Tag: Business Ethics

Management Notes

Organizational Decision Making

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Decision making can be defined as selecting between alternative courses of action. Management decision making concerns the choices faced by managers within their duties in the organization. Making decisions is an important aspect of planning. Decision making can also be classified into three categories based on the level at which they occur.

Strategic Decisions: These decisions establish the strategies and objectives of the organization. These types of decisions generally occur at the highest levels of organizational management.

Tactical Decisions: Tactical decisions concern the tactics used to accomplish the organizational objectives. Tactical decisions are primarily made by middle and front-line managers.

Operational Decisions: Operational decisions concern the methods for carrying out the organizations delivery of value to customers. Operational decisions are primarily made by middle and front-line managers.

Decisions can be categorized based on the capacity of those making the decision.

Personal Decisions: Personal decisions are those primarily affecting the individual though the decision may ultimately have an effect on the organization as a result of its effect on the individual. These types of decisions are not made within a professional capacity. These decisions are generally not delegated to others.

Organizational Decisions: An organizational decision is one that relates or affects the organization. It is generally made by a manager or employee within their official capacity. These decisions are often delegated to others.

Strategies:

Marginal Analysis

Marginal analysis helps organizations allocate resources to increase profitability and benefits and reduce costs. An example from indeed.com is if a company has the budget to hire an employee, a marginal analysis may show that hiring that person provides a net marginal benefit because the ability to produce more products outweighs the increase in labor costs.

SWOT Diagram

This tool helps a manager study a situation in four quadrants:

  • Strengths: Where does the organization excel compared to its competition? Consider the internal and external strengths.
  • Weaknesses: What could the organization improve?
  • Opportunities: How can the organization leverage its strengths to create new avenues for success.
  • Threats: Determine what obstacles prevent the organization from achieving its goals.

Decision Matrix

A decision matrix can provide clarity when dealing with different choices and variables. It is like a pros/cons list, but decision-makers can place a level of importance on each factor. According to Dashboards, to build a decision matrix:

  • List your decision alternatives as rows
  • List relevant factors as columns
  • Establish a consistent scale to assess the value of each combination of alternatives and factors
  • Determine how important each factor is in choosing a final decision and assign weights accordingly
  • Multiply your original ratings by the weighted rankings
  • Add up the factors under each decision alternative
  • The highest-scoring option wins

Pareto Analysis

The Pareto Principle helps identify changes that will be the most effective for an organization. It’s based on the principle that 20 percent of factors frequently contribute to 80 percent of the organization’s growth. For example, suppose 80 percent of an organization’s sales came from 20 percent of its customers. A business can use the Pareto Principle by identifying the characteristics of that 20 percent customer group and finding more like them. By identifying which small changes have the most significant impact, an organization can better prioritize its decisions and energies.

Steps:

Make long-term goals and use them to measure your decisions.

All too often, organizations find themselves endlessly running around in pursuit of short-term goals. Money that has been committed to a year-long project gets overrun or set off because flashy or short-term priorities arise and resources are redirected. As a result, you typically end up with an awful lot of confusion and a lack of overall progress.

To avoid this problem, nail down your high-priority, long-term goals from the outset. Then as your organization makes decisions, ask yourself whether what you’re doing aligns with those goals. This should be a constant process, returning again and again to check your organizational activity against your goals.

When you apply this method successfully, you will engage more reliably in short-term projects that support your long-term goals. Over time, this will push your organization forward.

Align your goals with your core values

Ideally, these should flow from your organization’s mission and core values. Your organization’s goals may evolve over time, but its values should be much less mutable.

Your organizational values confer a coherent sense of identity and continuity to your organization. They should be clearly understood and agreed upon by your decision-makers. As you evaluate your goals, make sure that they are aligned with your core values.

Assess (and reassess) spending

One way to evaluate your priorities as they are being realized today is to take a look at your spending. Often, you may think you’re prioritizing a particular goal or effort, while your budget tells a different story.

Make sure your organizational spending reflects your identified priorities. If not, you need to take a second look. And as with any such check-in, it’s essential to make this a regular assessment to continuously verify that you’re on track.

Understand the impacts of your decisions.

Some decisions may be discrete and routine, having neat boundaries and only significantly impacting the matter directly at hand. But more often, organizational decisions may have wide-ranging consequences, especially if they will touch on policy or processes.

As your organization considers varying possibilities, make sure to weight second and third-order effects. These consequences can provide crucial context for the decision at hand.

Remember your personnel.

Organizations tend to depend on the quality of their employees to succeed. If your decisions make it difficult for your employees to be productive in their work environment, it will damage your prospects for long-term success even if your decisions appear to advance a short-term goal.

Evaluate the effect your decisions will have on your employees’ ability to perform their jobs and factor this component into your decisions accordingly.

The most effective decision-making should lead to improved work toward your long-term goals, which should be driven by core values. You should constantly reevaluate your spending and assess likely consequences of your actions. If you follow these steps thoroughly, you will have assembled a framework for successful organizational decision-making.

Advantages of Decision Making

Increase People’s Participation

Decision making in the organisation is done by a group of peoples working in the organisation. It is not carried out by a single individual rather than by a group of people. Each people actively participates in decision making of the organisation. They are free to present their creative ideas without any boundations.

Also, none of them is individually criticized for any failure but the whole group is responsible to handle. This increases the participation level of different people in the organisation.

Gives More Information

Good decision-making process acquires enough information before taking any action. In decision making, there is a large number of peoples involved. It is undertaken by the whole group rather than by a single individual. Each person gives his perspective to handle a particular situation.

They all represent there facts and figures according to their skill. This generates enough information which can be used for better understanding of the situation. This helps managers in taking corrective decisions.

Provide More Alternatives

Companies are able to get different alternatives for a particular situation through group decision making. There are different people working as a group for proper decisions. Each person looks differently to a particular problem.

They give their own perspectives and ideas for it. This way there are different options available to choose. All the alternatives are properly analysed in light of handling situation. The best one is chosen to arrive at a better result.

Improves the Degree of Acceptance and Commitment

Companies always face the chances of conflict among its staff working in the organisation. Through group decision making each person gets equal right to share his views and ideas.

Here decisions are not imposed on the peoples but are created with their participation. It develops a sense of loyalty and belongingness among people towards the business. They easily accept the decisions taken and are committed to their roles.

Helps In Strengthening the Organisation

It helps in improving the strength of the organisation. Decision making provides a platform to each individual working in an organisation to equally represent their ideas. Everybody gets an equal right to take part in managing the organisation.

It develops a sense of cooperation and unity among individuals working there. They all come together and work towards the accomplishment of the company’s goals. This increases the overall productivity of the organisation and strengthens its overall structure.

Improves the Quality of Decisions

Decision making helps in taking quality decisions at the right time. There are different experts engaged by organisations in their decision-making group. These peoples have through knowledge and creative thinking.

They analyse each and every aspect of every alternative available to them for handling situations. Best among the different alternatives available is chosen. It enables in quality decision making which helps in easy attainment of objectives.

Limitations:

Consultation ambiguity: This can be a scenario where a group of employees all feel like they have a vote in a decision or when a manager asks for input but doesn’t consider a group’s views. It’s important for a manager to solicit feedback but to make sure that contributors understand it’s the manager’s final decision.

Avoiding discomfort: Sound management decision making requires leaders who do not confuse their need for comfort with making the best decision. Some of the most effective decisions involve a degree of discomfort for the manager.

Appearing indecisive: Sometimes, a systematic decision making process has a downside. Being too rigorous in evaluating every possible angle can draw out the process and open the risk of appearing indecisive. Keep stakeholders informed about the timeline for a decision.

Blind spots: People have particular perspectives and ways of thinking that can create blind spots, which may be important for an effective decision but cannot be readily apparent. It can be helpful to seek input from trusted colleagues to provide a different perspective.

Groupthink: This occurs when a group’s members want to minimize conflict and reach a comfortable decision at the expense of a critical evaluation of other ideas and viewpoints. It’s important to explore alternatives a group may not have considered.

Management Notes

Environmental Scanning, Importance, Factors, Technique

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Environmental Scanning is the process of gathering information about events and their relationships within an organization’s internal and external environments. The basic purpose of environmental scanning is to help management determine the future direction of the organization.

Every organization has an internal and external environment. In order for the organization to be successful, it is important that it scans its environment regularly to assess its developments and understand factors that can contribute to its success. Environmental scanning is a process used by organizations to monitor their external and internal environments.

The purpose of the scan is the identification of opportunities and threats affecting the business for making strategic business decisions. As a part of the environmental scanning process, the organization collects information regarding its environment and analyzes it to forecast the impact of changes in the environment. This eventually helps the management team to make informed decisions.

The purpose of the scan is the identification of opportunities and threats affecting the business for making strategic business decisions. As a part of the environmental scanning process, the organization collects information regarding its environment and analyzes it to forecast the impact of changes in the environment. This eventually helps the management team to make informed decisions.

