Basic Laws For Managers and Management Students.

“Every contract involves an agreement but every agreement does not necessarily result in a contract” Explain

An agreement in restraint of trade, Marriage or anything which is Legally valid as per Indian Contract Act is void : Agreements restraint of trade come under the broad heading of agreements against public policy. Courts do not enforce agreements that impose unnecessary restriction on the freedom of individuals to carry on any lawful trade or business.
According to Section 27 of the Indian Contract Act, an agreement by which any one is restrained from exercising lawful trade or business of any kind is to that extent void. As per this section, any restriction, whether partial/general or qualified/unqualified, is void.
However, there are certain exceptions to the rule that an agreement in restraint of trade is void.
The following are valid:
Sale of goodwill: As per the exception to Section 27 of the Contract Act, the seller of goodwill of a business may agree with the buyer to refrain from carrying on a similar business so long as the buyer or his agent carries on a similar business within specified local limits and the restrictions are reasonable.
Partners agreement: As per the provisions of the Partnership Act:
A partner may agree not to carry on any business other than that of the firm so long as he is a partner;
A partner on ceasing to be a partner will not carry on any business similar to that of the firm within a specified period or within specified local limits (provided the restrictions are reasonable)
Partners may, on anticipation of dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits (provided the restrictions are reasonable)
When the goodwill of the firm is sold, the partners may agree that they will not carry on similar business for specified period within specified local limits provided the restrictions are reasonable.
Service agreements: An agreement of service by which a person binds himself during the period of service not to take any service with any one else or not to compete with the business of the employer is void even though it is in restraint of trade.
Also where agreements signed under force and without consent or with coercion are null and void and therefore do not made a Contract under Indian Contract Act.

We enter into contracts so many times in a day that ‘contract’ has become an indispensable part of our life. When you purchase milk or newspaper in the morning or go to movie in the evening, you are entering into a contract. Indian Contract Act really codifies the way we enter into a contract, execute a contract, implement provisions of a contract and effects of breach of a contract. Basically, a person is free to contract on any terms he chooses. The Contract Act consists of limiting factors subject to which contract may be entered into, executed and breach enforced. It only provides a framework of rules and regulations which govern formation and performance of contract. The rights and duties of parties and terms of agreement are decided by the contracting parties themselves. The court of law acts to enforce agreement, in case of non-performance.
Section 1 of Contract Act provides that any usage or custom or trade or any incident of contract is not affected as long as it is not inconsistent with provisions of the Act. In other words, provision of Contract Act will prevail over any usage or custom or trade. However, any usage, custom or trade will be valid as long as it is not inconsistent with provisions of Contract Act. The Act extends to the whole of India except the State of Jammu and Kashmir; and came into effect on 1-9-1872.
It must be noted that contract need not be in writing, unless there is specific provision in law that the contract should be in writing. [e.g. * contract for sale of immovable property must be in writing, stamped and registered. * Contracts which need registration should be in writing * Bill of Exchange or Promissory Note must be in writing. * Trust should be created in writing * Promise to pay a time barred loan should be in writing, as per Limitation Act * Contract made without consideration on account of natural love and affection should be in writing ]. A verbal contract is equally enforceable, if it can be proved.. A contract can be enforced or compensation/damages for breach of contract can be obtained through Civil Court
Essential Ingredients of a contract - As per Contract Act, an agreement enforceable by law is a contract. [section 2(h)]. Hence, we have to understand first what is ‘agreement’.
Every promise and every set of promises, forming the consideration for each other, is an agreement. [section 2(e)]. - - A person makes a proposal (offer). When it is accepted by other, it becomes a promise. However, promise cannot be one sided. Only a mutual promise forming consideration for each other is ‘agreement’. - - For example, A agrees to pay Rs 100 to B and B agrees to give him a book which is priced at Rs 100. This is set of promises which form consideration for each other. However, if A agrees to pay Rs 100 to B, but B does not promise anything, it is not ‘set of promises forming consideration for each other’ and hence not an agreement.
It should be noted that the term ‘agreement’ as defined in Contract Act requires mutual consideration. - - Thus, if A invites B to dinner and B agrees to come, it is not an ‘agreement’ as defined in Contract Act.
Meaning of ‘Proposal’ - When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. [section 2(a)].- - Thus, a ‘proposal’ can be to do a positive act or abstinence from act (i.e. negative act). [English Act uses the word ‘offer’, while Indian Contract Act uses the word ‘proposal’. Generally, both words are used inter-changeably. This is not technically correct, as the word ‘offer’ is not used in Contract Act].
Meaning of ‘Promise’ - When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A pro­posal, when accepted, becomes a promise. [section 2(b)]. - - Thus, when a proposal (offer) is accepted, it becomes a ‘promise’. As is clear from the definition, only person to whom proposal is made can signify his assent. Other person cannot accept a proposal.
Promisor and promisee - The person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”. [section 2(c)].
