COMMERCIAL LAW NOTES

 PART ONE

INTRODUCTION TO COMMERCIAL LAW

Definition

There is no universally accepted definition of commercial law. Some examples of definitions:

“Commercial law is an expression incapable of strict definition but it is used to comprehend all that portion of the law of England which is more especially concerned with trade and business”.

It is the special rules which apply to contracts for the sale of goods and such contracts as are auxiliary thereto, namely contracts for the carriage of and insurance of goods and contracts the main purpose of which is to finance the carrying out of contracts of sale.

H.W. Disney, The Elements of Commercial Law (1931), p1

According to Prof. Sir Roy Goode, commercial law is that branch of law, which is concerned with rights and duties arising from the supply of goods and services in the way of trade. Goode on Commercial Law, 2010 p 8

It represents the totality of the laws response to mercantile disputes. It encompasses rules, statutory provisions of whatever kind and from whatever source which bear on the private law rights and obligations of parties to a commercial transaction. Goode, Commercial Law in the Next Millenium p 8-9

There is general agreement that by its nature commercial law is a subject of wide compass. It embraces many different areas of law. It draws for its sustenance on all the great streams of law that together make up the corpus of English jurisprudence, with the law of contract at its core. Goode on Commercial Law

— Does commercial law exist then?

Due to the hybrid nature of the subject, many people have often asked whether there really exists a subject like commercial law. Many have queried whether commercial law is not merely a label that is used for collection of many laws and therefore has no home of its own.

It has been said that in reality commercial law is no more than an agglomeration of distinct subjects (contracts, sale of goods, banking) etc., boundaries of which may overlap but which otherwise share little in common except the underlying foundations of the law of contract.

Referring to distinct areas of the law under one subject creates a problem for practitioners and students especially because the scope of commercial law is not defined. It is not clear what spheres of commercial activity are included in the subject.

In support of commercial law it is argued that:

The thread running through all the definitions is the mercantile nature of the subject. (Commercial law is the law of commerce. It is concerned with commercial transactions. i.e. transactions in which both parties deal with each other in the course of business). It is therefore possible to get to a point of consensus and the difference in definition may not be as fundamental.

Thus Goode in his latest edition agrees that

Commercial law is the totality of the laws response to the needs and practices of the mercantile community. It is characterised by those principles, rules and statutory provisions which are concerned with upholding and protecting the acceptable customs and practices of merchants.

This commonality in these specific subjects justifies grouping them together as commercial law. E.g. In US these subjects are codified to a Uniform Commercial Code.

Secondly, it is argued that commercial law has specific functions/objectives:

· To deal in merchandise. Disney

· The accommodation of rules, usages and documents fashioned by the world of business and the facilitation rather than the obstruction of legitimate commercial development. To facilitate the growth and development of principles within a sound conceptual framework. Goode

· To facilitate commercial transactions. Courts will listen to commercial law practitioners argue for their clients and out of this courts respond to the needs of the business community by ensuring that commercial law and practice develops and keeps up with the changing times. Thus we have what is from time to time referred to as common commercial practice upheld by the courts. This is helpful as commercial decisions are predictable and flexible to accommodate new commercial practices.

In Kum vs Wah Tat Bank Ltd Lord Devlin stated thus:

“The function of the commercial law is to allow, so far as it can, commercial men to do business in the way they want to do it and not to require them to stick to forms that they might think outdated. The common law is not bureaucratic”.

There are certain Principles/concepts of commercial law that are unique to commercial law subjects:

The concept of a market

As one would expect in a body of law concerned with dealings among merchants, the concept of a market is central to commercial law.

By market is not necessarily meant a physical market but a mechanism for bringing together substantial numbers of participants who deal in commodities, securities or money and who make a market by acting as buyers and sellers of good and services.

Commercial law is influenced by markets in several ways.

· Firstly the parties dealing in a market are deemed to contract with reference to its established and reasonable customs and usages.

· The market price is also taken as the reference point in computing damages against a seller who fails to deliver or a buyer who fails to accept the subject matter of the contract.

The importance of customs or usages or a trade of locality

Commercial courts will recognize established customs or usages such as those of a particular locality where circumstances indicate that the parties were contracting by reference to the custom or usage (may happen where there is no contract in writing or where a contract is ambigous).

The importance of customs or usages or a trade of locality

Commercial courts will recognize established customs or usages such as those of a particular locality where circumstances indicate that the parties were contracting by reference to the custom or usage (may happen where there is no contract in writing or where a contract is ambigous).

The importance of a course of dealing.

Since traders are often concerned in continuous and consistent course of dealing with the each other, it is taken for granted that the usual terms apply whether or not spelled out in the contract. Terms implied by a course of dealing are thus a fruitful source of implication into commercial contracts.

5.The principle of good faith

6. The sanctity of agreement

7. The concept of negotiability.

This concept derives from the old law merchant and is a characteristic of commercial law. It concerns the development of documents of title and negotiable instruments and securities, the delivery of which, together with all necessary endorsements passes constructive possession or legal title to the underlying rights.

It should however be noted that with time there is the possibility of decline of the use of negotiable instruments and securities as electronic funds transfers and other forms of paperless transfers of security come in.

The historical development of commercial law

Modern commercial law has its roots in the lex mercatoria.(Latin for law merchant) of the Middle Ages. The lex mercatoria was an international law of commerce based on general customs and practices of merchants, which were common throughout Europe.

The laws were applied uniformly by merchant courts in various courts in different countries. Thus during this period when merchants travelled with their goods to fairs and markets across Europe they would have their disputes settled by special courts using the lex mercatoria.

The lex mercatoria derived its authority from voluntary acceptance by merchants whose conduct it sort to regulate. The lex mercatoria suited their needs because it emphasized the freedom of contract and freedom of alienability of movable property.

It was also flexible enough to adapt to new mercantile practices. It was during the era of the lex merctiroa that some of the most important features of commercial law were developed e.g. the bill of exchange, the Bill of Lading, concepts of assignability and negotiability etc.

In the 15th and 16th centuries most of the business of the merchant courts was taken over by the court of Admiralty, which continued to recognise lex mercatoria.

In the 17th century the work of the Admiralty courts was itself taken over by the common law courts and by the 18th century lex merctoria was fully incorporated into the common law.

The development of commercial law through the common law led to a complex and sometimes conflicting mass of case law.

In the 19th century certain defined areas of commercial law were codified. Eg The Bills of Exchange Act, Sales of Goods Act, Insurance Act etc. These are the laws that Kenya inherited from the English through the reception clause, and which remain in force up to today.

*The Sources of Commercial Law

A. Contracts

The law of contract lies at the heart of commercial law. In the world of commerce goods and services are supplied pursuant to terms of contracts made between businessmen. Some contracts will be standard form contracts while others arise from negotiation.

Often times commercial courts will be called upon to construe the terms of commercial contracts. Over the years there has been a shift from strict construction of commercial instruments to what is now referred to as commercial construction of such documents.

B. Custom and Usage

A custom is a rule which has obtained the force of law in a particular locality and a usage is the settled practice of a particular trade or profession.

Thus, the custom of merchants has always been a fruitful source of law.

A court may therefore admit evidence of a trade custom or usage to imply a term into a Commercial contract or as an aid to construction of the contract. The custom or usage should thus be one, which the court will recognize.

In Cunliffe-Owen vs Teather and Greenwood [1967] I WLR 1421 the Learned Judge pointed out that usage as a practice that the court will recognize is a question of fact and law. The practice must be certain in that it is clearly established, it must be notorious in the sense that it is well known in the market in which it is alleged to exist and it must be reasonable. It must not be unlawful.

