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NEGOTIABLE INSTRUMENTS
1. INTRODUCTION
A negotiable instrument is a written order to pay, such as a
cheque, bill of exchange, or promissory note. It is transferable from one person
to another, provided certain conditions are met. When a person cashes a cheque,
he negotiates the cheque by signing his name on the back and presenting it to a
bank, thereby becoming the legal owner of funds represented by the writing on
the face of the same. He may take the funds as cash or deposit the money into
an account. Cheques are negotiable by Endorsement and delivery (also called
Presentment) to the paying bank, which is then obligated to pay the check. If
an instrument is payable to the bearer, for example, a bearer stock or bearer
bond, negotiation is done by simply presenting the instrument.
A negotiable instrument is not a contract per se, as contract
formation requires an offer, acceptance, and consideration, none of which are
elements of a negotiable instrument. Unlike ordinary contract documents, the
right to the performance of a negotiable
instrument is linked to the possession of the document itself
(with certain exceptions such as loss or theft). The two primary classes of
negotiable instruments are 'promissory notes' and 'bills of exchange.'
Examples of Negotiable instruments include:
Bills of Exchange
Promissory Notes
Cheques
Treasury Bills
Bearer Bonds
Share Warrants
Bearer Debentures
Quasi Negotiable Instruments include:
Insurance Policies
Postal Orders
Share Certificates
Bills of Lading
Bills of Exchange
S 3(1) Bills of Exchange Act defines a bill of exchange.
Essentials of Bills of Exchange:
1. It must
be an order and not a request. That is, the terms must be imperative.
2. The order
to pay must be unconditional i.e. no condition should be attached to the making
of payment.
3. It must
be addressed by one person to another
4. It must
be signed by the person giving it.
5. It must
require payment to be made to a specified person or his order or to bearer.
6. If the
order to pay is not on demand, the time to pay must be fixed or in a
determinable future time.
7. It must
order payment of a sum payable in money.
Parties to a bill of exchange:
There are usually three parties to a bill of exchange:
Drawer-The person who writes out and signs the bill. An assignment
document is usually a nullity.
Drawee – the person on whom the bill is drawn. The person who is
going to be asked to pay the sum on the Bill
Payee- the person to whom payment will be made, unless he passes
on the Bill to someone else by negotiation
Purposes of a bill of exchange
A owes a sum of money e.g. Kshs 50,000 to B. A sample bill of
exchange would look like this: Pay B on demand Shs.50, 000.When the payee
endorses the bill to another party, then the person who endorses to the party
becomes the endorser and the party to whom the bill is endorsed becomes the
endorsee. If B endorses the Bill to D, then B becomes the endorser and D the
endorsee.
It is possible for a bill to have two parties only i.e. the drawer
and the drawee are the same person. Where the drawer and the drawee are the
same person, the holder has the option of treating it either as a promissory
note or a bill of exchange. Section 5(2) of the Bill of Exchange Act).
Cheques
A cheque is a special type of bill of exchange under s.73(1) a
cheque is defined as “A bill of exchange drawn on a banker and payable on
demand.”
A cheque has two special features:
1. It is
always drawn on a special banker
2. It is
always payable on demand
A cheque as a bill of exchange is a negotiable instrument and can
be negotiated from one person to another by mere delivery or delivery and
endorsement or whatever the case may be. Under s.73(2) the provisions of the
Bills of Exchange Act applicable to a bill of exchange payable on demand apply
to cheques except as provided otherwise in part 3 of the Act.
As with the Bill of Exchange Act, there will always be three
parties to a cheque.
1. Drawer-
this is the bank customer who draws the cheque and orders the bank to make
payment.
2. Drawee-This
is the Bank which is ordered to make payment
3. Payee-
This is the person to whom the payment is made.
Differences between a bill of exchange and a Cheque
1. A cheque
is always drawn on a bank while a bill of exchange may be drawn on any person
including a bank.
2. A cheque
can only be payable on demand while a bill may be drawn payable on demand, on
expiry of a certain period, or after sight or on the happening of a
determinable future event.
3. A bill
must be accepted before payment is demanded while a cheque does not require
acknowledgment and is intended for immediate payment.
4. Notice of
dishonor of a bill is necessary, but no notice is necessary in the case of a
cheque.
5. A cheque
may be crossed but not a bill.
6. A 3 days
grace period is allowed in case of bills while in cheques no grace period is
given.
Promissory Notes
Under s.84(1) of the Bills of Exchange Act a promissory note is an
unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand or at a fixed or determinable future time a
sum certain in money or to the order of a specified person or to the bearer.
In a promissory note there are only two parties to the note
despite there being only two parties, it is still a negotiable instrument.
Therefore a promissory note can still be negotiated to another party.
Characteristics of a Promissory Note
1. It must
be in writing: a mere verbal promise is not sufficient
2. It must
contain an express promise to pay; a mere acknowledgment is not sufficient.
3. The
promise to pay must be unconditional
4. The maker
of the note must sign it.
Parties:
There are 2 parties to a promissory note.
Maker: The person who makes the promise to pay and signs
Payee: The person to whom the payment is to be made, that is, unless
he negotiates it.
Differences between a bill of exchange and a promissory note
1. A bill is
an order while a promissory note is a promise to pay.
2. There are
usually 3 parties to a bill while only two to a promissory note.
3. A foreign
promissory note need not be protested if it is dishonored, while a foreign bill
must be protested.
BILLS OF EXCHANGE:
There are several characteristics to a Bill of Exchange:
1. The order
to pay must be unconditional- so that a bill that required that the validity of
a bill be based on the signature of the person receiving it, acknowledging
receipt was held to be conditional and could not be treated like a bill of
exchange.
2. If the
order to pay is not on demand, the time of payment must be a fixed determinable
future time.
In this case the words, “90 days after acceptance’ did not amount
to a determinable future time as acceptance of a bill cannot be certain.”
Types of Bills:
Order Bills and Bearer Bills
Order Bills: A bill is payable on order
when it is expressed to be payable to the order of a specific person and does
not contain words prohibiting transfer to another person.
HIRE PURCHASE AGREEMENTS
5.1 INTRODUCTION
A
hire-purchase agreement may be defined as a system for purchasing merchandise,
such as Motor Vehicles, Furniture or Machinery where the buyer, upon payment of
an initial deposit, takes immediate possession of the item(s) and completes the
purchase by paying a series of regular agreed instalments. During this period,
the seller retains ownership of the item until the final instalment is paid.