Reciprocal promises - Promises which form the consideration or part of the consideration for each other are called reciprocal promises. [section 2(f)].
Consideration for promise – The definition of ‘agreement’ itself states that the mutual promises should form consideration of each other. Thus, ‘consideration’ is essential for an agreement. A promise without consideration is not ‘agreement’ and hence naturally, it is not a ‘contract’.
Definition of ‘consideration’ - When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consid­eration for the promise. [section 2(d)].
Steps involved in contract - The steps involved in the contract are – * proposal and its communication * acceptance of proposal and its communication * Agreement by mutual promises * Contract * Performance of Contract. - - All agreements are not contract. Only those agreements which are enforceable by law are ‘contracts’. Following are essential requirements of a valid contract.
Offer and its acceptance
Free consent of both parties
Mutual and lawful consideration for agreement
It should be enforceable by law. Hence, intention should be to create legal relationship. Agreements of social or domestic nature are not contracts
Parties should be competent to contract
Object should be lawful
Certainty and possibility of performance
Contract should not have been declared as void under Contract Act or any other law
Communication, acceptance and revocation of proposals - Communication of proposal/ revocation/acceptance are vital to decide validity of a contract. A ‘communication’ is complete only when other party receives it.
Acceptance must be absolute - In order to convert a proposal into a promise, the acceptance must - (1) be absolute and unqualified; (2) be expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such a manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance. [section 7].
Acceptance of offer is complete only when it is absolute and unconditional. Conditional acceptance or qualified acceptance is no acceptance.
Promises, express or implied - Insofar as the proposal or acceptance of any promise is made in words, the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the prom­ise is said to be implied. [section 9]. - - For example, if a person enters a bus, there is implied promise that he will pay the bus fair.
Voidable Contract - An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. [section 2(i)]. - - (a) When consent is obtained by coercion, undue influence, misrepresentation or fraud is voidable at the option of aggrieved party i.e. party whose consent was obtained by coercion/fraud etc. However, other party cannot avoid the contract. (b) When a contract contains reciprocal promises and one party to contract prevents the other from performing his promise, the contract becomes voidable at the option of the party to prevented. (section 53). Obvious principle is that a person cannot take advantage of his own wrong (c) When time is essence of contract and party fails to perform in time, it is voidable at the option of other party (section 55). A person who himself delayed the contract cannot avoid the contract on account of (his own) delay.
Void contract - A contract which ceases to be enforceable by law be­comes void when it ceases to be enforceable. [section 2(j)]. - - Thus, initially a contract cannot be void, i.e. a contract cannot be void ab initio. The simple reason is that in such a case, it is not a contract at all to begin with. Hence, only a valid contract can become void contract due to some subsequent events. e.g. the person dies or property is destroyed or Government imposes a ban etc. - - A void agreement is void ab initio. It never becomes a contract. It is nullity and cannot create any legal rights.
What agreements are contracts - All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful considera­tion and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall effect any law in force in India and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. [section 10].
Who are competent to contract - Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. [section 11].
Free consent – Consent of both parties must be free. Consent obtained through coercion, undue influence, fraud, misrepresentation or mistake is not a ‘free consent’. - - Two or more persons are said to consent when they agree upon the same thing in the same sense. [section 13]. - - Consent is said to be free when it is not caused by - (1) coercion, as defined in section 15, or (2) undue influence, as defined in section 16, or (3) fraud, as defined in section 17, or (4) misrepresentation, as defined in section 18, or (5) mistake, subject to the provisions of sections 20, 21 and 22. - - Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake. [section 14].
Void agreements - An agreement not enforceable by law is said to be void. [section 2(g)]. - - Note that it is not ‘void contract’, as an agreement which is not enforceable by law does not become ‘contract’ at all. Following are void agreements - * Both parties under mistake of fact (section 20) * Unlawful object or consideration (section 24) * Agreement without consideration (section 25) * Agreement in restraint of marriage (section 26) * Agreement in restraint of trade (section 27) * Agreement in restraint of legal proceedings (section 28) * Uncertain agreement (section 29) * Wagering agreement (section 29) * Agreement to do an impossible Act (section 56). - - These are discussed below.
Obligation of person who has received advantage under void agree­ment or contract that becomes void - When an agreement is discovered to be void, or when a con­tract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.
Contingent contract - A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustration - A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract. [section 31].
Contracts which must be performed - The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract. - - Illustrations - (a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1,000 to A’s representatives. (b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A’s representative or by B [section 37]. The performance can be ‘actual performance’ or ‘attempted performance’, i.e. ‘offer to perform’.
Performance of reciprocal promises - Promises which form the consideration or part of the consideration for each other are called reciprocal promises. [section 2(f)]. A mutual promise can be of following types – (a) Mutual and independent – Where each party must perform his promise independently and irrespective of whether the other party has performed or willing to perform e.g. Seller agrees to deliver on 5th and Buyer agrees to pay on 15th. (b) Conditional and dependent – Performance of promise by one party depends on prior performance of promise by other party. e.g. Buyer agrees to pay for goods 15 days after delivery. Hence, unless seller delivers goods, buyer’s liability does not arise. (c) Mutual and concurrent – Where the promises of both parties must be performed simultaneously. e.g. buyer agrees to pay immediately on delivery of goods i.e. cash payment.
