LEGAL CONSIDRETATION FOR OPENING A NEW UNIT

A number of legal issues are associated with starting a business that should not be overlooked. Most businesses are regulated and there is much government and legal oversight to make sure that they are operated correctly within the confines of the law. Following are the legal considerations to be familiar with when starting a new business.

Develop a business plan:

Business plan is a roadmap for your business that provides both you and your financial backers with key information as to what your business is going to do and how it will operate. Your business plan is a work in progress that should evolve over time and be influenced by outside factors such as the economy. Numerous resources are available to assist you in thinking through and developing your plan.

Determine the legal structure of your business:

The form of your organization will determine whether you, the business owner, will be personally responsible for its debts and obligations. Corporations, limited liability companies, limited partnerships and other types of limited liability entities all protect owners from obligations they have not personally guaranteed. On the other hand, sole proprietors and partners in general partnerships are personally responsible for the debts and obligations of the business. In addition, the form of entity will determine how earnings of the business will be taxed. For example, C corporations are taxed at the entity level and the owners (shareholders) are taxed again on dividends they receive from the corporation. S corporations, limited liability companies and limited partnership are not subject to entity-level tax. Income from the organization is passed through and taxed to the owners individually.

Understanding taxes:

Your business will be subject to taxes such as income, employment, and sales taxes. Proper tax planning on a regular basis is necessary to assure proper deposits of employment and income taxes at the federal and state levels. To report and pay taxes, your business will likely need a federal and state employer tax identification number. In Colorado, employers are required to carry workers compensation insurance on their employees. Information on workers compensation can be found at Colorado Department of Labor and Employment.

Select your business name:

Check to see if the business name you have selected is available for use. Most business organizations are required to register with the Secretary of State of the state in which they business is located. If you plan to use a name other than the formal legal name of the business you must file a trade name affidavit, or fictitious name affidavit, with the Secretary of States Office. The business name should be used on all contracts, government forms, and applications and permits. Depending on how your business name is used in the marketplace, it may be advisable to seek federal trademark protection.

Protect your trademarks:

Search the availability of any trademark you want to use in connection with your products or services. Trademark rights are acquired through usage and need not be registered to be enforceable. Registration, particularly federal trademark protection, carries with it enhanced rights for the trademark owner and thus is often desirable if the business products or services will be sold regionally or nationwide. Availability must be searched in a number of places including the United States Patent and Trademark Office, state trademark registries (typically searched through a secretary of states office), the Internet and relevant trade publications and the like. You may hire search services to perform searching. The assistance of a trademark attorney may be desirable in seeking to federally register a trademark.

Memorialize your relationships with other shareholders/members/partners:

If you plan to own your business with others, work out the details of the relationship and record them in a written agreement. An operating agreement typically sets forth the rights and obligations of the members (including exit rights) and ideally should be negotiated and executed prior to starting to conduct business. In the corporate context, shareholders will want to work out a shareholders agreement or buy-sell agreement. The assistance of a lawyer can be beneficial during this process.

Contracts:

Dont sign on the dotted line until you understand what you are agreeing to? Read and understand contracts before signing them. If you dont understand the contract, seek guidance. If your business is an entity such as corporation, be sure to sign the contract in your capacity as an officer or manager of the entity, so as to ensure the obligation is one of the entity and yours personally. For example, ABC Company, By John Doe, President.

Capitalization and access to capital:

Capital includes both debt and equity. Equity is raised by sale of the business ownership interest, such as a share of stock in a corporation or a membership interest in an LLC. Equity does not require repayment. Debt is typically evidenced by a promissory note under which the debt accrues interest and which must be repaid at the maturity date. You should seek to establish banking and or other financial arrangements early on. If you plan to raise capital from investors, you will need the advice of a securities attorney who can guide you on compliance with federal and state securities law.

Business Licenses: Think about what business licenses you need to operate legally in the area where you want to set up your business. Most municipalities have regulations on what types of businesses can operate in certain areas and most also have specific licensing requirements before business operations can commence. Make sure you have obtained the proper business license for the type of business you want to operate in order to avoid fines or other legal troubles for your start-up venture.

Jurisdiction: All businesses need to comply with all federal legislation connected with the business. The business needs to comply with the laws of not just the state where the business is located but also of all the states where the business conducts its operations. While small businesses usually remain confined to a single state, mailing a product into a particular state through internet transaction is also a form of doing business in that states. The exact requirements vary from state to state. Good contact points for comprehensive information on the licensing and legal compliance applicable to the area include:

State's Attorney General's office States Business Resource Office Local office of the Small Business Administration

Zoning: When you are selecting the location for your business, you will need to make sure it is properly zoned for the type of business you plan to operate. It is not okay to just assume that, if your business is of the same type as the one that is currently there, the zoning is appropriate. Zoning may have changed while the other business was operating, and that business might have been provided an exemption that won't be provided to yours.

Non-Disclosure Agreements: If you will be setting up financing for your business or entering into contracts with suppliers, you should consider confidentiality and nondisclosure agreements. Since these outside firms will have access to business information that you may want to keep private, you should consider having them sign these agreements. If you are ordering a thousand gizmos for your grand opening, you don't want the supplier to call your competitor to see if they want a thousand gizmos so that they can offer them on the same day. The more confidential information your business plan contains, the more important these agreements are. Getting Legal Representation: A business lawyer is a necessity for anyone starting a new business. Legalities are a part of any money-making venture. But, the need for a trustworthy lawyer does not end when the front doors open. The relationship between entrepreneur and attorney should last as long as the business is open. Legal counsel becomes vital when a disgruntled former employee or customer opts to file suit, or simply makes life miserable. In addition, a lawyer helps with all of the day-to-day concerns of a profitable business. For example, legal assistance comes in handy for:

Drafting sales agreements Sale or lease of assets Commercial leases Buyer/seller agreements Liquidating or selling a business

A good lawyer is a great asset from the moment an individual decides to turn a business concept into a profitable product or service, until the entrepreneur decides to retire, sell the business, or close the doors for the last time.

