Commercial Law Formative PDF

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Question: In relation to supplies of goods, explain the legal differences between a contract of (i) conditional sale and (ii) hire purchase. Critically assess the significance of Forthright Finance Ltd v Carlyle Finance (1997) in determining the borderline between those two types of contract.

Described by Van Winsen in ‘Theories of Hire-Purchase (1930)’ as ‘a sale with a

reservation, the sale being subject to a resolutive condition’, a contract of hire purchase is

essentially an ‘agreement for the bailment of goods’ where the hirer has an option to

purchase at the end of the instalments (Dobson and Stokes, 2012). Under both s. 189(1) of

CCA 1974 and s. 7 of CRA 2015, a contract of hire purchase involves the hiring of contract

goods by the hirer (trader, for the purpose of CRA 2015) in return for ‘periodical payments’.

Under a contract of conditional sale, a buyer is required to pay for the purchase price in

instalments. The property under such contract will only pass when the conditions set forth

are fulfilled, which usually involves the payment of the final instalment (s. 189(1)

Consumer Credit Act 1974; s. 5(3) Consumer Rights Act 2015).

A closer examination of both contract of conditional sale and contract of hire purchase will

show that they bear striking similarities – the requirement for periodical payments, and

the reservation of title by the seller. Despite the similarities, there are stark differences

Question: In relation to supplies of goods, explain the legal differences between a contract of (i) conditional sale and (ii) hire purchase. Critically assess the significance of Forthright Finance Ltd v Carlyle Finance (1997) in determining the borderline between those two types of contract.

between them. For instance, under a contract of hire purchase, the hirer has no obligation

to exercise their option to purchase –the hirer may choose not to take title of the goods. In

contrast, under a contract of conditional sale the passing of property takes place

automatically upon the completion of condition(s), such as when the final instalment is

paid for. An important point to note here would be, the hirer in exercising his or her option

to purchase under a hire purchase agreement, he or she would have to pay for an ‘Option

to Purchase Fee’, which usually involves only a nominal sum, such as £1.

It is important to distinguish between conditional sale agreement and hire purchase

agreements. Where it is a conditional sale, the seller is not protected against the possibility

of buyer selling goods to third party prior to completing the instalments. By virtue of s.

25(1) of the Sale of Goods Act, a person who has ‘bought or agreed to buy goods’ may pass

good title to a third party. This provision does not apply to hire purchase, as the hirer did

Question: In relation to supplies of goods, explain the legal differences between a contract of (i) conditional sale and (ii) hire purchase. Critically assess the significance of Forthright Finance Ltd v Carlyle Finance (1997) in determining the borderline between those two types of contract.

not agree to buy goods. Thus, it is in the seller’s interest to opt for a hire purchase

agreement to protect their financial viability.

To understand the inextricable link between conditional sale and hire purchase, one would

have to look at the landmark case of Lee v Butler (1893). The decision in Lee has weakened

the protection offered to sellers, subsequently leading to the rise of hire-purchase

agreements (Connolly, 1998). The agreement described as ‘hire and purchase’ in Lee was

classified as a contract of sale, instead as being one of hire. The court’s reasoning was as

such: the ‘hirer’ had an obligation to buy the goods from the outset; the title will pass

automatically when the final instalment is made. Thus, it can be concluded that a very

important distinguishing factor between conditional sale and hire purchase is the parties’

commitment – if both parties have an obligation to buy or to sell, it will be a contract of

conditional sale.

Question: In relation to supplies of goods, explain the legal differences between a contract of (i) conditional sale and (ii) hire purchase. Critically assess the significance of Forthright Finance Ltd v Carlyle Finance (1997) in determining the borderline between those two types of contract.

