Hire purchase is used across a wide range of commercial goods including in relation to industrial equipment such as scaffolding, warehousing items such as forklifts, car fleets for corporations, farm machinery and computerised mechanisms for heavy and light industry. Hire purchase is now generally used only as a source of commercial finance because the national Consumer Credit Code of 1996 (see Section 10) deems hire purchase in the consumer context (ie. individuals wholly or predominantly acquiring goods for personal, domestic or household purposes) as a sale by instalments contract to which the terms of the Code apply.

Hire purchase is distinguished from other transactions in that:

-hire purchase involves a financier, who purchases the goods from the original vendor immediately prior to or at the time of execution of the hire purchase agreement. The hirer pays the financier by instalments and does not pay the original vendor;

-the hirer has an option to purchase the goods which is generally exercised by payment of a residual fee. This is unlike a lease where there is generally no option to purchase within the lease agreement. It is also unlike a sale of goods contract which is a binding obligation on the parties to a sell/buy contract;

-title remains with the financier/owner until the last instalment and the residual fee, if any, is paid. This is unlike sale of goods where title usually passes to the holder of the goods/buyer unless there is a retention of title clause (a Romalpa clause);

-possession of and the right to use the goods passes to the hirer generally on payment of the first instalment. This is unlike a lay-by arrangement where possession of the goods remains with the financier/owner until the last instalment is paid.

It is important to ensure that a hire purchase agreement cannot be legally interpreted as a contract for sale of goods. This is because the sale of goods legislation has statutory implied conditions and warranties, in particular in relation to fitness for purpose, quality and title.
State legislation used to cover hire purchase agreements however most have been repealed with the exception of Western Australia where residual statutory provisions remain in force (as of June 2009) regarding hire purchase agreements newly entered into. The WA provisions relate to repossession and the power of a Court to make determinations in relation to harsh and unconscionable contracts. In all other respects common law principles apply to hire purchase contracts. In Victoria, rights of hirers when the owner repossesses goods is covered by Section 121 of the Goods Act 1958 (Vic).

A hire purchase agreement establishes a relationship of bailment. The hirer is the bailee (because it has no title to the goods) and the common law of bailment applies unless expressly excluded as a term of the contract. This template includes a clause whereby the parties expressly reserve their common law rights.

This agreement provides an option for payment of a residual fee on the expiry of the term of the hiring or if the Hirer exercises its option to purchase before the hire period expires. It is very important to ensure that the residual fee amount is not excessive having regard to the hiring as a whole, otherwise the residual payment may be challenged as being a penalty. Under the common law, a penalty is void and therefore unenforceable. A payment which can be proved to be a genuine pre-estimate of either the damage arising from a breach of the agreement or the loss due to early termination is unlikely to be held a penalty.

This agreement provides that the occurrence of an event of default amounts to a repudiation of the contract. This gives the party not in default the right to terminate and sue for breach of contract. The optional clauses should be considered very carefully in light of the context of the commercial arrangement when determining whether to include or exclude them in the agreement, having regard to the potential consequences of default and repudiation.

For taxation purposes, specific GST and depreciation rules apply to a hire purchase agreement - see the Australian Taxation Office website at www.ato.gov.au.

In some circumstances a guarantee from a third party, such as company director personally guaranteeing the company's payments under the agreement, is required. LawLive's Deed of Financial Guarantee may be used for this purpose.

LAWLIVE recommends: This is a complex document which involves the creation of complex legal rights and obligations and may give rise to various taxation and liability consequences. The best way to use this document is to complete it, print it out, print out any checklist that applies to it and all other LawLive information that relates to this type of document. When you have done this, LawLive recommends you read it carefully and instruct lawyers to assist you in the finalisation of the document and that you take tax advice from your accountant or tax adviser as to any income tax, capital gains or GST consequences.