Relevance of the minimum payment clause in HPA's

Minimum payment clause

A hire-purchase agreement may be terminated either by the owner or hirer and the hirer may return the article to the owner after terminating the agreement. But since the articles are subject to usual wear and tear on account of user, it is usual to insert a “minimum payment” clause in the agreement in order to provide for depreciation of the article taken under the hire-purchase agreement. Such a clause provides that in the event of the agreement being determined by the owner or the hirer, the hirer shall be liable to pay 50% of the total price after deduction of the instalments already paid by the hirer. This clause was inserted in the contracts in United Dominions Corporation v. Laclipc P and Amusan v. Bentworth Pinence" and the courts upheld and enforced it.

The value of hire-purchase transactions has remained at a fairly steady level during the first few years and it would be pleasant to think that the law affecting them has reached a stable stage of maturity. This however is not the case as we shall see, instead, a number of legal problems continue to spring up and multiply and some aspects of the hire-purchase law have reached a state of complexity which must baffle even the most qualified legal minds. One of these is the law relating to the minimum payment clause.

This familiar clause usually provides that in the event of the hire purchase agreement being terminated for any reason before a stated proportion of the hire-purchase price is paid; the owner shall be entitled to recover from the hirer the difference between that fraction and the sums already paid or payable. The minimum sum may be “one-half, two thirds or some times, as in cooden Engineering Co. Ltd. V Stanford, the full amount. In all these cases, the hirer’s obligation to pay this additional sum is almost invariably stated to be by way of compensation to the owner for the depreciation which the goods have suffered while in the hirer’s hands.

PURPOSE AND NECESSITY OF THE CLAUSE

In all hiring agreements, the rental payments automatically take the factor of depreciation into consideration. The agreement is in substance a one of two things. When the trader/owner finances his own credit transactions, it is really a credit sale in which the owner remains with/ retains the title in the goods by way of security for payment of the price. It is sometimes referred to as a conditional sale. On the other hand where a hire-purchase company is involved, the transaction amounts in truth to a secured loan. The finance company advances to the purchase price of the goods and in return receives the title to the goods from the trader as security for the repayment of the loan together with interest.

Sec 25 of the sale of goods act prevents the owner/ hire-purchase Company from attaining their perfectly legitimate objectives in a straightforward manner, and they have therefore been forced to adopt the fictitious hire-purchase form of agreement.

From the owner’s point of view, the minimum payment clause is so necessary. Since the so called rental agreements do not reflect the true rental value of the goods at all but merely represent predetermined fractions of the hire purchase price, it may well happen that at the date of determination of the agreement, the depreciated goods are worth less than the balance of the hire purchase price. Without the clause, however, the owner would be unable to recover the difference from the hirer since, on normal contract principles; the hirer would only be liable for rentals/instalments in areas if any.

If the hire-purchase company had contented itself from the beginning with merely requiring the hirer to pay this difference, the courts would almost certainly have upheld the clause and subsequent difficulties would be avoided. On the contrary, the company sought a short cut and in many cases the amount payable in the minimum payment clause covers much more than the potential loss to the owner through the premature termination of the agreement.

This was captured in Bridge v Campell Discount Co Ltd. Here, relying on a clause with a two thirds provision, the owners upon termination of the agreement, sought to recover 206 pounds from the hirer. The hirer had only had the goods, a vehicle, for one month and had already paid 115 pounds toward the hire-purchase price of 482 pounds. When the case was remitted by the House of Lords to the county court judge to access the real loss suffered by the owners, he set it at 80 pounds a difference of 176 pounds. The owners had not been seeking a windfall for it actually transpired that they had only received 101 pounds on the resale of the vehicle. The judge found out that they ought to have been able to realise at least 275pounds. These factors demonstrate another vice in connection with the minimum payment clause: it encourages hire-purchase companies to be careless in their manner of disposing of repossessed goods.

In view therefore, there is a possibility of the clause being used as an instrument of oppression. 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.