Legal environment of business

1. Legal Environment of business

2. Prepared By Kindly restrict the use of slides for personal purpose. Please seek permission to reproduce the same in public forms and presentations. Manu Melwin Joy Assistant Professor Ilahia School of Management Studies Kerala, India. Phone – 9744551114 Mail – [email protected]

3. Contents

4. Unit I Introduction. Sources of law and interpretation of law. Classification of Law. Principles of natural justice. History of Indian judicial system.

5. Unit II Law of contract, Essential features of contract, offer, acceptance and consideration. Different types contract. Performance of contract. Discharge of contract. Breach of contract. Damages-Indemnity and Guarantee.

6. Unit III Negotiable Instruments Act- 1881. Cheques – Bills of Exchange – Promissory Notes . Definitions and Characteristics of Negotiable Instruments. Dishonor and Discharge of Negotiable Instruments. Latest laws relating to Negotiable Instruments . Sale of goods Act-1930. Conditions , Warranty, Agreement to sell.

7. Unit IV Company Law. Types of companies. Incorporation. Memorandum and Articles of Association. Prospectus. Winding up of companies and Types .

8. Unit V Consumer Protection Act 1986. Consumer Redressal Mechanisms. Foreign Exchange Management Act - 1999. Objectives and Features of Cyber laws. Intellectual Property Rights. Patents , Trademarks, Designs - implications on business.

9. Legal Environment of business

10. What is business? Development Provide things to enjoy life Productive utilization of wealth producing resources. Leads to innovation and improvements in production process- enriches the life. Today Business Enterprises dominate our lives .

11. Power of business The wealth of a country is, to great extent, is created and controlled by BUSINESS. This gives business and executives thereof the ‘enormous power’ to affect the lives of different segments of society, such as customers, employees, shareholders , etc.

12. Business environment Business environment means the sum of all external forces and conditions that influence business and potentially affects its performance which includes economic factors, socio-cultural factors, politico-legal factors, technical factors and international factors .

13. Relationship b/w Business and its Environment Various interest groups: Consumers , Employees, Owners, Creditors, Suppliers, Distributors, Competitors, the Governments, etc. Survival and Growth of business will depend upon its relations with all these interest groups. Law and business are closely related disciplines (complementary)

14. Importance of law People living in an organized society have to follow certain common rules and the state has to enforce these rules. Law is the sum of these rules which regulate the life of people. Otherwise, peaceful living is impossible.

15. Definition of law According to Holland, “ Law is a rule of external human action enforced by a sovereign political authority ”.

16. Elements/Characteristics of law This definition states that, following elements should be available in a law A body of rules. External acts of human being governed by rules. A sovereign political authority enforcing rules.

17. Sources of Law Legal Environment of Business

18. Sources of Law English Law Judicial Decisions Customs and usage Indian Statute English common Law Equity Law Merchant Statute law

19. English Law Indian business law is modeled on the lines of English Mercantile Law, as India was under British rule before its independence. The difference in the laws of India and England are primarily on account of their different business environment, customs and trade practices.

20. English Law The sources of business law in India are generally the English laws which have roots in the following. English common law. Equity. Law Merchant. Statute Law.

21. English Common Law It refers to a system of law based upon English customs, usages and traditions which were developed over centuries by the English courts. It is unwritten or the non – statutory laws. These are found in the reported decisions of the court of law.

22. Equity It refers to that branch of the English Law which developed separately from the common law. It is based on principle of fairness and concepts of justice developed by the judges whose decisions became precedents.

23. Law Merchants It refers to the usages or customs of merchants and traders that have been ratified by the courts of law. The object is to protect the interest of trade. The courts in these cases assume that the parties have dealt with each other on the footing of customs or usages prevailing generally.

24. Statute Law The statute law refers to the law laid down in the Acts of the parliament. It is superior to and overrides any rules of the common law, equity or law merchant. The court of law interprets the meaning of such enactments and apply them.

25. Judicial Decisions Judicial decisions are usually referred to as precedent and are binding on all courts having jurisdiction lower to that of the court which gave the judgment. This is also called judge made laws.

26. Customs and Usages Customs or usage of a particular trade also guide the courts in deciding disputes arising out of mercantile transactions. Such a custom or usage must be widely known, certain and reasonable, and must not be opposed to any legislative enactment.

27. Customs and Usages But where a statute specifically provides that the rule of law contained therein are subject to any well – recognized custom or usages of trade, the latter may over – ride the statute law.

28. Indian Statute The constitution of India confer power to enact law on its parliament and legislatures of states when a bill is passed by the parliament / state legislatures and assented to the president or governor of a state. It becomes an act or statute.

29. Indian Statute The bulk of Indian Mercantile Law is statute law. The Indian contract act, 1872, The company Act, 1955, The Negotiable Instruments Act, 1881 are instances of the statute law.

30. Discussion Identify 10 reasons why human trafficking is thriving? Suggest 10 ways by which human trafficking can be stopped? Formulate 10 laws that has to be enforced to curb human trafficking?

31. Interpretation of law Legal Environment of Business

32. Interpretation of law The process by which the courts of law try to ascertain or understand the meaning of the legislation through the wording of enactment is technically called interpretation. The aim of interpretation of a statute is to find out the legislative intention.

33. Rules of interpretation Literal rule of interpretation. Golden rule of interpretation. Mischief rule of interpretation. Rule of “ Ejusdem Generis”.

34. Literal rule of interpretation All rules of interpretations have one aim in view ie ., to ascertain the legislative intention of the statue. The literal rule of interpretation gives much importance to the words and phrases used in the statute.

35. Literal rule of interpretation According to this rule, words, phrases and sentences are to be given their ordinary natural meaning. If the language used in the statute is clear, unambiguous and admits only meaning, the judges should accept it and enforce it. The judge has to give respect to the letter of the law. This is the basic rule of construction.

36. Golden rule of interpretation The golden rule of interpretation propounded by Wensleydale states that, while interpreting statutes, the court has to adopt literal or grammatical interpretations. If the words in the statute lead to absurdity, repugnancy or inconsistency, the court can modify the words for the purpose of avoiding such absurdity, repugnancy or inconsistency but no further.

37. For example, imagine there may be a sign saying "Do not use lifts in case of fire." Under the literal interpretation of this sign, people must never use the lifts, in case there is a fire. However, this would be an absurd result, as the intention of the person who made the sign is obviously to prevent people from using the lifts only if there is currently a fire nearby.

38. Mischief rule of interpretation The mischief rule of interpretation insists that the court should adopt that construction, which would suppress the mischief and advance the remedy. This is also known as “Rule in Hydon’s case.”

39. Mischief rule of interpretation For the interpretation of all statutes, four things are to be considered by the judge The law existing before the present act was passed. The mischief and defect for which there was no law. The remedy provided by the legislature for avoiding the mischief. The true reason of mischief.

40. Under the Street Offences Act [1959], it was a crime for prostitutes to "loiter or solicit in the street for the purposes of prostitution". The defendants were calling to men in the street from balconies and tapping on windows. They claimed they were not guilty as they were not in the "street." The judge applied the mischief rule to come to the conclusion that they were guilty as the intention of the Act was to cover the mischief of harassment from prostitutes.

41. Rule of “ Ejusdem Generis” The rule of “ Ejusdem Generis” literally means “ of the same kind or species”. The rule says that when there is a general word following particular and specific words, the general word must be confined to the things of the same kind.

42. Rule of “ Ejusdem Generis” According to Maxwell, the general word which follows particular and specific words takes its meaning from them and is presumed to be restricted to the same genus of those word.

43. Rule of “ Ejusdem Generis” In order to apply this rule, the following conditions are to be satisfied The section should contain an enumeration of specific words Should constitute a class. The class should not be exhausted by the enumeration and A general term should follow that enumeration.

44. Example: if a law refers to automobiles, trucks, tractors, motorcycles and other motor-powered vehicles, "vehicles" would not include airplanes, since the list was of land-based transportation.

45. Classification of Law Legal Environment of Business

46. Classification of Laws Pubic and Private Law. Civil and Criminal Law. National and International Law. Statute and Common Law. General and Special Law. Natural and physical Law.

47. Public Law Public Law is concerned with the legal relation between the state and the individuals. All laws relating to the distribution and exercise of power by the state are the part of public law.

48. Public Law The aim of public law is promotion of social objectives and the protection of collective interest of individuals. The criminal law, constitutional law and administrative law are examples of public law.

49. Private Law Private Law is that part of the law which determines relationship between individuals in their ordinary private capabilities. The primary purpose of private laws is the protection of individual interests. The law of contracts, the law of property, torts etc are various forms of private law.

50. Criminal Law Criminal Law means law relating to crime. It deals with offences and their punishments. One of the major objectives of the Criminal Law is to punish the wrong doer for action which is deemed to be contrary to the interests of the state and its citizens.

51. Civil Law Civil Law provides remedies to individual victims, which are recognized by statutes or decided cases. The Civil Law creates a framework which delivers the rights and obligations of individuals in their dealings with one another.

52. National Law National Laws refer to internal legal rules of the country.

53. International Law International Law is a body of rules which are regarded as legally binding on their relationship with other nations.

54. Statute Law Law laid down in the Acts of Parliament or Assemblies are known as Statute Laws. Bill proposed in the parliament becomes acts.

55. Common Law Common Law consists of those principles, usages and rules of action applicable to the Government, Security of persons and of property. Common Law of Hindus regarding marriage, succession of property etc are made statutory law by bringing necessary changes.

56. General Law General Laws are those laws applicable to all persons and things in a country. They have general applications.

57. Special Laws Special Laws are applicable only to certain special circumstances. Local Law, Marital Law, Conventional Law etc are some special Laws.

58. Natural law By natural Law is meant the principles of natural right and wrong. Natural Law is considered to be the highest reason implanted by nature which commands what ought to be done and forbids the opposite.

59. Physical Law Physical Laws are those laws which describe the general nature and principles according to which the physical phenomenon acts under given conditions.

60. Principles of Natural Justice Legal environment of business

61. Introduction PNJ were derived from the Romans who believed that some legal principles were “natural” or self evident and did not require a statutory basis. PNJ is embedded in Article 311 of the Constitution of India.

62. Principles of Natural Justice Rule against Bias Rules for the fair hearing. Reasoned decision.

63. Rule against Bias This means that the administrative authority, who exercises quasi judicial function should be impartial. He should be free from bias.

64. Rule against Bias The administrative authority, exercising, quasi judicial function, is said to be biased if He has pecuniary interest in the subject matter of the dispute. (Pecuniary bias) He is a relative or a friend or enemy of disputing parties. (Personal bias) He has general interest in the subject matter. (Official bias).

65. Rule against Bias Rules against bias are based on three maxims. No man shall be a judge in his own cause. Justice should not only be done but manifestly and undoubtedly seem to be done. Judges should be above suspicion.

66. Rules for the fair hearing The second important condition of natural justice is that the person whom an action is proposed to be taken, should be given a reasonable opportunity to defend himself. Before passing an order against any person, he must be heard.

67. Rules for the fair hearing For a fair hearing, the following two are necessary Notice. Opportunity of hearing.

68. Reasoned Decision (Speaking Order) Speaking order means on order which contains reasons for the decision. The administrative authority exercising quasi judicial function should give reasoned decision.

69. Reasoned Decision (Speaking Order) A party to the dispute has a right to know the result of the enquiry and the reason in support of the decision. The reasoned decision safe guards against possible injustice and arbitrary exercise of powers by quasi judicial authority.

70. History of Indian Judicial System Legal Environment of Business

71. History Maharajas - Hindu Laws Mughal Emperors - Islam Laws + HL British Empire – English Common Law + HL + IL Present - Constitution

72. Indian Judicial System Supreme Courts High Courts Subordinate courts

73. Supreme Courts Supreme court of India stands at the apex of the entire judicial system. It consists of a Chief Justice and not more than twenty five judges. Every judge of supreme court shall be appointed by the president.

74. Supreme Courts Supreme court has four kinds of jurisdiction. Original. Appellate. Advisory. Special.

75. High Courts High court is the head of the judicial administration of the state. Each high court consist of a chief justice, appointed by the president.

76. High Courts Jurisdiction of High Court Court of record. Power of issue writs. Power of superintendence.

77. Subordinate Courts The power and functions of these courts have been principally derived from the two important codes. Code of Civil Procedure. Code of Criminal Procedure.

78. Subordinate Courts Each state is divided into Judicial districts presided over the District and sessions judge. He is the highest judicial authority in a district.

79. Fundamental Rights and Duties

80. Fundamental Rights Rights are claims that are essential for the existence and development of individuals. In that sense there will a long list of rights. Whereas all these are recognized by the society, some of the most important rights are recognized by the State and enshrined in the constitution. Such rights are called fundamental rights.

81. Fundamental Rights The Constitution guarantees six fundamental rights to Indian citizens as follows: right to equality right to freedom right against exploitation right to freedom of religion Right to cultural and educational rights and right to constitutional remedies.

82. Fundamental Duties

83. Law of Contract Legal Environment of Business

84. Contract The word contract is derived from the Latin word “Contractum” which means “drawn together”. To the layman, the word “contract” probably means “an agreement’ which can be enforced in the court of law.

85. Definition Section 2 (h) of the Indian Contract Act defines the term contract as follows: “ An agreement which is enforceable at law is contract ”.

86. Definition Contract = Agreement + Enforceability at Law

87. Example Basil invites Hari to dinner and Hari accepts the invitation. It is only a social agreement and not enforceable in a court of law. So it is not a contract. Basil agrees to sell his house to Hari for Rs 50,000. This is a contract.

88. Definition According to Section 2 © of the contract act, the person making the proposal is called the Promisor and the person accepting the proposal is called promise.

89. Elements of a contract The essential elements of a contract are contained in the definition of contract given in section 10 of contract Act.

90. Elements of a contract Agreement. Consensus of Idem. Capacity of parties. Free consent. Consideration. Lawful Object. Not declared to be void. Certainty and possibility of performance. An intention to create legal relationship.

91. Elements of a contract Agreement - There must be an agreement between the parties of a contract. An agreement involves a valid offer by one party and a valid acceptance by the other party.

92. Example Sanitha sends a proposal to Julie to purchase her house for Rs 5 Lakhs and Julie accepts the proposal, then this results into an agreement.

93. Elements of a contract Consensus of Idem – The parties to contract must agree upon the subject matter of the contract if the same manner and in the same sense.

94. Example Adarsh has two houses, one at Trivandrum and another at Kochi. Adarsh expresses his willingness to sell on of his houses to Shanu . Adarsh had in his mind house at Trivandrum where Shanu had house at Kochi in mind. So there is not Consensus Ad Idem.

95. Elements of a contract Capacity of parties – There must be at least two parties to every contract. These parties must have legal capacity to enter into a contract. Every person who is a major and possesses sound mind is competent to enter into a contract. (Minors, Lunatics, drunken persons not competent).