As seen from the figure above, environmental scanning should primarily identify opportunities and threats in the organization’s environment. Once these are identified, the organization can create a strategy which helps in maximizing the opportunities and minimizing the threats. Before looking at the important factors for environmental scanning, let’s take a quick peek at the components of an organization’s environment.

Importance of Environmental Scanning

  1. SWOT Analysis

As we saw previously in the environmental scanning meaning, it is a complex process. The close study of the internal and external environment of an organization will reveal some very valuable information, i.e. the strengths, weaknesses, opportunities, and threats of a company.

Let us take a brief look.

  • Strength: After analysis of the internal environment of a company, we will be able to identify the strengths that give the company a competitive advantage. The entrepreneur can use this information to maximise these strengths and earn more profits.
  • Weakness: Study of the internal environment also point out the weaknesses of the company. For the growth and stability of the company, these identified weaknesses must be corrected without delay.
  • Opportunity: Analysis of the external environment helps with the identification of possible opportunities. The entrepreneur can prepare to capitalize on these.
  • Threats: Analysis of the external environment will also help in the identification of any business threats from competitors or any other factors. The company can come up with a strategy to diffuse such threats or minimize its impact.
  1. Best Use of Resources

Environmental scanning helps us conduct a thorough analysis and hence leads to the optimum utilization of resources for the business. Whether it is capital resources, human resources or other factors of production, their best use and utilization is very important for any business. Environmental scanning will help us avoid any wastages and allow for the most effective and economical use of these resources.

  1. Survival and Growth of the Business

It is a very competitive world and for any business to survive and thrive it is a difficult task. But if the business employs all the techniques of environmental scanning it can gain a significant advantage. It will allow the firm to prepare for future threats and opportunities while at the same time eliminating their weaknesses and improving on their strengths.

  1. Planning for Long Term

A business must have a plan for both short term and long term. The planning of long-term objectives can only occur after proper analysis and environmental scanning meaning. This will help the entrepreneur plan the necessary business strategy.

  1. Helps in Decision Making

Decision making is the choice of the best alternative done by management. Environmental scanning allows the firm to make the best decision keeping in mind the success and growth of the business. They point out all the threats and weaknesses. And they also identify the strengths of the firm.

Important Factors for Environmental Scanning

  • Events

These are specific occurrences which take place in different environmental sectors of a business. These are important for the functioning and/or success of the business. Events can occur either in the internal or the external environment. Organizations can observe and track them.

  • Trends

As the name suggests, trends are general courses of action or tendencies along which the events occur. They are groups of similar or related events which tend to move in a specific direction. Further, trends can be positive or negative. By observing trends, an organization can identify any change in the strength or frequency of the events suggesting a change in the respective area.

  • Issues

In wake of the events and trends, some concerns can arise. These are Issues. Organizations try to identify emerging issues so that they can take corrective measures to nip them in the bud. However, identifying emerging issues is a difficult task. Usually, emerging issues start with a shift in values or change in which the concern is viewed.

  • Expectations

Some interested groups have demands based on their concern for issues. These demands are Expectations.

Business Environment Scanning Techniques:

  • SWOT Analysis:

Assessing Strengths, Weaknesses, Opportunities, and Threats helps in understanding internal capabilities and external factors affecting the business.

  • PESTLE Analysis:

Examining Political, Economic, Social, Technological, Legal, and Environmental factors provides a comprehensive view of the external environment.

  • Market Research:

Gathering data on market trends, customer preferences, and competitor activities through surveys, interviews, and data analysis helps in understanding the market dynamics.

  • Competitor Analysis:

Analyzing competitors’ strategies, strengths, weaknesses, and market positioning provides insights into competitive threats and opportunities.

  • Scenario Planning:

Developing scenarios of possible future events and assessing their potential impact on the business helps in preparing for different eventualities.

  • Benchmarking:

Comparing the organization’s performance and practices with industry standards and best practices helps in identifying areas for improvement and staying competitive.

  • Trend Analysis:

Tracking long-term trends in technology, consumer behavior, regulatory changes, etc., helps in anticipating future developments and adapting the business strategy accordingly.

  • Industry Reports and Publications:

Keeping abreast of industry reports, market studies, and relevant publications provides valuable insights into industry trends, challenges, and opportunities.

  • Networking:

Engaging with industry experts, attending conferences, and participating in industry forums helps in staying informed about the latest developments and building valuable connections.

  • Technology Monitoring:

Monitoring technological advancements relevant to the business helps in identifying opportunities for innovation and potential disruptions.

  • Global Analysis:

Understanding global economic trends, geopolitical developments, and international trade policies helps in assessing global opportunities and risks.

  • Regulatory Analysis:

Keeping track of changes in regulations and compliance requirements helps in identifying potential regulatory risks and opportunities.

  • Consumer Feedback:

Gathering feedback from customers through surveys, reviews, and social media helps in understanding customer preferences and improving products or services.

  • Internal Reports and Feedback:

Leveraging internal data and feedback from employees, managers, and stakeholders helps in identifying internal strengths, weaknesses, and areas for improvement.

  • Environmental Scanning Tools:

Utilizing specialized software and tools for environmental scanning, such as automated news aggregators, social media monitoring tools, and data analytics platforms, helps in efficiently gathering and analyzing relevant information.

Management Notes

Networking of Computers, Client Server LAN, Wide Area Network (WAN)

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A computer network is a system in which multiple computers are connected to each other to share information and resources.

Characteristics of a Computer Network

  • Share resources from one computer to another.
  • Create files and store them in one computer, access those files from the other computer(s) connected over the network.
  • Connect a printer, scanner, or a fax machine to one computer within the network and let other computers of the network use the machines available over the network.

NODA

A node is any physical device within a network of other tools that’s able to send, receive, or forward information. A personal computer is the most common node. It’s called the computer node or internet node.

Modems, switches, hubs, bridges, servers, and printers are also nodes, as are other devices that connect over Wi-Fi or Ethernet. For example, a network connecting three computers and one printer, along with two more wireless devices, has six total nodes.

Nodes within a computer network must have some form of identification, like an IP address or MAC address, for other network devices to recognize it. A node without this information, or one that’s offline, no longer functions as a node.

In telecommunications networks, a node is either a redistribution point or a communication endpoint. The definition of a node depends on the network and protocol layer referred to. A physical network node is an electronic device that is attached to a network, and is capable of creating, receiving, or transmitting information over a communications channel. A passive distribution point such as a distribution frame or patch panel is consequently not a node.

Network nodes are the physical pieces that make up a network. They usually include any device that both receives and then communicates information. But they might receive and store the data, relay the information elsewhere, or create and send data instead.

For example, a computer node might back up files online or send an email, but it can also stream videos and download other files. A network printer can receive print requests from other devices on the network, while a scanner can send images back to the computer. A router determines which data goes to which devices that request file downloads within a system, but it can also send requests out to the public internet.

Client Server LAN

On a client/server network, every computer has a distinct role: that of either a client or a server. A server is designed to share its resources among the client computers on the network. Typically, servers are located in secured areas, such as locked closets or data centers (server rooms), because they hold an organization’s most valuable data and do not have to be accessed by operators on a continuous basis. The rest of the computers on the network function as clients.

The components of a client/server LAN.

Wide Area Network (WAN)

A wide area network (WAN) is a telecommunications network that extends over a large geographical area for the primary purpose of computer networking. Wide area networks are often established with leased telecommunication circuits.

Business, as well as education and government entities use wide area networks to relay data to staff, students, clients, buyers and suppliers from various locations across the world. In essence, this mode of telecommunication allows a business to effectively carry out its daily function regardless of location. The Internet may be considered a WAN.

Similar types of networks are personal area networks (PANs), local area networks (LANs), campus area networks (CANs), or metropolitan area networks (MANs) which are usually limited to a room, building, campus or specific metropolitan area, respectively.

Management Notes

Theory of interest

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1. Productivity Theory:

According to productivity theory, interest can be defined as a reward for availing the services of capital for the production purpose.

Labor that is having good amount of capital produces more as compared to the labor who is not assisted by good amount of capital.

For example, farmer having tractor to plough the field produces more as compared to the farmer who does not have it. Thus, interest is the payment for the productivity of capital.

However, the productivity theory is criticized on the following grounds:

  1. Focuses only on the causes for what the interest is paid, not on the determination of interest rates.
  2. Assumes that interest is paid due to the productivity of capital. In such a case, pure interest should vary as per the productivity of the capital. However, pure interest is the same in money market during the same period of time.
  3. Lays emphasis on the demand of interest, but ignores the supply side of capital.
  4. Fails to explain how the interest is paid for the loan borrowed for consumption purposes.

2. Abstinence or Waiting Theory:

The abstinence theory was propounded by Senior. According to him, interest is a reward for abstinence. When an individual saves money out of his/her income and lends it to other individual, he/she makes sacrifice. The term sacrifice implies that the individual refrains from consuming his/her whole income that he/she could spent easily. Senior advocated that abstaining from consumption is unpleasant. Therefore, the lender must be rewarded for this. Thus, as per Senior, interest can be regarded as the reward for refraining from the use of capital.

