance company eliminates any title the owner had in the goods and at this point the parties now become two because a new owner has emerged (the finance company) who now deals directly with the hirer.

    • Jerry says:

      @Adaora, there can be circumstances where the owner, for instance, a car dealer may not be able to afford to go into a HP transaction, due to the manner of payment involved. And so the dealer gets a finance company that is capable and willing to pay the cash price, and then the hirer (who wants the car but cannot afford full payment) is allowed to pay bit by bit over a period of time as agreed. I advise Adaora agrees with Isioma on this note.

      @Isioma, it is apparent that beyond the two parties to a HP agreement identified by Adaora, as provided in section 20(1) of the HPA, according to Dr. Nat Ofo, there are situations in HP transactions where other ‘third parties’ (though are, strictu sensu, not parties but at best, agents of one of the parties towards the conclusion of the HP transaction) are part of the transaction framework. In view of this, don’t you think your analysis of ‘HP Transaction Taking a Triangular Form’ appears rather intricate. With the ‘Law of Agency’ in mind, I would like you to briefly reconcile your research with Dr. Nat Ofo’s observation, and if likely, ascertain the Agent, the Principal and the Third party in your article.

  5. NWAKA ADAORA says:

    @Jerry, please why would the owner not have tha capacity to enter into a HP transaction when he is actually the one that has possession and property in the goods? Is the owner now paying the hirer for the goods? Please I beg to decline. Its only the hirer who may not have such financial capacity and that’s where the finance company comes in and becomes the subsequent owner. This isn’t Law of Agency rather its a hire-purchase agreement. Besides it’s not all HP agreements that require a finance company.

  6. NWAKA ADAORA says:

    Jerry, whether you agree with me or not, I am still of the view that a HP agreement involves two parties. Your explanation seems confusing.

  7. Ndubuisi Christian says:

    I think the car dealer here should be termed a guarantor or a surety who is just standing for the hirer in case he is unable to make the future installments to the finance company. The finance company can hold him at anytime where the hirer refused to make his payment. Nice work MISS. MENSAH. @ JERRY AND ADAORA… Everybody has his or her own position…….

  8. Lala says:

    What exactly is the relationship between the hirer and the original owner after the involvement of the finance company? If there is none, I am of the opinion that the chain in the triangle between the owner and hirer be broken.

  9. Chizam Elenwo says:

    Quite a good article but the triangular form is flawed if such confusion arises among readers. With that said they can be only two parties to a HP agreement that is owner and hirer, the fin co. can not be a third party and in the situation put forward by jerry the owner is the owner, all that is left is to perfect the ownership.

  10. olivia arusuraire says:

    Regarding Semirah’s question in my opinion there are only two parties to a hire purchase agreement which are the owner and the hirer. As such there cannot be three parties because the finance company becomes the owner of the car after purchasing it from the car dealer as property and possession passes after the transaction is made and the person who hires the car from the finance company as the hirer. In my observation the triangular formation of the hire purchase transaction is an alternative or another form of how a hire purchase agreement can be made or entered into that is where the car dealer cannot afford to enter into a HP agreement.

  11. Ada says:

    @Isioma the article is readable not possible. Once property passes there is only one owner. It is a straight line relationship: owner, hirer. Even where an agent is involved he will be regarded as the agent of the party for whom he acts. I don’t buy the triangular form of HP.

  12. mz mercy says:

    Nice write-up. I will like to know if leasing of goods function as hire-purchase. I.e if it takes the same form of transaction if not would love to know their difference

  13. raliat says:

    I totally agree wit Adaora. The parties to the HPA are only two since the property has passed from the original owner to the company. This means that the agreement is between the owner and the hirer. Nice article @Isioma.

  14. Jerry says:

    @ Adaora, the reason why an owner may not have the capacity to enter into a HP transaction even though he has possession and property in the goods, is because HP operates similar to credit sale. M.C Okany noted that ‘a dealer in particular goods or the manufacturer cannot always provide credits and yet the goods must be bought to enable the dealer or manufacturer continues in business. Consequently, a finance company may be involved, who is capable and willing to provide the necessary credit. The hirer may not have the financial capacity to buy immediately, and that is where the finance company comes in and becomes the owner. If the original owner has the necessary resources to finance a HP agreement, then there will be most likely no need to involve a finance company.