96. Elements of a contract Free consent – For the formation of a contract, one person must give his consent to another person. The consent thus obtained must be a free consent. A consent is said to be free if it is not caused by coercion, undue influence, fraud, misrepresentation or mistake.

97. Example Arun asks Ajas to sign an agreement. Ajas refuses to do it. So Arun threaten Ajas of severe consequences if Ajas is not signing the document. So Ajas finally agrees, fearing consequences. The consent thus shown by Ajas is not free.

98. Elements of a contract Consideration – Consideration means something in return. In every contract, each agreement must be supported by consideration, when one party agrees to give something (or give up something) he must be benefited by the other party.

99. Example Amal offers to sell his house to Jasir for Rs 4 Lakhs . Jasir accepts the proposal. Here, the consideration for the sale of his house is Rs. 4 Lakhs and the consideration of Jasir’s payment of 4 Lakhs is the house.

100. Elements of a contract Lawful Object – The object of an agreement must be lawful. It must not be illegal or immoral or opposed to public policy. When an object of a contract is not lawful, the contract is void.

101. Example Eldhose promises to pay Aiju Rs 5 Lakhs for murdering Davood Ibrahim. Here the object of the contract is to commit murder. It is unlawful and therefore the contract becomes void.

102. Elements of a contract Not declared to be void – The agreement might not have been expressly declared void by any law in force in the country. In such cases, the agreement cannot be enforced.

103. Example A agrees to supply liquor to B, subsequently prohibition Act comes into force. Thus all agreement to supply liquor become void, thereafter. Therefore B cannot enforce the agreement which is made before the act comes into force. The agreement has already become void from the date of prohibition order come into effect.

104. Elements of a contract Certainty and possibility of performance – The term of contract should be certain and precise. They should not be vague and they should not create any confusion in the minds of the parties.

105. Example Sanitha agrees to sell one of her houses. She has four houses. Here the terms of agreement is uncertain. A agrees to pay Rs 1 Lakh to B if B brings his son (who died last year). This is an impossible act .In both these examples, the agreement void.

106. Elements of a contract An intention to create legal relationship – The agreement should create a legal obligation. Mere informal promise is not to be enforced. Social agreements are not to be enforced as they do not create any legal obligation.

107. Agreement All contracts are agreements but all agreements are not contracts. Every promise and every set of promises forming consideration for each other is an agreement. Agreement = Offer + Acceptance. An agreement not enforceable by law is said to be void.

108. Types of Contract Legal Environment of Business

109. Classification of contracts Legal Effects Performance Formation Valid Contract Void Contract Voidable contract Unenforceable contract Illegal contract Unilateral Contract Bilateral contract Executed contract Executory contract Express Contract Implied contract Quasi contract

110. Classification based on legal effects Valid Contract – An agreement enforced by law is a valid contract. An agreement becomes a valid contract when it fulfills all the essentials of a contract as laid down in section 10.

111. Example Sophi offers Arun to sell his house for Rs 3 Lakhs . B agrees to buy the house for this price. It is a valid contract.

112. Classification based on legal effects Void Contract – A contract coming out from a void agreement is a void contract. A contract becomes void when it ceases to be enforceable by law.

113. Classification based on legal effects Voidable contract – An agreement which is enforceable by law at the opinion of one or more of the parties there to but not at the opinion of the other or the others is a voidable contract. A voidable contract remains to be good till it is avoided by the party entitled to do so.

114. Example If the consent of the party was caused by coercion, the contract is enforceable at the option of the party whose consent was not free.

115. Classification based on legal effects Unenforceable contract – An unenforceable contract is one which cannot be enforced in a court of law because of some technical defects such as absence of writing, time barred, want of stamps etc.

116. Example When the promissory not is under – stamped, the agreement therein becomes unenforceable because of that technical defect.

117. Classification based on legal effects Illegal Contract – An illegal agreement is one which criminal in nature or which is immoral or which is against public policy.

118. Example A contract to commit dacoity is an illegal contract.

119. Classification based on Performance Unilateral contract – A unilateral contract is one in which only one party has to fulfill his obligation at the time of the formation of the contract and the other party having fulfilled his obligation at the time of the contract or before contract comes into existence.

120. Example Amina permits a coolie to put his luggage to a carriage. The contract comes into existence as soon as the coolie puts the luggage. So Amina has only to fulfill his part.

121. Classification based on Performance Bilateral Contract – A bilateral contract is one in which the obligation on the part of both the parties to the contract are outstanding at the time of the contract.

122. Example Athulya promises to paint a picture in return for which Saranya promises to Rs 1000.

123. Classification based on Performance Executed Contract – If both parties of a contract have performed their respective obligation, contract is known as an executed contract.

124. Example Amal contracts with Bessy to buy a house for Rs 1,00,000. Amal paid Rs. 1,00,000 to Bessy . Bessy executed the sale deed and delivered its possession.

125. Classification based on Performance Executory contract – An executory contract is one in which both parties have not yet performed their obligations either wholly or in which there remains something to be done on both sides.

126. Example Rahul agrees to paint a picture for Rejith for Rs. 500. Rahul has not painted the picture and Rejith has not paid the price also.

127. Classification based on Formation Express contract – If the terms of a contract are expressly agreed upon (whether orally or in writing) at the time of the formation of the contract, the contract is said to be an express contract.

128. Example Collin writes to Aby “ I am willing to sell my car to you for Rs 50,000”. Aby accepts Collin’s offer by another letter.

129. Classification based on Formation Implied contract – An implied contract is one which is inferred from the act or conduct of the parties or course of dealings between them.

130. Example Diljith gets into a public bus. Then he enters into an implied contract with the authorities of the bus that he wishes to travel in the bus.

131. Classification based on Formation Quasi Contract – Under certain circumstances, law itself creates legal rights and obligations against the parties. These obligations are known as quasi contracts. It is created by law and it only resembles a contract. .

132. Example Aiju , a tradesman leaves goods at Sajid’s house by mistake. Suppose Sajid treats the goods as his own, then Sajid is bound to pay to Aiju a reasonable price for the goods.

133. Offer Legal Environment of Business

134. Definition As per Section 2 (a) of the contract Act, “ When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make an offer ”.

135. Example When A expresses his willingness to sell motor care for Rs 10,000 with a view to get B’s acceptance, A is said to make an offer.

136. Definition The word offer of the English law is synonymous to the word proposal of the Indian Contract Act. The person making the offer is called the offeror and the person accepting the proposal is called the offeree. Offer is made either by words spoken or by words written. This is expressed offer. An offer is made by conduct or behavior. This is implied offer.

137. Essential Characteristics of a valid offer The terms of an offer must be clear and certain or at least capable of being made certain. Offer must be communicated to the offeree . An offer must be made with an intention of creating legal obligations. Invitation to an offer is not an offer.

138. Essential Characteristics of a valid offer Special terms attached to an offer must be communicated. An offer may be to an individual or to the public at large. Offer may be expressed or implied. Offer must be made with a view to obtaining the assent of the other party Offer may be conditional. Offer should not contain a term, the non compliance of which would amount to acceptance.

139. Essential Characteristics of a valid offer The terms of an offer must be clear and certain or at least capable of being made certain. Example – A agrees B a hundred tons of oil. There is nothing whatsoever to show what kind of oil was intended to be sold. Hence the agreement is void for uncertainty and vagueness.

140. Essential Characteristics of a valid offer Offer must be communicated to the offeree. Example – In Fitch Vs Snedakar , a person gave information without knowing that an award was offered for it and claimed the award subsequently. It was held that he was not entitled to the award since he was not aware of the same.

141. Essential Characteristics of a valid offer An offer must be made with an intention of creating legal obligations. Example – A invited B for a dinner and when B came, dinner was not ready. B could not enforce it since it is just a social agreement.

142. Essential Characteristics of a valid offer Invitation to an offer is not an offer. Example – When a merchant sends his quotation, it is not an offer but is only an invitation on his part of his readiness to transact business on those terms.

143. Essential Characteristics of a valid offer Special terms attached to an offer must be communicated.

144. Essential Characteristics of a valid offer An offer may be to an individual or to the public at large. Example – In Carlil Vs Carbolic Smoke ball company, the company has offered by advertisement a reward of $ 100 to anybody contracting influenza after using their smoke ball. Mrs Carlil did and she was entitled for $ 100 since it was a general offer and she accepted it.

145. Essential Characteristics of a valid offer Offer may be expressed or implied. Example – A writes to B that he is prepared to sell his house for Rs. 2 Lakhs. This is an express offer. If a person hires a taxi, it is implied that he has to pay the fare.

146. Essential Characteristics of a valid offer Offer must be made with a view to obtaining the assent of the other party Offer may be conditional. Offer should not contain a term, the non compliance of which would amount to acceptance.

147. Kinds of offers General offer – If an offer is addressed to an unascertained body of individuals, it is called general offer. Special offer – If an offer is addressed to a definite individual or body of individuals, it is called a specific offer.

148. Example A issues a public advertisement that he would give Rs 100 to anyone who brings back his missing dog, it is a general offer. A promises to give Rs 100 to B if he brings back his missing dog, it is a special offer.

149. Kinds of offers Standing offer – An offer for a continuous supply of a certain article at a certain rate over a definite period is called a standing order. Example – A, by means of an offer agrees to supply coal to B at a particular price for a period of two years. It is a standing offer.

150. Kinds of offers Counter offer– A counter order is rejecting the original offer and making a new offer. Example – A offers to sell his house for Rs 2 lakhs to B. B accepts to purchase it for Rs One lakh. This is a counter offer.

151. Kinds of offers Cross offer – When two parties make identical offer to each other in ignorance of each other’s, such offer is called cross offer. Example – A by letter offers to sell his car to B for Rs 50,000. B by letter offers A to buy the same car for Rs. 50,000. It is a cross offer.

152. Lapses of offer Revocation by communication of notice. By lapse of prescribed time. Death of the offeror. Insanity of the offeror. Non- Fulfillment of conditions. Offer not accepted according to the mode prescribed. Rejection by a counter offer.

153. Consideration Legal Environment of Business

154. Definition The term consideration is defined in Sec. 2 (d) of the Indian contract Act as “ When at the desire of the promisor, the promise or any other person has done or abstained from doing, or promises to do or to abstain from doing something, such act, abstinence or promise is called a consideration for the promise. ”

155. Definition Consideration is the backbone of all promises. Consideration means something in return to the promisor.

156. Essentials of consideration Consideration must move at the desire of the promisor . Consideration may move from promisee or any other person. Consideration may be past, present or future. Consideration need not be adequate.

157. Essentials of consideration Consideration must be real and not illusory. Consideration must be lawful. Consideration must be something which the promisor is not already bound to.

158. Essentials of consideration Consideration must move at the desire of the promisor . Example – X’s son is missing and Y voluntarily goes in search for him. Y cannot claim any remuneration or reward for finding out X’s son because he has not done it at X’s request.

159. Essentials of consideration Consideration may move from promisee or any other person. Example – In Chinnayya Vs Rammayya , it was held that consideration moving from third party is also good consideration.

160. Essentials of consideration Consideration may be past, present or future. Example – X’s son was rescued from drowning by Y on 15 th August at the request of X. Subsequently on 17 th , X promised to pay Rs 500 for the service rendered in the past. Y’s consideration in this case is past consideration.

161. Essentials of consideration Consideration may be past, present or future. Example – X agrees to look after the child of Y and he further agrees to receive all expenses incurred by him from Y at the end of the year. In this case, consideration is a future one for X.

162. Essentials of consideration Consideration need not be adequate. Example – A agrees to sell his horse worth Rs 25,000 to B for Rs. 1000. The contract is valid provided A’s consent was freely obtained.

163. Essentials of consideration Consideration must be real and not illusory. Example – A promises to shift a mountain from one place to another if B paid Rs 10,000. A’s promise is physically impossible of performance.

164. Essentials of consideration Consideration must be lawful. Example – Where A promises to obtain an employment for B in the public service and B, in return promises to pay Rs. 1000 to A, the agreement is void as the consideration is unlawful.

165. Essentials of consideration Consideration must be something which the promisor is not already bound to. Example – A is paid salary for doing a job. So he is bound to do the job. But a promise to pay another sum of money for doing the job is without consideration.

166. Different Kinds of consideration Present consideration – When consideration is given simultaneously with promise, ie at the time of promise, it is said to be present consideration. Example – Cash sales.

167. Different Kinds of consideration Future consideration – A consideration is said to be future consideration when it is done in future or yet to be complied with.

168. Different Kinds of consideration Past consideration – When consideration for a present promise was given by party in the past, ie before the date of promise, such a consideration is a past consideration. Example – A has already rendered some service to B and B now makes a promise.

169. Acceptance Legal Environment of Business

170. Definition Section 2 (b) of the contract Act defines ‘Acceptance’ as follows: “ When the person to whom the offer is made signifies his assent thereto, the offer is said to be accepted .”

171. Definition The offeree, when he accepts the offer, is called the acceptor. Acceptance can be made by words, spoken or written. An offer can be accepted only by the person to whom it is made.

172. Essentials of a valid acceptance Acceptance must be absolute and unqualified. Example – A says to B, “ I offer to sell my house for Rs. 2 Lakhs .” B replies “ I will purchase it only for Rs 1 Lakh ”. It is only a partial acceptance.

173. Essentials of a valid acceptance Acceptance must be communicated to the offeror . Acceptance must be made within a reasonable time. Acceptance must be communicated in some usual and reasonable manner. Acceptance may be expressed or implied.

174. Essentials of a valid acceptance Acceptance must be made by the offeree. Acceptor must be aware of the proposal at the time of the offer. Acceptance must be made only after the offer is made.’ Acceptance must be given before the offer lapses or is revoked. Acceptance concludes the contract.

175. Performance of contract Legal Environment of Business

176. Definition Performance of a contract consists in doing or causing to be done what the promisor has promised to do. A contract creates legal obligations. Performance of a contract means the carrying out of these obligations.

177. Definition When the terms of a contract are fulfilled by the respective parties to the contract, performance of contract takes place.

178. Example A promises to deliver 100 bags of wheat to B and B promises to pay Rs. One lakh on delivery. The contract is said to be performed when A delivers 100 bags wheat to B and B pays Rs. One Lakh to him.

179. Who may perform the contract? The contract may be performed by three categories. Promisor Agent Legal representative

180. Who may perform the contract? Promisor – If a contract involves the exercise of personal skill and qualifications of the promisor, then it must be performed by the promisor himself.

181. Who may perform the contract? Agent – When the personal skill of the promisor is not necessary and the work could be done by anyone, the promisor or his representative may employ a competent person to perform it. He acts as the agent of the promisor.

182. Who may perform the contract? Legal representative – If the promisor dies before the performance of the contract, his legal representatives like sons and daughters who inherit the property of the deceased promisor are bound to perform it.