This definition is in line with Section 2 (1) of the Hire
Purchase Act[18].
It may also be defined as a contract where the owner of goods
hires them out to another person for an agreed periodic rent payable by
installments and gives him the option to purchase[19]. The
process involves the drafting and signing of an agreement between the hirer
(the consumer) and the owner (the lending institution). The primary statute is
the Hire Purchase Act Cap 507 of the Laws of Kenya. The
Sale of Goods Act[20], Stamp
Duty Act[21], Bankruptcy
Act[22]among
other statutes, including statutes of General application[23] are
also relevant to Hire purchase type of agreements. At common law a
hire purchase agreement would appear to be a contract for the delivery of goods
one of whose terms is that the Hirer is granted an option to purchase the
goods.
5.2 ESSENTIAL OF HIRE PURCHASE AGREEMENTS
An HPA is just like any other contract.
1. Offer
2. Acceptance
3. Consideration
4. capacity
of parties
5. Legality
6. Intention
to create legal obligations
5.2.1 CAPACITY TO ENTER INTO HIRE-PURCHASE AGREEMENTS
The question of capacity to enter into a Hire
purchase agreement is governed by the normal rules of contract law[24].
Since Hire purchase agreements are in their very essence contractual
the principles of contract law where statute law is silent would apply. It
follows that in order to be obligated under a Hire purchase agreement
the parties must be competent to create legally binding relations. Such
capacity is determined by looking at age, legal status or mental condition of
the parties. A party must be a recognized ‘person’ at law with the exception of
Corporations every legal person is at law presumed to be competent to enter
into a Hire purchase contract. The exceptions are due to age, mental
infirmity or legal incapacitation such as bankruptcy.
5.2.1.1 Children
A Hire purchase agreement entered into by a child or a
mental incapacitated person would then be void or voidable at the instance of
the party that lacks capacity. As regards age, the Age of Majority
(Amendment) Act of 1974 fixes the age of majority at 18 years below which a
person would ordinarily lack the capacity to enter into a contract. The
exception to this rule is that the contract would be binding if it is for
necessaries.
Under the Sale of Goods Act[25] ‘necessaries’
mean goods suitable to the condition in life of the infant or minor or other
person, and to his actual requirements at the time of the sale and delivery.’
Alderson B in the case of Chapple vs. Cooper[26]defined necessaries
as :
…things without which an individual cannot reasonably exist…they
include among other things food, raiment [clothing], lodging,…instructions in
art or trade, intellectual, moral and religious information, the assistance and
attendance of others..[27]
Laibuta in his Principles of Commercial Law[28] argues
that the subject matter and extent of the contract may vary according to the
state and condition of the infant in question. According to him
Whether or not specific goods or services satisfy the definition
of necessaries is a question of both fact and law and depends on the facts and
the circumstances of the case. The nature and extent will invariably depend on
his position in society. In every case, the class itself is one in which the
things furnished are essential to the existence to the existence and reasonable
advantage and comfort of the infant contractor...
He comes up with the following definition for necessaries;
1. Good that
are suitable for his (sic) station in life
2. His (sic)
actual requirement and to his interest and benefit, at the time of the sale and
delivery
However not all contracts for the benefit or interest of the child
will be binding. For example in the case of Mercantile Union Guarantee
Corporation Ltd vs. Ball[29]an infant who carried on
business as a haulage contractor entered into a Hire
purchase agreement for the purchase of a lorry to be used in his business.
When sued for installment arrears he pleaded infancy. It was held that the
infant was not liable irrespective of the fact that the business sustained his
livelihood. The court pointed out that a contract for a large
and expensive lorry on onerous Hire purchase terms was not a contract
for the benefit of the infant. Finlay J. stated that;
An infant may bind himself to pay for his necessary meat, drink,
apparel, necessary physique, and such other necessaries and likewise for his
good teaching or instruction, whereby he may profit himself afterwards[30].
Hire purchase Contracts entered into by children in Kenya would
also be governed by the Infants Relief Act (1874) of England, which is a
statute of general Application.[31] The
Act also declares absolutely void contracts for goods other than necessaries
for which the minor or person of unsound mind is bound to pay a reasonable
price.
5.2.1.2 Mentally Retarded and Drunken Persons
The test of capacity in relation to insane or drunken persons is
whether at the time of contracting, the party was under such degree of mental
disability that he was incapable of understanding the nature of the contract.
It must be proved however that the fact of mental incapacity was or ought to have
been known to the other party. A contract made during lucid moments is binding
notwithstanding knowledge or lack of it of the other contracting party. Under
the Sale of Goods Act, a mentally retarded person is liable for necessaries
supplied to him or to his wife [sic][32]
An undischarged bankrupt is also incapacited from entering
Hire-purchase Agreements. Section 139 of the Bankruptcy Act [33]provides
that
Where a person who has been adjudged bankrupt or insolvent in
Kenya or any reciprocating territory and has not obtained his
discharge— either alone or jointly with any other person obtains
credit to the extent of one hundred shillings or upwards from any person
without informing that person that he is an undischarged bankrupt;
5. 2.1.3 The Bankrupt
The Bankruptcy Act, the Sale of Goods Act as well as the Sale of
Goods Act do not define ‘credit’ or what it entails. In absence of such
definition we rely on the definition of for example the Black’s Law
Dictionary which defines ‘credit trade’ to include any deferred
payment form of trade. Since the actual payment of the purchase price of the
Hired goods is paid later it would be possible to surmise that Hire
purchase is a technical form of Credit trade.[34] In
that case the incapacitation of undischarged bankrupts would apply. However
Section 50 (d) (ii) gives an exception where the dealing is without notice of
the Bankrupt’s acts of Bankruptcy at the time of entry into the transaction[35].
