Corporate Governance & Business Law

UNIT I

Syllabus
Unit - I (8 sessions) Issues, need of corporate governance code, Code of Corporate Practices, Social Responsibility of Corporate, Corporate Social Reporting, Corporate Governance and the Role of Board (BOD),Corporate Governance System Worldwide, Corporate Disclosure and Investor Protection in India. The Indian Contract Act: Essentials of a valid contract, void agreements, performance of contracts, breach of contract and its remedies, Quasi Contracts Unit - II (8 sessions) Moral Values and Ethics: Values Concepts, Types and Formation of Values, Ethics and Behaviour. Values of Indian Managers; Managerial Excellence through Human Values; Development of Ethics, Ethical Decision Making, Business Ethics- The Changing Environment and Stakeholder Management, Relevance of Ethics and Values in Business, Spiritual Values. Modern Business Ethics and Dilemmas, Overview of Corporate Social Responsibilities (CSR) and Sustainability. Unit - III (8 sessions)

The Sale of Goods Act: Contract of sale of goods, conditions and warranties, transfer of property, rights of an unpaid seller; the negotiable instruments act: nature and types; negotiation and assignment; holder in due course, dishonour and discharge of a negotiable instrument, arbitration
Unit - IV (8 sessions) The Companies Act, 1956: Nature and types of companies; formation; memorandum and articles of association; prospectus, shares and share capital, allotment of shares Unit - V (8 sessions) Membership; borrowing powers; management and meetings; accounts and audit; compromise arrangements and reconstruction; prevention of oppression and mismanagement; winding up; Consumer Protection Act and Cyber Law; RTI Act 2005 : Purpose, Right to Information and Obligation of Public Authorities, Exemption from

Corporate Governance
The

system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community.

Since

corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests

Corporate

Governance

Corporate Governance
There are several challenging shareholders issues :
1.

Nomination process. Not all shareholders have a full access to the proxy statements and existing SEC (Securities & Exchange Commision) rules allow companies to reject any proposal pertaining to director election. Voting System. The prevailing plurality voting system also makes it difficult for shareholders to monitor their companies. Proxy Statements. Shareholders of public companies with dispersed ownership have few, if any, incentives or opportunities to monitor their companys business affairs and managerial activities.

2. 3.

To address those issues SEC has adopted a few initiatives.

Corporate Governance
Roles of boards are expanding to both advisory and oversight functions. Several prevailing challenges facing directors remain unresolved: (1) director accountability and personal liability, (2) the separation of chair and CEO roles, (3) director stock ownership, (4) board diversity, (5) director interlocks, (6) director performance scorecard, (7) rotation of audit committee members.

Sox Compliance Challenges

It has been argued that the emerging corporate governance reforms, including SOX, SEC related implementation rules, and listing standards, have caused smaller companies to (1) incur compliance costs that are disproportionate to the induced incremental benefits, and (2) divert the attention of company management away from strategic decisions and operational activities. To address those concern COSO in 2005 issued Guidance for Smaller Public Companies Reporting on Internal Control over Financial Reporting. The new guidance is intended to assist small companies to implement, assess, and report on ICFR in compliance with Section 404 of SOX and PCAOB AS No. 2.

Sox Compliance Challenges

The MAIN CHALLENGE is the cost of compliance. Some of rules, for example, rules concerning internal controls of Section 404, cost at least one hundred times more than what was originally estimated by the SEC (e.g., estimated cost of $91,000 per company to the first-year actual cost of, on average, $9.8 million).

Financial Reporting Challenges

1. Financial restatements The persistence of financial restatements adversely affects investor confidence. The substantial decline in the number of restatements by large public companies suggests that Section 404 is working well in reducing the number of financial restatements and thus improving financial reporting quality. 2. Enhanced Business Reporting Enhanced business reporting (EBR) focusing on both financial and nonfinancial information about current and future KPIs is suggested as an alternative to improve the quality, transparency, and integrity of financial reporting 3. Stock Options Accounting The two pricing models commonly used in determining the real value of a stock option are Black-Scholes and indexing of similar publicly traded companies. the current pricing models are being criticized for not properly determining the value of stock options

FINANCIAL REPORTING CHALLENGES (CONT)

An effective antifraud program should address corporate culture, control structure, and fraud procedures: 1. Corporate cultureCorporate culture should create an

environment that sets an appropriate tone at the top 2. Control structureAn effective control structure should eliminate opportunities for individuals to engage in fraudulent activities.