Bearing in mind the decision in Lee, the case of Helby v Matthews (1895) shall be

examined. In Helby, their Lordships have put much emphasis on the fact that the bailee,

Brewster, did not have any obligation to buy. Lord Watson in particular, have pointed out

that Brewster was merely in possession of the right to purchase, which was not an

agreement to buy. Realistically speaking, albeit the hirer is not legally bound to exercise his

or her option to purchase, most of the time the hirer would do so. From the hirer’s point of

view, the periodical payments made are in essence, payment for the contract goods made

over a period of time. It would only be economically and logically sound for the hirer to

purchase the goods, for a nominal sum nonetheless (Bridge, ‘Formalism, Functionalism,

and Understanding the Law of Secured Transactions’ (1999)).

The option to purchase is a very important feature of contract of hire purchase, as it is one

of the defining features that differentiate contract of hire purchase from that of

conditional sale. However, for the reason mentioned above, the distinguishing factor

Question: In relation to supplies of goods, explain the legal differences between a contract of (i) conditional sale and (ii) hire purchase. Critically assess the significance of Forthright Finance Ltd v Carlyle Finance (1997) in determining the borderline between those two types of contract.

between contract of hire purchase and conditional sale is almost illusory and operates on a

theoretical basis that is detached from reality – in reality, most buyers would purchase the

contract goods. This point was fortunately, addressed by Lord Macnaghten in Helby. His

Lordship emphasised that even though there is an 'expectation' between the parties that

the property will be transfer once instalments are paid and option is accepted by Brewster,

‘an expectation, however confident and however well-founded, does not amount to an

agreement’.

In both Lee and Helby, the court has looked at the substance of the agreement in

determining whether it is a contract of conditional sale or hire purchase. It was in the case

of Forthright Finance Ltd v Carlyle Finance Ltd (1997) that the court has explicitly gave

that the court will look at the substance of an agreement instead of its form; emphasising

that the language used by the parties in the agreement is not conclusive. In Forthright

Question: In relation to supplies of goods, explain the legal differences between a contract of (i) conditional sale and (ii) hire purchase. Critically assess the significance of Forthright Finance Ltd v Carlyle Finance (1997) in determining the borderline between those two types of contract.

Finance, despite that the contract was titled as a contract of hire purchase, the court held

that it was a contract of conditional sale.

The facts in Forthright Finance was tricky, as the ‘hirer’ was required to pay all

instalments, and the option to purchase will be deemed exercised unless the seller was

informed otherwise. Phillips LJ has emphasised on the fact that the hirer is bound to

complete the instalments, which was seen as an obligation. This can be contrasted with

Helby, where the hirer had no obligation to continue with his instalments and may opt-out

of the agreement anytime. A problematic issue in Forthright Finance would be the

‘negative option’ to opt out given to the ‘hirer’ – similar to the option to purchase in a hire

purchase agreement. To this, Phillips LJ has clarified that ‘the option not to take title,

which one would expect only to be exercised in the most unusual circumstances, does not

affect the true nature of the agreement’. Indeed, looking at the substance of the agreement,

Question: In relation to supplies of goods, explain the legal differences between a contract of (i) conditional sale and (ii) hire purchase. Critically assess the significance of Forthright Finance Ltd v Carlyle Finance (1997) in determining the borderline between those two types of contract.

it is clear that the agreement was one of conditional sale as the purchaser has an

obligation to complete the instalment payments (Goode, Consumer Credit Legislation).

Despite offering much needed clarification to the law, Forthright Finance has brought

forth a question worth pondering upon – would the agreement in Forthright Finance still

be a conditional sale agreement if a positive nominal option was inserted, instead of a

negative option (J MacLeod, Consumer Sales Law (2002))? Unfortunately, the court has

expressly turned down the opportunity to comment on this issue. Based on the position of

the law today, the only way the sellers could afford themselves some protection would be to

refrain from legally binding their customers from paying the instalments – the payment

terms must be arranged in such a way that it is in the customer’s interest to complete the

hiring.

Question: In relation to supplies of goods, explain the legal differences between a contract of (i) conditional sale and (ii) hire purchase. Critically assess the significance of Forthright Finance Ltd v Carlyle Finance (1997) in determining the borderline between those two types of contract....