Contracts which need not be performed - Normally, a contract is expected to be performed. The performance my be actual or by way of tender, i.e. attempted performance. However, in certain situations as stated below, the contract need not be performed. * Novation, rescission and alteration of contract * Promisee may dispense with or remit performance of promise * Effect of neglect of promisee to afford promisor reasonable facilities for performance * Merger of superior rights with inferior right under contract. This is usually termed as ‘discharge of contract’.
Quasi Contracts - ‘Quasi’ means ‘almost’ or ‘apparently but not really’ or ‘as if it were’. This term is used when one subject resembles another in certain characteristics but there are intrinsic differences between the two. ‘Quasi contract’ is not a ‘contract’. It is an obligation which law created in absence of any agreement. It is based on equity. There are certain relations resembling those created by contract. These are termed as ‘quasi contracts’. These are – (a) Supply of necessaries (section 68) (b) Payment of lawful dues by interested person (section 69) (c) Person enjoying benefit of a gratuitous act (section 70) (d) Finder of goods (section 71) (d) Goods or anything delivered by mistake or coercion (section 72).
Consequences of Breach of Contract - Compensation is payable for breach of contract. Penalty is also payable if provided in contract. Breach of contract may be actual or anticipatory.
Summary of principles of compensation and damages - Following points are important - * Compensation for loss or damage is payable. Since the word used is ‘compensation’, punitive damages cannot be awarded. * These should be in usual course or known to parties i.e. both parties must be aware * No compensation for remote and indirect loss or damage * Same principle applies to quasi contract also.
General damages – General damages are those which result from ‘direct and proximate’ consequences from breach of contract. Normally, what can be awarded is compensation for loss or damage which can be directly or proximately attributed to the breach of contract. One way of assessing damages is the difference between the contract price and the market price on date of breach of contract, plus reasonable expenses incurred by him on account of the breach plus cost of suit in court of law.
Consequential loss or special damage – Special damages or consequential damages arise due to existence of special circumstances. Such damages can be awarded only in cases where the special circumstances were foreseeable by the party committing the breach or were specifically known to the party. Consequential losses like loss of profit due to breach, which may occur indirectly due to breach cannot be normally awarded unless there are special circumstances which parties were aware. Loss of profit can be awarded only in cases where seller could have foreseen those losses and arose directly as result of breach.
Promisee should take steps to mitigate the loss or damage – Explanation to section 73 specifically provides that in estimating loss or damage, the means available for remedying the inconvenience caused by breach of contract shall be taken into account. Thus, promisee should take all reasonable steps to mitigate the losses e.g. if promisor does not supply goods, he should make efforts to procure from alternate sources may be even at higher price, to reduce his losses arising out of breach of contract.
Vindictive or exemplary damages – Vindictive or exemplary damages cannot be awarded under Contract Act. However, these may be awarded by Court under tort under special circumstances e.g. * Dishonour of cheque by Bank when there was balance in account, as it causes loss of reputation of credit worthiness of person issuing cheque * Breach of contract to marry, as it hurts both feelings and reputation.
Quantum Meruit – ‘Quantum meruit’ means ‘as much as earned’. A contract may come to end by * breach of contract * contract becoming void or * Voidable contract avoided by party. In such case, if a party has executed part of contract, he is entitled to get a proportionate amount i.e. ‘as much as earned by him’. This is not by way of ‘damages’ or ‘compensation for loss’. - - The principle is that even when contract comes to a premature end, the party should get amount proportional to the work done/services provided/goods supplied by one party. One party should not get enriched at the cost of other.
Contract of indemnity - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract of indem­nity’. - - Illustration - A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. [section 124].
Contract of guarantee - A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. [section 126]. - - [Person giving guarantee is also called as ‘guarantor’. However, Contract Act uses the word ‘surety’ which is same as ‘guarantor’]. - - Three parties are involved in contract of guarantee. Contract between any two of them is not a ‘contract of guarantee’. It may be contract of indemnity. Primary liability is of the principal debtor. Liability of surety is secondary and arises when Principal Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the request of principal debtor. If the surety gives guarantee on his own, then it will be contract of indemnity. In such case, surety has all primary liabilities.
Consideration for guarantee - Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee. - - Illustrations - (a) B requests A to sell and deliver to him goods on cred­it. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise. (b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient considera­tion for C’s promise. (c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agree­ment is void. [section 127].
Bailment - Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. - - Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods is transferred, but property i.e. ownership is not transferred. A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is called the “bailee”. - - Explanation : If a person already in possession of the goods of another, contracts to hold them as a bailee, he thereby becomes the bailee, and owner becomes the bailor, of such goods, although they may not have been delivered by way of bailment. [section 148]. [Thus, initial possession of goods may be for other purpose, and subsequently, it may be converted into a contract of bailment, e.g. seller of goods will become bailee if goods continue in his possession after sale is complete].