5. 2.1.3 Corporations
While corporations may enter into credit arrangements in the form
of Hire purchase, such transaction would not be governed by Cap 507 by
virtue of Section 3. The section provides that the Act applies to Hire
purchase agreements ‘other than a hire-purchase agreement in which the
hirer is a body corporate, wherever incorporated;’[36] The
Court of Appeal in Diamond Trust Bank vs. Jaswinder Singh
Enterprises [37] upheld
this position stating;
To my mind to understand section 3(1) of the Act it should be read
as follows:- "3(1) The Act applies to and in respect of all Hire
purchase agreement ... other than a hire-purchase agreement in which the
hirer is a body corporate whichever incorporated". The words "other
than" should be read to mean `except'. The section therefore excludes all
the agreements where the hirer is a body corporate from the protection of the
Act.
The exclusion of Corporations from the protection of the Act
alongside the monetary limitation at Kshs 300, 000 can be interpreted to make a
statement that Hire-purchase is an arrangement for the low income earner who is
vulnerable in a harsh capitalist society hence deserves statutory protection.
Indeed the court in Diamond Trust above proceeded to point out that.
The reason for this is that body corporates are deemed to be
sophisticated enough when entering into commercial transactions and therefore
with more bargaining power. The Act is instead meant to provide statutory
protection to hirers who are individual traders from exploitation by
hire-purchase companies. In the Kenyan situation the Act was meant to protect,
as it should, the small man or woman who goes to buy the common households
goods e.g. a bicycle, television etc. Indeed that is why a monetary
limitation was placed on the applicability of the Act.
This must also explain why for the most of its part the Act
discloses open bias in favor of the Hirer.[38]
5.3 FORMAL REQUIREMENTS OF HIRE PURCHASE CONTRACTS
1) It
must be in writing. Section 5(1).
Section 6(2) (a), it must
be duly executed.
2) It
contains pre-contractual statements showing:
1. hirer
2. cost
price
This condition (of showing the hirer and cost price) will be
satisfied if hirer had inspected goods before entering into agreement and goods
were tagged or catalogued or advertised. Pre-contractual statement,
except:
1. Where the
cash price of the goods was stated in writing to the hirer by the owner
otherwise than in the agreement; see Form HP 4 or
2. If the
hirer inspected the goods at a time when their prices were attached to them or;
3. The hirer
selected the goods by reference to a catalogue.
1. The
Agreement must be signed by the hirer S.6 (2).
2. It must
contain mandatory statements:
1. Cash
price and hire purchase price
2. Installment
to be paid, date and the date upon which it is payable.
3. Full
description of goods
4. Notice of
Right of Hirer in a statutory form.
1. Right to
terminate
2. Right to
complete purchase taking certain steps
3. Consequence
of damaged goods
4. Where to
return goods
5. Owner to
supply hirer a copy of agreement within 21 days of hiring.
Section 7, seller’s right to enter premises and take possession.
NOTE:
1. Owner
cannot incur higher liability than set out in the Act.
2. Provisions
that constitute owner’s agent as hirer is not acceptable.
3. Provisions
that owner’s agent is immune to liability is void
IMPLIED TERMS BY THE COURT-SECTION 8
1. Owner has
right to sell goods
2. Warranty
that hirer shall enjoy quiet possession of the goods this means that no one
will interfere with the hirer's possession during the term of the contract.
3. Goods are
free from any encumbrance and charge to 3rd party.
4. Goods are
of merchantable quality unless they are second hand.
5. Legal
ownership shall pass to hirer upon payment of Hire Purchase Price.
6. Goods are
fit for the purpose for which they are to be used (owner earlier
notified). Where the goods are hired by reference to a description or to a
sample, the goods supplied must correspond with the description and the sample.
The Hire-Purchase Act requires that Hire-purchase
agreements be in writing by virtue of requiring that the Agreements be
registered upon execution[39]. The Act
makes provisions for and regulates registration of all Hire-purchase that fall
within its jurisdictions as specified by section 3. Section 4 establishes the
Registry of Hire-purchase Agreements and the officers thereto. In mandatory
terms the Act proceeds to prescribe that the Agreements are to be in English.
The Agreement must also be stamped on payment of the prescribed
duty, failing which Section 19 (1) read together with Schedule 1 of the Stamp
Duty Act[40] render
it inadmissible in evidence. Courts have however in the past held that this is
a curable defect in a document required to be registered and stamped. For
example in the case of Diamond Trust Bank of Kenya vs.
Mohammed Noor Ahmed[41] the court stated that
‘failure to stamp a document is not, per se, fatal. It is curable by allowing
the party seeking to rely on the unstamped document an opportunity to have it
stamped.’ It is also noteworthy that Section 19 of Cap 480 confers
discretionary powers to the court to allow time for curative stamping.
In default of registration however, Section 5(4) of the
Hire-purchase Act stipulates that the Agreement is not enforceable against
the hirer. Neither is any contract of guarantee relating to the
agreement. Further no security given by the hirer under a
related guarantee contract[42] shall
be enforceable. The court in Fidelity Commercial Bank vs. Agritools
& 3 others [43] reiterated
this position. In this case, The Hire Purchase Agreement the subject of the
application before court was executed on 7th August 2003 and it was not denied
that it had not been registered. Such a document under Section 5 (2) shall not
be registered unless, it is liable for payment of stamp duty, and stamp duty is
duly paid.
The 2nd objector’s counsel did not deny that the
Hire Purchase Agreement was subject to the Stamp Act and nor did he deny that
such duty had not been paid. Counsel argued that that the fact the
agreement was not registered nor stamp duty paid, did not detract the
agreement from being a contract and he emphasized that the logbook reflected
the 2nd objector’s joint ownership and that interest reflected in the log book
came first before the judgment creditors interest. The court held that Section
5 (4) of the Hire Purchase Act to be very specific that an agreement which is
not registered is not enforceable against the hirer. As a result, the 2nd objector
had no right to recover the subject motor vehicle from the 2nd judgment
debtor. This is an occasion whereby the Act has demonstrates bias in favor of
the Hirer clearly for reason discussed above i.e. the Hirer is more vulnerable
than the owner, financier or guarantor.
Cap 507 also imposes another condition that before making the
Hire-purchase Agreement, the seller must inform the hirer in writing the cash
price of the good.[44]This may
be done by displaying the cash price on a ticket or label, tag, price list,
catalogue or advertisement exhibited for inspection by the Hirer. Under Section
6(2) non-compliance with the provision deprives the owner of the right to
enforce the Agreement or any contract of guarantee related thereto. This serves
a protective role of ensuring that the Hirer freely elects either to purchase
by cash or proceed on Hire-purchase terms. It therefore enables the court to
ascertain the intention of the parties.