Separate the Personal and Professional: A good business lawyer helps business owners keep personal assets separate from the business assets. The best attorney prepares an entrepreneur for every possible outcome. Hopefully, the venture is wildly successful, and the business will serve the public for many years. However, the statistics support the closure of the majority of new enterprises within the first 5 years. So, to protect the owner, a lawyer will make sure the business is a separate entity from the house and family car. The business needs a separate bank account, credit rating, identification number, and source of income and investment. Lawyers know about:

Partnerships and limited partnership Limited liability companies Corporations Private ventures Franchises

Unfortunately, many individuals tie the home into the business. Then, if the enterprise is unsuccessful, the disenchanted entrepreneur loses everything. Good legal counsel will make sure all financial eggs do not land in the same basket. In short, a business lawyer is a vital asset for any new business enterprise or a well-established and profitable business. While the attorney deals with all of the legal issues and documents, the entrepreneur concentrates on providing the best product or service to the consumer.

FORMS OF BUSINESS OWNERSHIP

What is a Private Limited Company?
MEANING:
A private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures.

FEATURES:

It has an independent legal existence. The Indian Companies Act, 1956 contains the provisions regarding the legal formalities for setting up of a private limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies floated in the respective states and the Union Territories.

It is relatively less cumbersome to organize and operate it as it has been exempted from many regulations and restrictions to which a public limited company is subjected to. Some of them are: It need not file a prospectus with the Registrar. It need not obtain the Certificate for Commencement of business. It need not hold the statutory general meeting nor need it file the statutory report. Restrictions placed on the directors of the public limited company do not apply to its directors. The liability of its members is limited.

The shares allotted to their members are also not freely transferable between them. These companies are not

allowed to invite public to subscribe to its shares and debentures. It enjoys continuity of existence i.e. it continues to exist even if all its members die or desert it.

What is Public Limited Company?

MEANING:
A Public Limited Company is a Company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 7. A public limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited.

FEATURES:
The company has a separate legal existence apart from its members who compose it. The Indian Companies Act, 1956 contains the provisions regarding the legal formalities for setting up of a public limited company. A company must have a minimum of seven members but there is no limit as regards the maximum number. The company collects its capital by the sale of its shares and those who buy the shares are called the members. The amount so collected is called the share capital. The shares of a company are freely transferable and that too without the prior consent of other shareholders or without subsequent notice to the

company. The liability of a member of a company is limited to the face value of the shares he owns. Once he has paid the whole of the face value, he has no obligation to contribute anything to pay off the creditors of the company. As a company is an independent legal person, its existence is not affected by the death, retirement or insolvency of any of its shareholders.

SOLE PROPRIETORSHIPS
DEFINATION:
A sole trader is a person who trades on his own account rather than in partnership or as a member of a company

FEATURES:

SINGLE OWNERSHIP: The ownership of sole trading concern is in the hand of the one person. A sole trader owns all the assets and property of the business.

UNLIMITED LIABILITY: The liability of a sole trader is unlimited. This means the sole trader is alone responsible for the debts of the firm.

BUSINESS SECERECY:

The sole trader can maintain complete business secrecy. He need not publish any accounts and record.

QUICK DECISION MAKING: The sole trader can take quick decision on his own. He need not consult others.

LOCAL AREA BUSINESS: A sole trader conducts business in a local area because if limited size of his business.

MERITS:
EASE IN FORMATION : A sole trading concern is easy to start and conduct its activity. There is least legal formalities information.

CLOSE CONTACT WITH CUSTOMER :

He deals regularly with customer. By developing personal contact with his customer he can come to now the likes and dislikes taste and preference of the customer.

CREDIT STANDING :

Sole enjoy a good credit standing so he can obtain credit facility from his suppliers because of unlimited liability and the goodwill of the sole trader. FLEXIBILITY IN OPERATION: Sole trader offers maximum flexibility. He can take the right decision at right time and also expand his business or change the line of business if situation demand. LIMITED TAX BURDEN: The sole trader enjoy limited tax burden. Tax rate under Income Tax Act are lower for sole trading concern as compare to others.

DEMERITS:
LIMITED CAPITAL: The sole trader can manage limited amount of capital from his own saving. He may also get some funds from friends and relative so this is the main drawback of sole trader. LACK OF CONTINUITY: A sole trade business lacks continuity because if the sole trader cannot run his business due to ill health or if he dies the business comes to an end.

LIMITED EXPANSION:

The sole trading concern is restricted in its growth because of limitation capital and lack of managerial skills that are necessary for expanding

organization. LACK ECONOMIC OF SCALE: Sole trader cannot achieve economies of scale this is because of limited scale of operation. He often buys and sells in small quantities, thus fails to get the benefits of large scale of operation LESS SCOPE FOR EMPLOYEES : The employees of sole trading concerns may not get opportunities for promotion and career development.

PARTNERSHIP FIRM
INTRODUCTION:
Partnership firm is a form of commercial organization came into existence due to limitation of sole trading concern. Thus a need was felt to have more without partner the business cannot be formed there is requirement of at least two partners. A single person cannot form partnership firm. Partnership firm is suitable for conducting business. For example: Wholesale, super market, multiple shops, stationary shops and general stores run on the basis of partnership. Partnership firm in India are governed by provision of Indian Partnership Act, 1932.

DEFINITION: Partnership is the relationship between persons who have agreed to

share the profit of business carried on by all or any of them acting for all.

-Section 4 of Indian Partnership Act, 1932.

FEATURES:

AGREEMENT:

Partnership is the voluntary agreement between the person to carry on the business. Thus partnership does not emerge from a birth status but from a contract. In France and Italy written agreement among partners is required and in USA, UK and India partnership agreement may be oral or written. However agreement should be in writing rather than oral. LAWFUL BUSINESS: Partnership firm must conduct business for earning profit. It cannot undertake any business activity which is restricted by law.

SHARING OF PROFIT AND LOSS: Partners should share there profit in ratio mentioned in the Partnership deal. If partnership deal is silent regarding profit, the profit sharing ratio of the partners will be assumed equally.

NUMBER OF PARTNERS:

Minimum number of partners required for forming partnership firm is two and maximum number of partners for conducting banking business is ten, and for non banking business are twenty.

UNLIMITED LIABILITY:

Liability of every partner of a firm is unlimited, joint and several. That means if the business assets are not sufficient to pay the third party debts and due to this there will be no distinction made between business and personal property of partners to fully settle such liabilities.

ATMOST GOODFAITH:

Partnership organization is based upon the spirit and co-operation, confidence among the partners. Partners should be loyal to one another and also the firm. And must disclose all the facts regarding business to all partners and should work for prosperity of business and not for self interest.