3. Antifraud proceduresAdequate fraud procedures should be

developed and performed to ensure prevention and detection of potential fraud.

Global Financial Reporting Standards

We should expect significant changes in financial reporting as both the FASB and IASB are moving toward convergence in their standards, and the SEC is promoting the idea of giving U.S. companies the choice between U.S. GAAP and IFRS compliance in their filings with the SEC.

The SEC is requirement

expected

to

remove

the

reconciliation

for international firms traded on U.S. exchanges to file using IFRS by 2009. The move by the SEC can be regarded by many as the first step by the SEC to eventually allow listed companies to use IFRS in place of U.S. GAAP.

Emerging Auditing Issues

The emerging auditing issues in the post-SOX period are:
(1)
(2) (3) (4)

auditor independence,
auditor changes, engagement letters, audit failure,

(5)
(6) (7) (8) (9) (10)

integrated audit approach,

concentration of and competition in public accounting firms, electronic financial reporting and continuous auditing, confirmations, audit report, auditor liability.

Principles of corporate governance

Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to nonshareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment. Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Disclosure and transparency :Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors

Social Responsibility of Corporates

The concept of social responsibility:
Proposes that a private firm has responsibilities to society that extend beyond making a profit Obligation of firm decision makers to make decisions & act in ways that recognize the interrelatedness of business & society. It recognizes the existence of various stakeholders and firms deal with them.

Social Responsibility of Corporates

Two Views of who are firms responsible to?
(1) Traditional View (Milton Friedman) There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

By taking on the burden of social cost, the business becomes less efficient: Prices go up to pay for increased costs; or Investment in new activities & research is postponed
Firms are responsible to only their shareholders

Purely economic reasoning

Social Responsibility of Corporates

(2) Modern View (Archie Carroll)
Social Responsibilities

Economic (Must Do)

Legal (Have to Do)

Ethical (Should Do)

Discretionary (Might Do)

Social Responsibility of Corporate

(2) Modern View (Archie Carroll)
Business firms have four responsibilities (a) Economic Produce goods & services of value to society so that the firm may repay its creditors and stockholders (b) Legal Defined by governments in laws that management is expected to obey (c) Ethical Follow generally held beliefs about how one should act in society Work with employees & community in planning for layoffs, though no laws requiring this Many people expect firms to do these things (d) Discretionary Purely voluntary obligations a firm assumes Philanthropic contributions, training hard-core unemployed, providing day-care centers, etc. Many people do not expect firms to do these things

Corporate Social Reporting

Corporate social reporting is referred as the process of communicating the social and environmental effects of economic organisations'. The reporting is also a form of corporate self-regulation integrated into a business model. Its policy functions as a self regulating mechanism whereby business monitors and ensures its active compliance with the spirit of the law ethical standards and international norms.

Corporate Governance and the Role of Board(BOD)

The OECD (Organization for Economic cooperation & Development) Principles of Corporate Governance (2004) describe the responsibilities of the board; some of these are summarized below:
Board members should be informed and act ethically and in good faith, with due diligence and care, in the best interest of the company and the shareholders. Review and guide corporate strategy, objective setting, major plans of action, risk policy, capital plans, and annual budgets. Oversee major acquisitions and divestitures. Select, compensate, monitor and replace key executives and oversee succession planning. Align key executive and board remuneration (pay) with the longer-term interests of the company and its shareholders. Ensure a formal and transparent board member nomination and election process.

Corporate Governance and the Role of Board(BOD)

Ensure the integrity of the corporations accounting and financial reporting systems, including their independent audit. Ensure appropriate systems of internal control are established. Oversee the process of disclosure and communications. Where committees of the board are established, their mandate, composition and working procedures should be well-defined and disclosed.

Corporate Governance System Worldwide

There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or Multistakeholder Model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. A related distinction is between market-orientated and networkorientated models of corporate governance. Continental Europe Some continental European countries, including Germany and the Netherlands, require a two-tiered Board of Directors as a means of improving corporate governance.

Corporate Governance System Worldwide

In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions. India India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.

Corporate Governance System Worldwide

It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions. United States, United Kingdom The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a singletiered Board of Directors that is normally dominated by nonexecutive directors elected by shareholders. Because of this, it is also known as "the unitary system". Within this system, many boards include some executives from the company (who are ex officio members of the board). Nonexecutive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees.