The parties to the agreement must reach consensus ad idem.
Section 6 also stipulates some standard terms of the Agreement by requiring
that for it to be enforceable; the Agreement must contain some information that
favor the Hirer’s position[45].
Other safeguards in favor of the Hirer are prohibition of any
unilateral term purporting to restrict the owner’s liability or to relieve the
owner from liability for wrongful entry upon any premises with the intent to
repossess the goods [or] to restrict the right of the Hirer to terminate the
agreement…[or] to increase the Hire’s liability there under.’ The Hirer’s
right to terminate is therefore indefeasible.[46]
Section 8 further reinforces the position of the Hirer by creating
implied warranties and conditions (similar to those under the Sale of Goods
Act), Cap 31 Laws of Kenya) in any Hire purchase Agreements. The
statutory warranties and conditions apply and bind the parties notwithstanding
any agreement to the contrary. According to Laibuta KI, (2006) the warranties
and conditions are considered not only necessary in protecting the rights and
interests of the hirer but also ‘to lend meaning and efficacy to contracts for
hire-purchase.’ He argues that while respecting party autonomy, it must be
appreciated that no useful purpose would b allowed to incorporate every
conceivable term including those terms that would substantially erode the very
purpose of the contract. In every case for example it is an implied term that
the goods will be in the condition as they were when the offer was made. This
condition protects the Hirer from paying for goods modified or altered in
quality, or even reduced in quantity after the contract has been made.
5.3.1 THE HIRER'S RIGHTS
The hirer usually has the following rights:
1. To buy
the goods at any time by giving notice to the owner and paying the balance of
the HP price less any rebate (each jurisdiction has a different formula for
calculating the amount of this rebate).
2. To return
the goods to the owner. This is subject to the payment of a penalty to reflect
the owner's loss of profit but subject to a maximum specified in each
jurisdiction's law to strike a balance between the need for the buyer to
minimize liability and the fact that the owner now has possession of an
obsolescent asset of reduced value.
3. To assign
both the benefit and the burden of the contract to a third person with the
consent of the owner. The owner cannot unreasonably refuse consent where the
nominated third party has good credit rating.
Where the
owner wrongfully repossesses the goods, either to recover the goods plus
damages for loss of quiet possession or for damages representing the value of
the goods lost, the hirer has the following rights:
1. Right of
protection.
2. Right
of notice.
3. Right of
repossession.
4. Right of
statement.
5. Right of
excess amount.
The hirer however does not
have absolute right with the hired goods. They usually have the following
obligations among others:
2. To take
reasonable care of the goods (if the hirer damages the goods by using them in a
non-standard way, he or she must continue to pay the installments and, if
appropriate, compensate the owner for any loss in asset value)[48]
These obligations translate
into the owner's rights, albeit by implication, since the Kenyan Act does not
expressly secure the Owner’s rights. The owner usually has the right to
terminate the agreement where the hirer defaults in paying the installments or
breaches any of the other terms in the agreement. This entitles the owner:
1. To
retain the deposit and installments paid so far
2. To retain
the installments already paid and recover the balance due
3. To
repossess the goods (which may have to be by application to a Court depending
on the nature of the goods and the percentage of the total price paid)
4. To claim
damages for any loss suffered.
5.3.2 THE PASSING OF PROPERTY/TITLE IN THE GOODS
In Hire purchase property which essentially means
ownership of the goods does not pass to the hirer till the option to purchase
has been exercised. Thus the hirer has the right to return the goods
and terminate his liability at any time[50]. Under Section
2 of the Factors Act of England 1889 which is a statute of general
application to Kenya[51] if
a mercantile agent disposes of the goods in his possession with the consent of
the owner he passes a good title to a bona fide purchaser for value without
notice. If then goods are lent to a hirer who is a mercantile agent
he cannot pass a good title to a 3rd party since the goods are
lent to him in his personal capacity and not in the capacity of a mercantile
agent.
Section 22 of the English Sale of Goods Act of 1893 provides
that a sale to a bona fide purchaser in market overt according to the usage of
the market passes a good title even if the seller had no title. This
therefore operates as an exception to the nemo dat[52] principle under Hire
Purchase. This exception may be inferred from the definition
of Hirer under Section 2 of Cap 507 which recognizes a person to whom the goods
has passed by assignment. Sometimes the owner of the goods hired to
the hirer who has resold them may voluntarily relinquish his title to them
after being paid and hence good title passes to subsequent
purchasers. This is not quite an exception to nemo dat but
a modification of it. The hirer under a hire purchase agreement possesses a
contractual right to acquire ownership of the goods upon payment of
all installments due and the exercise of the option to
purchase. The question that therefore arises is; can the hirer
therefore assign the benefit of the Agreement? At common law if a contract is
silent on assignment then the hirer can assign but if it specifically prohibits
assignment then he should not assign. The Act itself appears to acknowledge the
fact that a hirer possesses a contractual right to ultimately acquire ownership
of the goods upon payment of all the installments due under the
agreement, and on exercising the option to purchase. It
therefore expressly recognizes the right to assign as contemplated by
section 2(1) which defines a hirer as
… a person
who takes or has taken goods from an owner under a Hire
purchase agreement and includes a person to whom the hirer’s rights or
liabilities under the agreement have passed by assignment or by operation of
law
It then follows that by definition a hirer can assign any of his
rights under a Hire purchase agreement including the option to
purchase. According to Laibuta (2006) an option is in general terms exercisable
by the owner or other person by whom it may be acquired by assignment. [53] In United
Dominions Trust vs. Parkways Motors [54] the court
held that an express term that the option to purchase shall not be assigned
will always be upheld. It then follows that where the right of assignment is
specifically excluded by contract, the hirer loses the right to assign.
5.3.3 REPOSSESSION BY THE OWNER
At common law an owner of goods is entitled to repossess them once
the bailment ceases or terminates. A hire purchase contract may
provide that if the hirer commits a specified breach then the agreement
terminates whereupon the owner is entitled to possession of the
goods. In cases of resale of the goods by the hirer the hirer cannot
pass a good title hence the owner can repossess the goods from the innocent
purchaser. The owner’s claim to damages will be limited to the
unpaid balance of the hire purchase price. Should judgment be
entered against the hirer, the judgment creditor is not permitted to seize
goods the subject matter of a hire purchase agreement.