PRINCIPAL AGENT RELATIONSHIP:

Every partner works as an agent and as a principal. So partner is regarded to be an agent of a firm. Therefore every partner can act on behalf of firm and bind other partners by his act. REGISTRATION: Registration of partnership is compulsory since 1985. Registration takes place as per Indian Partnership Act which came into existence in the year 1932.

MERITS:

EASY FORMATION:

Partnership does not require much legal formalities. It can be formed easily. An oral or written agreement is sufficient to start any business on partnership basis. And all that is required is an agreement among the partners.

HIGHER CAPITAL:

One of the important reasons of forming partnership firm is to have more capital. And the financial resources of all the partners are pulled together are definitely more than the sole trader.

BUSINESS SECRECY:

Partnership firm are not required to public annual accounts like profit and loss account and balance sheet. Important secrets of business remains

confined to the partners and are unknown to the outside world and can have successful business organization.

PERSONAL CONTACT AND RELATIONSHIP:

Partnership firms due to there small or medium size business can maintain personal contact with there customers and can supply them with the goods and services as per there satisfaction. This help customers and firms to earn more goodwill in the market and good relationship can be maintained with the employees which helps firms to seek there co-operation and achieve goals towards the organization. FLEXIBLE ORGANISATION: Under this there can be changes bought under terms and conditions of partnership deed easily. Moreover the changes in business activity can be curtailed and diversified as per the changing condition or circumstances easily and quickly.

DEMERITS:
UNLIMITED LIABILITY: Every partner is jointly and severally liable for entire debt of the firm. He has to suffer not only for his own mistake but also laps of the other partner.

LIMITED RESOURCES:

The amount of financial resources is limited to the contribution made by the partners. The number of partners cannot exceed 10 in banking business and 20 in other type of business.

INSTABILITY:

Partnership business comes to an end in the event of any contingent as there is no regulation of its formation or publication of its account.

LACK OF PUBLIC CONFIDENCE:

A partnership generally lacks a public confidence as there is no regulation of its formation or publication of its account. NON TRANSFERABILITY OF INTEREST: No partner can transfer his shares in the firm as an outsider without the consent of all the partners. This makes investments in partnership firm liquid and fixed. An individual capital is also blocked.

TYPES OF PARTNERSHIP FIRM:

PARTNERSHIP AT WILL:

It is formed for an indefinite period. It can be resolved by any partner by giving 14 days notice in writing to all other partners.

PARTICULAR PARTNERSHIP:

It is formed for a particular purpose or a particular period. It comes to an end, if the purpose is achieved or if the period is over.

LIMITED PARTNERSHIP:

The liability of the partner is limited to the extent of their capital contribution. Such type is popular in Europe and USA.

ESSENTIALS OF A VALID CONTRACT

What is a contract? A contract is an agreement that can be enforceable by law. An agreement is an offer and its acceptance. An agreement which can be enforceable by law must have some essential elements. According to Section 10 "All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void" As per the above section, a contract must have the following elements. Intention to create legal relationship: The parties entering into a contract must have an intention to create a legal relationship. If there is no intention to create a legal relationship that agreement cannot be treated as a valid contract. Generally there is no intention to create a legal relationship in social and domestic agreements. An agreement wherein it is clearly mentioned that "This agreement is not intended to create formal or legal agreement and shall not be subject to legal jurisdiction in the law of courts." cannot be treated as a contract and not valid. Lawful Object: The objective of the agreement must be lawful. Any act

prohibited by law will not be valid and such agreements cannot be treated as a valid contract. Agreement not expressly declared void: Section 24 to 30 specify certain types of agreement which have been expressly declared void. Some of the agreements which have been expressly declared void are agreement in restraint of legal proceedings, agreement in restraint of trade, agreement in restraint of marriage and agreement by way of wager. Proper offer and it s acceptance: To create a valid contract, there must be two or more parties. One who makes the offer and the other who accepts the offer. One person cannot make an offer and accept it. There must be at least two persons. Also the offer must be clear and properly communicated to the other party. Similarly acceptance must be communicated to the other party and the proper and unconditional acceptance must be communicated to the offerer. Proper offer and proper acceptance should be there to treat the agreement as a contract which is enforceable by law.

Free Consent: According to section 14, consent is said to be free when it is not caused by (i) coercion, (ii) undue influence (iii) fraud, (iv) misrepresentation, or (v) mistake. If the contract made by any of the above four reason, at the option of the aggrieved party it could be treated as a void contract. If the agreement induced by mutual mistake the agreement would stand void or canceled. An agreement can be treated as a valid contract when the consent of the parties are free and not under any undue influence, fear or pressure etc. The consent of the parties must be genuine and free consent. Capacity of parties to contract: Parties entering into an agreement must be competent and capable of entering into a contract. According to Section 11 of the Act which says that 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. So it is clear that the party must be of sound mind and of age to enter into a valid agreement which can be treated as a valid contract. Certainty of meaning: Wording of the agreement must be clear and not uncertain or vague. According to Section 29 of the Contract Act says that Agreements, the meaning of which is not certain or capable of being made certain, are void.

Possibility of performance: As per section 56, if the act is impossible of performance, physically or legally, the agreement cannot be enforced by law. There must be possibility of performance of the agreement. There must be possibility of performance must be there to create a valid contract. Lawful consideration: An agreement must be supported by a consideration of something in return. That is, the agreement must be supported by some type of service or goods in return of money or goods. However, it is not necessary the price should be always in terms of money. Legal formalities: The contract act does not insist that the agreement must be in writing, it could be oral. But, in some cases the law strictly insists that the agreement must be in writing like agreement to sell immovable property must be in writing and should be registered under the Transfer of Property Act, 1882. These agreement are valid only when they fulfill the formalities like writing, registration, signing by the both the parties are completed. If these legal formalities are not completed, it cannot be treated as a valid contract.

CAPACITY OF PARTIES TO ENTER INTO A CONTRACT

One of the essentials of a valid contract is that parties to the contract must be competent to enter into a contract. Section 11 of the Indian Contract Act, 1872 states that Every person is competent to enter into a contract who is: 1. Of the age of majority according to the law to which he is subject; 2. Of sound mind; and 3. Not disqualified from contracting by any law to which he is subject. The analysis of the above section makes it clear that following persons are NOT competent to enter into a contract: a) Minor b) Person of unsound mind c) Person disqualified by any law.