Corporate Governance System Worldwide

The United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance. In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly traded corporations. Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws. Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the

Corporate Disclosure and Investor Protection in India

Corporate Disclosure: Meaning The act of releasing all relevant information pertaining to a company that may influence an investment decision good or bad. It includes disclosure about: company objective financial details- operating results governance structure and policies the board of directors, their remuneration significant foreseeable risk factors material issues regarding employees and other stakeholders, etc. Objective: Transparency to disclose information in a timely, consistent and appropriate manner; to protect and prevent the improper use or disclosure of Material Information and Company Information;

Corporate Disclosure and Investor Protection in India

Corporate Disclosure: Need Better support at stock exchanges Attracts more investors Fulfil the demands of labour unions who are interested in the security and welfare of the employees Information provided to government to comply with legal regulations Fulfil the demand of society at large

Corporate Disclosure and Investor Protection in India

Investor Protection: Investor protection focuses on making sure that investors are fully informed about their purchases, transactions, affairs of the company that they have invested in and the like. Investor protection is one of the most important elements of a thriving securities market or other financial investment institution. Simply put, investor protection is the effort to make sure that those who invest their money in regulated financial products are not defrauded by brokers or other parties SEBI & Investor Protection The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was amended in the years 1995, 1999 and 2002,the primary function of which is the protection of the investors interest and the healthy development of Indian financial markets.

Corporate Disclosure and Investor Protection in India

OBJECTIVES OF SEBI Investor protection, so that there is a steady flow of savings into the Capital Market. Ensuring the fair practices by the issuers of securities, namely, companies so that they can raise resources at least cost. Promotion of efficient services by brokers, merchant bankers and other intermediaries so that they become competitive and professional. Regulating substantial acquisition of shares and takeover of companies Promoting investors education and training of intermediaries of securities markets Carry out inspection/ audits of the SEs / intermediaries etc. Call for information from any bank / any authority / corporation / agencies in respect of any transaction in securities which is under investigation or inquiry by SEBI

Corporate Disclosure and Investor Protection in India

OBJECTIVES OF SEBI Performing such functions and exercising such powers under the Securities Contracts (Regulation) Act, 1956 (SCRA) Conducting research
Investor Protection Measures by SEBI Section 11(2) of the SEBI Act contains measures available with SEBI to implement the legislated desire of investor protection. The measures available with SEBI include the following: regulating the business in Stock Exchanges (SEs) and any other securities markets registering and regulating the working of intermediaries like stock brokers, sub-brokers, registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds

Corporate Disclosure and Investor Protection in India

Investor Protection Measures by SEBI prohibiting fraudulent and unfair trade practices relating to securities markets prohibiting insider trading in securities Credit Rating Agencies SEBI regulates the credit rating agencies, for the purpose of streamlining work of the credit rating industry as well as to safeguard the interest of the investors. SEBI plans to bring all the credit rating companies under its direct control to bring about consistency and credibility. Rating is only an informed professional opinion. Rating agencies are retained by the issuer and not by the investing public. Its the issuer who pays them and consequently, they are under great pressure to give a good rating.

The Indian Contract Act

The law relating to contracts in India is contained in Indian Contract Act, 1872. It is applicable to all the states of India except the state of Jammu and Kashmir. It determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some rights and duties on the contracting parties. Hence this legislation, Indian Contract Act of 1872, being of skeletal nature, deals with the enforcement of these rights and duties on the parties in India.

The Indian Contract Act

Indian Contract Act embodied the simple and elementary rules relating to Sale of goods and Partnership. The developments of modern business world found the provisions contained in the Indian Contract Act inadequate to deal with the new regulations or give effect to the new principles. Subsequently the provisions relating to the Sale of Goods and Partnership contained in the Indian Contract Act were repealed respectively in the year 1930 and 1932 and new enactments namely Sale of Goods and Movables Act 1930 and Indian Partnership act 1932 were re-enacted. At present the Indian Contract Act may be divided into two parts Part 1:deals with the General Principles of Law of Contract Sections 1 to 75 Part 2:deals with Special kinds of Contracts such as (1)Contract of Indemnity and Guarantee (2)Contract of Bailment and Pledge (3)Contract of Agency

The Indian Contract Act

Essentials of a valid contract:
According to Section 10, "All agreements are contracts, if they are made by the free consent of the parties, capacity of parties to contract, for a lawful consideration with a lawful object, and not hereby expressly to be void." 1. Proper offer and proper acceptance There must be an agreement based on a lawful offer made by person to another and lawful acceptance of that offer by the letter. Sections 3 to 9 of the Contract Act, 1872 lay down the rules for making valid acceptance. 2. Lawful consideration An agreement to form a valid contract should be supported by consideration. Consideration means something in return (quid pro quo). It can be cash, kind, an act or abstinence. It can be past, present or future. However, consideration should be real and lawful and not fictional.