Repossession is however closely guarded by the Act.[55] Where
goods have been let under a hire-purchase agreement and two-thirds of the
hire-purchase price has been paid, whether in pursuance of the agreement or of
a judgment or otherwise, or has been tendered by or on behalf of the hirer or a
guarantor, the owner shall not enforce any right to recover possession of the
goods from the hirer otherwise than by suit. If an owner retakes possession of
goods in contravention of the Act the hire-purchase agreement, if not
previously terminated, shall terminate and -
(a)
the hirer shall be released from all liability under the agreement and shall be
entitled to recover from the owner by suit all sums paid by the hirer under the
agreement or under any security given by him in respect thereof; and
(b)
A guarantor shall be entitled to recover from the owner by suit all sums paid
by him under the contract of guarantee or under any security given by him in
respect thereof.
If the hirer does release the goods and they are seized and sold
the owner cannot maintain an action for conversion against an innocent
purchaser but he can recover the price for which the goods were sold in an
action for money had and received. If the goods have not yet been
sold then the owner is entitled to possession of them from the judgment
creditor. Further;
Where
an owner institutes a suit to enforce a right to recover possession of goods
from a hirer and proves that, before the institution of the suit and after the
right to recover possession of the goods accrued, he made a request in writing
to the hirer to surrender the goods, the hirer's possession of the goods shall,
for the purpose of the owner's claim to recover possession thereof, be deemed
to be adverse to the owner[56]
In cases where the hirer is a tenant of leasehold premises and he
fails to pay rent, the landlord may re-enter the premises and seize all goods
therein whether they belong to the tenant or not. For the owner of
the goods hired to be protected, he must serve notice to the landlord that
those goods belong to him. Only then can he repossess them. Where
the hirer is adjudged bankrupt all his property vests in the trustee in
bankruptcy for distribution among creditors[57]. But
this does not apply to goods let on hire purchase when the owner serves a
notice to the hirer withdrawing his consent to possession of the hired goods[58]. The
owner must do this before the hirer is adjudged bankrupt.
Finally if hired goods are delivered to a bailee for repair the
bailee has a particular lien on the goods till his charges are paid by the
hirer. If the owner is entitled to terminate the hiring, the
repairer can still claim a lien as against the owner. In all
the foregoing circumstances of the owner of the goods repossess them, prima
facie the hirer cannot claim relief against forfeiture of the goods or
the payments already made.
5.3.4 THE MINIMUM PAY CLAUSE AND DAMAGES
In addition to the owner’s common law right of repossession of the
hired goods the owner may seek damages. Goods let on hire purchase
depreciate in value because of user. The owner seeks to pass the
risk of depreciation on to the hirer by providing in the Agreement that the
hirer shall make a minimum payment for the period the hirer has used the
goods. This is normally labeled ‘compensation for depreciation’[59].
The question then is, can the owner sue the hirer for the sums
stated in the minimum payment clause or can the hirer refuse to pay because the
amount is a penalty and not liquidated damages? Common law courts took the
position that it is for them to determine the measure of damages payable in the
event of breach of contract. If the damages agreed between the
parties is not a genuine pre-estimate of the loss likely to be incurred upon
breach the courts will strike it down as a penalty. There are 3 circumstances
under hire purchase which invite the operation of the minimum payment clause.
1. In the
case of the hirer’s breach of contract, the minimum payment clause will be
regarded as a penalty and hence be struck out whereupon the court will assess
the amount of damages payable.
2. In the
case of voluntary termination of the contract by the hirer by returning the
goods the minimum payment clause will be enforced.
3. The
minimum payment clause will be enforced in the case of involuntary termination
of the contract where either the hirer dies or becomes bankrupt[60].
5.3.5 DAMAGES FOR BREACH OF CONTRACT
If the hirer commits a breach of any of the terms of hire purchase
agreement the owner may claim damages. The hirer has several
obligations the breach of which gives rise to damages namely
1. The
obligation to take delivery of the goods,
2. The duty
to take care of the goods,
3. The
obligation to pay the installments and
4. The
obligation to continue the hiring for the agreed period.
Here the owner’s rights upon the hirer’s breach are termination of
the agreement, and a claim for damages. Interestingly these provisions in the
Kenyan Act are in several ways similar to those of other jurisdictions. However
there are some differences which warrant analysis in the next chapter with a
view to guide my proposals on reforms necessary to improve Hire
purchase regime in the country.
5.4 HIRE PURCHASE AS DISTINGUISHED FROM OTHER COMMERCIAL
TRANSACTIONS
5.4.1 HIRE PURCHASE AND CONTRACT OF SALE
1. In HPA,
hirer is not bound to purchase the goods comprised in the
agreement. The hirer only exercises an option and is not bound to
buy.
2. A
contract of sale of goods, on the other hand, entails a binding obligation on
the buyer to buy and a similar obligation on the seller to sell.
The classical Hire-purchase
case of Helby vs. Mathews[61] was
particular about this point. A piano was handed over to a hirer who agreed to
pay stated installment. He could become the owner by paying up to the last
installment or could return the instrument at his choice. Property was to
remain in the owner until the payment of the very last
installment. The Hirer paid only a few installments then
proceeded to pledge the Piano to a third party who actually acted in good faith
and without knowledge of the owner’s rights. The owner was allowed by court to
recover his piano from the third party.
The Court in Helby
vs. Mathew[62] emphasized
the fact that a hirer does not have ownership. He cannot therefore purport to
create ownership by transfer or pledge to another person. This feature of
Hire-purchase makes it fundamentally different from other consumer-credit
transactions and ordinary agreements to sale. For example the House
of Lords in the above case was unanimous that the position would have been
different if the goods had been delivered under an agreement to sale; that in
that case the buyer could have been compelled to buy the goods and pay the price.
Such transaction confers on the buyer the right to deal with the goods.
5.4.2 HIRE PURCHASE AND MONEY LENDING
A HPA is not a money lending transaction and a credit or finance
charge does not constitute interest on a loan. All that the owner of
the goods is doing is giving hirer a right to purchase the goods at a rather
higher figure than if he were paying in cash on the spot.