C. National Legislation

Statutes are an important source of commercial law. They also play an important role in the regulation of commercial transaction. Although most statutes are aimed at giving effect to the free will of the parties, some statutes are designed to promote social and economic policies of the state rather than the free will of individuals e.g. Restrictive Trade and Monopolies Act.

D. International Conventions, Model Laws, Uniform Rules and Uniform Trade Terms

International conventions have the force of law under 2010 constitution if ratified. Egs of international conventions: Vienna Convention on contacts for the International Sale of Goods, UN Convention on International Bills of Exchange.

A model law has no legal force as such. It only provides a model which a state can adopt in whole or in part. e.g. The Model Law on Bankruptcy which the Insolvency Bill borrows from largely.

E. Equity

Since time immemorial, commercial lawyers resisted the use of principles of equity in commercial law and argued that equity had no place in world of commerce. They argued that equity would be inconsistent with the practice of speed and certainty, which are essential requirements for the orderly conduct of business affairs.

With the growth and development of commercial law however, equity has slowly found its way and been embraced as a part of commercial law. E.g. Concepts of fiduciary duty,

This is because much commerce today is based on trust; the relationships are likely to be relationship of trust and confidence.

With the growth and development of commercial law however, equity has slowly found its way and been embraced as a part of commercial law. E.g. Concepts of fiduciary duty,

This is because much commerce today is based on trust; the relationships are likely to be relationship of trust and confidence.

Secondly, there has never been a greater need to impose on those who engage in commerce the high standards of conduct which equity demands. The common law insists on honesty, diligence and the due performance of contractual obligations. But equity exerts higher standards than those of market place; loyalty, fidelity, integrity, respect for confidentiality, and the disinterested discharge of obligations of trust and confidence.

The place of equity in Kenyan commercial law Ref: Henry Mbugua vs Patrick Gachie Kigo, HCCC 652/2004 where the court stated that:

“Equity is the business of this court. And equity will be readily administered where a party’s rights are being compromised and violated by a thoughtless party moved by nothing but cupidity and breaches of trust. This court will dispense equity in favour of the plaintiff and it will be dispensed by building upon such foundation of legal rights as would be found to exist”.

For Discussion: Discuss the socio economic context within which commercial law exists in Kenya/Does commercial law have a future in Kenya?

Legal framework – areas of commercial law in Kenya are governed by different legislation, not codified, challenge of outdated laws makes Kenya lag behind as a choice of investors to do business in Kenya, has necessitated the amendment of laws eg the Insolvency Act….

Effect of IT on commerce – Many Kenyans are computer literate, trade using websites on the increase, phone money transfer eg Mpesa on the increase, lack of specific regulation on these types of transactions….

Regional and international trade- Increased international cooperation and integration of Kenya with other regional/world markets (COMESA, EAC etc). Main aim is economic growth and trade cooperation. Brings about need for developed commercial laws locally,regionally and internationally. Formation of courts and dispute resolution mechanisms that are not local.

Courts and court processes -Rapid increase in commercial disputes led to the creation of the commercial court division of the high court in 1999. Provides a faster and more effective dispute resolution mechanism for commercial cases, has seen the development of jurisprudence.

PART TWO

BAILMENT

Introduction

A bailment is a unique concept recognised under common law and is independent of a contract in that it may or may not arise from a contractual position. As such, it is not necessary to establish the existence of a contract in order to succeed in a bailment claim.(as per Coggs v Benard).

Eg where a friend agrees to store some items for another or someone ends up with items belonging to another by mistake, there is no consideration in both cases hence no contract…..

In both cases they will be responsible for any loss or damage by reason of the trust that the bailor put in them or the obligation that the bailee undertakes to discharge. It may be contractual or not.

Definition:

Bailment is the delivery of goods from one person (the bailor or his agent) to another (the bailee or his agent) on the condition express or implied in the contract that the goods shall be returned to the bailor as soon as the purpose for which they have been bailed has been completed. If there is no intention to return the goods, that is not a bailment.

The reason for bailment may be for storage, repairs, trade, personal use etc

E.g. of bailment contracts

Delivering a car or an electronic or other item to a mechanic for repair

Lending an item to a friend to use and return back

Banks holding property as security for a loan, before they sell

Depositing luggage at a supermarket deposit box so as to be allowed to get in the supermarket

Giving your luggage to the matatu owners to store as you travel

Where a person is already in possession of goods belonging to another and he contracts to hold them as a bailee, he henceforth assumes the role of a bailee (and the owner the bailor). This is under a bailment by atonement i.e. where goods passed but not by bailment initially. Example: where a person ends up with a letter or a parcel that belongs to someone else by mistake.

Two parties: bailor and bailee

Bailor; this is a person who leaves goods in the custody of another (or his agent) usually under a contract of bailment.

Bailee; The custodian (or his agent) to whom chattels are delivered to under a contract of bailment and who is responsible for returning them.

Conditions of Bailment:

Possession lies at the heart of a bailment:

It has been said before that delivery of the goods by the bailor is necessary so that the bailee may re deliver them back to the bailor after the bailment. The bailor delivers the possession of the goods and not the ownership/ title so its important that the bailee is in possession. Possession is determined by the amount of control that the bailee has over the item….it may be real possession or constructive possesion

--Is a loan transaction between bank and customer a bailment? No it is not. You don’t usually return the same cash! It seems like the cash you get becomes yours too! You get ownership.

Ashby v Tolhurst [1937] 2KB 242

The owner of a car left it in a private car park. He paid the parking attendant and received a ticket from him. While the car owner went around his business the parking attendant allowed a thief to drive off in the car. The thief misled the attendant into believing that he was taking the car with the owner’s permission.

The owners of the car park admitted that the park attendant had been negligent, but relying on an exclusion clause printed on the ticket denied liability. The question then turned on whether the car owners had become bailees of the car. HELD: The relationship between the parties was of licensor and licensee and not of a bailor and bailee. The car owner had merely been given permission to park in the car park. The owners of the car park had not received possession of the car.

The bailor retains a superior interest in the chattel to that of the bailee.

Bailee acquires a limited possessory interest in the chattel. The interest is subordinate to that of the bailor. This is evidenced by the requirement to re deliver the chattel back to the bailor and requirement for the bailee to deal with the chattel according to the bailors instructions).

NB: Where possession and ownership has passed to the bailee, that ceases to be a bailment (eg hire purchase).

The bailee must consent to take possession of the chattel for there to be a bailment:

This is a point of contention especially because of ‘involuntary bailments’. (whereby a person ends up in control of a chattel belonging from another without consenting as a bailee.) eg A letter may be sent to someone by mistake.

Traditionally bailment was considered to arise out of mutual consent.. It is still unsettled whether the consent needed is the consent of the bailor or of the bailee.

The general rule is that any person who voluntary assumes possession of goods belonging to another will be held to owe the duties of the bailee at common law.

Types of bailment

Authors adapt different classifications.

Indefinite Term vs Fixed Term Bailment

How long are the goods supposed to be held?

Where there is an agreement that chattels should be picked after some time and the bailor fails to collect them, the bailor may be taken to have given up his rights to the property and considered to have abandoned the chattels.

If there was no agreement on how long the chattel was to stay there will be no abandonment unless the bailee gives a notice to the bailor.

See : The Disposal of Uncollected Goods Act Cap 38

S 5: Notice to take delivery needs to be given of at least 30 days.

S 6: Notice of intention to sell should be given before the goods are sold. The notice should be for a period of at least 90 days.

S7: If the notices are not honoured the bailee may sell at the best price possible, offset his expenses and pay the balance back to the bailor (If any) or claim the balance

Gratuitous Bailment vs Bailment for Consideration

Will the person holding the chattel be paid for their actions or are they doing it for free?

If they are being paid then it is a bailment for consideration and he will generally be held to a higher degree than a person who is doing it for free ie gratuitously.