The Indian Contract Act

Essentials of a valid contract:
3. Capacity of parties to Contract In order to make a valid contract the parties to it must be competent to be contracted. According to section 11 of the Contract Act, a person is considered to be competent to contract if he satisfies the following criterion: The person has reached the age of majority. The person is of sound mind. The person is not disqualified from contracting by any law. 4. Free Consent To constitute a valid contract there must be free and genuine consent of the parties to the contract. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake. 5. Lawful Object and Agreement The object of the agreement must not be illegal or unlawful. 6. Agreement not declared void or illegal Agreements which have been expressly declared void or illegal by law are not

The Indian Contract Act

Essentials of a valid contract:
7. Intention To Create Legal Relationships When the two parties enter into an agreement, there must be intention to create a legal relationship between them. If there is no such intention on the part of the parties. There is no contract between them. Agreements of a social or domestic nature do not contemplate legal relationship;as such they are not contracts. 8. Certainty, Possibility Of Performance 9. Legal Formalities 10. By surety

The Indian Contract Act

Types of contracts:
On the basis of validity: 1. Valid contract: An agreement which has all the essential elements of a contract is called a valid contract. A valid contract can be enforced by law. 2. Void contract[Section 2(g)]: A void contract is a contract which ceases to be enforceable by law. A contract when originally entered into may be valid and binding on the parties. It may subsequently become void. There are many judgments which have stated that where any crime has been converted into a "Source of Profit" or if any act to be done under any contract is opposed to "Public Policy" under any contractthan that contract itself cannot be enforced under the law.

The Indian Contract Act

Types of contracts:
On the basis of validity:
3. Voidable contract[Section 2(i)]: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a voidable contract. If the essential element of free consent is missing in a contract, the law confers right on the aggrieved party either to reject the contract or to accept it. However, the contract continues to be good and enforceable unless it is repudiated by the aggrieved party. 4. Illegal contract: A contract is illegal if it is forbidden by law; or is of such nature that, if permitted, would defeat the provisions of any law or is fraudulent; or involves or implies injury to a person or property of another, or court regards it as immoral or opposed to public policy. These agreements are punishable by law. These are void-ab-initio. All illegal agreements are void agreements but all void agreements are not illegal. 5. Unenforceable contract: Where a contract is good in substance but because of some technical defect cannot be enforced by law is called

The Indian Contract Act

Types of contracts:
On the basis of formation: 1. Express contract: Where the terms of the contract are expressly agreed upon in words (written or spoken) at the time of formation, the contract is said to be express contract. 2. Implied contract: An implied contract is one which is inferred from the acts or conduct of the parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise than in words, promise is said to be implied. 3. Quasi contract: A quasi contract is created by law. Thus, quasi contracts are strictly not contracts as there is no intention of parties to enter into a contract. It is legal obligation which is imposed on a party who is required to perform it. A quasi contract is based on the principle that a person shall not be allowed to enrich himself at the expense of another.

The Indian Contract Act

Types of contracts:
On the basis of formation: Examples claim for necessaries supplied to person incapable of contracting or on his account Reimbursement of person paying money due to another, in payment of which he is interested obligation of person enjoying benefit of non gratuitous act Responsibility of finder of goods Liability of person to whom money is paid or thing delivered

The Indian Contract Act

Types of contracts:
On the basis of performance: 1. Executed contract: An executed contract is one in which both the parties have performed their respective obligation. 2. Executory contract: An executory contract is one where one or both the parties to the contract have still to perform their obligations in future. Thus, a contract which is partially performed or wholly unperformed is termed as executory contract. 3. Unilateral contract: A unilateral contract is one in which only one party has to perform his obligation at the time of the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the contract comes into existence. 4. Bilateral contract: A bilateral contract is one in which the obligation on both the parties to the contract is outstanding at the time of the formation of the contract. Bilateral contracts are also known as contracts with executory consideration.