A. MINORS AGREEMENT:

According to Section 3 of Indian Majority Act, 1875, a minor is a person who has not completed 18 years of age except in cases where guardian of a minor or his property or both is appointed, the age of majority is 21 years. The position of a minor as regards his agreement is as follows: An agreement with or by a minor is void-ab-initio and inoperative: Section10 states that, for a valid contract, parties to the contract must be competent and Section 11 states that a minor is not competent to enter into a contract. However, neither section 10 nor section 11 makes it clear that agreement with a minor is void or voidable. Minors agreement cannot be ratified on attaining majority: To ratify means to adopt or to confirm or to approve. Ratification relates back to the date of making of the contract. A minor on attaining majority cannot confirm an agreement made by him during his minority. A contract which was then void cannot be made valid by subsequent ratification. If necessary new contract must be entered into and that will require fresh consideration.

Rule of Estoppel does not apply against minor: Estoppel is a rule of evidence where a person, who expressly or impliedly induces another person to believe that a certain state of things exists, cannot deny the existence of that state of things later. This rule of estoppels is not applicable against a minor. A minor who enters into an agreement by misrepresenting his age may disclose his real age subsequently and seek declaration that his agreement is void on grounds of minority as rule of estoppels does not apply to a minor. There can be no specific performance of minors agreement: As minors agreement is absolutely void, there can be no specific performance of such an agreement. However, when such an agreement is entered into by a guardian on behalf of a minor, for minors benefit, it can be specifically enforced.

 Minor cannot be declared as insolvent:

A minor cannot be declared as insolvent because he is incapable of contracting debts and he is not personally liable even for necessaries supplied to him. No return of benefit:

If minor has received any benefit under a void agreement, he cannot be asked to compensate or pay for it. E.g.: A, a minor, obtains loan by mortgaging his property. He is not liable to refund the loan nor can his property be made liable to pay the debt.

Exceptions to the rule that minors agreement is void: a. Minor can be admitted to the benefit of partnership b. Minor can be appointed as agent c. Minor can be a promisee or transferee d. Minor is liable to pay out of his property for necessaries supplied to him, or to his dependence

B. CONTRACT BY A PERSON OF UNSOUND MIND: A person of unsound mind is incompetent to enter in a contract. According to Section 12 A person is said to be of sound mind for the purpose of making a

contract, if at the time of making a contract he is capable: To understand the terms of the contract To form a rational judgment as to its effect upon his interest

A person who is usually of a sound mind but occasionally of unsound mind can enter into a contract when he is of sound mind.

C. PERSONS DISQUALIFIED BY LAW:

Persons who are disqualified by any law can not enter into a contract. Following persons are disqualified to enter into a contract according to the provisions of other laws. a. Alien enemy b. Foreign sovereigns c. Convicts d. insolvent

KINDS OF CONTRACT
Voidable Contract: An agreement which is enforceable by law at the option of one or more of the parties there to, but not at the option of the other or others, is a voidable contract. A contract is voidable when one of the parties to the contract has not exercised his free consent. One of the essential elements of a formation of a contract for example, free consent, is absent. All voidable contracts are those which are induced by coercion fraud or misrepresentation. The person whose consent is not freely given may avoid a contract. It therefore continues to be valid till the party whose consent is caused by coercion, undue influence, fraud or misrepresentation choose to avoid the contract within a reasonable time. Contract then is not binding on the other party.

Void Contract: A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable. A void contract is a nullity from its inception. No rights accrue there under. A contract may also be originally valid when entered into but subsequently due to change in the events or circumstances, it may become void. It should be noted that there cannot be a void contract because when the contract is void, it is no contract at all. The right expression therefore is void agreement and not void contract.

 Unenforceable Contract: A contract which cannot be enforced is a valid contract in law, but is incapable of proof, and therefore cannot be enforced in the Court of Law.

Executed Contract: Where both the parties have performed their obligation, it is an executed contract. Even when one party to the contract has performed his share of the obligation, the contract is executed though to the other party is still under an outstanding obligation to perform his part of the promise.

Executory Contract: Here neither party to the contract has performed his share of the obligation, for example, both the parties have yet to perform their promises, the contract is executory. In an executed contract one party has already performed his part of he agreement while the other party has to perform his par. In an executory contract both the parties have to perform their mutual promises and the fact that they have to perform their parts of the contract does not affect the validity of the contract.

Express Contract:

When the terms of a contract are reduced in writing or are agreed upon by spoken words at the time of its formation, the contract is express.

Implied Contract: The terms of a contract are inferred from the conduct or dealing between the parties. When the proposal or acceptance of any promise is made otherwise than in words, the promise is said to be implied. Such an implied promise leads to an implied contract. For example, A boards a bus. It is implied from his conduct that A has entered onto an implied promise to purchase a ticket.

Quasi-Contract: Certain relations resemble those created by a contract. Certain obligations which are not contracts in fact are so in the contemplation of law. These are called Quasi-Contracts.

Contingent Contract: A contingent is one in which a promise is conditional and the contract shall be performed only on the happening of some future uncertain event.

Contracts of Record:

A contract of record is one which is taken to the records of a Court, for example judgment of a court. Such judgments create a binding effect through the authority of the Court.

Specialty Contract: A specialty contract is a contract which is in writing signed, sealed and delivered by the parties. It is also called a contract under seal. Consideration is not necessary in a specialty contract.

Simple Contract: A simple contract is one which is not under seal. All contracts which are not under seal are simple contracts. All simple contracts require consideration. They may be made by written or spoken words. Contracts of Record and Specialty Contracts are also known as Formal Contracts. The classification of contracts into Contracts of Record, Specialty and simple is under the English Law. Indian Law does not recognize contracts without consideration. All contracts must have consideration in order the valid subject to exceptions under section 25 of the Act.