183. Who can demand performance? Naturally, it is only the promisor who can demand performance of the promise. It makes no difference whether the promise is for the benefit of the promise or for any other person. In certain cases, a third party can also enforce a promise under a contract even though he is not a party to contract. In the case of death of promisor, his legal representatives can demand performance.

184. Example A promises to B to pay C a sum of Rs. 500. A does not pay the sum to C. C cannot take any against A. It is only B or his representatives who can enforce this promise against A since B is the promisee .

185. Time and Place of performance It is for the parties of the contract to determine the time and place of performance of contract. The following rules regarding time and place of performance of a contract are discussed in the Contract Act.

186. Time and Place of performance Where the time is not fixed – According to section 46, where the contract is to be performed without any demand by the promise and where no time for performance is fixed, then the contract must be performed within a reasonable time.

187. Example A borrowed certain sum of money from B and B directed to pay the said sum to C, a third party. A also agreed to repay to C but A did not fulfill his promise for three years. It was held that the failure to pay the amount to C by A amounted to a breach of contract since a period of three years considered a reasonable time for performance.

188. Time and Place of performance Where the time is fixed – According to section 46, when a promise is to be performed on a certain day and the promisor has undertaken to perform it without application by the promise, the promisor may perform it at any time during the usual hours of business on such a day and at the place at which the promise ought to be performed.

189. Example X promises to deliver goods at Y’s godown on the lst of January. On that day, X brings the goods to Y’s godown , but after the usual hour for closing it. Hence the goods are not received. In this case, X has not performed his contract in time.

190. Time and Place of performance Place of performance – If the contract mentions a place, the contract must be performed at the place mentioned in the contract. If the place is not mentioned, the promisor must ask the promise to fix a reasonable place to perform the contract.

191. Discharge of Contract Legal Environment of Business

192. Definition Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when the parties thereto are freed from the task of performing their respective obligations as arising from the contract.

193. Definition When a contract is discharged, all the rights and liabilities of the contracting parties are extinguished and their relationship comes to an end.

194. Various modes of discharge By performance of contract. Actual Performance. Attempted performance. By agreement. By Novation . By alteration. By recession. By remission. By waver. By merger.

195. Various modes of discharge 3. By lapse of time. 4. By operation of law. By death. By insolvency. 5. By impossibility of performance. At the time of contract. Subsequent to contract. 6. By breach of contract.

196. By performance of contract When persons who have undertaken the obligations perform it within the time and in the manner prescribed, the contract will be properly discharged.

197. By performance of contract Performance is classified into two. Actual performance – Section 37 states that in order to claim performance, the parties to a contract must have actually performed their part of the contract. Example – If A agreed to supply 20 bags of rice to D, A must have actually supplied the entire 20 bags of rice. Then only it can be stated that the contract has actually been performed.

198. By performance of contract Performance is classified into two. Attempted performance – A person who is bound to perform a promise will be ready to perform his promise but sometimes the other party refuses to accept that performance. This is known as attempted performance or tender.

199. By agreement As contract emerges from an agreement of both parties, it may also be terminated by another agreement or consent of both parties.

200. By agreement Contract may be discharged by agreement in the following ways. By Novation . By alteration. By recession. By remission. By waver. By merger.

201. By agreement By Novation (substitution of a new contract) – Sometimes, the contracting parties may agree to substitute a new contract in the place of the original contract between themselves and different parties. The substitution of new contract is called “ Novation ”.

202. Example A owes Rs 5000 to B. It is agreed between A, B and C that henceforth, C will repay the amount of Rs. 5000 to B. Old contract disappears and new one is formed.

203. By agreement By alteration – Alteration means a change in one or more of the terms of the contract. By mutual agreement, parties to contract can alter one or more terms of the contract. By such alteration, the contract is discharged.

204. Example X enters into a contract with Y for supply of 100 bags of Sugar by the first of the next month. Subsequently, X and Y want to alter the terms of the contract and thereby X and Y agree that X should supply 50 bags of sugar instead of 100 bags on the 10 th of the next month. In this case, the old contract is discharged.

205. By agreement By recession – Recession means cancellation of contract. In that case, the original contract need not be performed. Both the contracting parties may agree, by mutual agreement, to rescind the contract by cancelling some or all the terms of the contract.

206. Example X agrees to supply Y certain luxurious good within six months. By the time, the said goods go out of fashion. Both X and Y agree to cancel the contract. By such cancellation, the contract between X and Y is discharged.

207. By agreement By remission – Remission means acceptance of a lesser performance than what was actually due under the contract. It is a unilateral act of promise discharging at his will and pleasure the obligation of another.

208. Example X owes Rs. 500 to Y. Y agrees to accept a lesser sum namely, Rs 400 instead of Rs. 500. As soon as Rs. 400 is paid by X, the whole debt of Rs. 500 is discharged.

209. By agreement By waver – When both parties by mutual consent, agree of abandon their respective rights, the contract need not be performed and the same is discharged. It is called waiver.

210. Example A agrees to supply B 10 bags of rice. B, in return agrees to supply A, 10 bags of wheat. Subsequently, both A and B agree to abandon their respective rights. Accordingly A need not supply rice to B. Likewise B need not supply wheat to A. Now contract is discharged.

211. By agreement By merger – Sometimes, both parties, who have already entered into a contract within inferior rights, may enter subsequently new contract and the new contract creates superior rights. Now the previous contract with lesser right is said to be merged with subsequent contract with superior rights.

212. Example Y is the owner of the house in which X is residing as a tenant. Subsequently X buys the property from Y. In such case, X’s lesser rights as leasee will be merged into his superior rights as an owner.

213. By lapse of time Every contract must be performed within specified period and it is called the period of limitation. If the contract is not performed and the promise fails to take any action within the period of limitation, then the contact is terminated or discharged by lapse of time.

214. Example X borrows Rs. 500 from Y through a promissory note. If X does not pay any amount, Y must file a suit to recover the amount in a court of law within three years from the date of execution of the promissory note. If no action is taken by Y within three years, the promissory note is completely barred by limitation and Y can’t recover the amount from X.

215. By operation of law A contract may be discharged by operation of law. In other words, law itself discharges the contract in the following circumstances. By death – An contract which is based upon personal skill and qualification of the promisor is terminated on the death of the promisor. In other contracts, the rights and liabilities of deceased person pass of his legal representatives.

216. Example X agrees to paint a picture for Y. Subsequent to the agreement X dies. Now the contract of X with Y discharged because of the death of the promisor.

217. By operation of law By insolvency – If a person is adjudicated insolvent by a competent court, all his rights and liabilities are vested with the official receiver and the insolvent is discharged from all his rights and liabilities arising from all his earlier contracts.

218. By impossibility of performance Contract will be discharged when the performance of contract becomes impossible. Impossibility of performance of a contract may exist either

219. By impossibility of performance At the time of contract – when both the contracting parties are aware of impossibility of performance of the contract even at the time of formation of the contract itself, then the agreement becomes void. If they are not aware, contract becomes void when such impossibility is discovered.

220. Example X agrees to pay Y Rs. 10,000 and Y, in return promises to bring the moon from heaven for X. In such a case, the impossibility is known for the parties.

221. By impossibility of performance Subsequent to contract – As a general rule, the impossibility of performance will not excuse the promisor and in case of non performance, the promisor is liable to pay damages to the promise. But there may be some cases in which non – performance of the contract may be due to some even beyond the control of the parties. In such cases, performance of contract will be discharged. This is called “Doctrine of Supervening impossibility’.

222. Example A and B contracts to marry each other. Before the time fixed for marriage, A goes mad. This supervening factor renders the contract impossible. So the contract becomes void.

223. By breach of contract Breach means failure of a party to perform his obligation under a contract. When a promisor has failed to perform his part of contract, he has committed a breach of contract. Breach of contract is of two kinds.

224. By breach of contract Actual breach of contract – Actual breach of contract may take place at the time when the performance becomes due and in such cases, one party, fails or refuses to perform his obligation.

225. Example X agrees to supply Y, 10 bags of sugar on the 1 st of March. In this case, performance is due on 1 st March. On the 1 st march, he fails to supply sugar. This is actual breach of contract at the time when the performance is due.

226. By breach of contract Anticipatory breach of contract – When a party to a contract refuses to perform his obligation before the due date of performance, it is called anticipatory breach of contract.

227. Example X agrees to supply Y, 10 bags of sugar on the 1 st of March. But before this date, say in the second week of February, he informs B that he is not going to supply the sugar. This is anticipatory breach of contract by express repudiation.

228. Breach of Contract Legal Environment of Business

229. Definition Parties to a lawful contract are bound to perform their respective obligations. But when one of the parties of a contract fails to perform his part of contract, he is said to have committed breach of contract.

230. Definition Breach of contract confers a right of action upon the party injured. This right of action is the remedy available for the injured against the party committing breach of contract.

231. Remedies for breach of contract Rescission of contract (Cancellation). Restitution. Suit for specific performance. Suit for Injunction. Suit from ‘Quantum Meruit ’. Suit for damages.

232. Remedies for breach of contract Rescission of contract (Cancellation) - Rescission of contract means annulment of it. It is the revocation of the contract. When all or some of the terms of contract are cancelled, rescission of a contract takes place.

233. Example A promises to supply certain goods to B for price. A does not supply the goods. B is discharged from his liability to pay the price.

234. Remedies for breach of contract Restitution – Restitution means return of the benefit received by one party from the other party in a void contract. When an agreement is, later discovered to be void or when the contract becomes void, any person who received any advantage under such agreement or contract is bound to restore it or make compensation for it to the person from whom he received it.

235. Example A pays B Rs. 1,00,000 in consideration of B’s promising to marry C, daughter of A. But C is dead at the time of promise. The agreement is void at the time when the death is known. So B must repay the amount of Rs. 1,00,000.

236. Remedies for breach of contract Suit for specific performance – Specific performance means actual performance of the particular contract as per agreement. Specific performance will be granted in those cases where compensation will not be an adequate remedy or actual damage cannot accurately be assessed and it will usually be granted in contracts connected with purchase of land or house.

237. Example A agrees to sell his land to B. If A subsequently refuses to sell the land, B can file a suit for special performance and the court can compel A to sell and to execute the sale deed in favor of B in respect of the land agreed to be sold.

238. Remedies for breach of contract Suit for Injunction – Another remedy for breach of contract is an injunction which is an order of the court restraining or preventing a person from doing a particular act. It is another mode of securing the specific performance by the negative terms of a contract.

239. Example A contracts with B to sing for 12 months at B’s theatre and in no other place. Later A entered into a contract with C to sing in C’s theatre and refuse to sing in B’s theatre. Now B can file a suit and obtain an order of injunction restraining A from singing in C’s theatre.

240. Remedies for breach of contract Suit from ‘Quantum Meruit ’ – The phrase ‘Quantum Meruit ’ literally means ‘ as much as earned’. When a person has done some work under a contract and the other party repudiates the contract or some even happens which makes further performance of the contract impossible, then the party who has performed the work can claim remuneration for the work he has already done.

241. Example Under a contract, A agrees to do a certain piece of work for a lump sum of Rs 1000 which is payable on its completion. When A has done 50 % of work, B repudiates the contract. In such a case, A can claim “ Quantum Meruit ” ie Rs 500 being the reasonable remuneration of 50 % of the work done.

242. Remedies for breach of contract Suit for damages – Damage means monitory compensation payable by the defaulting party to the injured party in the event of breach of contract. The object of awarding damages is to put the aggrieved party in the same financial position, had the contract been performed.

243. Different types of damages General damages Special damages Vindictive damages Nominal damages Liquidated damages Penalty

244. Different types of damages General damages – Damages that arise naturally in the usual course of things from the breach itself are called general damages. These damages are awarded only for consequences which arise out of breach of contract.

245. Different types of damages Special damages – Special damages are those which arise from the breach of contract under special circumstances.

246. Different types of damages Vindictive damages – These damages are awarded with a view to punish the defaulting party who injured the feelings of the others and not solely with the idea of awarding compensation to the injured party.

247. Different types of damages Nominal damages – Nominal damages are awarded in cases where the injured party is able to prove a breach of contract but he has not suffered any real and substantial loss.

248. Different types of damages Liquidated damages – This represent a sum fixed or ascertained by the parties of the contract. It is a fair and genuine pre – estimate of the probable loss that might ensure as a result of the breach.

249. Different types of damages Penalty – It is a sum fixed in the contract at the time of its formation which is disproportionate to the damages likely to accrue as a result of the breach. It is used for forcing the other party to perform the contract.

250. Contract of indemnity Legal Environment of Business

251. Contract of indemnity - Definition To indemnify means to compensate or make good the loss. According to Section 124 of the contract Act, “ A contract of indemnity a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person .”

252. Example A takes court proceedings against B to recover a sum of Rs 1000. At this juncture, C enters into an agreement with B and promises to compensate B from the loss or consequences of such court proceedings which A takes against B. This is a contract of indemnity.

253. Definition The person who promises to save the other from the loss is called indemnifier. The person, to whom the promise is made, is called indemnified.

254. Definition To constitute a valid contract of indemnity, the following three ingredients are necessary. One party promises to save the other from loss caused to the latter. The loss caused to him by the conduct of the promisor. The loss is caused by the conduct of any other third person.

255. Object of contract of indemnity The object of contract of indemnity is essentially to protect the indemnified form the anticipated loss. A contract of Indemnity may be expressed or implied. Expressed contract of Indemnity – Where the terms of the contract or Indemnity are either in oral or in written form. Implied contract of Indemnity – where the contract of Indemnity can be inferred from the circumstances of the case or from the relationship of the parties.

256. Rights of indemnity holder Section 125 enumerates the rights of an indemnity holder in a contract of indemnity. An indemnity holder can recover from the indemnifier the following.

257. Rights of indemnity holder Damages – All damages which he may be compelled to pay in any suit of any matter to which the promise to indemnify applies. Costs – All costs he may be compelled to pay in any such suit. All sums – All sums which he may have paid under the terms of any compromise of any such suit, provided such compromise is not contrary to the orders of the promisor and was one which it would have been prudent for the indemnity holder to make. Suit for special performance – An indemnity holder is entitled to sue the indemnifier even before he has suffered any damage provided an absolute liability has been incurred by him.

258. Contract of Guarantee Legal Environment of Business

259. Definition According to Section 126, “a contract of Guarantee is a contract to perform the promise or to discharge the liability of a third person in case of his default.”

260. Example A lends Rs 500 to B on C’s promise to pay the same if B fails to pay within a year. This is contract of Guarantee.

261. Definition A contract of Guarantee involves three parties, the creditor, the surety and the principal debtor. The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is give is called the ‘creditor’.

262. Essential features of a Contact of Guarantee A contract of Guarantee involves three parties, the creditor, the surety and the principal debtor. The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is give is called the ‘creditor’.