Eg of gratuity-lending an item to a friend

Voluntary vs Involuntary Bailments

Voluntary bailments: the bailee accepts responsibility of the items. Involuntary bailments: the bailee ends up with goods without ever intending to do so. Eg goods send to someone by mistake. In the latter case the bailee is responsible of taking care of the items for a reasonable period. An involuntary bailee is only liable for gross negligence or deliberate damage to goods. A voluntary bailee is under a higher duty to take care of the goods.

Bailment and third parties

The bailee’s possession gives him sufficient legal interest in the goods to be able to insure them against loss or damage or other risk either for the full value or to cover his interest.

E.g. when you take a car to a reputable garage, the garage owner may have taken out insurance in case your car gets lost or gets damaged while it is in his garage, so that should this arise, his insurer would compensate you for the loss.

The bailee cannot pass a good title to a third party even if the third party obtains the item in good faith without knowledge of the bailees defect in title. In case this happens the bailor may recover the goods from the third party. The bailee will be liable in conversion

The bailee’s possession is also sufficient to bring an action against a 3rd party wrongdoer in negligence. The bailee is entitled to recover full market value of the chattel against the wrongdoer and also damages for consequential loss.

Having recovered in full from the wrongdoer the bailee may subtract the value of his interest and pay the surplus to the bailor.

When the bailee recovers in full from the wrongdoer, no action may later be maintained by the bailor even if he would otherwise have a right of action to sue.

Likewise a bailee is prevented from recovering from the wrongdoer if the bailor has done so already.

O’Sullivan v Williams [1992] 3All ER 385

The owner of a vehicle lent it to his girlfriend while he was on holiday. The car was damaged while in her possession. His successful claim for damages based on his right to recover the car from her at his will was held to preclude a second action by the girlfriend even though she had possession of the car at the time it was damaged.

Principally the bailor and bailee recover according to their actual interests so as to avoid double liability of the wrongdoer. All the parties may be enjoined in a suit. If the wrongdoer suffers double liability the later claimant must reimburse the wrongdoer to the extent of his unjust enrichment (which depends on him having also received payment from the first claimant).

Who should sue? Bailors right of action in trespass or conversion against a wrongdoer depends on the bailor having a right to immediate possession of the bailed chattel at the time of the wrongdoing or where the bailment is at the will of the bailor. Where bailment is for a fixed term the bailor has no rights to immediate possession.

The Bailee’s Duties and Liability

The bailee owes the bailor a duty to take reasonable care of the bailed chattel. This care is central to their relationship.

Traditionally (although sometimes contentious) the duty of the bailee may vary depending on the circumstances and type of bailment. Thus a higher standard of care may be expected in a bailment for consideration which is voluntary as opposed to an involuntary bailment or a gratuitous bailment. (Although even this requires reasonable care).

Onus is on the bailee to prove that he took appropriate degree of care under the circumstances).

Exclusion clauses may be applied by a bailee to deny liability. Even then, it has been held that where there is an exclusion clause excluding the bailees liability, the bailee may only escape liability if he can prove that the loss was not occasioned by the bailees negligent or that in fact it was the bailors negligence that caused the loss, unless the exclusion clause forms an integral part of the contract.

The bailee owes a duty not be negligent as he will be liable for negligence.

He is under duty not to use the goods otherwise than according to the terms of the bailment

He has a duty to return the goods after the bailment period.

In some circumstances the bailee’s liability for loss or damage is strict liability( i.e. no need to prove negligence so long as the act was committed) This may arise e.g. where the bailee is a common carrier (one who transports people or goods for a reward) unless the loss is caused by an act of God, or where the bailee deviates in the conduct of the bailment (storing goods elsewhere, passing the chattels to a 3rd party without consent, negligently refusing to return the goods as per the contract etc). Strict liability can however be avoided by an exclusion clause.

Liability of common carriers; BAT Kenya Limited vs Express Transport Company Ltd & Another 1968 EA 171

“A common carrier would be responsible for the safety of goods in all events except if the loss or injury arose solely from the Act of God or hostilities involving the state, or from fault of the consignor or inherent vice in the goods themselves”.

Coggs v Benard ; The law charges the common carrier against all events but acts of God and of enemies of the King. This is due to the policy of law for safety of all persons since it is possible for common carriers to collude with thieves or other clandestine manner and it may not be possible to discover them.

Deviation in the conduct of the bailment also results to a breach and gives the bailor an immediate right to repossess the chattel.

Where the deviation is so serious and results to a detriment of the bailors interests it may constitute conversion by the bailee.

If the chattel is lost or destroyed due to the negligence of the bailee he will be liable for breach of duty (to redeliver) and conversion.

Where the bailee delivers the chattel to the wrong person he will be liable to the bailor.

An involuntary bailee will only be liable for misdelivery if he acts negligently in making the delivery.

Remedies for the bailor

Recovery of the bailed item

Full value of goods lost or destroyed

Damages

Duties of the Bailor:

To disclose defects in the goods as known to him

To indemnify the bailee for any cost or loss

To allow the bailee retain a lien over goods not paid for, where the bailee has done work on them

To collect the goods once the bailment period is over

REVISION QUESTION

HENRY took his rolex watch to PERCY to be repaired. PERCY agreed to repair the watch at a fee of 1,500/= and told HENRY to collect it the following day. PERCY carried out the repairs then locked the watch away in his safe and properly secured his workshop for the night. That night TOBY, a thief, broke into PERCY’s workshop, forced the safe open and stole HENRY’s watch.

a) What type of bailment is represented by these facts?

b) Will Percy be liable to Henry for the loss and why?

c) What if Percy had been tricked into handing over the watch to Toby who falsely claimed to be Henry’s butler and produced a cleverly forged letter in support of his claim?

d) What if Toby executed the fraud some 6 months after Henry had delivered the watch to Percy in which period Percy had constantly urged Henry to come and collect it?

PART THREE

COMMERCIAL CREDIT AND SECURITY

Commercial credit:

Credit plays an important role in the world of commerce. Enterprises live (and sometimes die) by credit.

Credit is essential in starting/running a business

One needs to consider if they have sufficient funds or will need credit

‘credit’ : used in many different senses. eg used to describe someone’s financial standing (e.g. his credit is good) Recent development: The use of CREDIT REFERENCE BUREAUS in Kenya

It may also be used in a legal sense to describe some form of financial accommodation. (This is the meaning we shall ascribe to).

A lender (creditor) needs to consider if his credit will be serviced. Issues may arise eg unforeseen events-trade recession/industrial action/unforeseen demand for goods or services.

Creditor needs to ensure that he still receives his interest. Ensuring he takes security.

There are two main types of credit: loan credit and sale credit.

Loan credit is granted where money is lent to a debtor on terms that it must be repaid to the creditor together with interest in due course. e.g. bank loan/ overdraft/ mortgage advance

Sale credit on the other hand is granted where the debtor is allowed to defer payment of the price of goods and services supplied e.g. as with hire purchase agreements/open accounts

A distinction must also be made between fixed sum credit and revolving credit.

Fixed sum credit is granted where the debtor receives a fixed amount of credit, which must be repaid in lump sum or by instalments over a period of time. Transaction comes to an end upon completion of payment.

Amount to be borrowed is definite. Contract is definite. Lasts only so long as there are sums outstanding.

A revolving credit is granted where the debtor is allowed a credit facility, which he may draw on as and when he pleases up to an overall credit limit. The debtor may then restore the facility in whole or in part as he repays the creditor. e.g. bank overdrafts/credit cards. In strict legal terms, the overdraft facility is a standing offer for a loan made by the bank, which the customer accepts each time he draws upon the facility so that a series of contracts come into existence.