    Please do not be confused by my explanation. I totally agree with you that HP agreement involves two parties, and if you re-examine Isioma’s work, you will realise that we are all in agreement that there are two parties. Perhaps, our confusion is concerning the partakers in this transaction, which in strict sense are not all really parties to the agreement. Once the original owner of the goods, for example, the car dealer, sells the goods to the finance company under an outright contract of sale, the property is immediately transferred to the finance company who becomes the full owner of the goods. And so the HP agreement is between the present owner (finance company) and the hirer.

    I am aware that this is not Law of Agency, nonetheless, as M.C Okany noted, the dealer can serve as an agent of the finance company in bringing a contractual relationship between the finance company and his customer. Moreover, as Isioma noted, their relationship might not be entirely devoid of legal effect (M.C Okany pg. 495). Little wonder, Dr. Nat Ofo also made mention of a third party, as I stated earlier in my previous comment above.

    @Chizam, I hope you get my point… *wink*

    @Mercy, leasing of goods is quite similar to HP transaction but does not exactly function as same. I presume you know what HP is, by virtue of section 20(1) of HPA. Leasing is synonymous to hire, which is a kind of contract that is not expected to, and does not pass title of the goods (from the owner to the hirer) at a future date. Equipment leasing involves the hiring of goods on long term basis by business concern for use in their operations. Hire only enables a person to have possession of goods for his immediate use and does not want to, or cannot afford to purchase the property outrightly. The hirer will return the chattel to the owner after its use.
    Just like in HP, it is also a kind of bailment in which the hirer is given possession and use of an article during the period of the particular hiring agreement. While HP is a contract with statutory flavour, leasing has no such regulation.

  15. Melba says:

    In my opinion, there are only two parties to a hire-purchase agreement,the hirer and the owner. A finance company is not necessarily a party to a hire purchase agreement. A hire-purchase agreement for a motor vehicle or any other commodity can be entered into with or without a finance company.

  16. Isioma MENSAH says:

    this topic hire-purchase taking a triangular form strictly deserves creative thinking for one to understand the subject the relevance of this piece. the piece simply explains how hire-purchase begins with a three party involvement and subsequently boils down to its statusquo two parties involvement. the piece reads hire-purchase “taking” a triangular form, in other for us not to neglect the begining of the whole transaction before the main agreement betweeen the concerned parties… hope this may appeal to whoever finds it complicating in digesting this piece.

  17. bouye says:

    Is it correct to say that the subject matter of most hire purchase transactions involves vehicles? If yes, is this a plus to the Hire-Purchase Act?

  18. M.R. JOHNSON says:

    There is a difference between a hire-purchase transaction and an equipment lease. In a hire-purchase transaction, there are two elements involved the hire and the purchase. Howvever, at the end of the hire, there is usually an undeniable option to purchase to be made by the hirer in respect of the goods being hired during the transaction. In the case of a lease, this is quite different because there is no option to purchase at the end of the lease; and obviously there is no governing statutes regulating the agreeement and transaction between both parties unlike the Hire-Purchase Act Cap H4 Laws of the Federation of Nigeria 2004 that regulates hire-purchase transactions in Nigeria.

  19. Isioma MENSAH says:

    All you have to do is read in between the lines to understand this piece. It is a two party transaction that did not begin initially with two parties… e.g in the case of a motor vehicle, the hirer, dealer and fin co. Hope you understand.

  20. Isioma MENSAH says:

    Yes, you are right adaora, but the piece reads “taking”, not “takes”. I believe this is where the confusion is, so take note.

  21. NWAKA ADAORA says:

    Whether it is ‘Takes or Taking’, there is still no triangular form formed by the Hp agreement. Recheck your construction of the diagram.

  22. unyime udofia says:

    This triangular form is quite good but it contradicts the fact that a HPA is between two parties-the owner and the hirer

    • I am blessed says:

      @Semirah, there can only be two parties in a hire purchase transaction,that is the owner and the hirer. Where the finance company acquires the vehicle from the dealer,the property is passed on thereby making the finance company the owner of the vehicle. This eliminates the ownership right of the dealer and leaves the financial company and the hirer as the two parties in the hire purchase transaction. The finance company as the owner then enter forthwith into the hire purchase transaction with the hirer. The hirer does all payments directly to the finance company. Just as you cannot eat your cake and have it,so also the dealer cannot vend his vehicle to the finance company and expect to retain ownership or act as a party in the hire purchase negotiation.