Abstinence theory was also criticized by a number of economists. According to the theory, an individual feels unpleasant when they save as it reduces his/her consumption. However, rich people do not feel unpleasant while saving because they are able to meet their requirements.

Therefore, Marshall has replaced the term abstinence with waiting and described saving in terms of waiting. He states that saving is done by transferring the present requirement to the future and the person needs to wait for meeting those requirements. However, people do not want to wait rather they are motivated to save money by providing a certain amount of interest.

3. Austrian or Agio Theory:

Austrian theory is also termed as psychological theory of interest. This theory was advocated by John Rae and Bohm Bawerk in an Austrian school. According to Austrian theory, interest came into existence because present goods are preferred over future goods. Therefore, the present goods have premium with them in the form of interest. In other words, present satisfaction is of greater concern as compared to future satisfaction.

Therefore, future satisfaction has certain type of discount if compared with present satisfaction. The interest is the discounted amount that is required to be paid for motivating people to invest or transfer their present requirements to future. For example, an individual has to make a choice between two options.

He/she can either have Rs. 500 now or the same amount after a year. In such a case, he/she would prefer to have Rs. 500 in present. However, in case, the individual has a choice of getting Rs. 500 in present and Rs. 600 after one year.

In such a case, he/she would be more inclined toward getting Rs. 600 after a year. Thus, the extra payment of Rs. 100 would compensate the sacrifice involved in delaying his/her present satisfaction. The extra payment of Rs. 100 in the given case is considered as interest.

Agio theory’ has been criticized by various economists on the following grounds:

  1. Lays too much emphasis on the supply aspect and ignores the demand aspect
  2. Does not focus on the determination of rate of interest

4. Classical or Real Theory:

Classical theory helps in the determination of rate of interest with the help of demand and supply forces. Demand refers to the demand of investment and supply refers to the supply of savings. According to this theory, rate of interest refers to the amount paid for saving.

Therefore, the rate of interest can be determined with the help of demand for saving money to be invested in the capital goods and the supply of savings. Let us understand the concept of demand of investment. Capital goods are used for the production of consumer goods and provide returns continuously for many years.

However, a certain degree of uncertainty is associated with capital goods due to their future use. In addition, operation and maintenance costs are involved in using capital goods. This makes organizations to calculate the net expected return on the marginal cost that is represented as the percentage of cost of capital good.

In case, an organization has similar type of capital goods, then the increase in one more capital good would not yield them high revenue. The increase in the rate of interest would result in the fall of demand of capital goods.

Figure-18 shows the demand for capital investment:

4.1

In Figure-18, MRP represents the marginal revenue productivity curve. When the demand of capital is OM, then the rate of interest is Or. The net rate of return becomes equal to the current rate of interest (Or) at the OM demand of capital.

In case, the rate of interest decreases to Or’, then the demand of capital increases to OM’. The net rate of return is equal to Or’ when the amount of capital demanded is OM’. The demand for capital goods increases with a decrease in the rate of interest.

On the other hand, the supply of capital increases by the amount saved by an individual and the saving is done by transferring the present requirement to the future requirement. The rate of interest would increase with the increase in the amount of saving by an individual.

The rate of interest can be determined with the help of demand of investment and supply of savings. It would be the point of equilibrium where demand and supply intersects each other or get equal.

Figure-19 shows the determination of rate of interest with the help of demand and supply curves:

4.2

In Figure-19, SS is the supply curve of saving and II is the demand curve of investment that intersect each other at Or rate of interest with quantity of saving and investment is OM. OM represents the amount that is lent, borrowed and used for investment. The rate of interest can be changed by changing the demand and supply of savings and investment.

The classical theory is criticized by Keynes due to various reasons, which are as follows:

  1. Assumes the full employment of resources, which is not true in reality. This is because if one resource is reduced from one production process, then it would be utilized for other production process. On the contrary, if resources are available in abundant, then there is no need to save them.
  2. Assumes that investment can be increased only when individuals reduce their consumption. This is because if the consumption is less, then the saving would increase, which would lead to the increase in investment. However, if the demand of capital goods decreases, then the incentive to produce capital goods would also decrease. This would result in the decrease of investment.
  3. Assumes that there is no change in the income level of an individual. Thus, according to classical theory, saving and investment become equal due to change in rate of interest. However, according to Keynes theory, savings and investment become equal because of changes occur in the income level of an individual.

5. Loanable Fund Theory:

Loanable fund theory agrees with the view that time preference plays an important role in determining the occurrence of interest. This theory is also termed as neo-classical theory of interest. According to neo-classical economists, interest is the amount paid for loanable funds. It focuses on the determination of rate of interest with the help of demand and supply of loanable funds in the credit market. Let us understand the concept of supply of loanable funds.

The supply of loanable funds depends on the following factors:

  1. Savings:

Act as one of the sources of loanable funds. The loanable funds in the form of saving are classified as ex-ante saving and Robertsonian sense. Ex-ante saving refers to the saving that an individual plans according to his/her expected income and expenditure in the starting of a year or financial year or for a month.

On the other hand, Robertsonian sense refers to the saving that is produced by taking the difference of previous period income and present period consumption. In both the types of savings, the savings are different at different rate of interest. Savings are dependent on the income level that vanes with the rate of interest. The increase in the rate of interest would result in the increase of the level of saving and vice versa.

In the context of organizations, the amount left after distributing the profit in the form of dividends is termed as the saving of an organization. The savings of an organization depends on the rate of interest prevailing in the market. Increased rate of interest would encourage organizations to increase savings instead of borrowing money from loan market.

2. Dishoarding:

Involves reduction in the money stock of an organization. Therefore, in the previous money stock, the liquidity of money is high that can be utilized in the present time as loanable funds. The higher the rate of interest, the more would be the money dishoarded and vice versa.

3. Credit by bank:

Refers to the loan provided by bank to the organizations. Banks can increase or decrease the money lend to an organization on the basis of certain criteria. The supply of loanable funds increases with the increase in the money created by banks. The supply curve is interest elastic for loanable funds. The higher the rate of interest, the more the bank would lend money and vice versa.

4. Disinvestment:

Refers to the situation when the existing capital goods of an organization are reduced or the stock of the organization is less than the previous stock. In such a condition, the fund that is used for the replacement purposes are used as loanable funds.

According to Bober, ”Disinvestment is encouraged by the somewhat by a high rate of interest on loanable funds. When the rate is high, some of the current capital may not produce a marginal revenue product to match this rate of interest. The firm may decide to let this capital run down and to put the depreciation finds in the ban market”

After determining the factors that influence the supply of loanable funds, let us study the demand for loanable funds. The demand for loanable funds depends on investment, consumption, and hoarding of income. Organizations require loanable funds to a greater extent for expanding the stock of capital goods, such as machines and buildings.

The demand for loanable funds depends on the extent to which organizations require loanable funds. Interest is the price at which the loanable funds can be bought. Organizations require loanable funds at which the net rate of return on capital goods is equal to the rate of interest.

The higher rate of interest demotivates organizations to buy capital goods or expand their stock of capital goods. Therefore, the demand of loanable funds is interest elastic for organizations; therefore, the demand curve would slope downwards.

Another major constituent of demand for loanable funds is the requirement of funds b) individuals for consumption. Generally, individuals require loanable fund when they desire to purchase something out of their budget or the consumer goods that they cannot afford from their present income. The lower the rate of interest, the higher would be the demand for loanable goods. Therefore, the demand for loanable funds is interest elastic for individuals; thus the demand curve slopes downward.

Along with organizations and individuals, there are some people who require loanable goods for hoarding purposes. Hoarding refers to the holding of some part of income by the individuals for future use. In hoarding, the supplier and buyer of loanable funds is the same person.

A person may want to hold funds when the rate of interest is low. On the contrary, he/she may use his/her funds by investing in new projects, when the rate of interest is high. Therefore, the demand of loanable funds is interest elastic for hoarding purpose; thus, the demand curve slopes downward.

Figure-20 shows the interaction between the demand and supply curve of loanable funds to reach at equilibrium position:

4.3

In Figure-20, DH represents dishoarding curve, BM is bank credit curve, S represents saving curve, and DI is disinvestment curve. LS represent the supply of loanable funds, which is produced by summing up the DH, BM, S, and DI curve. Similarly, H represents hoarding, C is consumption, and I is investment, which together form LD.

In Figure-20, LD is the demand for loanable funds. The point at which the demand and supply curve of loanable funds intersect each other is termed as equilibrium point (E). At point E, the rate of interest is OR with ON loanable funds. Therefore, OR would be the equilibrium rate of interest in the credit market.

Management Notes

WTO Structure, Functions and Roles in the Current International Business Scenario

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The establishment of the World Trade Organization (WTO) as the successor to ,the GATT on 1 January 1995 under the Marrakesh Agreement places the global trading system on a firm constitutional footing with the evolution of international economic legislation resulted through the Uruguay Round of GATT negotiations.

A remarkable feature of the Uruguay Round was that it paved the way for further liberalization of international trade with the fundamental shift from the negotiation approach to the institutional framework envisaged through transition from GATT to WTO Agreement.