ELEMENT OF CONTRACT

Offer: An offer can be oral or written as long as it is not required to be written by law. It is the definite expression or an overt action which begins the contract. It is simply what is offered to another for the return of that person's promise to act. It cannot be ambiguous or unclear. It must be spelled out in terms that are specific and certain, such as the identity and nature of the object which is being offered and under what conditions and/ or terms it is offered. Acceptance: As a general proposition of law, the acceptance of the offer made by one party by the other party is what creates the contract. This acceptance, as a general rule, cannot be withdrawn, nor can it vary the terms of the offer, or alter it, or modify it. To do so makes the acceptance a counter-offer. Though this proposition may vary from state to state, the general rule is that there are no conditional acceptances by law. In fact, by making a conditional acceptance, the offeree is rejecting the offer. However the offerer, at his choosing, by act or word which shows acceptance of the counter-offer, can be bound by the conditions tendered by the offeree. Consideration: Consideration for a contract may be money or may be another right, interest, or benefit, or it may be a detriment, loss or responsibility given up to someone else. Consideration is an absolutely necessary element of a contract. As a word of caution, it should be noted that consideration has to be expressly agreed upon by both parties to the contract or it must be expressly implied by the terms of the contract. A

potential or accidental benefit or detriment alone would not be construed as valid consideration. The consideration must be explicit and sufficient to support the promise to do or not to do, whatever is applicable. However, it need not be of any particular monetary value. Mutual promises are adequate and valid consideration as to each party as long as they are binding. This rule applies to conditional promises as well. As additional clarification, the general rule is that a promise to act which you are already legally bound to do is not a sufficient consideration for a contract. The courts determine the application.

Capacity of the Parties to Contract: The general presumption of the law is that all people have a capacity to contract. A person who is trying to avoid a contract would have to plead his or her lack of capacity to contract against the party who is trying to enforce the contract. For example, he would have to prove that he was a minor, adjudged incompetent or drunk or drugged, and so forth. Often this is the most difficult burdens of proof to overcome due to the presumption of one's ability to contract. Intent of the Parties to Contract: It is a basic requirement to the formation of any contract, be it oral or written, that there has to be a mutual assent or a "meeting of the minds" of the parties on all proposed terms and essential elements of the contract. It has been held by the courts that there can be no contract unless all the parties involved intended to enter into one. This intent is determined by the outward actions or actual words of the parties and not just their secret intentions or desires. Therefore, mere negotiations to arrive at a mutual agreement or assent to a contract would not be considered an offer and acceptance even thought the parties agree on some of the terms which are being negotiated. Both parties must have intended to enter into the contract and one can not have been

misled by the other. That is why fraud or certain mistakes can make a contract voidable.

PROPOSAL
DEFINATION OF PROPOSAL:
Section 2(a) of the Indian contract act defines proposal as: When one person signifies to another his willingness to do or to abstain from doing anything with a view of obtaining assent of that another person to such act or abstinence he is said to make a proposal. ESSENTIALS OF A VALID PROPOSAL: All contracts are made by lawful offer of one party and lawful acceptance of the same by other party. Thus proposal is the first step in the formation of the contract. Thus, the essentials of a valid proposal are as follows: IT MUST BE DEFINITE:

There can be no agreement if the terms of the offer are vague or indefinite. To constitute a valid agreement it is essential that proposal must be so certain that the right and obligations of the parties can be exactly fixed.

IT CAN BE GENERAL OR SPECIFIC: When an offer is made to public at larger it is called as general offer. When an offer is made to a definite person or particular class of persons it is called as specific offer.

IT MUST B CAPABLE OF CREATING A LEGAL RELATIONSHIP:

If the proposal is not intended to create a legal relationship, it is not an offer in the eyes of law. Common intention of the parties to enter into a legal relationship is necessary for a valid contract.

IT MUST BE EXPRESSED OR IMPLIED: An offer which is made by words, spoken or written, is called as expressed offer. Offer which is inferred from the circumstances of the case is called as an implied offer.

 TO OFFER ACCEPTANCE: Offer must be made with a view to secure or obtain acceptance of the other person.

AN OFFER MAY BE CONDITIONAL: An offer may be made subject to some terms and conditions to be fulfilled. Such an offer is called a conditional offer. The offeree has to accept all the terms and conditions are not accepted, offer lapses or ends.

ACCEPTANCE
DEFINATION OF ACCEPTANCE:

Section 2(b) of Indian contract act defines acceptance as, When a person to whom

proposal is made signifies his assent thereto, the proposal is said to be accepted. CONDITIONS OR RULES OF VALID ACCEPTANCE: IT MUST BE MADE BY A CERTAIN PERSON: An offer can be made to uncertain number of persons; to the world at large but no contract can arise unless it is accepted by a certain person.

IT MUST BE ABSOLUTE AND UNCONDITIONAL: Acceptance of a proposal with conditions, variations and reservations is not valid acceptance at all. Qualified and conditional acceptance amounts to counteroffer thereby rejecting the original offer.

MODE OF ACCEPTANCE: There is no particular mode of communication of acceptance prescribed in the act. Acceptance must be communicated in some reasonable and usual manner i.e. by words or by conduct. It may also be expressed by post or by sending a telegram. Proposer has a right to prescribe the form in which the proposal will be accepted.

 IT MUST BE GIVEN WITHIN A REASONABLE PERIOD OF TIME: Acceptance to be valid must be given within the time limit prescribed by the offeror. If no time limit is prescribed or specified, it must be accepted within reasonable time.

MENTAL ACCEPTANCE IS NO ACCEPTANCE: Acceptance to be valid must be communicated to the proposer by words, spoken, written or by conduct. Silence cannot amount to acceptance.

ACCEPTOR MUST BE AWARE OF THE PROPOSAL: If acceptance is made in ignorance of a proposal, it is not acceptance of the proposal and does not give rise to any binding contract.

ACCEPTANCE IS OF ALL THE TERMS AND CONDITIONS: Acceptance of a proposal is the acceptance of all terms and conditions even if the acceptor is not aware or is ignorant of some of the conditions or terms.

Thus, to create a valid contract, there must be two or more parties. One who makes the offer and the other who accepts the offer. One person cannot make an offer and accept it. There must be at least two persons. Also the offer must be clear and properly communicated to the other party. Similarly acceptance must be communicated to the other party and the proper and unconditional acceptance must be communicated to the offerer. Proper offer and proper acceptance should be there to treat the agreement as a contract which is enforceable by law.

GUARANTEE
Under Section 126, of the Act, a contract of guarantee is defined as, a contract to perform the promise, or discharge the liability of a third person in case of his default. This type of contract is formed mainly to facilitate borrowing and lending money. 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. Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.

The three parties involved in this type of contract are: Surety: is the person by whom the guarantee is given Principal Debtor: is the person from whom the assurance is given. Creditor: is the person to whom the guarantee is given.