263. Essential features of a Contact of Guarantee Three parties. Indemnity of mind. Liability of existence. Primary and secondary liability. Writing or Oral. No misrepresentation or concealment.

264. Essential features of a Contact of Guarantee Three parties – There must be three parties in a contract of guarantee namely, the principal debtor, the creditor and the surety. In a Contract of Guarantee, there are three contracts (1) Contract between principal debtor and creditor (2) Contract between principal debtor and surety and (3) Contract between creditor and surety.

265. Essential features of a Contact of Guarantee Indemnity of mind – The Contract of Guarantee requires the identify of mind (Concurrence) of all the said three persons in respect of the subject matter of the contract.

266. Essential features of a Contact of Guarantee Liability of existence – There must be a primary liability in some person other than the surety. Primary and secondary liability – The primary liability lies with the principal debtor. The liability of the surety is only secondary in the sense that his liability arises only when the principal debtor fails to pay his debt.

267. Essential features of a Contact of Guarantee Writing or Oral – Contract of Guarantee may be oral or in writing. But under the English law, a contract of guarantee must always be in writing. Essential elements of a contract – A Contract of Guarantee must have all the essential elements of a valid contract.

268. Essential features of a Contact of Guarantee No misrepresentation or concealment – Any guarantee which has been obtained by means of misrepresentation made by the creditor or with his knowledge and assent concerning a material part of the transaction is invalid.

269. Kinds of Guarantee Absolute or conditional. Retrospective or prospective General or specific Limited or unlimited

270. Kinds of Guarantee Absolute or conditional – An absolute guarantee is one by which the guarantee unconditionally promises payment or performance of the contract on default of the principal debtor. A conditional guarantee is one which is not enforceable immediately on the default of the principal debtor but some other contingency.

271. Kinds of Guarantee Retrospective or prospective – When a guarantee is given for an existing debt, it is called retrospective guarantee. When a guarantee is given for a future debt, it is called prospective guarantee.

272. Kinds of Guarantee General or specific – A general guarantee is one for acceptance by the public generally. It is a general promise to any one accepting it to be answerable for a debt in case of the failure of another person.

273. Example A gives guarantee to B for the payment of the price of five sacks of flour to be delivered by B to C and to be paid in a month. B delivers 5 sacks to C. C in return pays for them. Afterwards, B delivers flour to C to which C does not Pay. In this example, the guarantee given by A was a specific guarantee so C is not liable for the sacks delivered subsequently.

274. Kinds of Guarantee Limited or unlimited – A limited guarantee is one, restricted to a single transaction. An unlimited guarantee is one which is unlimited either as to time or amount.

275. Negotiable Instruments Act Legal Environment of Business

276. Definition The word ‘negotiable’ means transferable by delivery and instrument means a written document by which a right is created in favorable of some person. The term negotiable instrument therefore literally means a document transferable by delivery.

277. Definition Section 13 (1) of the Negotiable Instruments Act states that “ A Negotiable Instruments means a promissory note, bill of exchange or cheque payable either to order or to bearer .”

278. Definition Negotiable instruments recognized by statute are only of three kinds: Promissory Notes. Bills of exchanges. Cheques.

279. Characteristics of negotiable instrument Property. Freely transferable. Title of holder free from all defects . Recovery. Presumption. Prompt payment. As good as cash. Transferability.

280. Characteristics of negotiable instrument Property – The possessor of the negotiable instrument is presumed to be the owner of the property contained therein.

281. Characteristics of negotiable instrument Freely transferable – The property in a negotiable instrument can be transferred without any formality.

282. Characteristics of negotiable instrument Title of holder free from all defects – A bonafide transferee for value is not affected by any defect of title on the part of the transferor or any of the previous holders of instrument.

283. Characteristics of negotiable instrument Recovery – The transferee of the Negotiable Instrument can sue in his own name, in case of dishonor for the recovery of the amount.

284. Characteristics of negotiable instrument Presumption – Certain presumptions apply to all negotiable instruments. Ex : A presumption is that consideration has been paid.

285. Characteristics of negotiable instrument Prompt payment – A negotiable instrument enables the holder of the instrument to expect prompt payment.

286. Characteristics of negotiable instrument As good as cash – A negotiable instrument is a document but it is as cash since cash can be obtained. It is a contract to pay money.

287. Characteristics of negotiable instrument Transferability – A negotiable instrument can be transferred any number of times till it is at maturity and holder of the instrument need not give any notice of transfer to the debtor.

288. Kinds of negotiable instruments Inland instrument. Foreign instrument. Ambiguous Instrument. Inchoate instrument. Accommodation bills. Fictitious bill. Bearer instrument. Order instrument. Instrument payable on demand. Instrument payable at a future time

289. Kinds of negotiable instruments Inland instrument – A promissory note, bill of exchange or a cheque drawn or made in India and made payable, in or drawn upon any person resident in India, shall be deemed to be an inland instrument.

290. Kinds of negotiable instruments Foreign instrument – A Foreign instrument is one which is not an inland instrument. Example: A bill drawn in India and made payable in London.

291. Kinds of negotiable instruments Ambiguous Instrument – When an instrument owing to its faulty drafting may be interpreted as a promissory note or a bill, then it is called an ambiguous instrument.

292. Kinds of negotiable instruments Inchoate instrument – It is one which is an incomplete instrument, for example, not mentioning the amount payable or leaving blank the name of the payee.

293. Kinds of negotiable instruments Accommodation bills – When a bill is drawn, accepted or indorsed without any consideration, it is called an accommodation bill.

294. Kinds of negotiable instruments Fictitious bill – When the name of the drawer or the payee or both is fictitious in a bill, the bill is called a fictitious bill.

295. Kinds of negotiable instruments Bearer instrument – When in a negotiable instrument, it is expressed that the amount is payable to the bearer or when the only or last endorsement is an endorsement in blank, the instrument is a bearer instrument.

296. Kinds of negotiable instruments Order instrument – When in a negotiable instrument, it is expressed that the money be payable to order or when it is expressed to be payable to a particular person and does not contain words prohibiting or restricting its transfer, the instrument is called order instrument.

297. Kinds of negotiable instruments Instrument payable on demand – When no time is specified on a promissory note or bill, then it is treated as payable on demand. Cheque is always payable on demand.

298. Kinds of negotiable instruments Instrument payable at a future time – A bill or a note is payable at a future time if it is stated to be payable at a fixed period after its date or after sight or after an event which is certain to happen.

299. Bill of exchange Legal Environment of Business

300. Definition “ A bill of Exchange is an instrument in writing containing the unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument ”.

301. Definition Thus bill of exchange is an order from the creditor to the debtor to pay a specified amount to a person mentioned therein.

302. Parties of Bill The maker of bill of exchange is called the Drawer . The person who is directed to pay is called Drawee . The person who will receive the money is called the Payee .

303. Essential elements of bill of exchange The instrument must be in writing. The instrument must contain an order to pay, which is expressed and unconditional. There must be three parties, drawer, drawee and payee and they must be certain and definite individuals. The instrument must be signed by the drawer.

304. Essential elements of bill of exchange The amount of money to be paid must be certain. The payment must be in the legal tender money of India. The money must be payable to a definite person or according to the order. It must comply with the formalities as regards date, consideration, stamps etc.

305. Difference between promissory note and bill of exchange There are two parties, promisor and promise in a promissory note while there are three parties, payee, drawee and drawer in a bill of exchange. A promissory note is an unconditional promise to pay while a bill of exchange is an unconditional order to pay.

306. Difference between promissory note and bill of exchange In promissory note, liability of the maker is primary and absolute while liability of the drawer of bill of exchange is secondary and conditional. A promissory note cannot be made payable to the maker himself while the drawer and the payee must be the same in bill of exchange.

307. Difference between promissory note and bill of exchange A promissory note requires not acceptance since it is signed by the person who is liable to pay while the bill of exchange requires acceptance by the drawee before it is presented for payment. A promissory note cannot be drawn payable to a bearer while a bill of exchange can be so drawn provided it is not payable to bearer on demand.

308. Difference between promissory note and bill of exchange Maker of a promissory note stands in immediate relation with the payee. Drawer of a bill stands in immediate relation with acceptor and not the payee. Promissory note cannot be drawn in sets. A bill can be drawn in sets.

309. Promissory Notes Legal Environment of Business

310. Definition A promissory note is an instrument in writing containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

311. Definition The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is to be made is called payee.

312. Example I acknowledge myself to be indebted to A in Rs 500 to be paid on demand for values received.

313. Essentials of a promissory note In writing. Promise to pay must be express. Definite and unconditional. To be signed by the maker. Certain in the case of parties. Certainty in the case of sum of money. Promise to pay money only. Formalities are not necessary.

314. Essentials of a promissory note In writing – Promissory note must be writing. Writing may include print, type writing, writing in pencil or writing in ink. Writing includes photographing and lithographing.

315. Essentials of a promissory note Promise to pay must be express – It must contain an express undertaking or promise to pay. A mere acknowledgement is not enough.

316. Essentials of a promissory note Definite and unconditional – The promise to may must be definite and unconditional. A promise to pay in unconditional if it depends on an event which is certain to happen or if it is to pay at a particular place or at a specified time. Example – A promise to pay a sum of Rs 1000 two days after the death of C.

317. Essentials of a promissory note To be signed by the maker – The promissory note must be signed by the maker otherwise it is incomplete.

318. Essentials of a promissory note Certain in the case of parties – The instrument must point out with certainty as to who is the maker and who is the payer.

319. Essentials of a promissory note Certainty in the case of sum of money – The sum expressed to be payable by the promissory note must be certain and must be capable of contingent additions or subtractions. Example – “I promise to pay A Rs 500 and all other sum payable” – Sum of money is not certain.

320. Essentials of a promissory note Promise to pay money only – The payment must be in the legal tender money of India. Example – “I promise to pay A Rs 500 and a quintal of rice” – Only money is acceptable.

321. Essentials of a promissory note Formalities are not necessary – Formalities like number, date, place, consideration etc are usually found in an instrument even though they are not essential in law.

322. Cheques Legal Environment of Business

323. Definition A cheque is a bill of exchange drawn upon a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

324. Definition All cheques are bills of exchange but all bills of exchange are not cheques .

325. Types of cheques Open cheques – A cheque which can be presented by the payee for payment at the counter of the bank of which they are drawn, are called open cheques .

326. Types of cheques Crossed cheques – Crossing a cheque means putting two parallel lines across the face of the cheque . The payment of such a cheque cannot be obtained at the counter of the bank. Such cheques must be collected through a banker.

327. Modes of crossing a cheque General crossing. Special crossing. Restrictive crossing. Not negotiable crossing.

328. General crossing When a cheque bears across its face an addition of ( i ) the words “And company” or (ii) any abbreviation between two parallel traverse lines simply either with or without the word negotiable or (iii) two parallel traverse lines simply either with or without the words not negotiable that addition shall be deemed a crossing, it is a general crossing.

329. General crossing The two traverse parallel lines across the face of the cheque are essential for general crossing. Effect of such crossing is that the holder or payee cannot get the payment over the counter of the bank but through bank only.

330. General crossing

331. Special crossing When a cheque bears across its face an addition of name of a bank either with or without the words ‘ not negotiable’, the cheque is deemed to be crossed specially. A cheque cannot be crossed more than once specially. A special crossing makes the cheque more safer than a general crossing because the payee or holder cannot receive payment except through the banker named in the cheque .

332. Special crossing

333. Restrictive crossing It includes words like A/C payee, Account Payee only, A/c Ashok only etc between traverse parallel lines. The effect of the restrictive crossing is that it directs the collecting banker that the proceeds of the cheques are to be credited only to the account of the payee named in the cheque or between the traverse lines.

334. Restrictive crossing

335. Not negotiable crossing A cheque may be crossed with the words ‘not negotiable’ on it. The effect of the words ‘ not negotiable’ on a crossed cheque is that cheque cannot be negotiable.

336. Difference between bill of exchange and cheque A bill of exchange may be drawn on any person including a banker. But a cheque is always drawn on a bank or banker. A bill must be accepted before the drawee can be called upon to make payment upon it. A cheque does not require acceptance.

337. Difference between bill of exchange and cheque A bill is entitled to 3 days of grace. A cheque is not entitled to any days of grace. A cheque may be crossed. But there is no such provision for a bill of exchange. A bill requires stamp except in certain cases. A cheque requires no stamp.

338. Discharge of Negotiable Instrument Legal Environment of Business

339. Definition An instrument is said to be discharged when all rights of action under it are completely extinguished and when it ceases to be negotiated. This would happen when the party who is ultimately liable on the instrument is discharged from liability.

340. Definition The term discharge in relation to negotiable instrument is used in two senses (1) discharge of the instrument and (2) discharge of one or more of the parties from liability thereon.

341. Different modes of discharge of an instrument By payment in due course. Any party primarily liable becoming holder. By express waiver. By cancellation. By discharge as a simple contract. By material alteration.

342. Different modes of discharge of an instrument By payment in due course – The instrument is discharged by payment made in due course by the party which is primarily liable to pay. The payment amount due on the instrument must be made at or after the maturity of the instrument if the maker or acceptor is to be discharged.

343. Different modes of discharge of an instrument Any party primarily liable becoming holder – If the maker of a note or acceptor of a bill becomes its holder at or after its maturity, in his own right, the instrument is discharged.

344. Different modes of discharge of an instrument By express waiver –When the holder of an instrument at or after its maturity absolutely and unconditionally renounces in writing or gives up his right against all the parties to the instrument, the instrument is discharged.

345. Different modes of discharge of an instrument By cancellation – When an instrument is intentionally cancelled by the holder or his agent and the cancellation is apparent thereon, the instrument is discharged.

346. Different modes of discharge of an instrument By discharge as a simple contract – A negotiable instrument may be discharged in the same way as any other contract for the payment of money. This includes, for example, discharge of an instrument by novation or recission or by lapse of period of limitation

347. Different modes of discharge of an instrument By material alteration – An instrument is discharged when the party primarily liable is discharged by material alteration in the instrument

348. Discharge of a party or parties The maker, acceptor or endorser of a negotiable instrument maybe discharged from liability in the following way. If the holder of a negotiable instrument or his agent cancels the name of any party on the instrument, with an intention to discharge him, such party is discharged from liability to the holder. If the holder of a negotiable instrument releases any party to the instrument by any method other than cancellation, the party so released is discharged from liability.

349. Discharge of a party or parties Payment to the person in possession of the bearer instrument discharges the party. If a cheque is not presented for payment within a reasonable time of its issue and the drawer suffers actual damage through the delay, he is discharged to the extent of such damage. If holder of a bill takes a qualified or limited acceptance, he does so at his own risk and discharges all the parties prior to himself unless he contains their consent.