  23. M.R. JOHNSON says:

    Section 1 of the HPA provides for only 2 categories of goods which can be the subject matter of a hire-purchsse transaction. These are motor vehicles and goods whose monetary value is not more than 2000 naira. So it is correct to an extent to say that motor vehicles falls within the subject matter most times. However, the monetary value goods of not more than 2000 naira sometimes revolve in modern hire-purchase transactions, but motor vehicles remains the dorminant feature in modern hire-purchase transactions from my observation.

    • yanyan says:

      Yes Johnson, it is seemingly so, and that is why scholars are working frantically to ensure the HPA is reviewed.The 2000 naira worth good is quite ridiculous to be made subject of hire-purchase agreement. Instead, such good would be subject of sale of good contract.

  24. DamiOkueyungbo says:

    Thanks for the interesting article Isioma. The hire and purchase agreement is quite interesting especially when the agreement is subsequently applied differently in various countries. According to VentureLine Website, “In the United States such a contract is generally treated as a conditional sale, and the term hire purchase is also sometimes applied to a contract in which the hirer is not free to avoid future liability by surrender of the goods. In England, however, if the hirer does not have this right the contract is a sale.”
    After getting into an hour argument with my sister that resides in the states about this agreement, i guess its a little easier for both of us to understand how the agreement works in North America and Africa. One great example she gave was leasing or financing of vehicles in the US. Although she drives her car everyday, pays for the insurance and registration, the car still belongs to the Bank (Financial Dealer) until the car is paid up to the nearest cent.

    Thanks
    Damilola Okueyungbo
    Reference
    Venture Line (2013.): Hire and Purchase Agreement. Retrieved April 28th, 2013 from http://www.ventureline.com/accounting-glossary/H/hire-and-purchase-agreement-definition/

  25. Isioma MENSAH says:

    Note that the hire-purchase agreement is between two parties and not three parties. Moreover, the title of this article reads: “HIRE-PURCHASE TRANSACTION TAKING A TRIANGULAR FORM”. This exposition is to reveal the underlying fact that a hire-purchase transaction, in some cases of motor vehicles, actually begin with one party who needs to be granted credit facilities to satisfy his want; thereby making a contact with the car dealer who in return may not want to take the risk of getting into such agreement, and decides to involve a third party (a financel company), who he believes may be willing to undertake a hire-purchase agreement with needy party. Once the fin co. accepts the offer from the dealer on behalf of the needy party, the needy party when the hire-purchase agreement is drafted becomes the hirer, and having bought and received the car from the dealer, the fin co. automatically becomes the owner, but must transfer the car to the hirer for possession and use, thereby making the hire-purchase transaction which initially started with three parties to boil down to two parties in place of the agreement, which are the hirer and the owner.

  26. yanyan says:

    Great Isioma for that brilliant expository remark on your triangular hire-purchase agreement. However, hire-purchase agreement would never start with three parties. Any preliminaries to the HPA is never a part of it. Therefore, we should not bring in any third party to HPA in any form at any point in time. My regards to all in the room.

  27. Job Faith says:

    Hmmm…interesting article and jaw dropping comments to go with it. But with all said, there are only two parties to a HPA and that is the owner and the hirer. So people please don’t get it twisted ok. @ada I totally I agree with you, the article is quite readable but not possible.

  28. vivisparkle says:

    As evident in the nature and number of responds so far, this triangle seem to be a little bit controversial. Little wonder, Dr. Loveday A. Nwanyanwu noted in his article titled “Hire Purchase Strategy of Physical Capital Investment and Financial Performance of Construction Companies: Illustrating from the Nigerian Stock Exchange”, that the obligations of the dealer in a hire purchase transaction sometimes create an ambiguous situation. Where the dealer is owner of the goods by reason of financing them, he is responsible for the description, quality and fitness of the goods. But if the dealer is not the financier, his duty is just to introduce the hirer to the finance company, he assumes no contractual obligation and if agency relationship is to develop between them, it should be through agreement, in which case the functions of the dealer would be spelt out in the terms of the contract.

    However, as noted by Jerry on the position of Dr. Nat Ofo, even though they may be situations in HP transactions where other ‘third parties’ are involved, they are stricto sensu, not parties but at best, agents of one of the parties towards the conclusion of the HP transaction. Victory Eneh

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