5.4.3 HPA AND AGREEMENT FOR SIMPLE HIRING
In a simple agreement for hiring, the hirer is obliged to return
the goods to the owner at the end of the period of hire and the agreement does
not confer on him an option to purchase the goods.
5.5 STATUTORY CONTROLS
1. Where the
hirer is an individual, the HP price is limited to Kshs.4,000,000
2. There is
no limit of the HP price where the hirer is a body corporate
3. HPA does
not apply to schemes by which the government provides loans to any persons for
the purchase of motor vehicle.
5.6 STEPS IN THE TRANSACTION
1. Completion
2. Termination
(Form HP8)
3. Completion
(Form HP9)
4. When
right to complete exercised
1. At any
time during the continuance of the agreement
2. If the
owner had reposed the goods, the hirer can only benefit from this right if he
approaches the owner and pays him of the net balance due as well as the costs
and expenses incurred in the process of repossessing the goods.
5.7 LICENSES
1. You must
get a license if you intend to be a hirer.
2. Licenses
are issued by licensing officer appointed by minister in charge of commerce by
filing form No. 10.
3. Licensing
officer grants license, he is not supposed to give a reason if he refuses.
4. Licenses
are valid for a year and must always be displayed in premises (business)
5. Appeals
are to the minister within 30 days.
5.8 CONSEQUENCES OF DEFAULT BY HIRER
1. Owner may
recall goods except where hirer has paid two thirds of the price. He cannot
recall them except by a court action.
2. Release
hirer from liability and he receives all sums he paid,
3. Risks
having the guarantors released and guarantors right to claim payments made by
them.
4. Where
owner files for termination, he can’t recover dues under the contract.
5. In the
above, the owner must always sue the guarantors and people who gave security as
a remedial measure.
6. Court may
issue order to repossess goods or partial transfer of goods.
5.9 REGISTRATION OF HPAs
All HPAs must be registered within 30 days from the day they are
signed. The registrar of HPAs or his deputies or assistants may
extend this time if good reason is shown for doing so.
What happens is that the HPA document is send to the registry of
HPAs and delivered to the registrar who registers it and issues a certificate
of registration. This certificate is in form HP2.
5.9.1 ADVANTAGES OF HIRE PURCHASE AGREEMENTS
1. The
transactions allow the buyer to pay for items without cashing in investments or
savings, and to spread the cost of expensive items over an extended period. In
such transactions ownership of goods is transferred to a finance company at a
discounted price, and the company hires out and then sells those goods to the
buyer. The process of hire purchase financing is an alternative option for consumers
who want to buy large and expensive items which may otherwise be difficult to
afford. This payment of installments is also beneficial to the owner since the
goods remain on hire only and the property in them does not pass to the hirer
unless and until all the agreed hire purchase installments have been paid and
the option to purchase exercised on payment by the hirer of a specified nominal
amount. This position was enunciated in the case of Nurdin Bandali
vs. Lombark Tanganyika Ltd[63] where the
court stated that the fact that all hire purchase installments have been paid
by the hirer does not mean that the goods becomes his. Until the property
passes by reason of due exercise of the option, the goods remain the property
of the owner who can repossess, sell or otherwise deal with them.
2. Section
12 of the Act gives the hirer an option to severe the contract
at his option before making the full payment by invoking the minimum payment
clause. Minimum payment clause under Section 12 provides that
the hirer may terminate an agreement by returning the goods to the owner at any
time before final payment, and that the transaction becomes a sale only when
the hirer exercises the option to purchase. This position has been supported
further by the appeal court decision in Associated Distributors Ltd
v Hall[64], which held that the
courts can enforce the minimum payment clause if the contract is terminated,
within its terms. In such cases, the operation of the minimum payment clause
which binds both parties where the goods are returned with an intention to
terminate the contract. This is an advantage to both parties as the hirer who
has taken the goods is not bound to purchase them and can return them if he
changes his mind.
3. The hirer
has an opportunity to terminate the transaction through a notice in writing to
the retailer if they experience hardships in payment. The goods must, however, be
as good as new because returning them in a poor condition may attract a suit by
the retailer seeking damages. Section 2(1) of the Act provides
that a hirer may purchase the goods. However, the hirer is not bound to
purchase as provided in Dalpat Rai v Manohar Lal & Sons[65] where
court stated that under the Act, the hirer is not bound to purchase
but the Act gives the hirer the option, but not the obligation, to
buy thus, where the hirer breaches the contract, it will be up to the
courts to decide whether a penalty has been incurred. Furthermore, if the hirer
returns the goods as his or her right, the hirer must pay the owner
damage.
4. A
hire-purchase agreement is not enforceable unless it has been registered. Section 5(4)
(a) and (b) states that unless a hire-purchase agreement is registered no
person shall be entitled to enforce the agreement against the hirer or to
enforce any contract of guarantee relating to the agreement and the owner shall
not be entitled to enforce any right to recover the goods from the owner. Similarly,
no security given by the hirer in respect of money payable under the agreement
or given by the guarantor relating to the agreement shall be enforceable
against the guarantor by any holder thereof. This was illustrated in the case
of Fidelity Commercial Bank ltd D.H v Agritools Limited and two
others (Judgment debtor).[66] The
decree holder sought to attach a motor vehicle in order to satisfy his judgment
against judgment debtor. The objectors filed an application to lift the
attachment arguing the motor vehicle in question belonged to them and not the
second judgment debtor who was only a hirer. The second judgment debtor had
entered into a hire-purchase agreement with the objectors for the purchase of
the motor vehicle. Following the agreement the motor vehicle was registered
jointly. The objector argued that the hire purchase agreement was still in
existence and since the second judgment debtor had not completed payment of
installment she was only a hirer. It was held that there wasn’t a valid
hire-purchase agreement since it had not been registered. It was also held that Section
5(4) of the Hire Purchase Act was very specific that an agreement
which had not been registered could not be enforced against a hirer.