350. Discharge of a party or parties Discharge can take place on account of an order of the insolvency court, by the lapse of time or merger. When a negotiable instrument has been materially altered but does not appear to have been so altered, payment on such an instrument discharges the party liable provided he makes payment according to the apparent tenor of the instrument and in due course. When a negotiable instrument is materially altered without the assent of all the parties on the instrument, the instrument is avoided.

351. Material alteration An alteration which in any way alters the operation of the instrument and the liabilities of the parties thereto or which alters the business effect of the instrument is a material alteration. For example, (1) alteration of date (2) alternation of name (3) alteration of amount etc.

352. Acceptor for honor Normally a stranger cannot accept the bill. But when a Bill of exchange has been noted and protested for non – acceptance or for better security, any person who is not already liable on the negotiable instrument under reference can accept. He is called acceptor for Honor.

353. Forged instrument Forgery is the fraudulent making or alteration of a writing to the prejudice of another man’s right. It may include fraudulently writing the name of an existing person, signing the name of a fictitious person etc. A forged document confers not title to the holder. For example: On a note for Rs 2000, A forges B’s signature to it as a maker. X, the holder, who takes it bonafide and for value acquires no title to the note. He can’t sue upon the note.

354. Sales of goods act - Agreement to sell Legal Environment of Business

355. Contents Sales and types of sales. Contract of sales and agreement of sales. Essential elements of a contract of sale. Good and types of goods. Perishing of goods. Price and fixation of price.

356. Sales Where the right of ownership in the goods is transferred from the seller to the buyer, the contract is called a sale.

357. Example On 1 st August, X sells 5 bags of cement to Y for a sum of Rs 1500. This transaction is called sale since the ownership of 5 bags of cement is transferred from X to Y.

358. Types of sales Absolute sales Conditional sales

359. Absolute sale The property in the goods passes from the seller to the buyer immediately and noting remains to be done by the seller. A sale on a counter in a shop is an absolute sales.

360. Conditional sale The property in the goods do not pass to the buyer absolutely until a certain condition is fulfilled.

361. Contract of sale A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property of goods to the buyer for a price. Property means the right of ownership.

362. Agreement to sale Where the transfer of ownership in the goods is to take place at a future time or subject to some conditions thereafter to be fulfilled, the contract is called agreement to sell.

363. Example On 1 st May, A and B agree that A should sell 5 bags of cement to B on 15 th June for a sum of Rs. 1500. It is an agreement to sell since A agrees to transfer ownership in the future. Date of agreement is 1 st May but actual sale would take place only on 15 th June.

364. Essential elements of a contract of sale Contract. Existence of two parties namely buyer and seller. Transfer of ownership. Subject matter of sale of goods. Price.

365. Essential elements of sale Contract – All the essential elements of a contract must be present in a contract sale.

366. Essential elements of sale Existence of two parties namely buyer and seller – The seller is the person who sells and the buyer is the person who buys. Both buyer and seller should be competent to enter into a contract. A person cannot buy his own goods or cannot sell his goods to himself.

367. Example C M Transport company Vs. ITO (1966) – In this case, a company resolved to transfer some buses to a partnership firm consisting of certain persons who were also the members of the company. Income tax officer considered it as transfer as sale because the company has a legal entity and can be a seller. This decision was upheld by the court.

368. Essential elements of sale Transfer of ownership - Transfer of ownership from seller to buyer is the most important ingredient in a contract of sale.

369. Example A borrows a sum of Rs 10000 from B and pledges his property against this loan to B. In this case, A transfers a special property to B, by handing over possession, but retains his ownership. Thus it is not a contract of sales.

370. Essential elements of sale Subject matter of sale of goods – The subject matter of sale must be the goods, the property in which, is transferred. Price – The consideration for sales of goods must be money called price. The price has been defined as money consideration for sales of goods.

371. Goods The goods include every kind of movable property other than actionable claim or money.

372. Types of Goods Existing goods. Special goods. Ascertained goods. Unascertained goods. Future goods. Contingent goods.

373. Existing good Goods owned and possessed by the seller at the time of making of the contract of sales are called existing goods.

374. Example If A sells his horse to B, believing it to be in existence but in fact the horse is dead, no contract will arise.

375. Specific goods These are goods identified and agreed upon at the time a contract of sales is made.

376. Example A has two horses, one black and one white. He agrees to sell white horse to B. In this case, the subject matter is specific. But if A has two white horse, unless that particular horse is identified and individualized from the remaining horses, it will not become specific one.

377. Ascertained goods it means goods identified in accordance with the agreement after the contract of sale is made.

378. Example If A had 30 chairs of the same kind and offers to sell 15, the goods are ascertained only when 15 particular chairs be appropriated towards the contract.

379. Difference The only point of difference is that specific goods are ascertained before or at the time of making a contract, but ascertained goods are identified and individualized after the formation of a contract of sales.

380. Unascertained goods It means generic goods, good defined by description or even samples.

381. Example Where a dealer has only one car and he makes a sale of it, the sale is complete because there is no uncertainty about the subject matter of sales.

382. Future goods It means goods to be manufactured or produced or acquired by the seller after making of the contract of sale.

383. Example A contract to sell oil not yet pressed from seeds, in his possession, is a contract for the sale of future goods.

384. Contingent goods These are types of future goods, the acquisition of which by the seller depends upon a contingency which may or may not happen.

385. Example Future crops, eggs etc. A agrees to sell 100 bags of cement provided the lorry carrying the cement reaches safely.

386. Perishing of goods Perishing of specific goods before making of the contract – Where there is a contract for the sale of specific goods and if they perish without the knowledge of the seller, even before the contract is made, the contract becomes void.

387. Example X agrees to sell a cow to Y. The cow is ill at the time of the agreement and subsequently dies. Both X and Y are ignorant of this fact. The agreement is void.

388. Perishing of goods Goods perishing before sales but after agreement to sell – Where contract is only an agreement to sell and goods without any fault of either the seller or the buyer perish subsequent to the contract, then also the agreement becomes void.

389. Example Example: In one case, A had agreed to erect machinery on B’s premises. The price was to be paid on completion. During the course of the work , the premises and machinery were completely destroyed by fire. It was held that both parties were excused from further performance and A was not entitled to the price of machinery as the specific sum was payable only on the completion of the entire work.

390. Perishing of goods Perishing of unascertained goods : Where the contract is for unascertained goods, the perishing of the good will not avoids the contract and the seller will be liable for damages for the breach of contract.

391. Example Example: X agrees to sell to Y 10 bags of grain from 50 bags stored in his godown. The godown had been destroyed by fire at the time of the contract. X is unaware of this fact. But in this case, the contract is not void as the sale is not of specific goods but of a certain quantity of unascertained goods. Hence X must supply 10 bags of rice or pay damages for the breach of contract.

392. Price Price is the money consideration of the sales of goods. It is a fundamental principle that no sales can take place without a price.

393. Fixation of price The price must be fixed by both parties at the time of contract itself. Both the parties may enter into an agreement regarding the manner in which the price may be fixed.

394. Fixation of price Where the price is not fixed, it can be determined in the course of dealings between the parties or as it is called market price of goods. Where the price has not been fixed by the parties, the buyer should pay a reasonable price.

395. Mode of payment In the absence of agreement to the contrary, the seller is not bound to accept any kind of payment other than the currency of the country. By common consent, the seller may accept payment by a cheque or a draft, bank guarantee, a letter of credit or by any other mode.

396. Mode of payment In the absence of agreement to the contrary, the seller is not bound to accept any kind of payment other than the currency of the country. By common consent, the seller may accept payment by a cheque or a draft, bank guarantee, a letter of credit or by any other mode.

397. Examples

398. Team 1 A agrees to sell a Maruti car to B for Rs. 1.5 lacs . Before making agreement, the car was stolen and it was in the knowledge of the parties. Is A bound to deliver Maruti Car to B? No

399. Team 2 Ritesh makes contract sales for selling heavy machine costing Rs. 2 Lacs to Hitesh on a condition that Hitesh will pay Rs. One lac in cahs and will deliver a second hand car valued at Rs 1 lac . Is contract of sale valid? Yes. Payment of price is made partly in cash and partly in goods.

400. Team 3 Ram enters into a contract of sales with shyam for selling Photostat machine to him for Rs 30,000. Invoice of the machine has been made in favor of shyam, payment has not been made. The machine is lying in the godown of the seller. Meanwhile, his godown sets on fire and machine is destroyed. Can shyam claim loss of machine from ram? No. Ownership of machine has been transferred to Shyam and machine get destroyed without any fault of ram.

401. Team 4 A transport company has resolved and transferred 10 buses to a partnership firm, which consists of certain people who are owners of the company. Transfer was made at a particular price. Is it a contract of sale? No person can sell his goods to himself.

402. Team 5 A is an agent of foreign currency. B makes an agreement with him for purchasing 100 pounds for Rs 7500. is contract of sales valid? No. Currency cannot be sold or purchased.

403. Team 6 Mohan and sohan agree that Mohan will sell his second hand car to Sohan at a price which will determined by a particular car mechanic. But the car mechanic refused to do the job of price fixation. On such refusal, can sohan compel Mohan to sell that car for any other price? No.

404. Team 7 A purchased a machine for Rs. 50,000 from B on installment payment basis. The payment is to be made in five equal monthly installments. A defaults in making the 3 rd installment. Is B entitled to get back the machine from A? No.

405. Team 8 X agrees to sell a horse to B on a condition that, B will keep it for six days on trail basis and have the option to return on the expiry of 6 day period, if he does not find it suitable. Three days after, the horse dies due to illness without the fault of A or B. Can this agreement be avoided. yes

406. Sales of goods act – Conditions Legal Environment of Business

407. Definition A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.

408. BALDRY Vs MARSHALL CASE In this case, B consulted M, a motor car dealer, for a car which is suitable for touring purpose. M suggested “ Buqatti ” car and B accordingly purchased it. The car turns out to be unfit for touring purpose. It was held that suitability of a car for touring purpose is a condition. It was so vital that, if it is not fulfilled, it would defeat the very purpose of contract for which B bought the car. He was therefore entitled to reject car and get his money back from the dealer.

409. Essential features of a condition It is essential to the main purpose of the contract. The non fulfillment of condition causes irreparable damage to the aggrieved party which would defeat the very purpose for which the contract is made. The breach of contract gives a right to the aggrieved party to rescind the contract and recover the damages for breach of condition.

410. Implied conditions Conditions as to title of goods sold – In every contract of sale, there is an implied condition that the seller has got a right to sell the goods.

411. Example A purchased a motor car from B and used it for four months and subsequently it was found that it belonged to C as it was stolen from B from C. So A was forced to surrender the motor car to C. A filed suit against B for recovering the price amount. It was held that A was entitled to recover the full price even though he had used the motor car for four months because of the breach of implied conditions as to title (Rowland Vs Diwali ).

412. Implied conditions Goods sold should correspond to description – Where there is a contract of sale of goods by description, there is an implied condition that the goods shall correspond with that description.

413. Example A wants to sell his cycle. He represents B, an intending buyer who has not seen the cycle that it is a new cycle manufactured in a particular company. B agrees to purchase it and on delivery, B finds that the cycle is old and manufactured in a different company. In this case, B can repudiate the contract.

414. Implied conditions Condition as to quality or fitness – This is applicable if The goods are needed for a particular purpose which the buyer brings to the knowledge of the seller, either expressly or impliedly. The buyer relies on the seller’s skills and judgment. It is seller’s duty to supply by description.

415. Example In one case, an order was placed for six lorries to be used for heavy traffic in a hilly country. Accordingly, Lorries were supplied and it was found that they were unfit for the purpose. It was held that order was for such lorries which would fit for a particular purpose namely heavy traffic in a hilly country and therefore there was a breach of condition as to fitness.

416. Implied conditions Conditions as to merchantability – Goods are of mercantile quality if They are reasonable by the description by which they are known in the market. They are purchased for personal use, they must be reasonably fit for the purpose for which they are generally uses.

417. Example In Grant Vs Australian Knitting Mills, A purchased some woolen dress from a company dealing in such goods and after wearing them, A contract a skin disease due to the excessive presence of chemicals. It was held that the article were not merchantile as they could not be worn next to the skin and that the company was liable to pay damages.

418. Implied conditions Condition as to wholesomeness - Wholesomeness means physical health. The provisions supplied must not only correspond to description and merchantable but also should promote physical health.

419. Example In Frest Vs Aylebury Diary Co., A purchased milk from B, the Diary. The milk contained typhoid germs, as a result of which his wife contracted typhoid fever and died. Hence A had to incur medical expenses and was put to loss of services and incurred funeral expenses. A filed a suit for damages and the court held that the company was liable to pay damages.

420. Implied conditions Condition as to sample – Whenever we want to purchase goods, generally we see some sample of those goods which we want to purchase. After seeing the sample and satisfying ourselves with the sample, we will place order asking the dealers to supply goods which would correspond to the sample.

421. Example In Ruben Ltd Vs Fair Brosa & Co, A agreed to supply B a particular type of vulcanized rubber and the sample was shown and it was flat and soft. But the goods supplied were crinkly and folded. Ina suit by B, A was held liable on the ground that the good were not in accordance with the sample.

422. Sales of goods act – Warranty Legal Environment of Business

423. Definition A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contact as repudiated.

424. Example A visits a dealer to buy a car. The dealer suggests that he has a car which runs 20 km/ 1 litre . A makes an agreement to buy that car. Later, on it turns out that the care run 10 km/ 1 litre . It amounts to breach of warranty because the stipulation made by the dealer is supportive one. Thus A can only claim for compensation, He is not entitled to avoid contract.

425. Essentials of a warranty It is collateral to the main purpose of the contract. The breach of warranty causes damage to the aggrieved party and does not defeat the main purpose of the contract. The aggrieved party can only claim the damages for the breach of warranty but cannot repudiate the contract.

426. Distinction between a condition and warranty No Difference Condition Warranty 1 Nature It is fundamental in nature and essential for main purpose of contract. It is supportive and collateral for the contract. 2 Breach Due to breach of condition, the contract may be avoided. It’s breach may give rise to a right to claim for compensation. 3 Treatment Breach of condition can be treated as a breach of warranty. Breach of warranty cannot be considered as a breach of condition

427. Implied warranty Warranty for quiet possession – The buyer has obtained the possession of goods and if the buyer is in any way disturbed in the enjoyment of goods, the buyer has a right to sue the seller for damages caused.

428. Example In Mason Vs Burningham , a lady purchased a second hand type writer from A. She used it for some months and also spent some money on its repair. But subsequently, it was found that it belonged to B. Hence he was forced to surrender it to the true owner B. It was held that she was entitled not only to get back the price but also to recover the cost of repair from A.

429. Implied warranty Implied warranty against encumbrance – The goods are not subject to any charge or encumbrance in favor of third parties which is not disclosed or known the buyer before or at any time when the contract is made.