By contrast, where a bank provides a customer with a single loan the customer enters into a single contract with the bank over that particular loan.

The period of revolving credit is indefinite.

Distinction between fixed and revolving credits also has legal and commercial significance:

Fixed sum credits are bilateral. Involve exchange of promises (offer and acceptance)

Terms of a revolving credit are no more than a standing offer. Each time one draws on the credit signifies a separate acceptance. A series of unilateral contracts come into existence, each of them governed by the standard terms of offer.

Creditors are either secured creditors or unsecured creditors.

Distinguished by the possession of a real right over the debtors assets.

An unsecured creditor has no claim to a specific asset or fund, just a right to sue for his money or invoke the legal process to enforce a judgment.

He has no right over a secured asset or how a secured creditor chooses to enforce his security.

Secured creditor may choose to deal with his security(sale/possession/appoint receiver/forecosure)

Commercial Security

Anyone providing credit to another must face the prospect that the debtor may fail to pay his debt. If the debtor fails to make good the repayment the creditor can resort to legal action. In order to guard against the risk of the debtors inability to pay a creditor can enquire into the credit worthiness of the debtor or better still take a security for payment of debt.

Commercial securities are a very common feature of commercial transactions. Securities may take one of various forms:

Security is either real security or personal security.

Real security involves the creditor taking or being given some proprietary right over the property of the debtor such that the ultimate is that the creditor may take possession of the property or have it sold to recover the debt.

Personal Security involves a 3rd party surety entering into a contract with the creditor to assure the creditor of the debtor’s performance and take up liability for the debtor’s failure to perform e.g. through indemnity or guarantee. In reality, the two can be combined in single transaction e.g. company x applies for a loan from Bank. The bank will require a charge over the property (real security) and in addition require personal guarantees of the directors (personal security)

Real securities may either be possessory or non possessory.

Possessory securities refer to those real securities whereby possession is at the heart of the security. For the security to be effective the lender must in some way be in possession of the property given by the lender. Possessory securities are pledges and liens.

Non possessory securities are whereby the lender retains proprietary rights in the property but are not necessarily in possession. These are securities such as mortgages and charges.

(Distinction between possessory and non-possessory is historical, to cover up for inconveniences caused by physical delivery).

Personal securities on the other hand are either guarantees or indemnities.

1. REAL SECURITIES: Possessory Security

These securities depend on the secured creditor having possession of the property held as security. It may be lost if the creditor losses possession. In identifying whether there was possession passed on, one must determine the level and degree of control required to amount to possession in law. There doesn’t have to be actual possession (i.e. actual physical control). Constructive possession of goods will suffice.

Constructive possession occurs if the goods, although in the physical possession of a 3rd party, the 3rd party holds them on his behalf and he has a right to take immediate possession of them. This is the case as in bailment where goods owned by A (the bailor) are stored in B’s stores (the bailee). B has constructive possession provided he can call for the immediate delivery of the goods.

Likewise, it has been held that where documents of title to property are endorsed and delivered to a creditor, by a debtor, this amounts to a constructive delivery of the property.

In Official Assignee of Madras v Mercantile Bank of India Ltd: held that where a firm of merchants endorsed railway receipts to the respondent bank, they had not pledged the documents but the property represented in the receipts. The receipts entitled the named consignee/indorsee to obtain delivery of the property from the railway company.

Pledge

I. What is a Pledge?

The pledge is the oldest form of real security. It is a form of consensual security created by delivery of goods by one person, the pledgor, to another, the pledgee, by way of security. The pledgee thus has possession of the goods and he has a right to sell the goods in case of the pledgor’s default. A pledge is a form of bailment.

A pledge makes a pledgee a bailee of a pledged asset. The pledgee owes the pledgor a duty of care with respect to the pledged assets subject to their contractual agreement.

Common law attached great significance to possession as this was the surest way for a debtor to guarantee payment.

With the development of documentary intangibles the scope of pledges increased. Pledges may now be applied not only to goods but also to documents of title and to other instruments embodying a money obligation. In addition, the notion of constructive possession was also invented in addition to physical possession.

Pledges are usually entered into so as to secure a payment but in principle there is no reason as to why they may not secure performance of any other obligation.

Although a pledgee is given a special property in the goods pledged, he does not become the general owner of the goods. His interest in the goods is significant and extends to an inherent right of sale, exercise of rights against 3rd party wrongdoers, right to re pledge the item under certain circumstances

The court questioned the nature of rights that are transferred in The Odessa since it is only a grant of proprietary interest that results but not exactly full ownership.

The interest is also limited to the value of the secured debt.

Essential characteristics:

1. Created by a contract.

2. Possession of the property pledged/document of title must be delivered actually or constructively to the pledgee

3. Pledgor has a right of redemption upon discharge of the debt or other obligation. Pledgee has no right of foreclosure under common law and the goods must either be sold or redeemed. Pledgee cannot become the owner.

II. Delivery

Delivery lies at the heart of a pledge. Official Assignee of Madras vs Mercantile Bank of India Ltd.

Physical delivery of the actual goods would clearly suffice although a pledge may also be created by constructive delivery e.g. by depositing with the pledgee a document of title. This was held in Official Assignee of Madras vs Mercantile Bank of India Ltd.

Follows that only chattels capable of delivery (actual/constructive) can be pledged. Intangible property like information cannot be pledged.

(Relevance): This practice is common in financing of international transactions where an importer may pledge the goods to the bank as security by depositing the bill of lading with the bank or giving a key to give the pledges access to and control over the goods.

Bill of lading: the only document under common law that is considered to be a document of title (so long as the goods are identified). Others may arise by custom/statute.

The bank may allow the importer to thereafter pick the document, to facilitate sale of the goods.

In order to retain constructive possession the bank releases the bill of lading by way of trust so that the creditor holds it as a trustee/agent. The proceeds of sale are also held as an agent/trustee on behalf of the bank, until payment in full

Ref: Hilton vs Tucker (1888) 39 Ch D 669

Pursuant to an agreement between a pledgee and pledgor, the pledgor hired a room in a building belonging to a 3rd party and stored certain prints and engravings there. The pledgor then wrote to the pledgee that the 3rd party had the key to the room ‘which I place entirely at your disposal’. The pledgor had access to the room via a duplicate key, for purposes of cleaning up the paintings. Issue: was there a valid pledge created?

HELD: There was a valid pledge. The engravings and prints were constructively delivered as the pledgee had sufficient control of the pledged items. The pledgor’s access was limited.

The question as to whether the pledgee needed the permission of the 3rd party to enter the premises was never raised though!

III. Re-delivery/Loss of Possession

The pledgee’s security is destroyed if he surrenders possession of the pledged goods to the pledgor unless he does so only for a limited time and for a limited purpose. In such a case this would not amount to parting with possession. If the pledgee consents to the pledgor taking possession the security is destroyed. The pledge however remains intact if the pledgor takes possession by fraud or without the consent of the pledgee.

If the pledgee has shown no intention to part with the property in a way to destroy the pledge, his rights cannot be defeated even by an unauthorized disposition by the pledgor. The position may be different if the pledgee may be estopped from denying an intention to divest himself of the property of the pledged item.

(See Reeves v Capper) – Important to build some certainty around the security.

Re delivery is necessary because the contract is a bailment.

Ref: Reeves vs Capper

W, the master of a ship pledged his chronometer to C as security for a loan. Pursuant to the terms of the loan agreement C returned the chronometer to W for a specific voyage. W pledged the chronometer to R. R argued that the original pledge was destroyed when C parted with possession and re delivered it to W. The court held that the re delivery did not destroy the original pledge. C had only granted W a license to use the chronometer for a specific purpose. The delivery to R was wrongful.