Section 128- Surety's liability

The liability of the surety is co-extensive with that of
the principal debtor, unless it is otherwise provided by the contract.

Illustration: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.

Section 129- Continuing guarantee

A guarantee which extends to a series of transactions is
called a "continuing guarantee".

Illustrations: A, in consideration that B will employ C in collecting the rent of B's zamindari, promises B to be responsible, to the

amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee.

Section 130- Revocation of continuing guarantee

A continuing guarantee may at any time be revoked by
the surety, as to future transactions, by notice to the creditor. Illustrations: A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A, gives notice of revocation. C dishonours the bill on maturity. A is liable upon his guarantee.

Section 131- Revocation of continuing guarantee by surety's death

The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

Section 132- Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on other's default

Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence. Illustration: A and B make a joint and several promissory note to C. A makes it, as surety for B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the note.

Section 134- Discharge of surety by release or discharge of principal debtor

The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. Illustrations: A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his surety ship.

Section 146- Co-sureties liable to contribute equally

Where two or more persons are Co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor. Illustrations: A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A,B and C are liable, as between themselves, to pay 1,000 rupees each.

INDEMNITY
Section 2 As per Section 124 of the Indian Contract Act, the contract of indemnity is defined as, a contract by which one party promises to save other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Illustration: A contract 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 125- Rights of indemnity holder when sued. The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor.
Sub Section (1) :All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; :All costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;

Sub Section (2)

Sub Section (3)

:All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the

absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

CONTRACT ACT: DIFFERENCES BETWEEN CONTRACT OF INDEMNITY AND GUARANTEE.

A few important distinctions between a contract of indemnity and contract of guarantee are as follows:

Number of Parties: In a contract of indemnity only two parties are

involved, whereas in a contract of guarantee, three parties are involved. Purpose: A contract of indemnity is formed to provide compensation of loss. A contract of guarantee is formed to give assurance to the creditor in lieu for his money. Nature of Liability: Primary liability and the surety owes the secondary liability. In a contract of indemnity, the indemnifier is the sole person who is held liable. In a contract of guarantee, the liability is shared by the surety and principal debtor.

C N ID R T N O S E A IO
M A IN : EN G C onsidera tion is an essential elem for the form ent ation of acontract. It m consist of aprom to performadesired a or a prom to refrain ay ise ct ise fromdoingan act that one is leg entitled to do. In a b ally ilateral contract, an a reem bywhich both p arties ex g ent chang m e utual prom ises, ea ch prom is reg ise arded a sufficient consideration for the other. In aunilateral s contract, an ag reem by which one partym ent akes a prom in ex ise chang e for the other's perfor m ance, the perform ance is consideration for the prom while the prom is consideration for the perform ise, ise ance.

S R N E T C N ID R T NA DS R N E T C N R C : T A G R O O S E A IO N T A G R O O T A T
If consideration is prov ided byany person who is not a partyto a contra ct, then prom isee is ca lled a strang to consideration. s er The principle of contract is applicable in India According . to this principle, a person who is not a party to the contract ca not sue. H ev there are n ow er, certa ex in pecta tions to the rule that strang to contract ca er nnot sue. In other w ords, in the follow cases, strang to contract can sue: ing er 1 MAR IAG S TTLE NT PAR ITIONO O E FAMIL S TTL ME ) R E E ME T R TH R Y E E NT: W hen prov ision is m de for a fam m bers, the fa ily m bers, who a ny ily em m em w not orig ere inally partyto the contract, ca n enforce the contract. 2 AS IG ) S NME O C NT AC NT F O R T: W hen contra ctual rig are a ned either v hts ssig oluntarilyor byopera tions of la the assig w, nee can enforce the contract e.g officia liquidator. . l 3 C NTR TE R DINTOT R UG AG ) O AC NTE E H O H ENT: W hen a contract is entered enforce it . into byan a ent, the principal ha rig to g s ht

A CONTRACT WITHOUT CONSIDERATION IS VOID OR EXCEPTION TO THE RULE NO CONSIDERATION NO CONTRACT:

Section 25 states that an agreement without consideration is void. The general rule is Ex Nudo Pacto Non Oritur Acto which means that out of bare promise no cause of action arises. 1) PROMISE TO PAY FOR PAST VOLUNTARY SERVICES: A promise to compensate, wholly or in part, who has voluntarily done something for the promisor, is even through without consideration. In other words, a promise to pay for past voluntary service is binding. 2) PROMISE TO PAY TIME BARRED DEBT: As, a general rule, a debt barred by law of limitation cannot be recovered. However, a written and signed promise by a debtor or his authorized agent would make it a valid and enforceable promise even through made without any fresh consideration. 3) COMPLETED GIFT: A gift does not require any consideration. In other words, nothing in section 215 affects the validity of gift as between the donor and the done of any gift actually made.

UNLAWFUL CONSIDERATION OR UNLAWFUL OBJECT:

The words object and consideration are not used synonymously. They are distinct in meaning. The word object means purpose or design. The consideration or object of an agreement is unlawful if: 1) IT IS FORBIDDEN BY LAW: If the object or consideration of an agreement is the doing of an act forbidden by law, the agreement is void. An act is forbidden by law where it is punishable by the criminal law of the country or when it is prohibited by special legislation or regulation. 2) IF IT IS OF SUCH A NATURE THAT, IF PERMITTED, WOULD DEFEAT THE PROVISIONS OF ANY LAW: If the object or consideration of any agreement is such that though not directly forbidden by law, it would defeat the provisions of any law, the agreement is void. 3) IT IS FRAUDULENT: An agreement with an intention to commit an offence or practice fraud upon some person would be void as being fraudulent. 4) IT INVOLVES OR IMPLIES INJURY TO PERSON OR PROPERTY OF ANOTHER: If the object of an agreement is to injure a person or property of another is void. Injury means wrong, harm or damage. Property includes both movable and immovable property. 5) THE COURT REGARDS IT AS IMMORAL AND OPPOSED TO PUBLIC POLICY:

When an agreement is harmful or is against the public interest or immoral it would be void. Immoral agreements are those agreements which are against good conscience and degree of morality prevailing or contravenes established interest of society, political, social or economic.