The Indian Contract Act

Offer: Proposal is defined under section 2(a) of the Indian
contract Act, 1872 as "when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtain the assent of that other to such act or abstinence, he is said to make a proposal/offer". Thus, for a valid offer, the party making it must express his willingness to do or not to do something. But mere expression of willingness does not constitute an offer.

Classification of Offer
1. General Offer: Which is made to public in general. 2. Special Offer: Which is made to a definite person. 3. Cross Offer: Exchange of identical offer in ignorance of each other. 4. Counter Offer: Modification and Variation of Original offer. 5. Standing, Open or Continuing Offer: Which is open for a specific period of time.

The Indian Contract Act

Classification of Offer
The offer must be distinguished from an invitation to offer. Invitation to offer "An invitation to offer" is only a circulation of an invitation to make an offer, it is an attempt to induce offers and precedes a definite offer. Acceptance of an invitation to an offer does not result in formation of a contract and only an offer emerges in the process of negotiation. A statement made by a person who does not intend to bound by it but, intends to further act, is an invitation to offer.

The Indian Contract Act

Void Agreements
A void contract, also known as a void agreement, is not actually a contract. A void contract cannot be enforced by law. Void contracts are different from voidable contracts, which are contracts that may be (but not necessarily will be) nullified. An agreement to carry out an illegal act is an example of a void contract or void agreement. For example, a contract between drug dealers and buyers is a void contract simply because the terms of the contract are illegal. In such a case, neither party can go to court to enforce the contract. A void contract is void ab initio, i e from the beginning while a voidable contract can be voidable by one or all of the parties. A contract can also be void due to the impossibility of its performance. E g: If a contract is formed between two parties A & B but during the performance of the contract the object of the contract becomes impossible to achieve (due to action by someone or something other than the contracting parties), then the contract cannot be enforced in the court of law and is thus void. A void contract can be one in which any of the prerequisites of a valid contract is/are absent for example if there is no contractual capacity, the contract can be deemed as void. In fact, void means that a contract does not exist at all. The law can not enforce any legal obligation to either party especially the disappointed

The Indian Contract Act

Void Agreements
Features of Void agreements: An agreement made by incompetent parties (Incapacitated Person) is void. Any agreement with a bilateral mistake is void. Agreements which have unlawful consideration is void. Agreement with a unlawful object is void. Agreements made without consideration is void. Agreement in restraint of marriage of any major person is void (absolute restriction). Agreement in restraint of trade is void.(reasonable reason) Agreement in restraint of legal proceedings is void. An agreement the terms of which are uncertain is void. An agreement by way of wager (betting/gambling) is void. An agreement contingent upon the happening of an impossible event is void. Agreement to do impossible acts is void.

The Indian Contract Act

Performance of contracts:
Execution of a contract by which the contracting parties are automatically discharged of their obligations under it. Although contracts usually call for full and precise performance, a substantial performance may be acceptable under certain circumstances, on a pro rata basis, or on payment of damages for the unfinished or defective performance. Contracts must be performed by: The promisor The Agent The representative

The Indian Contract Act

Breech of contracts and its remedies:
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. If the party does not fulfil his contractual promise, or has given information to the other party that he will not perform his duty as mentioned in the contract or if by his action and conduct he seems to be unable to perform the contract, he is said to breach the contract. Minor breaches: In a "minor" breach (a partial breach or immaterial breach or where there has been substantial performance), the non-breaching party cannot sue for specific performance, and can only sue for actual damages. Suppose a homeowner hires a contractor to install new plumbing and insists that the pipes, which will ultimately be hidden behind the walls, must be red. The contractor instead uses blue pipes that function just as well. Although the contractor breached the literal terms of the contract, the homeowner cannot ask a court to order the contractor to replace the blue

The Indian Contract Act

Breech of contracts and its remedies:
The homeowner can only recover the amount of his or her actual damages. In this instance, this is the difference in value between red pipe and blue pipe. Since the color of a pipe does not affect its function, the difference in value is zero. Therefore, no damages have been incurred and the homeowner would receive nothing. However, had the pipe colour been specified in the agreement as a condition, a breach of that condition would constitute a "major" breach. For example, when a contract specifies time is of the essence and one party to the contract fails to meet a contractual obligation in a timely fashion, the other party could sue for damages for a major breach. Material breach: A material breach is any failure to perform that permits the other party to the contract to either compel performance, or collect damages because of the breach. If the contractor in the above example had been instructed to use copper pipes, and instead used iron pipes that would not last as long as the copper pipes would have lasted, the homeowner can recover the cost of actually correcting the breach - taking out the iron pipes and