IV. Termination of a Pledge

a) By tender of the amount due

b) Re delivery of the pledged item to the pledgor without reservation

c) Acceptance of alternative security

d) Sale of the pledged item to recover the debt, after default

V. Realization

Pledgee has no right of foreclosure unless the contract provides so.

He must sell the pledged items or allow the pledgor to redeem them after the obligation is settled.

If after realizing the security there is surplus, he holds that surplus in trust for the pledgee.

If the sale of the pledged item does not realize the full amount due, the pledgee may bring an action for the balance.

Lien

I. What is a Lien?

A lien was defined in Hammonds v Barclay (1802) as a right in one man to retain that which is already in his possession belonging to another, until certain demands are satisfied.

Like a pledge a lien is a possessory security. It differs from a pledge in that the existence of a pledge depends on delivery. The existence of a lien does not.

A pledge is created by the delivery of goods/property by a pledgor to a pledgee. A lien however is a right to retain property previously delivered and held by the person asserting the lien (the lienee). Under common law the lienee has no implied right to sell the item he holds as lien, only a right of retention.

Other rights may be created under other types of liens: statutory (created under the Sale of Goods Act), equitable lien (close to the equitable charge), and maritime liens (arises in damages caused by ships). Concern is the common law lien (from usage).

II. Creation of Liens

Arises generally by operation of law/by contract/statute and rights are thereunder governed. S.43(1)(b) of the Sale of Goods Act is clear that a seller loses his right of retention/loses his lien when the buyer or his agent lawfully obtains possession of the goods.

Hatton v Car Maintenance Co Ltd [1915] 1 Ch 621

The owner of a motor vehicle entered into an agreement with the defendant company whereby the defendant company was to maintain his vehicle and do any necessary repairs.

There was an outstanding bill and the defendant company took possession of the car and claimed a lien on it for the amount due. The company’s claim was rejected. It was held that even if such a lien existed originally, it would be lost by virtue of the arrangement under which the owner of the motor vehicle was at liberty to take away the vehicle and it was entirety at the owner’s possession and authority.

Where goods are entrusted to a person to do work on them, that person will have a lien for the work done provided that he improves goods (improver’s lien).

Re Southern Livestock Producers Ltd [1964] WLR 24.

By an agreement with a pig company a farmer agreed to ‘care’ for a breed of pigs and supervise the breeding of the herd. The company supplied the boars for the latter purpose. On the company’s liquidation the farmer claimed a lien over the pigs to cover outstanding sums expended in feeding and caring for the herd.

The claim was rejected.

HELD: The excercise of labour to prevent a herd from deteriorating by feeding them is different from improving them. The requirement for care under the contract did not result to any improvement on the herd. Bringing forth litters was a natural phenomenon especially since the boars were provided by the company.

Compare this to Forth v Simpson (1849)

The owner of race horses stabled them with a trainer to be trained and kept. From time to time the horses, by order of the owner, were sent to different races, where the owner selected and paid the rider. There was an outstanding amount due to the trainer. He claimed a lien over the horses for the cost of training and upkeep. The claim failed.

HELD:

The trainers skill and labour were a good foundation for a lien. The trainer taught an untaught animal and adopted it for a particular purpose, thereby greatly improving its value. Where however there was no continuing possession on the trainers part, he lost a right that otherwise existed to claim for lien. When the owner took away the horses they were under his control and possession since it is the owner who hired the jockey on his terms. There was no continued possession of the horses.

A lien arises once the work is complete. If the owner withdraws instructions before the work is complete the improver is still entitled to a lien for his charges over the part of the work actually completed.

What can an advocate hold as lien for unpaid fees?

Liens can be general or particular. Particular lien gives lienee right to retain a chattel until all charges in respect of that chattel are cleared. General lien: gives lienee right to retain a chattel until all claims against a lienor are satisfied whether or not the claims are in respect of the retained chattel. Liens may arise by way of contract or by operation of law.

III. Possession

For a valid lien to arise there must have been a voluntary delivery of possession by the debtor to the creditor (or their agents). Wrongful possession resulting from the act of a 3rd party will not bind the owner unless in a case of estoppel or due to an ostensible or apparent authority. Possession must not be obtained by fraud/misrepresentation/force.

The lienee must be in continuous possession : Forth v Simpson (1849)

IV. Liens and Third Parties

A lienee holds the property of lienor in his possession as bailee and therefore owes the lienor a duty of care. A lien depends on the lienee continuing in procession. It is therefore lost if the lienee losses possession either to the lienor or to a 3rd party (Hatton Car Maintenance Case). If the lienee delivers goods to a carrier or other bailee or custodian for transmission to the buyer without reserving the right of disposal of the goods the lien terminates by reason of waiver. See s. 43(1)(c) of the Sale of Goods Act.

Tappenden v Artus

T allowed A to use a van which was under Hire purchase terms, pending completion of the agreement. The van broke down and A took it to the defendant’s garage for repairs. Shortly afterwards T withdrew his permission for A to use the van and demanded its return. The defendant refused to deliver up the van until he had been paid for his work. The matter went to the court of appeal and the issue is whether the defendant was entitled to a right of lien.

HELD:

The test is whether the original delivery of the goods to the 3rd party was legal and was permitted. It should not be assumed that the delivery of goods to a bailee automatically entitles him to re deliver them to a 3rd party. The owner should specifically point out the rights of the bailee.

The breakdown was normal, required the mechanic to be in possession so as to repair, there was nothing in the initial agreement to deny the bailee a right to have the car repaired. The mechanic thus had a right in lien as his possession was legal.

V. Enforcement

Under common law there was no right of sale of an item held under lien.

The right may however be given under contract or statute.

Like a pledge, any excess is held in trust for the lienor and any surplus after sale may be claimed by the lienee from the lienor.

VI. Termination

By the lienor tendering the amount of the debt secured.

The lienee may waive terms of the lien

Loss of possession

If the lienee accepts an alternative form of security

Non possessory security

Non-Possessory security has some advantages over possessory security since the former does not depend on the creditor taking possession and thus it is possible to have intangible or even future property as security and there is the convenience of not having to deliver possession of the item.

There are 2 types of non-possessory securities; a mortgage and a charge

A mortgage involves the outright transfer of ownerships of property by the debtor to the creditor subject to a right for the debtor to redeem the mortgaged property, by paying the secured debt and having the property re-transferred to him. Delivery of possession may only happen when there is default

A charge on the other hand involves no transfer of ownerships but is a mere encumbrance on the debtor’s property which gives the creditor the right to have the charged property appropriated for payment of the debt secured.

The details of mortgages and charges will be covered in Proprietary Rights and Transactions FLB 300, which is a required/compulsory course.

2. PERSONAL SECURITIES:

Guarantees

I. Nature and Definition

A guarantee is a promise/assurance especially in writing that something is of a specified quality, content, benefit etc. Or that it will perform satisfactorily for a given length of time (i.e. a money back guarantee).

A contract of guarantee is also a contract whereby the surety (or guarantor) promises the actual or potential creditor of a third person (the principal debtor) to be responsible to him, in addition to the principal debtor, for the due performance by the principal debtor of his existing or future obligations to the creditor if the principal debtor fails to perform. (this is our concern).

It is a contract by one person to another for the debt, default or miscarriage of another. See section 4 of the English Statute of Frauds of 1677 (adopted in article 3(3) of the Law of Contract Act, cap 23).

It was held in Henry Mbugua vs Patrick Gachie Kigo HCCC 652/2004 that the purpose of a guarantee was not to unnecessarily burden the guarantor with another person’s burden especially where the principle debtor was totally unmoved. For this reason a guarantor has a right to sue the principle debtor to recover the amount due to him after he has made good his guarantee to the creditor.

