GUJARAT NATIONAL LAW UNIVERSITY

LAW OF CONTRACT-II

CONTRACT ANALYSIS:
MOTOR VEHICLE INSURANCE AND HOME LOAN

Submitted by:
Ayush Aryan
20BAL022
ayush20bal022@gnlu.ac.in

Submitted to:
Ms. Niyati Pandey
(Assistant Professor of Law)
TABLE OF CONTENTS
INSURANCE CONTRACTS [MOTOR VEHICLE INSURANCE]..........................................................1

Introduction............................................................................................................................1

Elements of Contract of Insurance.........................................................................................1

Clause Analysis of Car Insurance Contract:...........................................................................2

LOAN CONTRACTS [HOME LOAN]..............................................................................................3

Introduction............................................................................................................................3

Features of a Loan Contract:..................................................................................................3

Article 1..................................................................................................................................4

Article 2..................................................................................................................................4

Article 3..................................................................................................................................5

Schedule I...............................................................................................................................6

Further Interest Rate...............................................................................................................6

Schedule II..............................................................................................................................6
INSURANCE CONTRACTS [MOTOR VEHICLE INSURANCE]
INTRODUCTION
An insurance contract is a contract of indemnity as under Section 124 of the Indian Contract
Act, 1872. The act defines a contract of indemnity as:

“A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person.”1
The indemnifier (“Insurer”) promises to cover the losses of the indemnified (“Insured”) in
exchange for a consideration termed as a “premium”.
Insurance contracts are also a type of contingent contracts2 because the liability of the
Insurer is only triggered by the occurrence of a certain event. Insurance contracts are special
contracts.
Indian Contract Act only covers the underlying concept of contract of indemnity. Insurance
contracts are also governed by the Insurance Act, 1938 and regulated by the Insurance
Regulatory and Development Authority of Indian (IRDAI), which was established in
1999.3

The present motor vehicle insurance policy is also governed by the Motor Vehicles Act, 1988
and the Transfer of Property Act, 1882.
ELEMENTS OF CONTRACT OF INSURANCE
(a) Insurable Interest: It refers to the subject matter of the contract, in which the Insured
has a pecuniary interest. In a motor vehicle insurance contract, the vehicle is the
insurable interest.
(b) Doctrine of uberrima fides: This means that the contract made should made with
utmost good faith from both the parties. The Insured must make full and true
disclosure of all material facts so that the Insurer is fully aware of the risk they are
undertaking. The Insurer can avoid their obligations under the contract if the insured
fails to disclose the risks of the contract.
(c) Material Facts: These are all the facts that are relevant to the insurable interest.

Some other important principles involving insurance contracts are as follows:

(a) Proximate Cause: The Insurer is liable to cover the losses of the Insured only when
such losses occur as a result of events covered under the insurance contract. For

1
Indian Contract Act 1872, s 124.
2
Indian Contract Act 1872, s 31.
3
Insurance Regulatory and Development Authority of India Act 1999, s 3.

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 example, if the goods of the insured persons are paper supplies and are insured only
against water damage then damage to the goods in case of a fire will not be covered.
(b) Subrogation: Subrogation refers to the passing of rights and remedies with respect to
the losses, from the Insured to the Insurer, once the latter has fully indemnified the
former. For example, In case of the insurance of paper supplies the insurer can
appropriate the damaged supplies to recycle it and mitigate some of the loses .
(c) Loss Minimization or Mitigation: The Insured must show that they made their
utmost best efforts to mitigate the loss they have incurred when they file their claim.
Failure to take mitigation measures often affects the claim amount ultimately given to
the Insured, it may be reduced or not given at all, depending on the particular facts of
the case.

While most insurance contracts are contracts of indemnity, life insurance and personal
accident insurance contracts do not fall within the purview of contracts of indemnity.4
The underlying principle of contract of indemnity is that the entire pecuniary value of the loss
faced by the indemnified is made good by the indemnifier.
Since no definite monetary value can be attached to life or accidents and disabilities
therefore, life insurance and personal accident insurance contract are not considered contracts
of indemnity.

CLAUSE ANALYSIS OF CAR INSURANCE CONTRACT:

https://dochub.com/ayush20bal022/P0B76b3K6Nj0e8jKn2y1Gg/car-insurance-pdf?
dt=fTXgdwfQszRxrHsRtmEE