The GATT 1947 and the WTO co-existed for the transitional period of one year in 1994. In January 1995, however, the WTO completely replaced the GATT. The membership of the WTO increased from 77 in 1995 to 127 by the end of 1996.

Structure of the World Trade Organization (WTO)

The organizational structure of the WTO is outlined in the Chart 1.

The Ministerial Conference (MC) is at the top of the structural organization of the WTO. It is the supreme governing body which takes ultimate decisions on all matters. It is constituted by representatives of (usually, Ministers of Trade) all the member countries.

The General Council (GC) is composed of the representatives of all the members. It is the real engine of the WTO which acts on behalf of the MC. It also acts as the Dispute Settlement Body as well as the Trade Policy Review Body.

There are three councils, viz.: the Council for Trade in Services and the Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS) operating under the GC. These councils with their subsidiary bodies carry out their specific responsibilities

Further, there are three committees, viz., the Committee on Trade and Development (CTD), the Committee on Balance of Payments Restrictions (CBOPR), and the Committee on Budget, Finance and Administration (CF A) which execute the functions assigned to them by e WTO Agreement and the GC.

The administration of the WTO is conducted by the Secretariat which is headed by the Director General (DG) appointed by the MC for the tenure of four years. He is assisted by the four Deputy Directors from different member countries. The annual budget estimates and financial statement of the WTO are presented by the DG to the CBFA for review and recommendations for the final approval by the GC.

Functions of the World Trade Organization (WTO)

The WTO consisting a multi-faced normative framework: comprising institutional substantive and implementation aspects.

The major functions of the WTO are as follows:

  1. To lay-down a substantive code of conduct aiming at reducing trade barriers including tariffs and eliminating discrimination in international trade relations.
  2. To provide the institutional framework for the administration of the substantive code which encompasses a spectrum of norms governing the conduct of member countries in the arena of global trade.
  3. To provide an integrated structure of the administration, thus, to facilitate the implementation, administration and fulfillment of the objectives of the WTO Agreement and other Multilateral Trade Agreements.
  4. To ensure the implementation of the substantive code.
  5. To act as a forum for the negotiation of further trade liberalization.
  6. To cooperate with the IMF and WB and its associates for establishing a coherence in trade policy-making.
  7. To settle the trade-related disputes.

Features of the WTO

The distinctive features of the WTO are:

(i) It is a legal entity

(ii) World Bank (WB) it is not an agent of the United Nations.

(iii) Unlike the IMF and the World Bank, there is no weighted voting, but all the WTO members have equal rights.

(iv) Unlike the GATT, the agreements under the WTO are permanent and binding to the member countries.

(v) Unlike the GATT, the WTO dispute settlement system is based not on dilatory but automatic mechanism. It is also quicker and binding on the members. As such, the WTO is a powerful body.

(vi) Unlike the GATT, the WTOs approach is rule- based and time-bound.

(vii) Unlike the GATT, the WTOs have a wider coverage. It covers trade in goods as well as services.

(viii) Unlike the GATT, the WTOs have a focus on trade-related aspects of intellectual property rights and several other issues of agreements.

(ix) Above all, the WTO is a huge organizational body with a large secretariat.

Objectives of the WTO

The purposes and objectives of the WTO are spelled out in the preamble to the Marrakesh Agreement.

In a nutshell, these are:

  1. To ensure the reduction of tariffs and other barriers to trade.
  2. To eliminate discriminatory treatment in international trade relations.
  3. To facilitate higher standards of living, full employment, a growing volume of real income and effective demand, and an increase in production and trade in goods and services of the member nations.
  4. To make positive effect, which ensures developing countries, especially the least developed secure a level of share in the growth of international trade that reflects the needs of their economic development.
  5. To facilitate the optimal use of the world’s resources for sustainable development.
  6. To promote an integrated, more viable and durable trading system incorporating all the resolutions of the Uruguay Round’s multilateral trade negotiations.

Above all, to ensure that linkages trade policies, environmental policies with sustainable growth and development are taken care of by the member countries in evolving a new economic order.

Management Notes

Consumer’s Surplus

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Consumer Surplus is the difference between the price that consumers pay and the price that they are willing to pay. On a supply and demand curve, it is the area between the equilibrium price and the demand curve

For example, if you would pay 76p for a cup of tea, but can buy it for 50p; your consumer surplus is 26p

Diagram of Consumer Surplus

Producer Surplus

  • This is the difference between the price a firm receives and the price it would be willing to sell it at.
  • Therefore it is the difference between the supply curve and the market price.

Consumer Surplus and Marginal Utility

The demand curve is derived from our marginal utility. If the marginal utility of a good is greater than the price, then that is our consumer surplus.

  1. Firms can reduce consumer surplus if they have market power. This enables them to raise prices above the competitive equilibrium.
  2. In a monopoly, a firm will maximise profits by reducing consumer surplus.
  3. Another way to reduce consumer surplus is to engage in price discrimination. Charging different prices to different groups of consumers. Those with inelastic demand will see their consumer surplus reduced. More on Price discrimination. To completely eliminate consumer surplus, a firm would need to engage in first-degree price discrimination this means charging the consumer the highest price they are willing to pay.
  4. To gain market power, a firm could advertise to create brand loyalty, this will make demand more inelastic

Significance of consumer surplus

  • In competitive markets, firms have to keep prices relatively low, enabling consumers to gain consumer surplus. If markets were not competitive, the consumer surplus would be less and there would be greater inequality.
  • A lower consumer surplus leads to higher producer surplus and greater inequality.
  • Consumer surplus enables consumers to purchase a wider choice of goods.
Management Notes

Performance of Contract, Rules regarding Performance of Contracts

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A contract places a legal obligation upon the contracting parties to perform their mutual promises, and it carries on until the discharge or termination of the contract. The most natural and usual mode of discharging a contract is to perform it. A person who performs a contract in accordance with its terms is discharged from any further obligations. As a rule, such performance entitles him to receive the other party’s performance.

Exact and complete performance by both the parties puts an end to the contract. In expecting exact performance, the courts mean that, performance must match contractual obligations. In requiring a contract to be complete, the law is merely saying that any work undertaken must be carried out to the end of the obligations.

A contract should be performed at the time specified and at the place agreed upon. When this has been accomplished, the parties are discharged automatically and the contract is discharged eventually. There are, however, many other ways in which a discharge may be brought about. For example, it may result from an excuse for non-performance. In certain cases attempted performance may also operate as a substitute for actual performance, and can result in complete discharge of the contract.

The term “Performance of contract” means that both, the promisor, and the promisee have fulfilled their respective obligations, which the contract placed upon them. For instance, A visits a stationery shop to buy a calculator. The shopkeeper delivers the calculator and A pays the price. The contract is said to have been discharged by mutual performance.

Section 27 of Indian contract Act says that:

The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or any other law.

Promises bind the representatives of the promisor in case of the death of the latter before performance, unless a contrary intention appears in the contract.

Thus, it is the primary duty of each contracting party to either perform or offer to perform its promise. For performance to be effective, the courts expect it to be exact and complete, i.e., the same must match the contractual obligations. However, where under the provisions of the Contract Act or any other law, the performance can be dispensed with or excused, a party is absolved from such a responsibility.

Example:

A promises to deliver goods to B on a certain day on payment of Rs 1,000. Aexpires before the contracted date. A‘s representatives are bound to deliver the goods to B, and B is bound to pay Rs 1,000 to A‘s representatives.

Types of Performance:

Performance, as an action of the performing may be actual or attempted.

1. Actual Performance

When a promisor to a contract has fulfilled his obligation in accordance with the terms of the contract, the promise is said to have been actually performed. Actual performance gives a discharge to the contract and the liability of the promisor ceases to exist. For example, A agrees to deliver10 bags of cement at B’s factory and B promises to pay the price on delivery. A delivers the cement on the due date and B makes the payment. This is actual performance.

Actual performance can further be subdivided into substantial performance, and partial Performance

  • Substantial Performance

This is where the work agreed upon is almost finished. The court then orders that the money must be paid, but deducts the amount needed to correct minor existing defect. Substantial performance is applicable only if the contract is not an entire contract and is severable. The rationale behind creating the doctrine of substantial performance is to avoid the possibility of one party evading his liabilities by claiming that the contract has not been completely performed. However, what is deemed to be substantial performance is a question of fact to be decided in both the case. It will largely depend on what remains undone and its value in comparison to the contract as a whole.

  • Partial Performance

This is where one of the parties has performed the contract, but not completely, and the other side has shown willingness to accept the part performed. Partial performance may occur where there is shortfall on delivery of goods or where a service is not fully carried out.

There is a thin line of difference between substantial and partial performance. The two following points would help in distinguishing the two types of performance.

Partial performance must be accepted by the other party. In other words, the party who is at the receiving end of the partial performance has a genuine choice whether to accept or reject. Substantial performance, on the other hand, is legally enforceable against the other party.