In this matter the plaintiff had guaranteed the defendants loan and deposited his car’s log book as security. It was agreed as between the plaintiff and the defendant that the defendant would deposit a title deed for his property with the plaintiff so that should the defendant default in repayment of the loan, a transfer would be made in favour of the plaintiff by the defendant, after the plaintiff had made good the debt.

The defendant defaulted in repayment and the plaintiff was called upon to make good the debt. The plaintiff successfully sued to have the defendant compelled to transfer the property to him as agreed, after the plaintiff failed to contact the defendant.

Generally the law has always adopted a protective attitude towards guarantors.

II. The Contract of Guarantee

A guarantee is a contract. It may be oral or in writing, implied or express. A contract of guarantee for financial purposes should be in writing and signed by the guarantor. It may be void or voidable.

In Kenya Planters Co-op Union Ltd vs Dr. Stephen Nyaga Kimani & Another, HCCC1529/1999 the court held that the fact that the 2nd defendant had described himself through an affidavit in another matter as a guarantor of the 1st defendant did not suffice as evidence of a contract of guarantee. In the absence of a written document any claim of guarantee fails and a suit against an alleged guarantor cannot succeed.

As a general rule, contracts of guarantee are strictly construed in favour of the surety. In most cases the terms of the guarantee will have been drafted by the creditor, often relying on a standard form contract and in cases of ambiguity the contra proferentem rule will be applied.

Blest v Brown (1862)

“It must always be recollected in what manner a surety is bound. You bind him to the letter of his engagement. Beyond the proper interpretation of that engagement you have no hold upon him.

He receives no benefit and no consideration. He is bound therefore, according to the proper meaning and effect of the written agreement he has entered into”.

A guarantee is an accessory/secondary contract. This means that for there to be a valid contract between surety and creditor, there has to be a valid principal obligation between the principal debtor and the creditor. The surety is therefore only liable to the same extent as the principal debtor is liable to the creditor. There is usually no liability on the part of the surety if the underlying obligation is void or unenforceable or if that obligation ceases to exist. A claim under guarantee must prove the indebtness of the principle debtor first. This was held in Joseph Kinuthia vs Barclays Bank of Kenya Ltd & Another HCCC 563/03.

1st defendant (BBKL) had advanced a loan to the 2nd defendant (Kilifi Mtwapa Distributors Ltd). The 2nd defendant failed to pay and the 1st defendant demanded the amount from the plaintiff, who was the guarantor. The plaintiff made proposals as to how he would repay the debt although he insisted that a copy of the document of guarantee be sent to his advocates, which the bank never did. The plaintiff sued the bank for declaratory orders and joined the 2nd defendant based on a dispute on the amount due. The bank put in a counter claim based on the liability form the guarantee and asked for summary judgment since the plaintiff had accepted and even made proposals as to payment.

It was held that since the issue of interest was in contention, (and as the bank had not sent the guarantee for the guarantor to peruse), the issue of the debt was still in issue. It was important that the bank placed evidence before the court to show that the 2nd defendant was indeed indebted to the 1st defendant to the tune demanded including interest, for the bank to demand the same from the plaintiff. The admission of the plaintiff having been made based on no back up documents and no way to ascertain the proper amount was thus equivocal and could not stand. The application for summary dismissal failed.

The lender has to exhaust all his remedies against the principle debtor before turning to the guarantor. To do otherwise would be to treat the guarantor as the principle debtor, which he is not. This arises from the secondary nature of the contract of guarantee.

The exception would be in demand guarantees/standby credits whereby the creditor does not have to prove default by the debtor. It is sufficient that the creditor issues a demand or issues a certificate of default.

The guarantor must be formally and separately informed of the debtors default.

In KCB vs Suncity Properties Ltd & 5 Others HCCC 1304/01

This is the case even in a matter where the company directors execute individual guarantees in favour of the company.

In this case the court was not satisfied that sufficient notice as required by law had been given to the directors. The argument that they would have known that the company had defaulted since they were directors was rejected. The court emphasized that the company was a separate legal entity from its directors and should not thus be treated as one.

Types of guarantees

Bipartite vs Tripartite

In all cases the creditor must be made a party to the contract. After all, the creditor must be privy to the surety’s promise if he is to enforce it. But it is not always necessary for the principle debtor to be made a party to the contract. In most cases, although the contract involves the principle debtor to the extent that the surety’s liability is accessory, it is between the surety and the creditor (bi partite). Where all three parties are joined in the contract it becomes a tripartite contract.

Discrete vs continuing

A guarantee is discrete where the surety guarantees payment of an identified and specific debt or the discharge of the principal debtor’s liability in respect of a specific transaction or transactions.

By contrast, a continuing guarantee extends over a series of transactions between the debtor and creditor. In such cases the surety’s liability is not fixed. It varies according to the principal debtor’s liability and each time the surety may have to confirm his guarantee.

By the very nature of the contract of guarantee, various contractual relationships will arise:

Between creditor and surety

Between debtor and surety

Between co sureties

I. Relationship between the creditor and surety

The surety becomes liable to the creditor once the debtor has defaulted (subject to notice being given to the surety). See Moschi vs Lep Air Services Ltd (1973) AC 331

The surety is liable so long as he has not been discharged. Instances that will lead to the surety’s liability to be discharged as against the creditor are:

a. Where the guarantee is materially altered by the principle debtor .

This follows the rule in Pigots Case (1614) that any material alteration not agreed on by all the parties to the original document made to a deed or other instrument after the execution of that instrument or deed renders it void. It is fundamental that such alterations are prejudicial to the guarantor.

b. Any material alteration of the terms of the contract between the creditor and the principal debtor will discharge the surety. This was also held in Kanyoro vs Wakarwa Printers Ltd & Another HCCC 3052/86.

c. Payment by the surety of amounts due under the guarantee discharges both the surety and principal debtor from liability. The surety may have rights of set-off against the creditor.

d. Payment or performance by the principal debtor will also discharge the surety. Part payment or part performance will be a discharge pro tanto.

II. Relationship between the debtor and surety

a. Indemnity

Where the guarantee was given upon request, express or implied, the surety has a right to be indemnified by the principal debtor for losses/payments made under the guarantee.

This is an implied term of the contract between the two. The surety’s right to indemnity only arises after he has paid the creditor. Where no request was made for a guarantee, it becomes much harder to establish a firm legal basis for indemnity.

Ref: Owen v Tate (1976) QB 402 that the surety has no right of recourse against the principle debtor where he voluntarily assumed his obligations under the guarantee without prior request of the principal debtor. (equity may be applied).

b. Subrogation

Where a surety pays the full amount of the indebtedness to which his guarantee relates, he is entitled to be subrogated to the creditors rights against the principal debtor and any security held by the creditor taken over the surety.

III. Relationship between co-sureties

a. Contribution

Where a surety pays more than his proportionate share of the indebtness he has an equitable right to recover the excess from any other surety of the same debt. The principles were summarized in Hampton v Minus (2002) I ALL ER 481 that:

Where more than one person guarantees to the creditor the payment of the same debt, an equity arises such that if one of them pays more than his due proportion of the debt, he is entitled to a contribution from his co-guarantors.

Although under equity all should bear an equal burden, these principles are subject to any contractual terms which may limit or extend the parties liabilities.

The rights of contribution arises from equity and not from contract.

Guarantee and Indemnity Distinguished

Yeoman Credit Ltd v Latter (1961) 1 WLR

The Plaintiff, a finance company let a car on hire purchase to the 1st defendant who has a minor. By a second agreement headed “Hire purchase indemnity” the 2nd defendant undertook to indemnify the 1st defendant against any loss arising out of the hire purchase agreement. The 1st defendant defaulted in paying his instalments. The finance company claimed against the 2nd defendant under the terms of the indemnity. The court of appeal held that the hire purchase agreement was void under the Infants Relief Act 1874.