AGREEMENT
DEFINITION:

VOID

A void agreement is not enforceable by law. It has no legal existence and it is inoperative. Following are the agreements expressly declared as void under the Indian Contract Act, 1872. 1) Agreements made by an incompetent person, for example a minor person or of unsound mind, etc (Sec 11). 2) Agreement made under mutual mistake as to matter of act essential to the agreement (Sec 20) 3) Agreements made under mistake as to a law not in force in India (Sec 21) 4) Agreement, the consideration or object of which is unlawful (Sec.23) 5) Agreement, the consideration or object of which is unlawful in part (Sec 24) 6) Agreement made without consideration (Sec 25) 7) Agreement in restraint of marriage (Sec 26)

8) Agreement in restraint of trade (sec 27) 9) Agreement in restraint of legal proceedings (sec 28) 10) Agreement, the meaning of which is uncertain (sec 29) 11) Agreement by way of wager (sec30) 12) Agreement contingent on an uncertain future event becomes impossible (Sec 32) 13) Agreement contingent on an impossible event (Sec 36) 14) Agreement to do an impossible act (Sec 56) 15) Agreement to do an act which subsequently becomes impossible (Sec 56)

Contract becomes impossible of performance in the following cases:

Destruction of subject matter of contract: In this specific subject matter of the contract ceases to exist, the contract becomes void due to impossibility of performance. Non-occurrence of the contemplated event: When the event or object, as agreed between the parties, does not take place, the performance of contract is frustrated. Change in circumstances: A contract is frustrated when there is change of circumstances which makes the performance of the contract impossible in the manner and at the time contemplated by the parties. Death or incapacity of a party to a contract: When the nature or terms of the contract requires, personal performance by the promisor, his death or incapacity puts an end to the contract. Government or legislative intervention:

A contract comes to an end if legislative or administrative intervention prevents the performance of a contract.

FREE CONSENT
The contract, to be valid must contain some ingredients. One of the most important element is the free consent of parties. The contract is the agreement between two or more persons. So there must be meeting of minds in similar manner. So the meeting must be voluntary. It must be free from any compulsion or pressure. A contract without free consent is not proper . Section 13 of the Indian Contract Act, 1872 says that when two or more persons agree upon the same thing in the same sense, there is consent. Consent can be express and implied. Section 14 of the Act goes on saying what is free consent. There are different elements the presence of which will compel someone to enter into a contract. So if those elements are present the contract is not formed by free consent. Those elements are as follows:

COERCION (SECTION 15)

In order to cause any person to enter into any contract, one person commits or threatens to commit an illegal act as defined in Indian Penal Code or

unlawfully detains any property connected with the other person or threatens to do so.

UNDUE INFLUENCE (SECTION 16)

When a person in a position to dominate the will of other uses this position to obtain an unfair advantage over another in a contract

FRAUD (SECTION 17)

Every act, promise, omission intended to deceive forms fraud.

MISREPRESENTATION (SECTION 18) MISTAKE (SECTIONS 20-22)

Misleading another in a contract comes under misrepresentation.

Mistake is the erroneous belief either of law or fact by one or other parties or both. If one or all of the above elements are present in forming a contract, it is voidable. Section 19 of Indian Contract Act specifically says that when the consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the part whose consent was so caused. Section 20 says that when both parties are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Section 19A says that a contract in which the agreement is caused by undue influence, it is voidable.

COERCION:
Coercion is a legal term that is used to describe a situation in which one person forces another person to do, or to refrain from doing, something against his will. Usually, this is done using psychological pressure or physical force. Other actions used to compel a person to behave in a certain way include deception and threatening to cause harm to the person, his family, or his property. In many jurisdictions, coercion is recognized as a

defense to an act that would otherwise create liability, such as a crime, tort, or breach of contract. Illustration: A threatens to shoot B if he does not let out his house to A. B agree to do so. This agreement has been brought about by coercion.

UNDUE INFLUENCE:
Undue influence exists where a contract has been entered as a result of pressure which falls short of amounting to duress, the party subject to the pressure may have a cause of action in equity to have the contract set aside on the grounds of undue influence. Undue influence operates where there exists a relationship between the parties which has been exploited by one party to gain an unfair advantage. Undue influence is divided into actual undue influence and presumed undue influence. Where a contract is found to be entered into as a result of undue influence, this will render the contract voidable. This will enable the person influenced to have the contract set aside as against a party who subjected the other to such influence. In addition, in some instances the party influenced may be able to have a contract set aside as against a party who was not the person inflicting the influence or pressure.

FRAUD:

Fraud means and includes any of the following acts committed by a party to a contract or b with his connivance or by his agent, with intent to deceive another party thereto or his to induce him to enter into the contract. The suggestion as to a fact that which is not true by one who does not believe it to be true. The active concealment of a fact by one having knowledge or belief of the fact, A promise made without any intention of performing it. Any other act fitted to deceive Any such act or omission as the law specially declares to be fraudulent.

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is in itself, equivalent to speech. Essentials of fraud1. There must be an intention to deceive. 2. The act must be done by a party to a contract or with his connivance or by his agent 3. There must be a false representation of a fact 4. There must be a false promise

5. The party so induced must have acted upon it and suffered loss.

MISREPRESENTATION:
Consent given under misrepresentation of facts is no consent at all. A statement made which in fact is not true, under the belief that it is true, is Misrepresentation. Misrepresentation is a
TORT,

or a civil wrong. This means that

a misrepresentation can create civil liability if it results in a pecuniary loss. For example, assume that a real estate speculator owns swampland but advertises it as valuable commercially zoned land. This is a misrepresentation. If someone buys the land relying on the speculator's statement that it is commercially valuable, the buyer may sue the speculator for monetary losses resulting from the purchase. To create liability for the maker of the statement, a misrepresentation must be relied on by the listener or reader. Also, the speaker must know that the listener is relying on the factual correctness of the statement. Finally, the listener's reliance on the statement must have been reasonable and justified, and the misrepresentation must have resulted in a pecuniary loss to the listener. IllustrationA says to B that Cs horse is a very good horse and runs 20 miles at a stretch. A believes the statement to be true. B purchases the horse from Con As information. It turns out that the horse is only able to run 2 miles. This is Misrepresentation.

MISTAKE:
In contract law a 'mistake' is an erroneous belief, 'at contracting', that certain facts are true. Mistake can be argued as a defence, and if raised successfully can lead to the agreement in question being found void ab initio or voidable, or alternatively an equitable remedy may be provided by the courts. Common law has identified three different types of mistake in contract: the 'unilateral mistake', the 'mutual mistake' and the 'common mistake'. It is important to note the distinction between the 'common mistake' and the 'mutual mistake'.