Payment is made on a different basis from that for substantial performance. It is made on quantum meruit, which literally means as much as is deserved. So, for example, if half of the work has been completed, half of the negotiated money would be payable. In case of substantial performance, the party that has performed can recover the amount appropriate to what has been done under the contract, provided that the contract is not an entire contract. The price is thus, often payable in such circumstances, and the sum deducted represents the cost of repairing defective workmanship.

2. Attempted Performance

When the performance has become due, it is sometimes sufficient if the promisor offers to perform his obligation under the contract. This offer is known as attempted performance or more commonly as tender. Thus, tender is an offer of performance, which of course, complies with the terms of the contract. If goods are tendered by the seller but refused by the buyer, the seller is discharged from further liability, given that the goods are in accordance with the contract as to quantity and quality, and he may sue the buyer for.breach of contract if he so desires. The rationale being that when a person offers to perform, he is ready, willing and capable to perform. Accordingly, a tender of performance may operate as a substitute for actual performance, and can effect a complete discharge.

Rules regarding Performance of Contracts:

In this regard, Section 38 of Indian Contract Act says:

‘Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract. For example, A contracts to deliver to B, 100 tons of basmati rice at his warehouse, on 6 December 2015. Atakes the goods to B‘s place on the due date during business hours, but B, without assigning any good reason, refuses to take the delivery. Here, A has performed what he was required to perform under the contract. It is a case of attempted performance and A is not responsible for non-performance of B, nor does he thereby lose his rights under the contract.’

Definition of Delivery

According to Section 2 (2) of the Sale of Goods Act, 1930, delivery means voluntary transfer of possession of goods from one person to another. Hence, if a person takes possession of goods by unfair means, then there is no delivery of goods. Having understood delivery, let’s look at the law on sales

Law on Sales

  • The Duty of the Buyer and Seller (Section 31)

It is the duty of the seller to deliver the goods and the buyer to pay for them and accept them, as per the terms of the contract and the law on sales.

  • Concurrency of Payment and Delivery (Section 32)

The delivery of goods and payment of the price are concurrent conditions as per the law on sales unless the parties agree otherwise. So, the seller has to be willing to give possession of the goods to the buyer in exchange for the price. On the other hand, the buyer has to be ready to pay the price in exchange for possession of the goods.

Rules Pertaining to the Delivery of Goods

The Sale of Goods Act, 1930 prescribes the following rules regarding delivery of goods:

1. Delivery (Section 33)

The delivery of goods can be made either by putting the goods in the possession of the buyer or any person authorized by him to hold them on his behalf or by doing anything else that the parties agree to.

2. Effect of part-delivery (Section 34)

If a part-delivery of the goods is made in progress of the delivery of the whole, then it has the same effect for the purpose of passing the property in such goods as the delivery of the whole. However, a part-delivery with an intention of severing it from the whole does not operate as a delivery of the remainder.

3. Buyer to apply for delivery (Section 35)

A seller is not bound to deliver the goods until the buyer applies for delivery unless the parties have agreed to other terms in the contract.

4. Place of delivery [Section 36 (1)]

When a sale contract is made, the parties might agree to certain terms for delivery, express or implied. Depending on the agreement, the buyer might take possession of the goods from the seller or the seller might send them to the buyer.

If no such terms are specified in the contract, then as per law on sales

  • The goods sold are delivered at the place at which they are at the time of the sale
  • The goods to be sold are delivered at the place at which they are at the time of the agreement to sell. However, if the goods are not in existence at such time, then they are delivered to the place where they are manufactured or produced.

5. Time of Delivery [Section 36 (2)]

Consider a contract of sale where the seller agrees to send the goods to the buyer, but not time of delivery is specified. In such cases, the seller is expected to deliver the goods within a reasonable time.

6. Goods in possession of a third party [Section 36 (3)]

If at the time of sale, the goods are in possession of a third party. Then there is no delivery unless the third party acknowledges to the buyer that the goods are being held on his behalf. It is important to note that nothing in this section shall affect the operation of the issue or transfer of any document of title to the goods.

7. Time for tender of delivery [Section 36 (4)]

It is important that the demand or tender of delivery is made at a reasonable hour. If not, then it is rendered ineffectual. The reasonable hour will depend on the case.

8. Expenses for delivery [Section 36 (5)]

The seller will bear all expenses pertaining to putting the goods in a deliverable state unless the parties agree to some other terms in the contract.

9. Delivery of wrong quantity (Section 37)

  • Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to the contracted quantity, then the buyer may reject the delivery. If he accepts it, then he shall pay for them at the contracted rate.
  • Sub-section 2 – If the seller delivers a larger quantity of goods as compared to the contracted quantity, then the buyer may accept the quantity included in the contract and reject the rest. The buyer can also reject the entire delivery. If he wants to accept the increased quantity, then he needs to pay at the contract rate.
  • Sub-section 3 – If the seller delivers a mix of goods where some part of the goods are mentioned in the contract and some are not, then the buyer may accept the goods which are in accordance with the contract and reject the rest. He may also reject the entire delivery.
  • Sub-section 4 – The provisions of this section are subject to any usage of trade, special agreement or course of dealing between the parties.

10. Installment deliveries (Section 38)

The buyer does not have to accept delivery in installments unless he has agreed to do so in the contract. If such an agreement exists, then the parties are required to determine the rights and liabilities and payments themselves.

11. Delivery to carrier [Section 36 (1)]

The delivery of goods to the carrier for transmission to the buyer is prima facie deemed to be ‘delivery to the buyer’ unless contrary terms exist in the contract.

12. Deterioration during transit (Section 40)

If the goods are to be delivered at a distant place, then the liability of deterioration incidental to the course of the transit lies with the buyer even though the seller agrees to deliver at his own risk.

13. Buyers right to examine the goods (Section 41)

If the buyer did not get a chance to examine the goods, then he is entitled to a reasonable opportunity of examining them. The buyer has the right to ascertain that the goods delivered to him are in conformity with the contract. The seller is bound to honor the buyer’s request for a reasonable opportunity of examining the goods unless the contrary is specified in the contract.

14. Acceptance of Delivery of Goods (Section 42)

A buyer is deemed to have accepted the delivery of goods when:

  • He informs the seller that he has accepted the goods; or
  • Does something to the goods which is inconsistent with the ownership of the seller; or
  • Retains the goods beyond a reasonable time, without informing the seller that he has rejected them.

15. Return of Rejected Goods (Section 43)

If a buyer, within his right, refuses to accept the delivery of goods, then he is not bound to return the rejected goods to the seller. He needs to inform the seller of his refusal though. This is true unless the parties agree to other terms in the contract.

16. Refusing Delivery of Goods (Section 44)

If the seller is willing to deliver the goods and requests the buyer to take delivery, but the buyer fails to do so within a reasonable time after receiving the request, then he is liable to the seller for any loss occasioned by his refusal to take delivery. He is also liable to pay a reasonable charge for the care and custody of goods.

Management Notes

Remedies for Breach of Contract, Remedies under Indian Contract Act 1872

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When a contract is legally formed, it binds both parties to fulfill their respective obligations. However, if one party fails to perform their duties as agreed, it results in a breach of contract. A breach can be either total or partial and may arise from refusal to perform, late performance, or defective performance. In such cases, the law provides remedies to the aggrieved party to ensure justice and restore their rights. These are known as remedies for breach of contract.

The term “remedies for breach of contract” refers to the legal solutions available to a party who suffers due to another’s failure to uphold contractual obligations. These remedies are intended to place the injured party in the position they would have been in had the contract been properly performed.

Remedies may include monetary compensation (damages), specific performance (compelling the defaulting party to fulfill the contract), injunctions (prohibiting further breach), rescission (canceling the contract), and restitution (restoring any benefits conferred). These remedies are governed by contract laws, such as the Indian Contract Act, 1872.

The objective of these remedies is not to punish the party at fault but to compensate the innocent party for the loss or inconvenience suffered. Courts assess the extent of damage, the nature of the contract, and the breach to determine the most appropriate remedy.

Objectives of remedies for breach of contract:

  • Restoration of Rights

One key objective of remedies for breach of contract is to restore the injured party to the position they would have enjoyed had the contract been performed as agreed. This means compensating them for losses and missed benefits. Courts aim to ensure that no party suffers unfair harm due to another’s failure. This restoration principle helps maintain the fairness and integrity of contractual obligations, ensuring that parties are made whole after a breach.

  • Compensation for Losses

Another primary objective is to compensate the aggrieved party for actual losses suffered due to the breach. This is typically achieved through the awarding of damages, which may be compensatory, nominal, or even consequential, depending on the nature of the breach. This financial restitution ensures that the innocent party does not bear the economic burden of the default and that the responsible party is held accountable for the consequences of their actions.

  • Enforcement of Legal Obligations

Remedies ensure that legal obligations under a contract are not taken lightly. When specific performance is awarded, the court directs the defaulting party to fulfill their contractual promise. This remedy is typically granted when monetary compensation is inadequate, especially in contracts involving unique goods or property. Enforcing obligations encourages compliance and reinforces the principle that agreements freely entered into must be respected and honored in a legal framework.