430. Example A person had pledged his goods. Subsequently, he took them from the pledge under some pretext and sells them. While the buyer is in possession, it is disturbed the pledges. Since the warranty is broken, the buyer may recover damages.

431. Implied warranty Implied warranty as to usage of trade – An implied warranty as to quality or fitness for a particular purpose may be fixed by the usage of trade.

432. Example When the goods are dangerous and the sellers is aware that the buyer is ignorant of the dangerous nature of the goods, he should warn the buyer about the probable danger.

433. Doctrine of caveat emptor Legal Environment of Business

434. Definition “ Caveat Emptor ” is a Latin expression which means “Let the buyer beware”. The doctrine of caveat emptor means that in a sale of goods, the seller is under not duty to reveal unflattering truths about the goods. A buyer must buy goods after satisfying himself of their quality and fitness.

435. Exceptions to the Doctrine of caveat emptor Fitness for buyer’s purpose – The seller will be held liable for breach of implied condition as to quality of the fitness of the goods if the buyer makes known to the seller the particular purpose for which he requires the goods and relies on the seller’s skills or judgment.

436. Exceptions to the Doctrine of caveat emptor Sale under a patent or trade name – In the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition that the goods shall be reasonably fit for any particular purpose.

437. Exceptions to the Doctrine of caveat emptor Merchantable quality – Where goods are bought by description from a seller who deals in goods of that description, there in an implied condition that the goods shall have Merchantable quality.

438. Exceptions to the Doctrine of caveat emptor Usage of trade – An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade.

439. Exceptions to the Doctrine of caveat emptor Consent by fraud – Where the consent of the buyer in a contract of sale is obtained by the seller by fraud or where the seller knowledgly conceal a defect which could not be discovered on reasonable examination, the doctrine of caveat emptor does not apply.

440. Company Law Legal Environment of Business

441. Introduction Companies act 1956 came into force on 1 st April, 1956. Central government is the supreme authority responsible for the administration of Companies act 1956.

442. Definition A company in broad sense may mean an association of individuals formed for some common purpose. Section 3(1) ( i ) of the Companies Act, 1956 states that a company means “a company formed and registered under this Act, or an existing company”. According to A.A.Barley , “ A company is a combined political, social, economic and legal institution”.

443. Salient features of registered company Voluntary Association – A company is a voluntary association of persons who have come together for a common object which generally is to earn profit. Incorporated association – A company comes into existence on incorporation under the companies Act.

444. Salient features of registered company Independent Legal Entity – A company is an artificial person created by Law. It has an independent legal entity apart from the members who constitute it. Separate property – A company is capable of owning, enjoying and disposing of property in its own name.

445. Salient features of registered company Legal restrictions – The formation, working and winding up of a company are strictly governed by laws, rules and regulations. Perceptual succession – A company has a perceptual succession in the sense that the life of a company is not measured by the life of any member.

446. Salient features of registered company Common seal - It acts as an official mark of the company. Anything done under an agreement between the company and the third party requires the recognition of the company in the form of an official seal. Share Capital – A company mobilizes its capital by selling it shares.

447. Salient features of registered company Limited Liability – A shareholder’s liability is limited to the amount of share that he has purchased. Transferability of shares – Shares in a company are transferable and can be sold or purchased in the share market.

448. Salient features of registered company Ownership and management – The owners of a company are its share holders. The affairs of the company are managed by their representatives known as directors

449. Difference between Company and partnership A company is the creation of law where as partnership is based on mutual trust between the partners. Registration of company is compulsory while it is not compulsory for a firm. A company has a separate legal existence where as a firm has not individual legal status

450. Difference between Company and partnership Property of the company belongs to the company where as property of the firm belongs to the partners. Liability of the shareholders is limited where are it is unlimited for partners.

451. National Company Law tribunal Section 10 FB inserted by the companies Act provides that the central government shall, by notification in the Official Gazette, constitute a Tribunal to be known as National company Law Tribunal to exercise and discharge such powers and function as conferred on it.

452. Features of NCLT It is a quasi judicial body composed of experts in corporate law. It helps faster disposal of cases. It has simpler procedures and less formality than courts.

453. National Company Law tribunal The tribunal will consists of a president and such number of judicial and technical members not exceeding sixty two, as the central government deems fit to be appointed that Government.

454. Types of companies Legal Environment of Business

455. Chartered companies These are those which are incorporated by a Royal Charter. Some of the biggest companies like the East India Company were formed by the Royal Charter in England.

456. Statutory companies These are those incorporated under a special act passed either by the parliament or the state legislature. In India, we find these companies in the field of public enterprises or public utility services. The RBI, SBI, IFC are such companies in India.

457. Registered companies These are those formed and registered under the Indian Companies act of 1956.

458. Companies limited by shares A limited company is one in which the liability of the members is limited. Most of the registered companies are companies limited by sharers. It must have a share capital and the members know of their liability in the company in which they are members.

459. Companies limited by guarantee Companies limited by guarantee is a company in which the liability of the shareholders to contribute to the assets of the company in the event of the company being wound up, is limited by its memorandum of association. This may or may not have a share capital. These are not formed for the purpose of profit but for the promotion of art, science, culture, charity, sports, commerce etc.

460. Unlimited companies A company not having any limit on the liability of its members is termed as unlimited company. In this class of companies, the liabilities of the shareholders depend upon the debts incurred by the company.

461. Private company As per section 3 (III) of the Companies Act, a private company means a company which has a minimum paid up capital of one lakh rupees or such higher capital as may be prescribed by its articles. It (a) restricts the right to transfer its shares (b) limits the members to fifty and (c) prohibits any invitation to the public to subscribe for any shares or debentures of the company. It must raise its capital only from its members or a bank or other financial institutions.

462. Public company Section 3(III) defines it as one which is not a private company and which has a minimum paid capital of five lakh rupees or such higher paid up capital as may be prescribed. All private companies which are subsidiaries of public companies are public companies. There must be atleast seven persons to form a public company.

463. Conversion of a Private company into a public company Conversion by default. Conversion by choice

464. Conversion by default When Private company makes a default in complying with any of the provisions of section 3(1) (III) of the Act, the company ceases to be entitled to the privileges and exemptions available to it. Then the whole act would apply to it as if it were a public company.

465. Conversion by choice A private company can be converted into a public company by a special resolution altering the articles so as to remove all or any restriction imposed on private companies under 3(1) (III) of the Act.

466. Incorporation Legal Environment of Business

467. Definition A company is said to be incorporated when it is registered with the Registrar of the joint stock companies.

468. Stages of incorporation Promotion. Registration / Incorporation. Floatation / Raising of capital. Commencement of Business.

469. Promotion The promoters have to first of all decide upon the proposed form of the company. (Public or private). Then they have to decide upon the name of the company and check availability. The registrar of companies may raise objection to certain names it they are not desirable in the opinion of the central government. Ex: If it is identical or closely resembles the name of an existing company.

470. Registration After the name is made available, application for registration shall be presented to the Registrar. It shall be accompanied by following documents. Memorandum and Articles of association of company. Agreement. A statement of its nominal capital. A notice of the address of the registered office of the company. A declaration of an advocate of the Supreme or high court entitled to appear before High court or a Chartered Accountant practicing in India who is engaged in the formation of a company.

471. Certificate of registration If the Registrar is satisfied that all the requirements under the act for purpose of registration of a company have been complied with, he shall register the company and issue a certificate of incorporation under his hand and seal.

472. Certificate of registration According to section 35, the certification of incorporation given by the Registrar shall be conclusive evidence that All the requirements of the Act have been complied with, in respect of registration. Company is duly registered. Company came into existence on the date of the certificate.

473. Floatation A private limited company is prohibited from inviting public to subscribe to its share capital. A public limited company can subscribe to its capital by issuing a prospectus.

474. Commencement of business Every private limited company can commence business immediately on receipt of certificate of incorporation. A public limited company by shares is debarred from commencing business on borrowing money without the certification of commencement of business.

475. Advantages of incorporation Limited liability – The liability of all the members of a limited company is limited to the nominal amount of their share therein. Transferability of shares – Shares in a company can be transferred to another without the consent of the other members.

476. Advantages of incorporation Separate legal entity – A company has separate legal entity from its members and its existence is not affected by insolvency or death of a member. Control – The control of a company can be secured by the acquisition of the majority of shares which carry the voting power.

477. Advantages of incorporation Perpetual succession and common seal – Life of a company is not measured by the life of any of its members. Company has an official seal. Separate property – A company can own, enjoy and dispose of its property.

478. Disadvantages of incorporation Incorporation requires expenses. Incorporation gives enormous power to the state and law courts to interfere in the affairs of the company. Management of the corporation is entrusted to a few selected persons. A company though a legal person is not a citizen. So it can’t claim protection of such fundamental rights. The company has a separate legal entity. Therefore there is a veil between the company and its members.

479. Memorandum of association Legal Environment of Business

480. Definition Memorandum of association is the document which contains the rules regarding constitution and activities or objects of the company.

481. Definition Company is governed by MOA. Its relation towards the members and outsiders are determined by this important document. The company is allowed to function within the framework of MOA.

482. Form of Memorandum of association Memorandum should be in one of the forms in table B,C,D and E in schedule I of the companies Act. According to section 15 of the Act, the memorandum must be printed, divided into paragraphs, numbered consecutively and signed by seven subscribers in the case of public companies and tow in the case of private company.

483. Purpose of Memorandum of association The intending shareholder can find out from the Memorandum the purpose for which his money is going to be used by the company and what risk he is taking in making the investment. Memorandum enables all those who deal with the company to know what its powers are and what the range of its activities are.

484. Clauses in the Memorandum of association Name clause. Registered office clause. Object Clause. Liability clause. Capital clause. Subscription Clause.

485. Name clause The first clause of the Memorandum requires to state the name of the proposed company. A company being a legal person must have a name to establish its identity. The name of a corporation is the symbol of its personal existence. The memorandum should state the name of the company with ‘limited’ as the last word of the name in case of public limited company and with ‘private limited’ in case of private limited company.

486. Registered office clause The memorandum must specify the state in which the registered office of the company is to be situated. Within thirty days of its incorporation, the exact place where the registered office is to be located must be decided and notice of the situation be given to the Registrar who is to record the same. All communication to the company must be addressed to its registered office.

487. Object Clause This is the most important clause of memorandum of association. It defines the object of the company and the extent of its powers and the sphere of its activities. The purpose of requiring the company to state its objects is to inform ( i ) the members in what kind of business their capital may be used and (ii) persons dealing with the company, what its powers are.

488. Object Clause Object clause is usually divided into three sub clause. Main objects – This sub clause should state the main objects of the company. Other objects – This clause should state other objects which are not included in main object. States to which objects extend – This sub clause has to mention the states to whose territories the objects are extended.

489. Liability clause This clause has to state the nature of liability that the members incur. (Limited or unlimited). If the company is to be incorporated with limited liability, the clause must state that the liability of the members shall be limited by shares. The liability clause is omitted from memorandum of association of unlimited companies.

490. Subscription Clause The memorandum concludes with the subscription clause. The memorandum has to be subscribed by at least seven persons in the case of a public limited company and by at least two in the case of a private limited company. Each subscriber must sign the document and must write opposite to his name the number of shares taken by him. After incorporation, no subscriber can withdraw his name on any ground whatsoever.

491. Capital clause This clause contains the amount of capital with which the company is registered and the number and value of the shares into which it is divided. The capital is determined as nominal, authorized or registered. An unlimited company having a share capital is not required to include the capital clause in its memorandum.

492. Legal Environment of Business

493. Definition Articles are the regulations or bye-laws of a company for carrying into effect the objects of the company as defined by the company in its memorandum of association and for the management of its internal affairs.

494. Definition While memorandum of association is the foundation of the company, the articles of association are the rules and regulations framed for the purpose of managing its internal affairs and for the benefit of the share holders.

495. Companies which must have their own articles The following companies shall have their own articles. Private companies limited by shares. Companies limited by guarantee. Unlimited companies.

496. Contents of articles of association The business of the company. The share capital, different classes of shares, right of different classes of share holders. Execution of preliminary contracts. Procedure of allotment of shares. Procedure of issuing of share certificates.

497. Contents of articles of association Dividends and reserves. Keeping of books of accounts and their audit. Common seal of the company. Payment of interest out of capital. Winding up.

498. Contents of articles of association Alteration of share capitals. Issue of share warrants. Rules regarding meetings. Voting rights of members. Borrowing power of the company.

499. Alteration of articles of association Companies have been given wide powers to alter their articles. A company can never replace its articles. It is only regulations contained therein which may be changed

500. Procedure for alteration A company may by passing a special resolution alter regulations contained in its Articles any time. A copy of the resolution shall be filed with the Registrar within 30 days of passing.

501. Restriction on the alteration of articles The alteration must not contravene the provisions of the memorandum. The alteration must be bona fide for the benefit of the company as a whole. A company cannot justify a breach of contract by altering its articles. A company may not deprive itself of the right to alter its articles, as the power of the company to alter its articles is statutory and absolute. The alteration should not make the articles unalterable. The alteration should not contain anything illegal.

502. Relations between Article and Memorandum The articles are subordinate to memorandum. The memorandum must be read in conjunction with the articles. The terms of the memorandum cannot be modified or controlled by articles.

503. Distinction between memorandum and articles No Memorandum of association Article of association 1 Supreme document Subordinate to memorandum 2 Every company must have its own memorandum A company limited by shares need not have articles of its own. 3 It is the constitution of the company These are rules of management of the company 4 It is a contract between company and outside person dealing with it. It creates a relationship between the company and its members. 5 It cannot be altered easily. They can be altered easily passing special resolution.

504. Prospectus Legal Environment of Business

505. Definition According to Sec. 2 (36), Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate.

506. Definition An advertisement offering to the public, shares or debentures of the company for sale, is a prospectus.

507. Rules regarding the issue of prospectus Registration of prospectus. Time limit for issue of prospectus Purpose of registration of prospectus. Particulars of records to be furnished. Dating of prospectus. Penalty of non registration of prospectus. Registrars refusal to register.

508. Registration of prospectus A copy of the prospectus duly signed by every director or proposed director or his agent, must be delivered to the Registrar for registration before its publication.

509. Time limit for issue of prospectus The prospectus must be issued within 90 days of the date of which a copy thereof is delivered for registration.

510. Purpose of registration of prospectus. Registration of prospectus presents an authoritative record of the terms and conditions of the capital issue.

511. Particulars of records to be furnished. (a) consent in writing of the expert (b) copy of every material contract relating to appointment and remuneration of managerial personnel (c) a written statement relating to adjustment if any and (d) consent in writing of auditors, legal advisors and bankers.

512. Dating of prospectus Every prospectus must be dated. This date shall be taken as the date of publication of prospectus.