Bailment can be only of ‘goods’. As per section 2(7) of Sale of Goods Act, ‘goods’ means every kind of movable property other than money and actionable claim. - - Thus, keeping money in bank account is not ‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as house or farm is not a movable property.
Bailment of pledges - Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].
Contract of Agency - Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have opportunity or facility to transact business through others like an agent. The principles of contract of agency are – (a) Excepting matters of a personal nature, what a person can do himself, he can also do it through agent (e.g. a person cannot marry through an agent, as it is a matter of personal nature) (b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal. - - Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also, except to the extent excluded in the Act. One important distinction is that as per section 185, no consideration is necessary to create an agency.
Agent and principal defined - An “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal” [section 182].
Who may employ agent - Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. [section 183]. - - Thus, any person competent to contract can appoint an agent.
Who may be an agent - As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [section 184]. - - The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.
Consideration not necessary - No consideration is necessary to create an agency. [section 185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.
Authority of agent – An agent can act on behalf of Principal and can bind the Principal.
Agent’s duty to Principal - An agent has following duties towards principal. * Conducting principal’s business as per his directions * Carry out work with normal skill and diligence * Render proper accounts [section 213]. * Agent’s duty to communicate with principal [section 214] * Not to deal on his own account, in business of agency [section 215]. * Agent’s duty to pay sums received for principal [section 218] * Agent’s duty on termination of agency by principal’s death or insanity - [section 209].
Remuneration to Agent - Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.
Rights of Principal - * Recover damages from agent if he disregards directions of Principal * Obtain accounts from Agent * Recover moneys collected by Agent on behalf of Principal * Obtain details of secret profit made by agent and recover it from him * Forfeit remuneration of Agent if he misconducts the business.
Duties of Principal - * Pay remuneration to agent as agreed * Indemnify agent for lawful acts done by him as agent * Indemnify Agent for all acts done by him in good faith * Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.
Termination of Agency - An agency is terminated by the principal revoking his au­thority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insol­vent debtors. [section 201]. - - In following cases, an agency cannot be revoked – * Agency coupled with interest (section 202) * Agent has already exercised his authority (section 203) * Agent has incurred personal liability.
























2. “Where there is a right, there is remedy” Explain this with reference to breach of contract


The basic rule is that parties to contracts must perform as specifiedin the contract unless (1) the parties agree to the change in thecontract's terms, or (2) the actions of the party who deviates fromthe terms of the contract are implicitly accepted ("ratified") by theaction or non-action of the other party. If there is no acceptance of deviation from the terms of thecontract, and the deviation is serious enough to make any realdifference in the intended result of the contract, then the deviatingparty is said to have breached the contract. His justifiedprevention or interference with the performance of the other party isalso a breach. Of course if one party fails more or less entirely to perform thecontract, or totally prevents the performance of the contract by theother party, the situation is straightforward. The situation becomesmore complex where the argument is over the quality of materials, thetiming of work, or something of that sort. Breach of contract leaves the nonperforming or improperly performingparty open to a claim for damages by the other party. The non-breaching party is relieved of his obligations under the contract bythe other party's breach. The aggrieved party, to help support his claim for breach, shouldhave done all the things required of him under the contract up untilthe time of breach, and must have done nothing to make it impossibleor unreasonably difficult for the other party to perform his share.The nonperforming party can be expected to make excuses for hisconduct, and he will try to find ways to blame the other party--anexcellent argument for performing one's own side of a contractpunctiliously and in a manner that leaves a record which others cansee. There are so many possible ways for performance of a contract to giverise to dissatisfaction that the courts have been forced to analyzethe matter in much more subtle terms than "breached" or "notbreached." The doctrine of "substantial performance" saves a party who haslargely fulfilled his obligations under a contract from sufferingmajor loss merely because he has unintentionally fallen short in someparticular which does not affect the essence of the contract. There has to be a limit to the quibbles of the dissatisfied customer,for example, or the courts would be swamped with trials over preciseshades of paint and tiny imperfections in services. A party canunintentionally fall short of perfection, but if he has substantiallyperformed his duties under the contract, he can still sue the otherparty for payment. The dissatisfied party, on the other hand, can usually win someadjustment in the amount of payment as compensation for the minordefects in the performance. Where a party's unintentional failure to perform fully does affectthe essence of the contract, he cannot sue the other party "on thecontract" in order to be paid. To the extent that his work hasbenefited the other party, he may recover on the theory of a contractimplied by law (quasi-contract), as explained above. REMEDIES The ordinary remedy for breach of contract is money damages. As we said earlier, a contract should always