  • Prevention of Unjust Enrichment

Remedies also aim to prevent a breaching party from unjustly benefiting from their misconduct. If one party receives a benefit without fulfilling their promise, restitution or rescission can be granted. Restitution ensures that any advantage or gain acquired through the breach is returned to the rightful party. This discourages unethical behavior and reinforces that no one should profit from breaking the law or evading contractual responsibilities.

  • Deterrence Against Breach

An important objective of contract remedies is deterrence. By making breaches legally and financially burdensome, the legal system discourages parties from casually ignoring their contractual duties. When parties know that breaches carry consequences such as heavy damages or court orders, they are more likely to act in good faith. This fosters a culture of accountability and predictability, which is essential for smooth and reliable business transactions.

  • Encouragement of Settlements

The availability of remedies encourages parties to resolve disputes amicably before escalating to litigation. Knowing the legal outcomes and potential liabilities, parties often prefer negotiation or settlement to avoid lengthy court processes. This not only saves time and resources but also promotes mutual understanding. Thus, remedies serve as a backdrop that motivates out-of-court settlements while ensuring that legal recourse is always available if needed.

  • Promoting Business Confidence

By providing predictable and enforceable remedies, contract law boosts confidence among businesses and individuals. Parties are more willing to enter contracts when they trust that the legal system will protect their interests in case of non-performance. This assurance fosters economic growth and commercial stability. Remedies make contracts more than just moral obligations—they become enforceable legal commitments that support economic relationships.

  • Upholding the Sanctity of Contracts

Ultimately, remedies serve to uphold the sanctity of contracts. When breaches are addressed appropriately, it sends a clear message that contractual promises are legally binding. This strengthens the importance of honoring agreements and discourages arbitrary or dishonest behavior. The legal recognition of remedies supports the principle that contracts are foundational to personal, business, and societal interactions and must be respected at all levels.

Remedies under Indian Contract Act 1872:

The Indian Contract Act, 1872 provides comprehensive legal remedies available to an aggrieved party in the event of a breach of contract. A contract, being a legally binding agreement, imposes obligations on both parties. When one party fails to perform as promised, the other party is entitled to legal recourse. The objective of these remedies is to place the aggrieved party in a position as if the contract had been performed.

Below are the primary remedies available under the Act:

1. Rescission of Contract

Rescission refers to the cancellation of the contract by the aggrieved party. When a contract is rescinded, the parties are restored to their original positions as if the contract had never been made. According to Section 39, if a party refuses to perform or disables themselves from performing the contract, the other party may rescind the agreement. Rescission may also be granted when a contract is voidable due to misrepresentation, fraud, undue influence, or coercion.

Example: A agrees to deliver goods to B. If A fails to deliver, B may rescind the contract and is no longer obligated to pay.

2. Damages

Damages are the most common remedy for a breach of contract. It is monetary compensation awarded to the aggrieved party to cover the loss incurred due to the breach. Under Section 73 of the Indian Contract Act, the injured party is entitled to compensation for losses that naturally arise from the breach or those that both parties knew at the time of contract formation as likely to result from the breach.

Types of Damages:

  • Ordinary Damages: These are damages that arise naturally from the breach.
  • Special Damages: These are awarded for specific losses that were communicated and agreed upon at the time of contract.
  • Exemplary Damages: Awarded not just for compensation but also to punish the wrongdoer.
  • Nominal Damages: Symbolic damages awarded when there is a breach but no substantial loss.
  • Liquidated Damages: Pre-decided damages stated in the contract.

Example: If A contracts to deliver 100 bags of rice to B and fails, B can claim damages equal to the market difference if the price of rice increased.

3. Specific Performance

Specific performance is an equitable remedy wherein the court directs the breaching party to fulfill their part of the contract. This is granted when damages are not adequate to compensate the aggrieved party. As per the Specific Relief Act, 1963, specific performance is especially used in contracts involving sale of land, unique goods, or where damages cannot be calculated in monetary terms.

Example: A agrees to sell a rare painting to B. A later refuses. The court may compel A to perform the contract and deliver the painting.

4. Injunction

An injunction is a legal order restraining a person from doing a particular act. It is granted when breach involves violation of a negative covenant in the contract. The Indian Specific Relief Act also governs the granting of injunctions. These are preventive in nature, ensuring the breaching party does not continue with the breach.

Types of Injunctions:

  • Temporary Injunction: Granted during the pendency of a case.
  • Permanent Injunction: Granted as a final remedy upon case conclusion.

Example: If A agrees not to open a competing shop near B, but does so, the court may issue an injunction to prevent A from continuing operations.

5. Quantum Meruit

The term “Quantum Meruit” means “as much as earned” or “as much as deserved”. When a contract is discovered to be void, or when there has been partial performance by one party, that party may claim compensation for the work done or benefit conferred. It applies when:

  • A contract becomes void.
  • A contract is indivisible, but partial work is accepted.
  • One party is prevented from completing the contract by the other.

Example: A contractor is hired to build a house but is stopped midway. He may claim payment for the work completed under quantum meruit.

6. Restitution

Restitution aims to restore the injured party to their original position. It involves returning the benefits or consideration received. This remedy ensures that no party unjustly enriches themselves at the expense of another. Section 65 of the Indian Contract Act provides that when an agreement is discovered to be void, or when a contract becomes void, the party receiving any advantage under such agreement is bound to restore it or compensate the other party.

Example: A pays B in advance for goods, but the contract is later declared void. B must return the advance to A.

7. Reformation

Though not explicitly mentioned in the Indian Contract Act, reformation is a remedy under equity. It involves modifying the terms of the contract to reflect the true intention of the parties when a written contract fails to do so due to mistake or fraud. Indian courts occasionally apply this through equitable jurisdiction.

8. Suit Upon Quantum Meruit (Special Cases)

Apart from unjust enrichment, suits upon quantum meruit are particularly useful in cases where:

  • The contract is void, and services are rendered.
  • One party abandons or refuses to proceed, and the other seeks compensation for the part performed.

This ensures fair remuneration in incomplete or unexecuted contractual engagements.

Management Notes

Agency and Contract of Agency

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In modern business and commercial transactions, it is often difficult for a person to personally perform every task or enter into every contract. Therefore, individuals and organizations appoint representatives to act on their behalf. The legal relationship that allows one person to act for another is known as Agency. The provisions relating to agency are contained in Sections 182 to 238 of the Indian Contract Act, 1872. Agency plays a vital role in business activities such as sales, purchases, banking, insurance, transportation, and corporate management. Through agency, a person can create legal relations with third parties even without being personally present.

Meaning of Agency

Agency is a legal relationship in which one person is authorized to act on behalf of another person in dealing with third parties. The person who acts is called the Agent, while the person for whom the act is done is called the Principal.

Definition (Section 182)

According to the Indian Contract Act, 1872:

“An Agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done is called the Principal.”

Meaning of Contract of Agency

Contract of Agency is an agreement whereby one person appoints another person to act on his behalf and create contractual or legal relationships with third parties. Through this contract, the agent receives authority to perform specific acts for the principal.

Unlike ordinary contracts, consideration is not essential for creating a valid contract of agency. The relationship is established through consent between the principal and the agent.

Example: A appoints B to purchase goods on his behalf from a supplier. B acts as the agent and A acts as the principal. Any contract entered into by B within his authority will bind A.

Parties to a Contract of Agency

Contract of Agency is a legal relationship in which one person is authorized to act on behalf of another person in dealings with third parties. The provisions relating to agency are governed by Sections 182 to 238 of the Indian Contract Act, 1872. Agency facilitates business transactions by allowing a person to delegate authority to another. Every contract of agency involves three important parties: the Principal, the Agent, and the Third Party. Each party plays a distinct role in creating and executing transactions. Understanding these parties is essential for understanding how agency relationships function in commercial and legal matters.

1. Principal

Principal is the person who appoints another person to act on his behalf. The principal authorizes the agent to perform specific acts, enter into contracts, or represent him in dealings with third parties. The principal is ultimately bound by the lawful acts performed by the agent within the scope of the authority granted.

A principal must be competent to contract, meaning that he must have attained the age of majority, be of sound mind, and not be disqualified by law. The principal has the right to direct and control the activities of the agent and may revoke the agent’s authority under certain circumstances.

Example: A manufacturing company appoints a sales representative to sell its products. The company acts as the principal, while the sales representative acts on its behalf.

Importance: The principal is the central figure in the agency relationship because the agent derives authority from the principal and acts for the principal’s benefit.

2. Agent

Agent is a person employed to do any act for another person or to represent another in dealings with third parties. The agent acts as an intermediary between the principal and the third party. The acts performed by the agent within the scope of authority legally bind the principal.

An agent does not necessarily need to be competent to contract, although practical competence is desirable. The agent must act honestly, follow the instructions of the principal, exercise reasonable care and skill, maintain proper accounts, and avoid conflicts of interest. The relationship between principal and agent is fiduciary in nature, requiring utmost good faith and loyalty.