5. Section
15 of the Act provides that when 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 this Section, the agreement is terminated and the hirer is released from
liability under the agreement and can recover all payments made by him from the
dealer. The two thirds provisos are meant to protect hirers from unscrupulous
dealers. This can be deduced from the case of Elijah Barasa Wepukhulu Vs
Munir Omar & 2 others. [67] The first and second defendants
bought a vehicle under hire purchase from the plaintiff. The third defendant
financed the transaction and held the log book as collateral. The first and
second defendants sold the vehicle to a third party who did not bother to check
the title of the two defendants. The first and second defendants completed
paying two thirds of the hire purchase price as required under Section
15 of the Act. They defaulted in paying the third defendant who
took possession of the vehicle as per their loan agreement. The owner sued
under Section 15 of the Act for possession of the
vehicle. It was held that Section 13 of the Hire Purchase
Act protects parties who are privy to contracts, that is, a hirer against an
owner so that where necessary an owner may become entitled and claim the
balance of the unpaid balance as opposed to repossession. It was also held
that Section 15 can’t be used by a third party purchaser
against the owner.
6. Where an
owner becomes bankrupt, a hire-purchase agreement entered into him will remain
in force and binding on the trustee without prejudice to the trustee right to
disclaim. This is stipulated under Section 30 of the Act. The
hirer is required to pay the installment to the trustee. However, if the
trustee decides to disclaim (do away with the agreement) the hirer is relieved
of the contract. Section 31 provides that if the hirer is
adjudged bankrupt his rights and obligations rest in his trustee although this
is subject to the trustee’s right to disclaim.
7. The hirer
acquires certainty in ownership of an object as long as he complies with the
terms of the underlying agreement. This certainty, which comes with known fixed
repayments, eases budgetary cash flows for the buyer. Purchasing of
goods using hire-purchase agreements comes with a fixed rate of interest
covering the full period of repayment so that you can easily budget without
fearing the effects of changes in interest rates that may occur with changes in
the economy generally. Hire purchase transactions are cushioned against
inflation and are therefore a cheaper alternative to bank overdraft where the
rate could be subject to fluctuations. There are also other advantages with regard
to tax where one can account for a rebate to the taxman.
INTERNATIONAL COMMERCIAL
AGREEMENTS
INTRODUCTION
International Commercial Agreements are agreements made between
parties from different countries. They cover issues such as Joint Ventures Agreements
(JVAs), agency and distribution agreements, licenses and franchises.
Pre-contractual Negotiations
1. To be
able to negotiate well one has to have the following as a minimum:
1. Know when
(or on what) and when not (or on what not) to negotiate,
2. Take into
account the commercial versus legal considerations,
3. Tactics
to avoid pre-contractual liability (employ non binding documents such as MoUs
or letters of intent),
4. Duty of
good faith,
5. The
power of silence,
6. Ability
to negotiate with difficult people,
7. Creative
problem solving’
8. an
Understanding of the cultural perspective in international negotiations take
place. In dealing with cross-cultural issues and must be able to identify and
manage cultural barriers and in fact turn cultural differences into commercial
advantages and
9. be able
to deal with different styles on the other side of the table.
If a local counsel required for negotiating with a foreign party
it may be advisable to engage one.
Key Legal
Issues to Consider in ICAs
2. Impact of
International Law (International treaties, conventions agreements and
international customary law)
3. National
law – competition law, revenue laws
4. Choice of
the governing law
5. Choice of
forum
6. Dispute
resolution mechanisms.
7. Common
clauses in ICAs
1. Definitions
and interpretation
2. Indemnity
3. Force
Majeure
4. Change of
control
5. Severability
6. Notices
7. Waivers
8. Confidentiality
9. Payments
10. Duration
of contract and effect of termination on antecedent acts
8. Resolving
International Commercial Disputes
1. Arbitration
2. Mediation
3. Litigation
9. Common
Types of ICAs
10. License
and Franchise Agreements( relevant for Licensing trademarks, patents and
copyrights, technology and know-how and other rights)
11. Agency
and Distribution Agreements
12. JVAs
Joint Ventures (JVs)
1. What is a
Joint Venture?
A JV is a legal
organization that takes the form of a partnership between two or more persons
by which they jointly undertake a transaction for mutual profit.
Generally each person
contributes assets and share risks.
Like a partnership, JVs can
involve any type of business transaction and the ‘persons’ involved can be
individuals, groups of individuals, companies, or corporations.
2. Nature of
a Joint Venture
In order to form a JV, the parties to it must agree to create a
new entity by both contributing equity, and they then share in the revenues,
expenses, and control of the enterprise.
The venture can be for one specific project only, or a continuing
business relationship. This is in contrast to a strategic alliance, which
involves no equity stake by the participants, and is a much less rigid
arrangement.
JVs are formed in the following ways:
1. Two
parties, (individuals or companies), incorporate a company. Business of one
party is transferred to the company and as consideration for such transfer,
shares are issued by the company and subscribed by that party. The other party
subscribes for the shares in cash.
2. Two
parties subscribe to the shares of the joint venture company in agreed
proportion, in cash, and start a new business.
3. Promoter
shareholder of an existing company and a third party, who/which may be
individual/company, one of them non-resident or both residents, collaborate to
jointly carry on the business of that company and its shares are taken by the
said third party through payment in cash.
Joint Ventures can take place between locals amongst themselves or
they may involve locals and foreigners. However, they are commonly used by
foreign companies to gain entrance into local markets. Foreign companies form
joint ventures with domestic companies already present in markets the foreign
companies would like to enter. The foreign companies generally bring new
technologies and business practices into the joint venture, while the domestic
companies already have the relationships and requisite governmental documents
within the country along with being entrenched in the domestic industry.
4. Rationale
for forming Joint Ventures
Internal
reasons
1. Build on
company's strengths
2. Spreading
costs and risks
3. Improving
access to financial resources
4. Economies
of scale and advantages of size
5. Access to
new technologies and customers
6. Access to
innovative managerial practices
Competitive
goals
1. Influencing
structural evolution of the industry
2. Pre-empting
competition
3. Defensive
response to blurring industry boundaries
4. Creation
of stronger competitive units
5. Speed to
market
6. Improved
agility
Strategic
goals
1. Synergies
2. Transfer
of technology/skills
3. Diversification
4. Form
of a Joint Venture Agreement (JVA)
Joint Ventures are achieved
through Joint Venture Agreements (JVAs). The Encyclopedia of Forms and
Precedents (4th Edn, Vol 22) defines a ‘joint venture
agreement’ as being in the nature of a partnership between enterprises by which
they seek to achieve, by mutual cooperation, a greater coordination of their
separate activities.