foresee the possibilityof nonperformance, intentional or unintentional, and should spell outwhat is to be done. Some contracts go so far as to include an agreement on a set amountof "liquidated damages" which are to be paid in case something goeswrong. These are acceptable to the courts as long as the amount ofliquidated damages is a reasonable estimation of the harm that wouldbe done by the breach. If the amount is so excessive as to amount toa penalty or fine rather than compensation for harm the courts willignore the liquidated damages clause and assess damages by actuallymeasuring at trial the financial harm done by the breach. You should, unless the provision may pose a worse threat to you thanto the other party, specify in your contracts that if legal actionfor breach is necessary, the losing party will pay attorney's fees. If you and the other party live in different geographicaljurisdictions, you should try to include a provision which says thatthe contract is to be enforced under the laws of your jurisdiction.This makes it possible for any litigation concerning the contract totake place in a court near your home. The purpose of damages in suits on contracts is at best to place theinjured party in as nearly as possible the same position he wouldhave been in had the contract been properly performed, and at leastto restore him as nearly as possible to the position he would havebeen in had he made no contract at all. In other words, no oneshould suffer loss because another has failed to perform a contractproperly. Where nonperformance is total, for example, the damaged party shouldget back any money he has paid, along with additional money tocompensate him for any actual financial loss which resulted from thenonperformance. The loss must have been a reasonably foreseeableresult of the nonperformance. Do not expect, however, to receive money damages designed merely topunish the breaching party for dishonesty or bad behavior. Such"punitive damages", which are possibilities in suits for personalinjury and other wrongs, are not available in suits on contracts.Of course if you can allege that you were defrauded, for example,then you are suing for wrongdoing beyond the breach of contract,and you may receive punitive damages. The principals of damages in contract suits are as numerous as theproblems that can arise from contracts. All we have been able to dohere is to give some idea of the ramifications. FRAUD Accusations of fraud most frequently arise where some sort ofcontractual situation is involved. Someone is induced to enter intoan agreement by a deliberate misrepresentation made by the otherparty. Here is a simplified version of the things which must occur in orderto establish a case for fraud: 1. D makes a representation about a fact.2. D knows that the representation is false, OR he makes it withcomplete and reckless disregard of whether it is true or not.3. D intends P to rely on D's misrepresentations.4. P does rely on D's misrepresentations.5. As a result of his reliance, P suffers harm for which there is alegal remedy. Here are some fine points which you will want to keep in mind whendealing with people: Mere silence may not be fraudulent: D is not necessarily under a dutyto tell P what D knows. But a seller may be found guilty of fraud ifhe fails to tell the buyer about a hidden defect (latent defect)which would not be found through ordinary inspection. (The sellermust of course know about the defect before he can be responsible forrevealing it.) Words are not necessary to create fraud: Actions which are calculatedto misrepresent something can be fraudulent. For example, a dealeruses a car as a demonstrator for six months and then rolls back theodometer and sprays the interior with new car scent before puttingthe vehicle on sale as a new car. Fraud does not occur when a person promises to do something,intending to do it, and then changes his mind and does not do it.Fraud does occur when a person misrepresents his present intentions:If D says to P, "If you'll buy this store, I'm leaving town andtaking my business with me," and D's actual intention is to open alarger, competing store across the street from P, then D is making afraudulent misrepresentation. If you rely to your detriment on a person who DOES mean what he saysat the time he says it, but who later changes his mind, your mostlikely remedies are a suit for damages if there is a contract, or ifthere is not a formal contract, a suit in quasi based on promissoryestoppel, depending on the circumstances. Those remedies are coveredabove. Opinions cannot be fraudulent. If D says to P, "This foal is goingto be a really great racehorse," and P buys the foal and it neverwins a race, P can't win a suit for fraud. On the other hand, if Dsays, "This horse cost me $50,000.00," but D actually paid much lessfor the horse, and P buys the horse because he is impressed with itsvalue, then D may be guilty of fraud. Finally, even if D knowingly makes a false representation of fact, hemay not be found guilty of fraud if P failed to find out the truthwhen it was available to him through reasonable investigation. P isnot required, however, to exert himself unreasonably to verifyeverything D tells him. If D gives P a financial statement whichdoesn't have some obvious defect on its face, P is entitled to relyon it rather than to hire accountants to go over D's books. WHAT TO DO IF YOU ARE A VICTIM OF FRAUD: 1. If convenient, simply do not perform your obligations under thecontract. Then just wait for the other party to sue you. Use theother party's fraud as your defense. For example, keep the horse butstop making payments to the seller. When the seller sues you, youcan then ask the court to remedy all your losses which have resultedfrom the seller's fraud. OR 2. Carry out your part of the contract and sue the other party fordamages caused by his fraud. Remember, though, that it is usuallybetter to let the other party go to the trouble and expense of suingyou if you can arrange it that way. OR 3. Instead of treating the contract as valid (as in 2), you couldrescind the contract, offering to return to the other person whateverconsideration you received from him, and suing him for the return ofwhatever consideration you gave to him. You cannot both confirm the contract (2) and rescind it (3), so youwould choose the remedy which will put you in the best position.