Example: A appoints B as his agent to purchase machinery from a supplier. B negotiates and purchases the machinery on A’s behalf.

Importance: The agent enables the principal to conduct business efficiently without being personally present in every transaction.

3. Third Party

The Third Party is the person with whom the agent deals on behalf of the principal. The third party enters into contracts or transactions believing that the agent has authority to represent the principal. Once a valid contract is formed through the agent, the rights and obligations generally arise between the principal and the third party.

The third party has the right to enforce the contract against the principal when the agent acts within the scope of authority. Similarly, the principal may enforce contractual rights against the third party.

Example: A appoints B as an agent to sell goods. C purchases the goods from B. In this case, C is the third party.

Importance: The third party is essential because agency relationships are created primarily to facilitate transactions between the principal and external persons.

Types of an Agency Contract

1. General Agency

General Agency is a type of agency in which the agent is authorized to conduct all transactions related to a particular business, profession, or activity on behalf of the principal. The authority granted is broad and continuous, allowing the agent to perform a series of acts necessary for the effective management of the assigned work. A general agent can enter into contracts, make purchases, supervise employees, collect payments, and perform other routine activities within the scope of authority. This type of agency is common in businesses where principals cannot personally manage day-to-day operations.

Features

  • Broad and continuous authority.
  • Covers multiple transactions.
  • Agent acts on behalf of the principal regularly.
  • Principal is bound by acts within authority.
  • Common in business management.

Example: A company appoints a branch manager to manage all operations of its regional office. The manager can hire staff, purchase supplies, and enter into routine contracts on behalf of the company.

2. Special Agency

Special Agency is created for a specific purpose or a single transaction. The authority of the agent is limited strictly to the task assigned by the principal. Once the assigned work is completed, the agency automatically terminates. The agent cannot perform activities beyond the authority granted. Special agencies are commonly used in property sales, legal representation, contract negotiations, and one-time business dealings. Since the authority is limited, third parties dealing with the agent should verify the extent of the agent’s powers. This type of agency offers greater control and reduces the risk of unauthorized actions.

Features

  • Authority is limited and specific.
  • Created for a particular transaction.
  • Terminates upon completion of the task.
  • Less risk of misuse of authority.
  • Principal retains greater control.

Example: A appoints B to sell a particular plot of land for ₹20 lakh. B’s authority ends immediately after the sale is completed.

3. Universal Agency

Universal Agency grants the agent authority to perform nearly all acts that the principal can legally perform. The agent may handle personal affairs, business matters, financial transactions, legal activities, and property management. This type of agency requires a very high level of trust because the powers granted are extensive. Universal agencies are relatively rare and are generally created through a comprehensive power of attorney. They are useful when the principal is unable to manage affairs due to travel, illness, or other reasons. The agent must always act in the best interests of the principal.

Features

  • Very broad authority.
  • Covers almost all lawful acts.
  • Requires a high degree of trust.
  • Often created through power of attorney.
  • Principal is bound by the agent’s lawful acts.

Example: A businessman relocating abroad appoints his brother to manage all business and personal affairs during his absence.

4. Del Credere Agency

Del Credere Agency is a special form of agency where the agent guarantees the performance and payment obligations of third parties. In exchange for assuming this additional risk, the agent receives extra remuneration known as a Del Credere Commission. If the buyer fails to pay, the agent becomes personally liable to compensate the principal. This arrangement provides greater security to the principal and encourages credit sales. Del Credere agents are commonly used in wholesale trade and commercial distribution networks. Their guarantee reduces the risk of bad debts and improves business confidence.

Features

  • Agent guarantees buyer’s payment.
  • Receives additional commission.
  • Bears risk of buyer default.
  • Enhances credit transactions.
  • Provides financial security to the principal.

Example: A wholesaler appoints a Del Credere agent to sell products on credit. If a customer fails to pay, the agent must compensate the wholesaler.

5. Commission Agency

Commission Agency is one in which the agent receives payment in the form of a commission based on the value or quantity of transactions completed. The agent acts on behalf of the principal and earns remuneration according to performance. Commission agents are widely used in real estate, insurance, exports, imports, and sales promotion. Since their earnings depend on successful transactions, they are motivated to maximize business opportunities and secure favorable deals. This arrangement benefits both the principal and the agent by linking compensation directly to results achieved.

Features

  • Remuneration based on commission.
  • Encourages performance and efficiency.
  • Common in sales and marketing.
  • Agent acts as an intermediary.
  • Earnings depend on successful transactions.

Example: A real estate broker earns a 2% commission on the sale value of a property sold on behalf of a client.

6. Factor Agency

Factor Agency involves a mercantile agent known as a factor who is entrusted with possession of goods and authorized to sell them. Factors have wider powers than ordinary agents because they can sell goods in their own names, grant credit to buyers, and collect payments. They often operate in wholesale and distribution businesses. Since factors possess the goods, they have significant control over the sales process. Manufacturers and exporters frequently use factors to market products in distant regions. Their expertise and market knowledge contribute to efficient distribution and sales management.

Features

  • Possession of goods remains with the factor.
  • Can sell goods in own name.
  • May grant credit to buyers.
  • Collects payments on behalf of principal.
  • Possesses wider authority than brokers.

Example: A textile manufacturer sends garments to a factor in another city for sale and collection of payments.

7. Broker Agency

Broker Agency is an arrangement where the broker acts as an intermediary to bring buyers and sellers together. A broker does not possess the goods and generally cannot enter contracts in his own name. The broker negotiates terms, facilitates communication, and helps parties conclude agreements. Brokers earn remuneration known as brokerage or commission. They are commonly found in stock markets, insurance, shipping, real estate, and commodity trading. Their specialized market knowledge helps clients make informed decisions and find suitable opportunities.

Features

  • Does not possess goods.
  • Acts as an intermediary.
  • Earns brokerage commission.
  • Limited authority compared to factors.
  • Facilitates negotiations and agreements.

Example: A stockbroker assists investors in buying and selling shares on a stock exchange and earns brokerage for the service.

8. Auctioneer Agency

Auctioneer Agency is formed when a person is authorized to sell goods or property through a public auction. The auctioneer acts as the agent of the seller and invites bids from potential buyers. The highest bidder generally becomes the purchaser once the auctioneer accepts the bid. Auctioneers possess expertise in valuation, marketing, and conducting auctions. They help principals obtain competitive market prices through open bidding. Auction sales are commonly used for antiques, artworks, machinery, vehicles, and government-seized property.

Features

  • Conducts public auctions.
  • Acts as seller’s agent.
  • Invites competitive bidding.
  • Helps obtain fair market value.
  • Earns commission or fees.

Example: An auctioneer sells antique paintings through a public auction where interested buyers compete by placing bids.

9. Agency by Necessity

Agency by Necessity arises when a person acts on behalf of another without prior authorization during an emergency to protect the principal’s interests. Such agency is recognized by law when immediate action is required, communication with the principal is impossible, and the action is taken in good faith. The person must act reasonably and only to the extent necessary to prevent loss or damage. Agency by necessity is common in transportation, shipping, and preservation of perishable goods. It ensures that urgent decisions can be made when obtaining prior approval is not practical.

Features

  • Arises during emergencies.
  • No prior authority required.
  • Communication with principal impossible.
  • Action taken in good faith.
  • Intended to prevent loss or damage.

Example: A transporter arranges cold storage for perishable goods when delivery is delayed due to floods, thereby preventing spoilage.

10. Agency by Ratification

Agency by Ratification occurs when a person performs an act on behalf of another without authority, and the principal later approves the act. Once ratified, the act becomes binding as if authority had existed from the beginning. Ratification may be express or implied through conduct. The principal must have full knowledge of all material facts and must be competent to contract. This type of agency provides flexibility in business transactions and validates beneficial acts performed without prior authorization. It prevents useful transactions from becoming invalid solely because permission was not obtained beforehand.

Features

  • Begins with an unauthorized act.
  • Requires approval by the principal.
  • Ratification relates back to original act.
  • Principal must know all facts.
  • Creates a valid agency retrospectively.

Example: B purchases machinery for A without permission. After learning the details, A approves the purchase, thereby creating an agency by ratification.

Management Notes

Price, Conditions and Warranties

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Price:

Another essential element of a contract of sale is that there must be some price for the goods. That means, the goods must be sold for some price. According to Sec. 2(10) of the Sale of Goods Act, the term price means “the money consideration for a sale of goods“.

Thus the price is the consideration for contract of sale which should be in terms of money. If the ownership of the goods is transferred for any consideration other than the money, that will not be a sale but an exchange. However, consideration can be paid partly in money and partly in goods.

For e.g., A delivered to B 10 cows valued at Rs.2,000 per cow. B delivered to A 20 bags of rice at Rs.750 per bag and paid the balance of Rs.5,000 in cash in exchange of the cows. This is a valid contract of sale.

Conditions:

In the context of the Sale of Goods Act, 1930, a condition refers to a fundamental stipulation that forms the essence of a contract of sale. It is a term that is so essential to the contract that its breach entitles the aggrieved party to repudiate the contract and refuse to accept the goods.