4
Avtar Singh, Law of Contract and Specific Relief (12th edn, Eastern Book Co. 2017), 594.

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LOAN CONTRACTS [HOME LOAN]
Following is the link for the home loan agreement which has been analysed below:
https://dochub.com/ayush294/Gd71aZOw4dzjmg9w2Q9AP3/homeloan-2018-g-7-pdf?
dt=mWxBtxrCQEZ2PWwnVPXu
INTRODUCTION
The investment to buy a home requires a huge amount of capital which is generally not
available all at once for the majority of people. Home Loan agreements provide for the said
capital upfront in exchange for its repayment over several instalments with a certain amount
of interest. This makes it easier for the purchaser to pay of the capital as it becomes a
relatively small amount to pay at a time.
There are two parties to the home loan contract, the Lender and the Borrower. The Lender is
the bank, which gives the loan amount and collects the repayment along with an interest. The
Lender holds the property papers as collateral or lien in order to minimize his risk till the loan
is paid off. The Lender may require additional security in the form of additional collateral or
a personal guarantor, depending on the credit profile of the Borrower and how the risk of
lending to them is assessed.
FEATURES OF A LOAN CONTRACT:
(a) Loan Facility: A loan may not always be the whole amount upfront but rather may be
certain amounts at certain agreed intervals. The contract that is being analyzed below
is also a Loan Facility.
(b) Interest: This refers to the amount that is payable to the Lender in addition to the loan
amount. This is often calculated at an annual rate as a percentage of the amount due,
or the total amount, depending on the terms and conditions agreed on by the Lender
and Borrower. Interest is the consideration for the contract.
(c) Collateral Agreement: While the primary obligation of the Borrower is to pay back
the sum lent by the Lender, along with interest, the Lender may also demand
collateral that can be retained by him or her if the Borrower defaults on the loan. This
collateral may be of varied forms: mortgage, guarantees, etc). This collateral is
returned only upon the repayment of the loan with interest. It is used to minimize the
risk undertaken by the Lender.
(d) Repayment Schedule: This refers to the schedule based on which the Borrower must
repay the Lender. This may be on a weekly, monthly or annual basis. Adherence to
this repayment schedule prevents the imposition of any penalties of extra charge on
the borrower.

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ARTICLE 1
Standard Terms refers to the set of terms, conditions and definitions defined as a part of the
standard form contract drawn up by the Lender. The terms of such contracts are usually not
modifiable or negotiable.
The terms need to be complied with in order for the contract to sustain. The notice of these
terms should be given in a reasonable way and contemporaneously to the contract.5 The
Borrower has been informed of the Terms in the first Article and was also orally informed
about it before he signed the contract.

The Standard Terms document is significant because it contains what is known as "fine
print." It defines the contract's scope and is used to interpret the contract's terms. It is crucial
in any disagreement because the meaning of the terms included within is carefully examined
to determine the precise nature of the parties' duties to each other. In the event of any
ambiguity, the standard terms will be interpreted against the party who drafted them.(rule of
contra proferentum).
ARTICLE 2
The Facility refers to the loan being granted by the Lender to the Borrower.
The Facility in this situation is an instalment-based loan for the building of a home that the
Borrower is purchasing. The Borrower will disburse a particular amount of money when the
construction reaches a pre-determined phase, and this will continue until the total cash is
disbursed for the entire construction.
The rationale for this form of disbursement of the loan amount stems from the fact that many
builders do not finish the apartment construction and leave it half-finished and abandoned for
years. When the entire loan amount is disbursed at once, the Lender takes on more risk, and
the Borrower may be obliged to pay for a benefit he never received. As a result, in the house
loan industry, instalment-based disbursement is preferred.
● This Article also outlines the duties and obligations of the Borrower as the following:
a) Repayment of the Facility and interest at the rates and dates set forth in the Schedule of
Repayment, as well as compliance with any applicable restrictions.
b) Even if the Lender was the one who provided any resources or information to the builder
or Development Authority, the Lender cannot be held liable for any delays in the Borrower
receiving ownership of the property or for any quality issues.
c) The Borrower has read, comprehended, and signed the Standard Terms to which he is
bound.
A breach of any of these obligations can lead to consequences as specified in the contract. For
example, the contract may stipulate a higher rate of interest that must be paid by the
Borrower if he defaults on the payment of EMI for a certain period of time. This is a crucial
Article which defines the Facility and lays down the primary obligations of the Borrower.

5
Singh (n 5) 70, 77.

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ARTICLE 3
The declarations by the Borrowers are used to confirm that they have clearly understood the
standard form contract drafted by the Lender and that they acknowledge and undertake the
mentioned stipulations.
If clear notice of the Terms is given, and they are valid and not unconscionable, the
enforcement of the contract by the Lender becomes easier. Hence, in the present contract, the
Lender has clearly outlined the terms to which the Borrower must consent through
declaration. These declarations can be enforced against the Borrower in legal proceedings if
he refuses to fulfil them after the conclusion of the contract.
● The first three clauses in this Article are instrumental in confirming the disclosures
made by the Borrowers with regards to their personal information and relevant
financial details such as, whether they have been insolvent. A Lender carefully
scrutinizes the credit profile of the Borrower before giving him a loan, based on the
details presented by him. Any concealment or misrepresentation of these material
details empowers the Lender to avoid the contract. This can be done under the
provisions of the Indian Contract Act on fraud6 and misrepresentation.7
● From this agreement, some other material terms that can be gathered are: the
employment of the Borrower, as salary, stability of income and nature of
employment. These factors affect their ability to repay the loan.
The above-mentioned details are used to decide the repayment schedule, interest rate,
collateral, etc.
● Furthermore, the Borrower must declare that the loan amount will only be used for the
pre decided purposes and explicitly prohibits its use for illegal purposes or more risky
activities like speculative investments, etc. The purposes of the loan have been
mentioned in Schedule I, which has been explained further below.