The Indian Contract Act

Breech of contracts and its remedies:
There are exceptions to this. Legal scholars and courts often state that the owner of a house whose pipes are not the specified grade or quality (a typical hypothetical example) cannot recover the cost of replacing the pipes for the following reasons: 1. Economic waste. The law does not favor tearing down or destroying something that is valuable (almost anything with value is "valuable"). In this case, significant destruction of the house would be required to completely replace the pipes, and so the law is hesitant to enforce damages of that nature.[3] 2. Pricing in. In most cases of breach, a party to the contract simply fails to perform one or more terms. In those cases, the breaching party should have already considered the cost to perform those terms and thus "keeps" that cost when they do not perform. That party should not be entitled to keep that savings. However, in the pipe example the contractor never considered the cost of tearing down a house to fix the pipes, and so it is not reasonable to expect them to pay damages of that nature. Most homeowners would be unable to collect damages that compensate

The Indian Contract Act

Breech of contracts and its remedies:
them for the loss of value in the house. For example, say the house is worth $125,000 with copper and $120,000 with iron pipes. The homeowner would be able to collect the $5,000 difference, and nothing more. The Restatement (Second) of Contracts lists the following criteria can be used to determine whether a specific failure constitutes a breach: In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

The Indian Contract Act

Breech of contracts and its remedies:
Fundamental breach: A fundamental breach (or repudiatory breach) is a breach so fundamental that it permits the aggrieved party to terminate performance of the contract. In addition that party is entitled to sue for damages. Anticipatory breach: A breach by anticipatory repudiation (or simply anticipatory breach) is an unequivocal indication that the party will not perform when performance is due, or a situation in which future non-performance is inevitable. An anticipatory breach gives the non-breaching party the option to treat such a breach as immediate, and, if repudiatory, to terminate the contract and sue for damages (without waiting for the breach to actually take place). For example, A contracts with B on January 1 to sell 500 quintals of wheat and to deliver it on May 1. Subsequently, on April 15 A writes to B and says that he will not deliver the wheat. B may immediately consider the breach to have occurred and file a suit for damages for the scheduled performance, even though A has until May 1 to perform.
Example: if Company A refuses to pay substantial interim payments to Company B, Company B can begin legal action due to anticipatory breach. Company B could also stop performing its contractual obligation, potentially saving time and or money.

The Indian Contract Act

Breech of contracts and its remedies:
Remedies for Breach Of Contract : 1.Rescission of the Contract . 2. Suit for specific performance. 3.Suit for Damages,. 4.Suit for injunction. 5.Suit upon quantum merit.

The Indian Contract Act

Quasi Contracts:
A quasi-contract (or implied-in-law contract or constructive contract) is a fictional contract created by courts for equitable, not contractual, purposes. A quasi-contract is not an actual contract, but is a legal substitute formed to impose equity between two parties. The concept of a quasi-contract is that of a contract that should have been formed, even though in actuality it was not. It is used when a court finds it appropriate to create an obligation upon a non-contracting party to avoid injustice and to ensure fairness. It is invoked in circumstances of and is connected with the concept of restitution. Generally the existence of an actual or implied-in-fact contract is required for the defendant to be liable for services rendered, and a person who provides a service uninvited is an officious intermeddler who is not entitled to compensation.

The Indian Contract Act

Quasi Contracts:
"Would-be plaintiffs cannot deliver unordered goods or services and demand payment for the benefit....A corollary is that one who does have an enforceable contract is bound by the contract's terms: subject to a few controversial exceptions, she cannot sue for restitution of the value of benefits conferred..." However, in many jurisdictions under certain circumstances plaintiffs may be entitled to restitution under quasi-contract (as in the example of Louisiana or Oklahoma below). They are used as remedies for unjust enrichment, management of another's affairs, or payment of a thing not due. Quasi-contracts are defined to be "the lawful and purely voluntary acts of a man, from which there results any obligation whatever to a third person, and sometime a reciprocal obligation between the parties. Quasi-contracts are stipulated in the 3rd Book, Title IV, Chapter 1 of the French Civil Code (articles 1371-1381). One authority defines a quasicontract as "A licit and voluntary act from which derives obligations subject to a regime close to the contractual one imposing on the author of the act and a third party, not-bound by a contract.