According to Section 12(2) of the Act, “A condition is a stipulation essential to the main purpose of the contract, the breach of which gives the aggrieved party a right to repudiate the contract.”

For example, if a buyer purchases a new diesel generator and it is delivered as a petrol generator instead, the buyer can reject the goods and cancel the contract since the term breached is a condition related to the core purpose of the transaction.

Conditions may be express (explicitly agreed upon by both parties) or implied by law. Common implied conditions include:

  • Condition as to title (seller has the right to sell),

  • Condition as to description,

  • Condition as to quality or fitness for purpose,

  • Condition as to sample.

A breach of condition allows the buyer to reject the goods, terminate the contract, and/or claim damages. However, under some circumstances, the buyer may choose to treat the breach of condition as a breach of warranty and claim damages without repudiating the contract.

Types of Conditions:

  • Express Conditions

Express conditions are those explicitly mentioned in the contract of sale, either orally or in writing. These are agreed upon by both parties and are binding. For example, if a buyer specifies that goods must be delivered by a certain date or must be of a particular brand, failure to comply constitutes a breach of condition. Such conditions form the basis of the agreement and must be fulfilled for the contract to remain valid. Breach of an express condition entitles the buyer to reject the goods and repudiate the contract entirely.

  • Implied Condition as to Title

Section 14(a) of the Sale of Goods Act, 1930 implies a condition that the seller has the right to sell the goods. This means that the seller must possess ownership or authority to transfer the title. If a seller sells stolen goods unknowingly, the buyer can reject the goods and recover the price paid. The buyer is not obligated to retain goods if the seller’s title is defective. This condition protects the buyer’s legal ownership and ensures that no third party can rightfully claim the goods sold.

  • Implied Condition as to Description

When goods are sold by description, it is an implied condition that they must match the description provided. This condition ensures that the buyer gets what was promised. For example, if a seller describes a phone as a “Brand New iPhone 14 Pro,” and a different or used model is delivered, it constitutes a breach. The buyer is entitled to reject the goods. This type of condition is especially crucial in cases where the buyer has not seen the goods physically and relies solely on the seller’s representation.

  • Implied Condition as to Quality or Fitness

If a buyer informs the seller about the specific purpose for which goods are required, it is an implied condition that the goods should be suitable for that purpose. This applies when the buyer relies on the seller’s skill and judgment. For instance, if a buyer asks for paint suitable for outdoor use, and it peels off within days, the buyer can claim breach of condition. However, this does not apply when the buyer does not rely on the seller’s expertise or buys goods based on their own judgment.

  • Implied Condition as to Merchantable Quality

When goods are bought by description from a seller who deals in such goods, there is an implied condition that they must be of merchantable quality. This means the goods must be fit for general use and free from latent defects. For example, if a person buys a washing machine and it breaks down within a day, it would not be considered of merchantable quality. The buyer has the right to reject such goods. This protects consumers from defective or substandard products.

Warranty:

A warranty is a stipulation collateral to the main purpose of the contract, that is to say, it is a subsidiary promise. Its breach does not entitle the aggrieved party to repudiate the contract. He can only claim damages. Where there is a breach of warranty on the part of the seller, the buyer must accept the goods and claim damages. Where A purchases 100 bags of wheat from B. Wheat must be fit for human consumption. This is an essential stipulation. Hence it is called as condition. Other stipulations like packing, etc., is a minor one, hence called as warranty. Conditions and warranties may be express or implied. An express condition or warranty is one stated definitely in so many words as the basis of the contract. Implied conditions or warranties are those which attach to the contract by operation of law. The law incorporated them into the contract unless the parties agree to the contrary. A sold to B timber to be properly seasoned before shipment. It was agreed between the parties, that in case of dispute the buyer would not reject the goods but accept or pay for them against documents. It was held that the provision as to seasoning was not a condition but only a warranty. If the timber was not properly seasoned B had to accept it and claim damages for the breach of warranty.

The points of distinction between a condition and warranty can be summed up as under:

(1) A condition is a stipulation essential to the main purpose of a contract while a warranty is astipulation collateral to the main purpose of contract.

(2) Breach of condition gives the right to treat the contract as repudiated while the breach of warranty gives the right to claim for damages alone. The contract cannot be repudiated because the breach of warranty does not defeat the purpose of contract.

(3) A breach of condition may be treated as breach of warranty but a breach of warranty cannot be treated as breach of condition. Let us take an example to make these two terms clear. So where a man buys a particular horse which is warranted quiet to ride. The horse, turns out to be a vicious one. Buyers remedy is to claim damages unless he has expressly reserved the right to return the horse. Suppose instead of buying a particular horse, he specifically asks for a quiet  horse-that stipulations is a condition. Now the buyer can either return the horse or retain the horse and claim damages. (Hartley v. Hymans)

Types of warranties:

  • Express Warranty

An express warranty is a specific assurance or promise made by the seller regarding the quality, performance, or condition of the goods. It can be stated in writing or spoken at the time of sale. These warranties are clearly agreed upon by both parties and form part of the contract. For instance, a seller may claim a refrigerator will function properly for five years. If the goods fail to meet these conditions, the buyer is entitled to claim compensation or replacement. However, breach of a warranty does not void the contract; it only allows for damages.

  • Implied Warranty of Quiet Possession

This warranty implies that the buyer will enjoy undisturbed use and possession of the goods. Under Section 14(b) of the Sale of Goods Act, the seller guarantees that no third party will interfere with the buyer’s possession or claim ownership. For example, if a person buys a car and later someone claims legal ownership, the buyer can sue the seller for breach of this implied warranty. The aim is to protect the buyer’s right to use the goods peacefully without facing legal challenges or possession issues from others.

  • Implied Warranty of Freedom from Encumbrances

According to Section 14(c) of the Sale of Goods Act, there is an implied warranty that the goods are free from any undisclosed charges or encumbrances. This means the buyer should receive goods that are not subject to any third-party claim, lien, or mortgage. If the buyer discovers an undisclosed lien on the goods, they are entitled to damages. For example, if a person buys a second-hand laptop that is still under EMI liability, the buyer can sue the seller for breach of warranty if not informed prior.

  • Implied Warranty as to Quality or Fitness (in Specific Cases)

Though generally treated as a condition, in some cases, fitness for a particular purpose may be treated as a warranty, especially when the buyer has not fully relied on the seller’s skill or when goods are purchased under one’s own judgment. If the buyer does not expressly communicate the intended use or does not depend on the seller’s expertise, the fitness becomes a mere warranty. This protects sellers from extensive liability while still giving buyers the right to claim damages if the goods turn out defective under usual use.

  • Warranty Arising from Usage of Trade

In certain trades or industries, regular practices establish standard warranties. These are known as warranties arising from usage of trade. Even if not explicitly mentioned, such warranties are enforceable due to consistent industry practices. For example, in the textile industry, it might be a trade practice that dyed fabrics must not bleed color on first wash. If this expectation is not met, the buyer may claim damages under this warranty. It emphasizes how commercial customs and business traditions influence obligations between buyers and sellers.

  • Voluntary or Collateral Warranty

A collateral warranty is an additional assurance provided voluntarily by the seller without being a formal part of the sale contract. It may relate to future performance, durability, or after-sales service. These warranties are usually given to enhance customer confidence and are often supported with service commitments or return policies. For instance, a seller might offer a “30-day free replacement guarantee” as a collateral warranty. Though not legally mandatory, once stated, it becomes enforceable and a buyer can seek remedies if the seller fails to honor it.

When condition to be treated as Warranty

Section 13 of the Sales of Goods Act mentions 3 cases in which a condition sinks or descends to the level of a warranty. A condition descends to the level of a warranty in the following cases:

(1)   Where the buyer waives the condition;

(2)   Where the buyer treats the breach of condition as breach of warranty;

(3)   Where the contract is indivisible and the buyer has accepted the goods or part of the goods.

In all the above three cases the breach of a condition is deemed to be a breach of a warranty and buyer can only claim damages or compensation for the breach of the condition. He cannot repudiate the contract or refuse to take delivery of the goods. In the first two cases, a condition is treated a warranty. at the will of the buyer; but in the third case the breach of condition can be treated only as breach of warranty; for once the buyer has accepted the goods he cannot reject them on any ground. If on subsequent inspection a breach of condition is disclosed, he can treat that as breach of warranty and sue for damages.

Example: Suppose A promises to deliver 100 bales of cotton to B on 1st August, 80. A delivers the bales of cotton on 10th of August. Now in this contract, time is the essence of contract. B can refuse to accept the delivery. But he can also waive this right. He may treat this breach of condition as breach of warranty by accepting the goods and claim damages instead.

Warranties from the Seller

Buyers often overlook the warranties being made by the seller. There is no such thing as “standard warranties.” Warranties vary across industries and from company to company, so be sure to closely review the seller’s promises. Are the goods being sold “as-is”? Is the seller disclaiming the warranties of merchantability or fitness for a particular purpose? If so, this might undo any verbal promises about the goods made by the seller.

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