The court sent the matters back for retrial as to whether the undertaking by the 2nd defendant was a guarantee or an indemnity.

If it was held to be a guarantee then it would fail since the underlying obligation was void.

It came out clearly that under a guarantee the surety provides a secondary obligation to the creditor while under an indemnity his obligation is primary. The court also held whether a contract is one of guarantee or of indemnity is a matter of construction. In this case all the parties were aware that the 1st defendant was an infant and there was all the indication of intention to have an indemnity and not a guarantee.

Features of an indemnity

There are only two parties; the indemnifier, indemnifee

The person giving the indemnity is primarily liable unlike in a guarantee where the liability is secondary.

The person giving the indemnity has some interest in the transaction apart from the indemnity.

Also, a contract of indemnity is enforced even if it is not in writing whereas a contract of guarantee can only be enforceable if evidenced in writing, per section 3(3) of the Law of Contracts Act.

PART FOUR

HIRE PURCHASE

Definition and Nature of HP Agreements

Hire Purchase as a mode of trade developed at the height of capitalism. At the time, the main concern of dealers was to reap maximum profit at whatever expense. This brought about great inequality in bargaining power and a lot of oppression especially of hirers.

For instance, hirers were made to enter into contracts they did not understand by signing blank agreements. As a result hirers entered into contracts which they could not afford and this enabled the owners to exercise their right to repossess the hired goods once there was default.

Exclusion clauses were very common and this included exclusion of conditions and warranties, so it was common to find a hirer paying for defective goods even if they were hired in a defective state.

Hirers under common law had a right to dispose of the hired goods to a 3rd party and this caused losses to the owner. There was also a risk of the hirer using the goods to exhaustion and then terminating the agreement. This caused depreciation and it was hard for the owner to re sell the property.

The Hire purchase Act was enacted to bring sanity to HP agreements and narrow the variance in bargaining power between parties. Presently HPs in Kenya are governed by the Hire Purchase Act Cap 507, which is mainly modeled on the English Hire Purchase law.

S.2 of the Act defines a hire purchase agreement as an agreement for bailment under which the bailee may buy the goods or under which the property in the goods will or may pass to the bailee. In other words, the owner of the goods hirers them out to the hirer and gives him the option to purchase the goods. The option to purchase may or may not be excercised.

The goods only pass to the hirer after the last instalment has been paid. Thus although the hirer is in possession of the goods and puts them into use during the period of the hire, the legal ownership/title still remains with the original owner. The hirer cannot pass any title to a 3rd party even an innocent purchaser if he sells to him before he has completed all the instalments due under the hire purchase agreement. It is immaterial that the 3rd party takes them in good faith and for value.

In effect the purported sale by the hirer of goods held under HP does not fall within the class of exceptions to the nemo dat quod non habet rule so as to elevate the innocent purchaser’s claim above that of the owner. The hirer is merely a bailee for hire for the entire period until he exercises his option to buy.

In the law on personal insolvency, where a hirer becomes bankrupt the goods sold under a HPA are protected. They do not form part of his estate as they are not his. They still belong to the owner.

The definition of HP emphasizes 2 elements:

The element of bailment of hire and the element of an option to buy. These were captured in

In Helby vs Matthews (1895), a hirer obtained a piano from a hirer on hire purchase terms. It was agreed that the piano would remain as the hirer’s property until the total purchase price had been paid. Before the hirer had paid the entire Hire Purchase price he pledged the piano to a 3rd party. The owner successfully sued for its recovery. It was held that the property in the piano had never passed to the hirer so he could not pledge it lawfully.

Although usually there are 2 parties to a HPA, in recent times HPA’s include financiers who usually purchase the owner’s interest in the item and subsequently lets it out to the owner. Guarantees are also common to guarantee payment by a hirer.

The HPA does not regulate all contracts.

s.3: the Act applies to agreements where the hire purchase price does not exceed Kshs 300,000/- although this sum may be revised from time to time by the relevant Minister. The Act also applies only to those agreements entered into after the commencement of the Act (2nd Nov 1970).

The restrictive provisions under the Act are protective in nature. The restriction with respect to the maximum value of the subject matter is meant to protect economically disadvantaged persons who are presumably more vulnerable to exploitation. The presumption is that individual hirers of goods of a value exceeding Kshs 300,000/= are able to protect and safeguard their interests and are economically empowered. The requirement for such a provision may be appreciated when one considers that HPA are standard agreements and may bring about inequality. For the same reason it is not surprising that corporations are excluded by s 3(1) from individuals who may enjoy statutory protection.

Distinction With Other Transactions:

Hire Purchase and Credit sale : In credit sale the property in the goods pass to the buyer immediately the contract is entered into and he therefore he can transfer title to a 3rd party even if he has not paid the full purchase price. This is particularly in a credit sale of ascertained goods.

This is so unless there is a reservation clause where title over the property is reserved until the full purchase price has been paid. This results to a conditional sale and the property in the goods does not pass until this or other condition has been met. Conditional sale bears some similarity to HPA.

A hire purchase agreement is also different from a credit/conditional sale agreement as there is no agreement to buy in a hire purchase contract. At the very most, the owner is bound to enter into a contract for sale if and only if the hirer exercises the option to purchase. It may or may not be exercised.

In a credit or conditional sale, there is an obligation on the buyer to purchase the goods and to pay the full purchase price.

In a credit or conditional sale the buyer can pass a good title to a 3rd party purchaser who buys for value and in good faith without notice that the buyer has not tendered the full purchase price while in a HPA the hirer cannot pass such title.

This is mainly because of the obligation to purchase in credit and conditional sales, Vis a Vis the freedom to exercise an option to buy in HPA. In credit/conditional sales, the goods are in the possession of the buyer with the consent of the owner, together with an obligation on the buyer to buy them.

Lee vs Butler [1893] 2 QB 318

The plaintiff let furniture on a HIRE AND PURCHASE agreement to the hirer. The hirer was to pay 1pound at once and the balance of 96 pounds in 4 monthly instalments. The furniture was to become the hirer’s upon payment of the last instalment. Before this condition was fulfilled the hirer sold and delivered the furniture to the defendant who bought it for value and without notice of the plaintiff’s rights. The CA held that under the agreement the hirer was under an obligation to pay all the instalments and she had ‘agreed to purchase’ the furniture.

Strictly speaking the transaction was not one of hire purchase. Accordingly, the hirer/buyer had passed a good title to the 3rd party since she had obtained possession of the goods with the consent of the owner. The defendant could not relinquish possession of the goods to the plaintiff.

Accordingly, in conditional sale, a condition intended to reserve property in the seller would nonetheless be ineffectual as against a 3rd party who buys the goods for value and in good faith without notice of such reservation.

Ld M’Naghten in Helby vs Mathews

“it was the intention of the parties, an intention expressed on the face of the contract itself, that none of these monthly instalments until the very last of the series was reached nor all of them put together without the last should confer upon the customer any proprietary rights in the piano or any interests in the nature of a lien or any interest of any sort or any kind beyond the right to keep the instrument and use it for a month to come”.

The House of Lords held that the hirer was under no obligation to purchase the piano, from the construction of the agreement. He had an option. Since he had not agreed to buy the piano, he could not pass title to a 3rd party. Accordingly the owner was entitled to recover the piano from the pawnbroker.

The difference with a contract for hire is that a contract for hire is an agreement for a party to keep and use goods for a specific time while paying rent for them.. There is no option to purchase as in HPA. Upon the expiry of the agreed time the hirer must return the goods to the owner.