513. Penalty of non registration of prospectus. If a prospectus has been issued without it being registered, the company and every person party to the issue of the prospectus shall be punishable with fine which may extend to Rs. 50 thousand.

514. Registrars refusal to register Registrar can refuse to register if any of the following rules are violated.

515. Contents of Prospectus Name and address of the registered office of the company. Main objects of the company with names, addresses and description and occupations of the signatories. The number and class of shares. Remuneration of directors. Minimum amount of subscription to be raised when shares are offered to the public.

516. Contents of Prospectus Amount to be shared on application and allotment of each share. Details of every contract with the company. Name and address of auditors and lead managers. Time and place where the contracts may be inspected. Nature and extend of the restrictions imposed upon the members of the company.

517. Types of prospectus Abridged prospectus. Shelf prospectus. Red Herring Prospectus. Deemed prospectus.

518. Abridged prospectus The companies Act of 1988 provided for the companies to furnish along with the application form for shares or debentures, an abridged form of the prospectus, instead of the complete prospectus. It should contain all the relevant details as laid down in the information memorandum.

519. Shelf prospectus Shelf prospectus means a prospectus issued by any financial institution or bank for one or more issues of securities or class of securities specified in that document. It enables public financial institutions and banks to raise capital from the public more than once without issue of fresh prospectus every time.

520. Red Herring Prospectus A company may issue a prospectus called red herring prospecus before the actual opening of the subscription list along with an information memorandum. It gives only a general idea about the securities.

521. Deemed prospectus When a company allot its shares to an intermediary called issuing house for offering them for sale to the public, the document by which the offer is made to the public by the issuing house is called deemed prospectus.

522. Misstatement in prospectus Misstatement includes Untrue statement. Statement which produce wrong impression. Statement which are misleading. Concealment of material facts. Omission of facts.

523. Effect of misstatement A misleading statement in the prospectus make the company liable to the shareholders and the shareholders may on the grounds of misrepresentation rescind the contract and may claim the money deposited with the company.

524. Remedies of misstatement Remedies against the company Remedies against the directors, promoters and experts Suit for compensation. Suit for damages for misrepresentation. Rescission of the contract. Suit for damages.

525. Rescission of the contract When a prospectus contains a misstatement, the person who is induced by such misstatement to subscribe to shares or debentures is entitled to rescind the contract.

526. Suit for damages A subscriber is entitled to claim damages from the company apart from rescinding the contract

527. Suit for compensation All these people will be liable to pay compensation to any and every person who subscribed for shares or debentures placing reliance on the prospectus.

528. Suit for damages for misrepresentation Section 62 imposes liability on the directors or promoters if there is an untrue statement in the prospectus.

529. Statement in lieu of prospectus If the promoters of a public company are confident of raising the required capital privately, no prospectus need be issued to public. In such case, they are to prepare a draft prospectus containing the information required to be disclosed. This document is called Statement in lieu of prospectus.

530. Winding Up Legal Environment of Business

531. Definition Winding up of a company is the process of putting an end to its life. At the end of the winding up, the company will be destroyed or dissolved and will have no assets or liabilities.

532. Winding up and Bankruptcy Winding up is different from Bankruptcy. In bankruptcy, the property of the debtors is divested from him and rests in the official receivers or the official assignees while the winding up the property of the company is not divested from it.

533. Reasons for winding up of a company The main object of the company for which it was established has been accomplished. It has become impossible to carry out the main objects of the company. The company has sold the business or the undertaking to another company or an individual. The company is not in a position to pay its debts in full.

534. Winding up by tribunal

535. Grounds for winding up by tribunal Special resolution Failure in holding statutory meetings. Failure to commence or suspend its business Reduction of membership below minimum Inability to pay debts Just and equitable Default in filing balance sheets, profit and loss account or annual returns Acted against sovereignty and integrity of India Sick industrial company

536. Special resolution If a company by a special resolution resolved that it may be wound up by the tribunal, the tribunal may pass a winding up order.

537. Failure in holding statutory meetings If a company makes default in holding a statutory meeting or in delivering a statutory report, the court may order winding up the company.

538. Failure to commence or suspend its business If a company does not commence its business within a year from its incorporation or suspends its business for a whole year, the tribunal may order for its winding up.

539. Reduction of membership below minimum When the number of members is reduced below 7 in the case of a public company and below 2 in the case of a private company, the tribunal may order winding up of the company.

540. Inability to pay debts Tribunal may order for winding up a company if it is unable to pay debts.

541. Inability to pay debts Tribunal may order for winding up a company if it is unable to pay debts.

542. Just and equitable The tribunal may consider it just and equitable that the company should be wound up if it is of that opinion. What is just and equitable will depend on the tests of each particular case.

543. Default in filing balance sheets, profit and loss account or annual returns The tribunal may order for winding up, if the company has made a default in filing with the registrar its balance sheets, profit and loss account or annual returns for any consecutive years.

544. Acted against sovereignty and integrity of India If company has acted against the sovereignty and integrity of India, the security of the state, public order, decency or morality, the tribunal may order for its winding up.

545. Sick industrial company If the tribunal is of opinion that the company should be wound up under the circumstances specified in Sec. 424 G, the tribunal may order for its winding up.

546. Application of winding up According to section 439, the following can send petition to tribunal for winding up of a company. Company itself. Contributories. Creditors. All or any of the above parties jointly or separately. Registrar

547. Voluntary winding up

548. Definition Voluntary winding up means winding up by the members or creditors of the company without the interference of the tribunal.

549. Definition The object of a voluntary winding up is that the company as well as the creditors is left free to settle their affairs without going to the tribunal.

550. Circumstances in which company can be wound up voluntarily By passing an ordinary resolution. By passing special resolution.

551. By passing an ordinary resolution When the period for the duration of a company by the Article has expired, the company in General Meeting may pass an ordinary resolution for its voluntary winding up.

552. By passing special resolution A company may at any time pass a special resolution what it be wound up temporarily.

553. Distinction between member’s and creditor’s voluntary winding up

554. Dissolution A company is said to be dissolved when it ceases to exist as a corporate body capable of holding property or of being sued in any tribunal.

555. Difference between winding up and dissolution

556. Consumer Protection Act 1986 Legal Environment of Business

557. Introduction The consumer protection Act was enacted in 1986 to provide better protection to the interests of the consumers. The primary object of the Act is the establishment of Consumer Councils and other authorities for the settlement of Consumer disputes.

558. Introduction Consumer protection Act recognizes that consumer has certain special rights, that these rights are enforceable , that where there was default on the part of manufacturer and traders on the provision of any of these right, punishment would be awarded for the default.

559. Objects of the Act Better protection of interest of consumers. Protection of rights of consumers. Consumer protection councils. Quasi judicial machinery for speedy redressal of consumer disputes.

560. Consumer Protection Council Central consumer protection council (Central Council) State consumer protection council (State Council)

561. Central consumer protection council Formation of council – The central government may, by notification establish a council to be known as the central consumer protection council.

562. Central consumer protection council Members of council – It consists of Minister in charge of consumer Affairs in central government, Minister of state in charge of consumer Affairs, eight members of parliament, secretary of national commission for SC and ST and representatives of central government departments, autonomous organizations concerned with consumer interests.

563. Central consumer protection council Terms and conditions of members of council – Term of members will be five years. Any member by writing under his hand to the chairman of the central council can resign from the council.

564. Central consumer protection council Procedure for meeting of council – (a) meeting has to be presided by chairman (b) 10 day notice before the meeting (c) specify the place , day and hour of meeting in the notice (d) For performing, council form working groups and (e) resolutions passed by the central council shall be recommendatory in nature.

565. Central consumer protection council Objects of central council – (a) right to protection against making of hazardous goods and services (b) right to be informed about quantity and quality of products (c) right be assured access to variety of products at competitive prices (d) right be heard and (e) right to consumer education.

566. State consumer protection council Formation of council - The state government may, by notification establish a council to be known as the state consumer protection council.

567. State consumer protection council Members of the council - It consists of Minister in charge of consumer Affairs in state government will be the chairman and such number of other official or non official members representing such interests as may be prescribed by the state government.

568. State consumer protection council Meetings of the council – The state council shall meet as and when necessary but not less than two meetings shall be held every year. Meeting place will be decided by chairman.

569. State consumer protection council Object of state council – same as that of central council.

570. Redressal agencies for consumer disputes

571. Redressal agencies for consumer disputes

572. District Forum Composition of district forum - Each district forum consists of A person who is qualified to be a district judge who shall be the president and Two other members who shall be persons of ability, integrity and standing.

573. District Forum Terms and conditions of the members of the district forum. Every member of the district forum shall hold office for a term of five years or up to the age of 65 years whichever is earlier. A member shall resign his office in writing under his hand addressed to the state government. The government may remove from office, the president or member of the district forum if he is disqualified as per Rule (3) of consumer protection rules.

574. District Forum Office and place of sitting of district forum. The office of the district forum shall be located at the headquarters of the district. The working days and office hours of the district forum shall be same as that of the government. The office seal and emblem of district forum shall be such as the government may specify. Sitting of the district forum shall be convened by the president.

575. District Forum Jurisdiction of the district forum. District forum shall have jurisdiction to entertain complaints where the value of the goods or services and the compensation, if any, claimed does not exceed rupees give lakhs . A complaint shall be instituted in a district forum within the local limits of whose jurisdiction the cause of action, wholly or partly arise.

576. District Forum Procedure for filing complaints. Who can file a complaint – Consumer to whom a goods or services is delivered, any recognized consumer association, one or more consumer and central and state government.

577. District Forum Procedure for disposing of complaints - Complaint relating to goods Referring samples to laboratory Fee for analysis or test Report of analysis

578. District Forum Procedure for disposing of complaints - Complaint relating to service On the basis of evidence brought to its notice by the complainant and the opposite party, where the opposite party denies or disputes the allegation contained in the complaint. On the basis of evidence brought to its notice by the complainant where the opposite party omits or fails to take any action to represent his case within the time given by the forum

579. District Forum Findings of the district forum If after the proceedings conducted under section 13, the district forum is satisfied that the goods complained against, suffer from any of the defects specified in the complaint, it shall issue an order to opposite party to do one or more of following things. To remove the defects in goods or services. To replace goods with new goods. To return the complainants the price. Not to offer hazardous goods for sales. To withdraw hazardous goods from being offered. .

580. District Forum Findings of the district forum Appeal against the orders of district forum – Any person aggrieved by an order made by district forum may prefer an appeal against such order to the state commission within a period of 30 days from the date of order.

581. State Commission Composition of State Commission - Each State commission consists of A person who is qualified to be a judge of high court who shall be the president and Two other members who shall be persons of ability, integrity and standing.

582. State Commission Terms and conditions of the members of the State Commission. Every member of the State commission shall hold office for a term of five years or up to the age of 65 years whichever is earlier. Every vacancy caused by resignation or removal of the president or any other member of the state commission shall be filled by fresh appointment.

583. State Commission Office and place of sitting of State Commission. The office of the state commission shall be located at the capital of the state. The working days and office hours of the state commission shall be same as that of the state government. The office seal and emblem of state commission shall be such as the government may specify. Sitting of the state commission shall be convened by the president.

584. State Commission Jurisdiction of the State Commission. State commission shall have jurisdiction to entertain complaints where the value of goods and services and compensation claimed exceeding rupees five lakhs but not exceeding 20 lakhs . State commission shall have jurisdiction to entertain appeals against the order of any district forum within the state and State commission shall have jurisdiction to call for the records and pass appropriate orders in any customer dispute which is pending before any district forum within the state.

585. State Commission Procedure for filing complaints before state commission and disposal by the state commission Procedure for filing complaints before the state commission, procedure followed on receipt of the complaint by the state commission, findings of the state commission etc are same as those application.

586. State Commission Appeal against the orders of the state commission. Any person aggrieved by an order made by State commission may prefer an appeal against such order to the National commission within a period of 30 days from the date of order. National commission may entertain an appeal after the expiry of the said period of thirty days if it is satisfied that there was sufficient cause for not filing it within the period.

587. National Commission Composition of National Commission - Each National commission consists of A person who is qualified to be a judge of supreme court who shall be the president and Two other members who shall be persons of ability, integrity and standing.

588. National Commission Terms and conditions of the members of the National Commission. Every member of the National commission shall hold office for a term of five years or up to the age of 70 years whichever is earlier. The Salary and honorarium and other allowances payable to and the other terms and conditions of service of the members of the National commission shall be such as may be prescribed by the Central government

589. National Commission Office and place of sitting of National Commission. The office of the National commission shall be located in Delhi. The working days and office hours of the state commission shall be same as that of the Central government. The office seal and emblem of district forum shall be such as the government may specify. Sitting of the National commission shall be convened by the president.

590. National Commission Jurisdiction of the National Commission. National commission shall have jurisdiction to entertain complaints where the value of goods and services and compensation claimed exceeding rupees twenty five lakhs . State commission shall have jurisdiction to entertain appeals against the order of any state commission within the country and National commission shall have jurisdiction to call for the records and pass appropriate orders in any customer dispute which is pending before any state commission within the country

591. National Commission Power of National Commission. To summon and enforce attendance of any defiance or witness and examining the witness on oath. To discover and produce any document or other material object producible as evidence. To receive evidence on affidavits.

592. National Commission Appeal against the orders of the National commission. Any person aggrieved by an order made by national commission may prefer an appeal against such order to the supreme court within a period of 30 days from the date of order. Supreme court may entertain an appeal after the expiry of the said period of thirty days if it is satisfied that there was sufficient cause for not filing it within the period.

593. National Commission Sitting of the national commission and signing of orders Every proceedings of the national commission shall be conducted by the president and at least two members thereof sitting together. Every order made by the national commission shall be signed by the president and at least two members who conducted the proceedings.

594. FEMA Foreign Exchange management Act, 1999

595. Introduction The Foreign Exchange Management Act, 1999 has come into effect on June, 1 2000 replacing the Foreign Exchange Regulation Act, 1973.

596. Objective The object of the Foreign Exchange Management Act, 1999 is to facilitate external trade and payments and to promote orderly maintenance of the foreign exchange market in India.

597. Regulation and Management of Foreign Exchange Dealings in Foreign exchange - The act permits dealings in foreign exchange only through an authorized person.

598. Regulation and Management of Foreign Exchange Holding of Foreign exchange – No person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

599. Regulation and Management of Foreign Exchange Regulations on current Account Transaction – Generally, all current account transaction are free unless specifically restricted by government of India.

600. Regulation and Management of Foreign Exchange Regulations of Capital Account Transactions – The Reserve bank in consultation with the Central Government, specify the permissible capital account transaction and the limits up to which foreign exchange be allowed for such transactions.

601. Regulation and Management of Foreign Exchange Export of goods and services – Every exporter of goods or services shall furnish to Reserve Bank or to such other authority a declaration, in such form and in such manner as may be specified, containing true and correct material particulars including the amount representing the full export value of the goods or services.