3. Distinguish between Contract of Indemnity and Contract of Guarantee

THE words "guarantee" and "indemnity" are commonly used. These words are frequently encountered in hire purchase and loan agreements and in many other transactions. However, what these words mean is not always a matter of immediate concern.When getting a bank loan, a person is often asked to provide a guarantee. Similarly those who obtain other facilities or scholarships have to provide guarantors. Sometimes the word "indemnity" is also added on in the document and one tends to think that it probably has something to do with the guarantee.But a guarantee and indemnity do not mean the same thing. In its wider sense a contract of indemnity could include a contract of guarantee. However, beyond that a contract of indemnity certainly differs from a contract of guarantee. What is the difference?As stated by Holroyd Pearce L.J. in Yeoman Credit Ltd vs Latter, an indemnity is a contract by one party to keep the other harmless against loss but a contract of guarantee is a contract to answer for the debt default or miscarriage of another who is to be primarily liable to the promisee.The concept of an indemnity and guarantee is reflected in our law as contained in the Contracts Act 1950. Section 77 states that: "A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity."On the other hand, a contract of guarantees "is a contract to perform the promise, or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor. A guarantee may be either oral or written."According to the Contracts Act, it would appear that a guarantee can be oral. However, the provision on indemnity is silent on this aspect. Does it mean that an indemnity must be in writing? It could be argued that an indemnity could be oral too.In a guarantee the liability arises at the point of time when the principal borrower or debtor defaults on his obligation. Where there is liability even though there is no default or breach by the principal debtor, it is not a contract of guarantee.This difference is explained by Lopez L.J. in Guild & Co vs Conrad, an English decision of the Court of Appeal, where it is stated that a promise to be liable for a debt conditionally on the principal debtor making default is a guarantee. On the other hand, a promise to become liable for a debt whenever the person to whom the promise is made should become liable, is a different matter to be viewed separately. The essence of the matter is that there is a difference between a promise to pay the creditor if the debtor defaults on payment as compared to a promise to make payment irrespective of any default by anybody so long as the recovery of the money is unsuccessful.In many jurisdictions, the words "guarantee" and "indemnity" are used interchangeably as if they mean the same thing, but the difference is in the fact that in a guarantee one agrees to assume responsibility for the obligation or debt of another if that other person defaults. However, in the case of an indemnity, one assumes a direct and primary obligation on the basis more of the occurrence of an event rather than a default.In a contract of indemnity not only is there no requirement for a default by a third party as a condition of liability but there may not even be a third party involved for either the creation or exercise of the right.By way of illustration, an insurance contract is an indemnity contract. A person who buys an insurance policy insures his property against damage. If and when the damage occurs, the insured is entitled to call upon the insurer to pay him. Of course, there may be conditions as to what can be claimed. The question of default does not arise.Another example is where a dealer enters into an agreement to provide an item which is not essential to an infant. He may ask for an indemnity if the infant does not pay. This is because if the infant does not pay he cannot be said to be in breach because the agreement will not be enforceable at all.However, if a third party has agreed to indemnify the dealer for the loss, the indemnity will prevail and a person who has undertaken such an obligation will have to pay. But there is no breach or default by the infant. On the other hand, if in such a situation the third party had signed a guarantee, it would not be enforceable.Thus a guarantee involves a default by a third party whilst an indemnity arises on the occurrence of an event. And whether a document is a guarantee or indemnity will depend on its contents and not on the title given to the document.
Guarantor's Obligation
Under this agreement the Guarantors obligation is to pay the amount specified as owing plus interest on that amount and all bank fees and taxes. This agreement distinguishes between your "basic liability" and "additional liability". The Guarantor is liable to pay both of these, so it is necessary to examine what is involved in each of them.
Basic Liability
The Guarantors guarantee that they shall pay to the lender the basic loan. This amount will only become due and payable in the event of a default of any description by the original borrower. Should any default be made then the guarantor is liable for the full amount regardless of whether the term of the loan has yet expired.
Additional Liability
If the borrower defaults under the original agreement the lender may incur further costs in attempting to obtain repayment of the debt. These costs will include the lenders administrative costs, legal fees, bank fees and charges and of course interest on those charges and fees. Charging interest on these additional fees of course has a snowball effect and can increase the actual liability very quickly.
All Lending Institutions have formulae whereby they calculate the amount of money that they will lend to the borrower. These formulae will depend upon the assets and the income of the borrower. Sometimes if the borrower does not have enough assets or sufficient income to meet the lender's requirements the lender will ask for a guarantee to "boost" the income or asset level of the borrower.


The Effect of Signing the Agreement
The effect of signing a guarantee is that the lender will be relying upon the guarantors ability to repay the loan either from the assets or the income of the guarantor. It is therefore not unusual for this liability to be absolute and as we have stated before to be expressed in the form of a complete indemnity rather than a "mere" guarantee. You should always be aware that the lender has recourse to your assets and make provision for this in all your financial dealings.