DISCHARGE OF CONTRACT
Termination of the contractual relations between the parties to a contract is called discharge of a contract. A contract is said to be discharge when the rights and obligations of the parties under the contract come to an end. Modes of Discharge of a contract: A contract can be discharged in various modes: DISCHARGE BY PERFORMANCE: A contract can be discharged by performance in any of the following manner. a) By actual performance: A contract can be discharged by actual performance when the parties to the contract perform their promises in accordance with the terms of the contract.

b) By attempting performance: A contract can be discharged by attempting performance when the promisor makes an offer to performance to the promisee but it the promisee does not accept it.

DISCHARGE BY MUTUAL AGREEMENT: A contract is

created by mutual agreement hence it can be discharged by mutual agreement. A contract can be discharged by mutual agreement in any of the following manner.
a)

Novation: Section 62 of the Indian Contract Act , provides that a contract can be discharged by novation or renewal. It is substitution of a new contract for the original contract such a new contract may be either between the same parties or between different parties. The consideration for the new contract is the discharge of the original contract.

b)

Recession: Recession means the cancellation of the contract by any party or all the parties of the contract mutually.

c)

Alteration: A change in the term of the contract with mutual consent of the parties is called alteration. Alteration discharges the original contract and creates a new contract. The parties to the new contract should be the same.

d)

Remission: Section 63 of the Indian contract provides that every promise may disburse with or remit wholly or in part, the performance of the promise made to him or may extend the time for such performance or may accept instead of if any

satisfaction which he thinks fit. In other words, remission means acceptance by the promisee of a lesser fulfillment of the promise made.

e)

Wavier: Wavier means intentional relinquishment of a right under the contract. It amount to releasing a person of certain legal obligation under a contract.

DISCHARGE OF OPERATIONAL OF LAW: A contract

may be discharged by the operation of law under the following circumstance.

a)

Death of the Promisor: A contract involving the personal skill or ability of the promisor is discharged on the death of the provisor. Insolvency: When a person is declared insolvent by court, he is discharged from the liability up to the date of his insolvency. Unauthorized Material Alteration: If any party makes any material alteration in the original terms of the contract without approval of the other party, the contract comes to an end and the concerned party is discharged from the contract. Identity of promisor and promisee: When the promisor becomes the promisee, the other parties are discharged from the contract.

b)

c)

d)

DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE:

Section56 of the Indian Contract Act provides that the contract is discharged when it becomes impossible to perform. There are two types of impossibilities- initial and supervening impossibility. Initial impossibilities means the impossibility existing at the time of making

the contract and supervening impossibility means impossibility which does not exist at the time of making the contract but which arise subsequently after formation of the contract. In case of initial impossibility, the agreement becomes void on the ground of mutual mistakes. However, when the promisor alone knows about the initial impossibility, he must compensate for any loss which the promisee sustains through the nonperformance of the promise. In case of supervening impossibility, the contract becomes unlawful by reason of some event beyond the control of the promisor, the contract to do such an act becomes void. However, when the promisor alone knows about the impossibility, he must compensate the promisee for any loss which such promisee might have suffered on account of nonperformance of the promise. When an agreement is discovered to be void or where a contract becomes void any person who has received any benefit under such an agreement or contract is bound to restore it or to make compensation for it, to the person from whom he has received the benefit.

DISCHARGE BY LAPSE OF TIME: A contract is said to

be discharged if it is not performed or enforced within a specified time period called period of limitation. The Limitation Act, 1963 prescribes the different periods for different contracts. E.g.: Sheth Brothers sold goods to Anand on 1-4-2001 on credit for rs.10000. Anand did not pay till 30-6-2005. State the legal position if credit period was allowed for 3 months.

 DISCHARGE BY BREACH OF CONTRACT: A contract

can be discharged by breach of contract if any party to the contract fails or refuses to perform his party of the contract. The act of the party makes it impossible to perform the obligation under the contract. A breach of contract may occur by Anticipation breach or Actual breach. Anticipatory breach occurs when the party declares his intention of not performing the contract before the performance is due. Actual breach of contract occurs if any party to a contract refuses or fails to perform his part of the contract at the time fixed for performance or any party has performed a part of the contract and then refuses or fails to perform the remaining part of the contract. The aggrieved discharged from his obligation and gets rights to proceed against the party at fault.

DISCHARGE OF SURETY: A surety is discharged when

his liability as surety comes to an end. The various modes of discharge of a surety are as follows:
A) REVOCATION: A surety is discharged from his liability by

revocation of a contract of guarantee in giving notice to the creditor, death of surety and by making a fresh contract of guarantee.
B) CONDUCT OF CREDITOR: Any variance made without the

suretys consent in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to variance. The surety is also discharged by any contract between creditor and principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which the discharge of the principal debtor. A contract between the creditor and principal debtor, by which the creditor make a composition with or promises to give time to or not to sue the

principal debtor, discharges the surety unless they surety assents to such contract. If the creditor does any act which affects the rights of the surety or omits to do an act which is his duty to surety requires him to do and eventual remedy of to surety himself against the principal debtor, is thereby impaired, the surety is also discharged. Finally if the creditor loses or without the consent of the surety parts with security given to him the surety is discharged from liability to the extend of the value of security.
C) INVALIDATION OF CONTRACT OF GUARANTEE:

Section 142 to 144 provides the rules for invalid guarantee. Accordingly any guarantee which has obtained by means of mispresntation made by the creditors or with his knowledge and assent, concerning a material part of the transaction is invalid. Again any guarantee obtained by the creditor by means of keeping silences to material circumstances is also invalid. When a person gives guarantee upon contract that a creditor that a creditor shall not act upon it until another person has joined in it as co-surety the guarantee is not valid if the person does not join as co-surety.

BREACH OF CONTRACT
When any party refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract is called breach of a contract. A breach of a contract may arise in two ways: (a) Anticipatory breach and (b) Actual breach of a contract. Anticipatory breach arises when the party declares his intention of not performing the contract before the performance is due. Actual breach of contract may arise on due date of performance or during the course of performance.

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.
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.
LOSS OR DAMAGE Explanation to section 73

PROMISEE SHOULD TAKE STEPS TO MITIGATE THE

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.