● The Borrower also has to undertake declarations regarding the obligations of the
guarantor, the Lender’s right to withhold the disbursement of the Facility, various
relevant charges (prepayment charges, cheque bounce charges, etc), sharing of
information with government authorities, etc.

SCHEDULE I

6
Indian Contract Act 1872, s 17.
7
Indian Contract Act 1872, s 18.

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This Schedule can be divided into three parts: (i) the purpose of the Facility, (ii) the details of
the Lender and (iii) details of the Facility.
1. First, the Schedule sets out the specific purpose for which the Facility may be used by
the Borrower in Clause 1. In the present case, it can be used for purchasing a
residence, land or office premises or improving the residence. Derogation from these
purposes is not permitted and the same is ensured when the Borrower declares his
intention to that effect under Article 3. Breach of these terms gives the Lender the
right to avoid the contract.
2. The second part sets out the name and address of the Lender, i.e, the identifying
details in Clause 2.
3. The third part is in relation to the Facility and the charges associated with it. These are
contained in Clause 3 to 8. This includes cheque bounce charges, prepayment charges,
etc. The Lender imposes a charge for carrying out transactions such as prepayment
and imposes charge for dishonor as a penalty. The Borrower is contractually obliged
to pay these charges when any of these situations occur. In the Note below these
clauses, the non-refundable nature of charges and the manner of their calculation has
been laid out.

FURTHER INTEREST RATE

This is the interest rate that is applicable when the Borrower defaults on a certain number of
EMIs. This is usually triggered by a substantial default and the Borrower will be penalized
with a higher interest rate that will be applicable until total repayment. The additional interest
rate (24%) is substantially higher than the agreed interest rate (9.5%) and is kept that way in
order to deter defaulting on the loans.

SCHEDULE II
This Schedule contains the integral terms of the loan agreement, i.e, the amount of the loan,
interest rate and the repayment schedule. It contains the details of the borrowers, the property
given as collateral and the guarantors, if any.

Clause 3 regulates the agreement of guarantee.

Often, banks may require the Borrower to either furnish collateral or bring in a Guarantor
who will pay the Lender in case of any default. Even though the Guarantee Clause hasn’t
been given effect in the present loan agreement, it has been discussed below in light of its
prevalence:
Contracts of Guarantee have been defined in Section 126 of the Indian Contract Act, 1872 as:

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“A contract to perform the promise, or discharge the liability of a third person in case of his
default.”8
There are not two, but three parties to a contract of guarantee: (i) the Principal Debtor
(Borrower), (ii) Creditor (Lender) and (iii) Guarantor. If a Guarantor agrees to act as the
surety, they will have a secondary liability, i.e., they will become liable to repay the loan if
the Principal Debtor defaults on it.
A contract of guarantee is governed by the same essentials of a general contract. This calls
into question the consideration given to the Guarantor, as consideration is an essential
element for the validity of a contract. 9 Section 127 of the Act stipulates that any promise
made or act done for the Principal Debtor amounts to sufficient consideration.10
The term in this contract stipulates that the guarantors, if multiple, are jointly and severally
liable and that their role is to guarantee the performance of repayment obligations to the
Lender. The Lender further prohibits the Borrower from paying a commission to the
Guarantor, perhaps to ensure that only a person who is willing to guarantee performance
becomes the personal guarantor, which may not be the case if someone is induced to do so by
a fee.

Here, no guarantee had been given to the Lender and hence, this clause has not been
concluded as a part of the contract.

1. The contract's compensation is interest, which can be calculated at a fixed or

fluctuating rate. The Schedule lists three potential methods for calculating interest,
with the method chosen dependent on the Lender and Borrower's agreement. In
this scenario, the second, a 9.50 percent p.a. Adjustable Interest Rate, is used. This
is calculated using a Base Rate Method that the Reserve Bank of India may
change at any time. This is a term that is detrimental to the Borrower because the
Lender has the ability to raise interest rates anytime market rates rise. This must
be taken into consideration by the Borrower when he fulfils his contractual
responsibilities.
2. The Repayment Schedule specifies the total amount owed to the Lender as well as
the method by which it must be repaid. In this situation, the Borrower must repay
the entire amount in monthly payments over a period of 120 months or ten years.
3. The Schedule also includes a term that specifies how the Facility will be used. The
use of this term repeatedly shows the emphasis that should be placed on the loan's

8
Indian Contract Act 1872, s126.
9
Indian Contract Act 1872, s 10.
10
Indian Contract Act 1872, s 127.

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 purpose, and any divergence from it will be firmly dealt with when reading the
contract.
4. The agreement's final page contains the signatures of both parties, making the
contract's provisions legally binding. The signature certifies that the Borrowers
have read and comprehended the provisions of the Lender's standard form
contract, as well as that both parties have engaged into a legally binding loan
arrangement.