Guarantor's Securities
The Guarantee provided to the lender is done by way of additional "security". Sometimes however should the lender's margins not be sufficient the lender may require a specific charge of security to be taken over an asset belonging to the guarantor. This is commonly referred to as a Third Party Charge or Mortgage. The effect of granting a specific charge or security is that the lender or lenders will attach that security first. You should be aware however that your liability does not cease on the sale of that asset and that should the debt be larger than the value of your assets then the lender will seek recourse against you for any balance outstanding.
Subrogation
Subrogation is a principle of law that directly applies to guarantees and indemnities. The purpose of this principle of law is to give the guarantor the same rights against the borrower as the lender has. The guarantor is required to pay off all or part of the loan he is then capable of seeking recovery of that amount (together with any interest and costs incurred) against the borrower. It is as if the guarantor was "placed in the shoes of the lender".
The problem with this of course is that whilst it sounds wonderful as a concept you can usually rely on the fact that if the original lender has been unable to obtain the money from the borrower you also will be unable to obtain money from the borrower. It is usually because the borrower has none in the first place. For this reason you should be extremely cautious about entering into any guarantee arrangements.
General
The Guarantee is a continuing security for all the money that the borrower owes i.e. the Guarantee continues as a security until all the money that the borrower owes to the lender is paid off.
Usually until the borrower has paid off all that he owes to the lender the Guarantor cannot claim any payment of money from the borrower.
If the Guarantor has an account with the lender then the lender can often attach the money in that account to pay off any liability that the borrower may have incurred under this Guarantee.
It is fair to say that the lender would not require a guarantee if the original borrower has sufficient assets or income which the lender could have recourse to. The lender therefore relies strongly upon guarantees in order to make the advance. It is not uncommon in guarantees to have a provision that the guarantor will be liable for the full amount of the loan not withstanding the fact that due to some legal interpretation or factual circumstance the original borrower may not be liable to or may be able to escape from his liabilities.
As you can see from the comments above guarantees should not be entered into lightly and should only be considered when you have full knowledge of the borrower and even then only upon legal advice as to the specific terms and obligations you are entering into. There is no "standard" guarantee document and all lending institutions whilst requiring basically the same things will have their own specific requirements. These requirements can also vary depending upon the type of loan and transactions being entered into.
This brochure is intended as a general guide only and should not be used as an "instruction manual" in running a case or dealing with a dispute. If you find yourself in the position contemplating or of being involved in any form of litigation you should seek legal advice to clarify your position. Your legal adviser can at that time also advise you of relevant costs and fees which are applicable to your matter.










4. “No consideration, No contract” Explain with exception

We enter into contracts so many times in a day that ‘contract’ has become an indispensable part of our life. When you purchase milk or newspaper in the morning or go to movie in the evening, you are entering into a contract. Indian Contract Act really codifies the way we enter into a contract, execute a contract, implement provisions of a contract and effects of breach of a contract. Basically, a person is free to contract on any terms he chooses. The Contract Act consists of limiting factors subject to which contract may be entered into, executed and breach enforced. It only provides a framework of rules and regulations which govern formation and performance of contract. The rights and duties of parties and terms of agreement are decided by the contracting parties themselves. The court of law acts to enforce agreement, in case of non-performance.
Section 1 of Contract Act provides that any usage or custom or trade or any incident of contract is not affected as long as it is not inconsistent with provisions of the Act. In other words, provision of Contract Act will prevail over any usage or custom or trade. However, any usage, custom or trade will be valid as long as it is not inconsistent with provisions of Contract Act. The Act extends to the whole of India except the State of Jammu and Kashmir; and came into effect on 1-9-1872.
It must be noted that contract need not be in writing, unless there is specific provision in law that the contract should be in writing. [e.g. * contract for sale of immovable property must be in writing, stamped and registered. * Contracts which need registration should be in writing * Bill of Exchange or Promissory Note must be in writing. * Trust should be created in writing * Promise to pay a time barred loan should be in writing, as per Limitation Act * Contract made without consideration on account of natural love and affection should be in writing ]. A verbal contract is equally enforceable, if it can be proved.. A contract can be enforced or compensation/damages for breach of contract can be obtained through Civil Court
Essential Ingredients of a contract - As per Contract Act, an agreement enforceable by law is a contract. [section 2(h)]. Hence, we have to understand first what is ‘agreement’.
Every promise and every set of promises, forming the consideration for each other, is an agreement. [section 2(e)]. - - A person makes a proposal (offer). When it is accepted by other, it becomes a promise. However, promise cannot be one sided. Only a mutual promise forming consideration for each other is ‘agreement’. - - For example, A agrees to pay Rs 100 to B and B agrees to give him a book which is priced at Rs 100. This is set of promises which form consideration for each other. However, if A agrees to pay Rs 100 to B, but B does not promise anything, it is not ‘set of promises forming consideration for each other’ and hence not an agreement.