5. How
to enter into a Joint Venture Agreement
1. Selection
of a good local partner is the key to the success of any joint venture.
2. Once a
partner is selected generally a Memorandum of Understanding or
a Letter of Intent is signed by the parties highlighting the
basis of the future joint venture agreement.
3. Negotiation
of the terms of the joint venture agreement. The terms should be thoroughly
discussed and negotiated to avoid any misunderstanding at a later stage.
Negotiations require an understanding of the cultural and legal background of
the parties. The negotiations will focus on issues such as:
1. Dispute
resolution agreements (Negotiation, arbitration, conciliation etc).
2. Applicable
law.
3. Force
Majeure: (What does it mean in the context of the subject agreement?). ‘Force majeure, as used herein, shall mean acts of
God, laws or regulations, industrial disturbances, acts of the public enemy,
civil disturbances, explosions and any other similar cause of equivalent force
not caused by, nor within the control of either party, and which neither party
is able to overcome. As soon as possible after the occurrence of the
force majeure and within not more than 15 days, the Supplier shall give notice
and full particulars in writing to the Federation of such force majeure if the
Supplier is thereby rendered unable, wholly or in part, to perform its
obligations and meet its responsibilities under this Purchase
Order. The Federation shall then have the right to terminate the
Purchase Order by giving in writing seven days notice of termination to the
Supplier, and the Supplier shall return any deposit paid by the Federation’.
4. Holding
shares (Percentages. Transfer of shares. Board of Directors. General meeting.
CEO/MD. Management Committee. Important decisions with consent of partners.
Dividend policy. Funding. Access. Change of control. Non-Compete.
Confidentiality. ‘All
materials prepared as well as all data collected and processed in the course of
your work under the terms of this contract become the property of the
International Federation to dispose of as the International Federation deems
suitable. They cannot be used for any purpose without prior written permission
from the Secretary General. You hereby assign to the International Federation
all intellectual property rights to the material prepared in the course of your
work under the terms of this contract. Any information you become aware of
during this assignment must remain confidential and not be divulged outside the
Federation Secretariat and its field delegations, except where such information
is publicly available’.
5. Indemnity.
‘The Supplier shall indemnify, hold and save
harmless, and defend, at its own expense, the Federation, its officials,
servants, and agents from and against all suits, claims, demands, and
liability, of any nature or kind, including their costs and expenses, arising
out of any acts or omissions by the Supplier, or the Supplier’s employees,
officers, agents, or sub-contractors, in their performance of this Purchase
Order. The obligations under this provision do not lapse upon
termination of this Purchase Order and do not prejudice any other remedies
available to the Federation’.
6. Assignment.
‘The Supplier shall not assign, transfer, pledge
or make other disposition of this Purchase Order or any part thereof or of any
of the Supplier’s rights, claims or obligations under this Purchase Order
except with the prior written consent of the Federation’.
7. Break of
deadlock.
Termination. ‘Without prejudice to
other remedies, either Party may cancel a Purchase Order immediately by
providing written notice to the other in the event that (i) the other party
commits a material breach of the Purchase Order and fails to remedy that breach
after being required to do so by notice in writing from the party seeking to
terminate the Purchase Order specifying the breach complained of and stating
its intention to terminate the Purchase Order if such breach is not made good,
(ii) the other Party becomes insolvent, (iii) termination is permitted in
accordance with the specific terms hereto’.
Legal compliance. The JV agreement should be subject to obtaining
all necessary governmental approvals and licenses within specified period. ‘The Purchase Order is conditional upon the obtaining
of any export license or other governmental authorization that may be
required. The Supplier shall inform the Federation beforehand of
such restrictions and shall obtain such license or authorization. In the event
of refusal thereof, through no fault of the Supplier, the Purchase Order will
be annulled and all claims between the parties automatically
waived. The Supplier shall be responsible for any expenses or losses
due to incorrect, incomplete or late documentation’.
8. How
to Draft a Joint Venture Agreement
A good Joint Venture agreement is one which provides a
comprehensive road map of the duties and obligations of both the parties. It
minimizes complications when disputes arise.
Before finalizing a Joint Venture Agreement, the terms should be
thoroughly discussed and negotiated to avoid any misunderstanding at a later
stage. Negotiations require an understanding of the cultural and legal
background of the parties.
Before signing a Joint Venture Agreement the following must be
properly addressed:
1. Applicable
law. Force Majeure. Holding shares. Transfer of
shares. Board of Directors. General
meeting. CEO/MD. Management Committee. Important decisions with
consent of partners.Dividend policy. Funding.Access. Change of
control. Non-Compete. Confidentiality. Indemnity. Assignment.
Break of deadlock. Termination. Security and confidentiality.Legal compliance.Fees
and payment terms.Proprietary rights.Auditing rights. Events of Defaults
and Addressing. Dispute Resolution Mechanism.Time limits.Location of
Arbitration.Number of Arbitrators.Interim measures/Provisional Remedies.Privacy
Agreement.Non-compete Agreement.Confidentiality Agreement. Rules
Applicable.Appeal & Enforcement.
2. Be aware
of local peculiarities.
3. Survival
terms after the termination of the Joint Venture agreement. The expiry or
termination of this agreement shall be without prejudice to any rights which
have already accrued to either of the parties under the Agreement. Things which
need to be done under it to continue as if the Contract was in force.
4. The Joint
Venture agreement should be subject to obtaining all necessary governmental
approvals and licenses within specified period.
5. Every
Joint Venture agreement should be modified as applicable under different
circumstances. One brush should not paint all the painting.
Joint Venture Agreements structured with in-country partners will
be different from those meant for international partnership.
The greatest risks for International Joint Venture come from some
emerging countries that are early entrants into Joint Venture, or those that
have limited governmental support, ineffective legal enforcement, immature
infrastructure, limited or nonexistent intellectual property protection or lack
an understanding of foreign laws.
The most important areas to protect through an international Joint
Venture agreement are security and confidentiality, legal compliance, fees and
payment terms, proprietary rights, auditing rights and dispute resolution
process. The legal systems in some countries might claim jurisdiction over any
agreement regardless of which system the agreement specifies, and that other
legal systems might have little respect for intellectual property rights.
Awesome pieces of work. kudos.
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