Essentials of Hire Purchase Agreements

Common law did not require HPA to be written. Oral agreements were equally enforceable. S5(1) marks a departure from this position and requires that all HPA must be in writing and registered with the registrar. S4 establishes the registry of HPA’s and offices thereto. It is also required that the document be in English.

s.6 : a trader is required by law to inform a hirer in writing of the cash price of the goods. This is usually done by displaying a price ticket of the goods on the goods for the hirer to read. It enables him make an informed decision. Failure to inform the hirer of the cash price deprives an owner of his right to enforce a hire purchase agreement or any contract of guarantee relating to it.

s.6(2) the Act requires that There is a written agreement, which must be signed by the hirer.

The agreement contains a statement of the hire purchase price and cash price of the goods in question.

The agreement contains the amount and dates of payment of each instalment

Agreement sets out the hirers rights under the contract and this should be as prominent as the rest of the contents of the agreement.

A copy of the agreement is sent to the hirer within 21 days of the date of the agreement.

Non-compliance of these requirements would render the agreement unenforceable. Courts may at certain instances enforce the agreement where it is sure that the hirer has not been prejudiced.

Registration:

S. 5(1) : All hire purchase agreements must be registered by the Registrar of Hire Purchase Agreements within 30 days after making the agreement and a certificate obtained. A hire purchase agreement cannot be registered if it is not in English or where the required stamp duty has not been paid as per s.5(2).

Failure to stamp a document not necessarily be fatal. s 19 of the Stamp Duty Act Cap 480 confers discretionary power to the court to allow time for the payment of accrued stamp duty and subsequent admission of the instrument in the proceedings before it.

Consequences of non registration provided for under s.5(4)

The agreement cannot be enforced against the hirer or the guarantor and the owner will not be allowed to recover the goods from the hirer.

Security given by the hirer or by guarantor is not enforceable against the hirer or the guarantor.

Fidelity Commercial Bank Ltd (Decree Holder) vs Agritools Ltd & 2 Others (Judgment Debtors) and Hussein Bhanji & Another (Objectors) Held: an owner has no right to recover a motor vehicle from the hirer where the hire purchase agreement had not been registered. Thus the motor vehicle which was subject of an execution was held to belong to the hirer. The owner’s claim over the car was defeated since the agreement had not been stamped or registered.

Implied terms (conditions and warranties). s8

In every hire purchase agreement the following terms are implied;

Quiet possession: An implied warranty that the hirer shall enjoy quiet possession of the goods.

Free from charge: An implied warranty that the goods are free from any encumbrance/charge in favour of a 3rd party.

Right to sell: An implied condition that the owner has the right to sell the goods at the time when property is to pass.

Merchantability: An implied condition that the goods are or merchantable quality except where they are let as 2nd hand goods in the agreement states this fact clearly.

This will not apply in cases of defects, which the owner could not reasonably have been aware, or where the hirer has examined the goods and such examination ought to have revealed the defects.

Fitness for purpose: Where the hirer makes known the particular purpose for which the goods are required (whether expressly or by implication), it shall be an implied condition that the goods shall be reasonably fit for that purpose.

S. 7: certain provisions cannot be avoided under a hire purchase agreement as these would be void:

Right of the owner or his agent to enter the premises to repossess the goods or

The right under S 12 a hirer to terminate the agreement and the liabilities spelt out there under or

Liability of the hirer in case of termination of the hire purchase agreement

The authority of any person acting on behalf of the owner as an agent.

The liability of the owner or his agent for acts or defaults in regard to the agreement

The terms of merchantability, title, quiet possession and free from any charge cannot be modified or excluded by any express agreement. The implied condition of fitness for purpose can be excluded if it can be proved that the relevant provision was brought to the attention of the hirer and its effect too. See s.8(3).

Termination of Agreement: s12

Either party is free to terminate the contract.

A hirer has a right to terminate the agreement any time before the final instalment falls due.

He must give notice in writing to the owner.

He is liable to pay all the instalments due by the time plus the sum (if any), that is required to make his total payment not less than half of the total hire purchase price (unless a lesser sum is specified in the agreement). Any provision for a larger payment is void.

This is referred to as a minimum payment clause.

This provision for a minimum payment clause is designed to protect the owners interest in the value of goods that are subject to depreciation while in use on hire. It compensates the owner. The amount should reasonably represent the actual loss suffered by the owner as a result of the breach or other eventuality causing the termination.

Under s.12(2):The hirer will be liable in damages if he fails to take reasonable care of the goods. Where he terminates the contract he must return the goods at his own expense.

The owner may also terminate the agreement and repossess his goods upon breach of the contract by the hirer. This is particularly due to non-payment of instalments (default).

This power to terminate is subject to s 15; Where the hirer has paid two thirds or more of the Hire Purchase price, the owner must not take any step to recover possession of the goods in the event of default, except through the courts or unless the hirer himself terminates the agreement. If the owner acts contrary to section 15(1) the agreement shall terminate and

The hirer will be released form all liability under the agreement and can recover all payments made by him and

A guarantor is entitled to recover all sums paid by him or any security given by him in respect of the agreement.

This provision is meant to protect hirers from unscrupulous dealers who would want to take advantage of the inequality in contract. If the repossession was automatically allowed the hirer would stand to lose more than the owner after having paid a lot of money. The owner may however be compensated for his loss by an award of the outstanding balance of the HPA.

In Elijah Barasa Wepukhulu vs Munir Omar & 2 Others HCCC 119/1999

1ST and 2nd defendant bought a vehicle under hire purchase from the plaintiff. The 3rd defendant financed the transaction and held the log book as collateral. The 1st and 2nd defendant sold the vehicle to a 3rd party who did not bother to check and ensure the title of the 1st and 2nd defendants. The 1st and 2nd defendants completed paying 2/3 of the hire purchase price as required under s15 of the Act. They defaulted in paying the 3rd defendant who took possession of the vehicle as per their loan agreement.

The owner sued under s15 of the Act for possession of the vehicle.

It was held that the owner’s suit could not stand as against the 3rd defendant since he was not privy to the hire purchase sale between the plaintiff and the 1st and 2nd defendants.

(s 15 therefore benefits parties who are privy to the HP Agreement and not 3rd parties).

Where the owner under a hire purchase agreement enforces a right to recover possession of the goods form the best price reasonably obtainable, he should as soon as possible account for the price and pay the hirer the difference after deducting expenses incurred. S 25.

Rights, Duties and Remedies Under HPA

Duty on the hirer to take delivery of the goods

Failure to do so amounts to a fundamental breach. The owner may rescind the contract and sue for damages arising from the breach.

Duty on the hirer to exercise reasonable care of the goods in his possession

Breach of this duty gives the owner a right to sue for damages in negligence or an action for trespass if the damage is deliberate. The hirer is expected to exercise reasonable care expected of a prudent bailee in his position.

Duty on the hirer not to remove/permit removal of the goods from the premises where they are normally kept or from Kenya without consent of the owner. S9,s10.

Duty on the hirer to pay the HP instalments when due

Default results in breach. The owner may terminate the agreement and repossess the goods subject to s 15 of the HPA.

Duty on the hirer to continue hiring the goods for the agreed time and not to re let, sell or part with possession

Breach of this duty gives the owner a right to terminate the agreement and repossess the goods.

The owners remedies are:

To terminate the agreement and repossess the goods

After repossession the hirer may still redeem the goods within 28 days by paying the balance due together with reasonable costs incurred by the owner in repossesing and any other costs.

Sue for damages

It should be noted that a hirer is not in breach where he decides to terminate the agreement by giving the required notice. Where this happens the owner may repossess the goods and invoke the minimum payment clause.

Where the owner is in breach of any of the warranties and conditions the hirer may sue for damages for breach of condition. The hirer may also recover all monies paid under the agreement.