It should be noted that the term ‘agreement’ as defined in Contract Act requires mutual consideration. - - Thus, if A invites B to dinner and B agrees to come, it is not an ‘agreement’ as defined in Contract Act.
Meaning of ‘Proposal’ - When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. [section 2(a)].- - Thus, a ‘proposal’ can be to do a positive act or abstinence from act (i.e. negative act). [English Act uses the word ‘offer’, while Indian Contract Act uses the word ‘proposal’. Generally, both words are used inter-changeably. This is not technically correct, as the word ‘offer’ is not used in Contract Act].
Meaning of ‘Promise’ - When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A pro­posal, when accepted, becomes a promise. [section 2(b)]. - - Thus, when a proposal (offer) is accepted, it becomes a ‘promise’. As is clear from the definition, only person to whom proposal is made can signify his assent. Other person cannot accept a proposal.
Promisor and promisee - The person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”. [section 2(c)].
Reciprocal promises - Promises which form the consideration or part of the consideration for each other are called reciprocal promises. [section 2(f)].
Consideration for promise – The definition of ‘agreement’ itself states that the mutual promises should form consideration of each other. Thus, ‘consideration’ is essential for an agreement. A promise without consideration is not ‘agreement’ and hence naturally, it is not a ‘contract’.
Definition of ‘consideration’ - When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consid­eration for the promise. [section 2(d)].
No consideration, no contract: According to Section 10 of the Indian Contract Act, one of the essentials of a valid contract is lawful consideration. An agreement without consideration is not a contract.
Consideration means something in return. It is the price for which the promise of the other is bought. It may be in the form of benefit, right, interest or profit that may accrue to one party, or it may be some forbearance, detriment, loss or responsibility suffered by the other.
Section 25 of the Contract Act makes it clear that an agreement without consideration is invalid. However, the same section provides certain exceptions to the rule `no consideration, no contract'. An agreement without consideration is valid under following circumstances:
· It is expressed in writing and duly registered and made on account of natural love and affection between parties standing in near relations to each other.
It is a promise to compensate a person who has already done something, which the promisor is legally compellable to do.
It is a promise in writing signed by the debtor or his agent to pay a time-barred debt;
It is a completed gift;
It is a contract of bailment or contract of agency.
The Indian Contract Act, 1872 ensures the Agreement without consideration, void, unless it is in writing and registered, or is a promise to compensate for something done, or is apromise to pay a debt barred by limitation law.
Section 25: "Agreement without consideration, void, uncles it is in writingand registered, or is a promise to compensate for something done, oris a promise to pay a debt barred by limitation law.-An agreement madewithout consideration is void, unless-(1) it is expressed in writing and registered underthe law for the time being in force for the registrationof 1*[documents], and is made on account of natural loveand affection between parties standing in a, nearrelation to each other ; or unless(2) it is a promise to compensate, wholly or in part,a person who has already voluntarily done something forthe promisor, or something which the promisor waslegally compellable to do ; or unless(3) it is a promise, made in writing and signed by theperson to be charged therewith, or by his agentgenerally or specially authorized in that behalf, to paywholly or in part a debt of which the creditor mighthave enforced payment but for the law for the limitationof suits.In any of these cases, such an agreement is a contract.Explanation 1.-Nothing in this section shall affect the validity,as between the donor and donee, of any gift actually made.Explanation 2.-An agreement to which the consent of the promisoris freely given is not void merely because the consideration is inade-quate ; but the inadequacy of the consideration may be taken intoaccount by the Court in determining the question whether the consentof the promisor was freely given.
Illustrations:(a) A promises, for no consideration, to give to B Rs. 1,000.This is a void agreement.(b) A, for natural love and affection, promises to give his son,B, Rs. 1,000. A puts his promise to B into writing and registers it.This is a contract.(c) A finds B's purse and gives it to him. B promises to give ARs. 50. This is a contract.(d) A supports B's infant son. B promises to pay A's expensesin so doing. This is a contract.(e) A owes B Rs. 1,000, but the debt is barred by the LimitationAct. A signs a written promise to pay B Rs. 500 on account of thedebt. This is a contract.(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A'sconsent to the agreement was freely given. The agreement is acontract notwithstanding the inadequacy of the consideration.(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. Adenies that his consent to the agreement was freely given.The inadequacy of the consideration is a fact which the Courtshould take into account in considering whether or not A's consent wasfreely given.
Consideration not necessary - No consideration is necessary to create an agency. [section 185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.
Authority of agent – An agent can act on behalf of Principal and can bind the Principal.
Agent’s duty to Principal - An agent has following duties towards principal. * Conducting principal’s business as per his directions * Carry out work with normal skill and diligence * Render proper accounts [section 213]. * Agent’s duty to communicate with principal [section 214] * Not to deal on his own account, in business of agency [section 215]. * Agent’s duty to pay sums received for principal [section 218] * Agent’s duty on termination of agency by principal’s death or insanity - [section 209].
Remuneration to Agent - Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.