602. Regulation and Management of Foreign Exchange Realization and repatriation of foreign exchange – Where any amount of foreign exchange is due or has been accrued to any person resident in India, such person should take all reasonable steps to realize and repatriate to India such foreign exchange, within such time and in such manner as may be specified by Reserve Bank.

603. Authorized Person - Definition An authorized person means an authorized dealer, money changer, off shore banking unit or any other person for the time being authorized under section 10(1) to deal in foreign exchange or foreign securities.

604. Duties of Authorized person To comply with RBI directions. Not to engage in unauthorized transactions. To ensure compliance of FEMA provisions. Duty to produce books, accounts etc.

605. Powers of authorized dealer To purchase or acquire or borrow from or sell or otherwise transfer or lend or exchange with any person, any foreign exchange. Make payments to a person in or resident in India by order or on behalf of any person resident outside India.

606. Appeals The FEMA provides for a two tier appellate machinery consisting of Special Director (Appeals) and the Appellate Tribunal for Foreign Exchange. Appeals to special director lie in cases where the orders of adjudication are passed by an Assistant Director of Enforcement or a Deputy Director of Enforcement. Appeals to Appellate Tribunal lie in cases where the adjudication orders are passed by the Director of enforcement or the special director of enforcement.

607. Cyber Law

608. Introduction In discharge of its international responsibility, the Government of India enacted a Law in 2000 known as Information Technology Act 2000. The Act extends to the whole of India and it applies also to any offence or contravention thereon committed outside India by any person.

609. Objects of the Act To grant legal recognition to electronic records. To grant legal recognition to digital signatures. To permit retention of information, documents and records in electronic forms. To foster use and acceptance of electronic records and digital signatures in the Government offices and its agencies. To prevent possible misuse of electronic medium. To prevent and arrest offences as well as deter the abuse of information Technology.

610. Digital signature Digital signature is authentication of an electronic record by a subscriber by means of an electronic method or procedure.

611. Digital signature Digital signature is created in two distinct steps. Electronic record is converted into a message digest by using a mathematical function known as ‘hash function’ which digitally freezes the electronic record thus ensuring the integrity of the content of the intended communication contained in the electronic record. Identity of the person affixing the digital signature is authenticated through the use of a private key which attaches itself to the message digest and which can be verified by any person who has the public key corresponding to the private key.

612. Electronic governance Legal recognition of electronic records. Legal recognition of digital signature. Use of electronic records and digital signatures in government. Retention of electronic records. Publication of rules, regulations etc in Electronic Gazette. Power to make rules by Central government in respect of digital signature.

613. Attribution of electronic records An electronic record shall be attributed to the originator If it was sent by the originator himself. By a person who had the authority to act on behalf of the originator in respect of that electronic record. By an information system programmed by or on behalf of the originator to operate automatically.

614. Acknowledgment of electronic records Where the originator has not agreed with the addressee that the acknowledgment of receipt of electronic record be given in a particular form or by a particular method, an acknowledgement may be given by Any communication by the addressee, automated or otherwise. Any conduct of addressee, sufficient to indicate to the originator that the electronic record has been received.

615. Dispatch of electronic records The dispatch of an electronic record occurs when it enters a computer resource outside the control of the originator. The time of receipt of an electronic record shall be determined as follows: (a) if the addressee has designated a computer resource for the purpose of receiving electronic records (b) if the addressee has not designated a computer resource along with specified timings, receipt occurs when the electronic record enters the computing resource and (3) an electronic record is deemed to be dispatched from the place of business of the originator.

616. Security of electronic records and digital signatures Secure electronic record. Secure digital signature. Security procedure.

617. Regulation of certifying authorities Certifying authority is a person who has granted a license to issue a digital signature. Appointment of controller certifying authorities – The central government by notification in the official gazette appoints a controller of certifying authorities.

618. Regulation of certifying authorities Power to investigate contravention and making access to computer – The controller or any officer authorized by him shall investigate any contravention of the provision of this act, regulates or rules made thereunder . Those officers in such cases, shall have access to any computer system or data.

619. Regulation of certifying authorities Functions of Controller. Exercising supervision over the activities of the certifying authorities. Certifying public keys of the certifying authorities. Laying down the standards to be maintained by the certifying authorities. Specifying the qualification and experience which employees of the certifying authorities should possess.

620. Digital signature certificates Issue of Digital signature certificate – Any person may make an application to the certifying authority for the issue of a digital signature certificate which is accompanied by a fee and certification practice statement. On receipt of an application, the certifying authority may, after consideration of the certification practice statement and after making such enquiries it may deem fit (a) grand the digital signature certificate or (b) for reasons to be recorded in writing rejection of application.

621. Digital signature certificates Suspension of Digital signature certificate – The certifying authority which has issued a digital signature certificate may suspend such certificate (a) on receipt of a request to that effect from the subscriber or any person authorized by him and (b) if it is of opinion that the certificate should be suspended in the public interest.

622. Digital signature certificates Revocation of Digital signature certificate - – The certifying authority may revoke a digital signature certificate issued by it (a) where the subscriber or any other person authorized by him makes a request to that effect or (b) upon the death of the subscriber or (c) upon the dissolution of the firm.

623. Penalty Penalty for damage of computer systems – If any person without permission of owner or any other person who is in-charge of the computer access, download or disrupt the functions, he shall be liable to pay damages by way of compensation not exceeding one crore rupees to the person so affected.

624. Penalty Penalty for failure to furnish information – If any person who is required to under this act fail to furnish any document, he shall be liable to a penalty not exceeding one lakh and fifty thousand rupees for each such failure.

625. Adjudication Power of adjudication – For the purpose of adjudication, central government shall appoint any officer not below the rank of director as the adjudicating officer. If he is satisfied that the person has committed the contravention, he may impose such penalty as he thinks fit.

626. Cyber Regulations Appellate Tribunal A cyber appellate tribunal shall consists of one person only referred to as the presiding officer, appointed by the central government.

627. Cyber Regulations Appellate Tribunal Any person aggrieved by an order made my controller may prefer an appeal to a cyber Appellate Tribunal within a period of 45 days from the date on which a copy of order made by the controller is received by the person aggrieved. On receipt of an appeal, Tribunal may after giving the parties an opportunity of being heard, pas such order thereon as it thinks fit.

628. Cyber Regulations Appellate Tribunal A penalty imposed under this act, if it is not paid, shall be recovered as an arrear of land revenue and the license or the digital signature certificate, as the case may be, shall be suspended till the penalty is paid.

629. Offences Tampering with computer source documents – Three years imprisonment or fine worth two lakhs . Hacking with computer system - Three years imprisonment or fine worth two lakhs . Publishing of information which is obscene in electronic form - Ten years imprisonment or fine worth two lakhs .

630. Offences Securing access to protected system - Ten years imprisonment or fine. Misrepresentation - Two years imprisonment or fine of one lakh . Breach of confidentiality and privacy - Two years imprisonment or fine of one lakh . Publishing of false digital signature certificate - Two years imprisonment or fine of one lakh .

631. Laws relating to Intellectual Property rights Legal Environment of Business

632. Introduction Property of a person may be corporeal property or Incorporeal property. Corporeal property refers to the right of ownership of any material things like ownership of a building, computer etc which are tangible.

633. Introduction Incorporeal property or intellectual property refers to right of ownership in an immaterial thing. Intellectual property is of two kinds. Industrial properties like patents, designs, trademarks etc. Copyrights granted to artists, musicians etc.

634. Introduction The intellectual property law regulates the creation, use and exploitation of mental or creative labor. It prevents third parties from becoming unjustly enriched by reaping what they have not sown.

635. Components of intellectual property rights Copyrights and related rights. Trademarks and service marks. Patents. Geographical indications. Industrial designs.

636. International instruments to protect Intellectual Property rights World Intellectual Property Organization (WIPO). Agreement on Trade Related intellectual Property Rights (TRIPs)

637. World Intellectual Property Organization (WIPO) WIPO is established on 14 th July, 1967. It is designated as a specialized body of UNO to act as a complementary body with WTO, for the promotion and protection of Intellectual Property Rights.

638. World Intellectual Property Organization (WIPO) The objectives of WIPO are To promote the protection of intellectual property throughout the world. To harmonize national international property legislation and procedures. Provide services for international applications for intellectual property rights. Exchange information on intellectual property.

639. Agreement on Trade Related intellectual Property Rights (TRIPs) The TRIPs agreement for the first time creates a multilateral framework for enforcement of all Intellectual Property Rights at international level which were so far left to the national states to carry out at their discretion under national laws. It is a mandatory agreement attached to WTO. Every member of WTO is required to observe the provisions of TRIPs and provide minimum level of Intellectual Property Rights in their national laws.

640. Copyright Act, 1957 Legal Environment of Business

641. Definition Copy right means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof.

642. Definition In the case of a literary, dramatic or musical work – To reproduce work, issue copies, perform work in public, make translation or adaptation etc. In the case of computer program - To reproduce work, issue copies, perform work in public, make translation or adaptation, to sell or give on commercial rental or offer for sale.

643. Definition In the case of artistic work – To reproduce the work, to sell or give on hire, to communicate the work to the public, to issue copies, to make adaptations etc. In the case of a cinematograph film – To make a copy of the film, to sell or give on hire, to communicate the film to the public. In the case of sound recording – To make any other sound recording embodying it, to sell or give on hire or to communicate the sound recording in public.

644. Characteristics of Copyright Creation of statute – The copy right is granted and protected according to copy right. Multiple rights – Copy right is not a single right, rather it is a bundle of rights in the same work comprising of literary work, right to reproduction etc. The work must be original – The first and essential requirement for claiming copyright is the originality of work. Copyright exists in expression of idea and not mere idea – The copyright exists only in the expression of idea in some material form like book, film, photograph or musical tone.

645. Subject matter of copyright protection Literary works – The expression literary work includes computer programmes , tables and compilations including computer database. Artistic works – It includes paintings, sculptures , works of architecture etc. Musical work – It includes music and any graphical rotation of such work. Computer software and programmes – Computer programme means a set of instructions expressed in words, codes, schemes or in any other forms. Work of Architecture – It means a building or structure having an artistic character.

646. Author and ownership of a copyright Section 2 (d) defines author of the work as show below. Literary or dramatic work – The author of the work. Musical work – The composer. An artistic work other than photograph – The artist. Photograph – The person who takes the photograph. Cinematograph film – the producer. Sound recording – the producer. Literary, dramatic, musical or artistic work which is computer generated – the person who causes the work to be created.

647. Various rights of owner of copyright Multiple statutory rights – The copyright is a creation of statute. It is granted and protected according to the copy rights Act. The owner of work can exploit and enjoy monopoly right in his work in several manners. Right to transfer – The author can transfer his rights through assignment or grant permissive use of his copyrights to any person.

648. Various rights of owner of copyright Negative right – Unauthorized use of copyright amounts to infringement. The act provides adequate remedies for preventing infringement. Moral right – These rights are to claim authorship of the work and to restrain or claim damages in respect of any distortion, mutilation or modification of the said work.

649. Licensing of copyrights Voluntary license – Section 30 of the copyrights act empowers the owner of copyright to grant any interest in the rights by license in writing signed by him or his duly authorized agent. Compulsory license – The copyright board is empowered to grant compulsory license under certain circumstances on suitable terms and conditions in respect of an Indian work.

650. Remedies against Infringement Infringement means unauthorized and illegal reproduction of work of others.

651. Remedies against Infringement Civil remedies – A plaintiff in a suit for infringement of his copyright can seek following civil remedies. Search and seizure order – The court can pass an ex – parte order to enter the premises and make inspection of relevant documents and articles and remove them for safe custody. Injunction – The plaintiff may seek relief by way of restraining defendant from infringing his copyright through temporary or permanent injunction in civil suit at various stages of trail.

652. Remedies against Infringement Criminal remedies – The infringement of copyright is not a civil wrong but also an offence. The plaintiff can , in addition to civil suit, also file criminal proceedings against infringer. Administrative remedies – The Registrar and copyright board have also been vested with some power to check violation of copyrights.

653. The Patent Act, 1957 Legal Environment of Business

654. Introduction The main object of patent law is to confer exclusive right to the patentee to gain commercial advantage out of his invention. The conferring of exclusive right encourages the inventors to apply their creative faculties.

655. Definition According to Section 2(1) of the Patent Act 1970, a patent means a patent for any invention granted under the Act. Patent is a document by which a right is granted by the Government to the grantee for a limited period. The guarantee gets the privilege of making, selling and using the invention for which patent has been granted.

656. General conditions to be satisfied for conferring patent right Under the Patents Act, a patent can be granted to a new and useful product or process. The subject matter of a patent is an ‘invention’. The element of novelty in an invention is the most essential condition for patenting a product or process. In India, patent is conferred only to useful products and processes. The invention must be non-obvious to a person skilled in the art to which the invention relates. The invention must be disclosed fully.

657. Procedure for obtaining patents An application for a patent for an invention may be made by (a) true and first inventor or (b) assignee of the true and first inventor. Every application for a patent shall be for one invention only and shall be made in the prescribed form and filed in the patent office. Every such application shall be accompanied by a provisional or a complete application. An application for patent shall ordinarily be open to the public for a prescribed period.

658. Procedure for obtaining patents On the request of the applicant, the application and other documents shall be referred to the Controller of examinations. If the application for the patent is found to be in order for grant of the patent, the patent shall be granted to the applicant with the seal of the patent office and the date on which the patent is granted shall be entered in the register.

659. Term of patent The term of every patent granted after the commencement of the patents (Amendments) Act 2002 shall be 20 years.

660. Rights of the patentee Section 48 confers the right to exploit the patent on the patentee. The patentee can transfer the patent right by assignment or license. A patentee can at any time surrender the patent. The patentee, his assignee, licensee or agent has the right to institute a civil suit in court not lower than District Court in case of any infringement.

661. Transfer and Transmission of Patent Right A patent is a transferrable property. The patentee can transfer the patent by assignment of licensee. An assignment is the transfer of interest through a duly registered agreement or through a letter of patentee or through a mortgage. When the patent right is transferred from patentee to another person by operation of law, it is called transmission.

662. License A license is a permission to make, use or exercise the patented invention. In license, the ownership of patent remains with patentee. Mere partial use is permitted.

663. License Compulsory License – At any time after the expiration of 3 years from the date of the grant of patent, any person interested may make an application to the Controller alleging that for grant of compulsory license on patent on the following grounds (a) reasonable requirement of public or (b) Patented invention not available to public at reasonable price.

664. License Voluntary license – Voluntary license is a written authority granted by the owner of the patent to another person empowering the latter to make, use, sell the patented article. Exclusive license – Exclusive license means a license from a patentee which confers on the licensee to the exclusion of all persons any right in respect of the patented invention.

665. Infringement The colorable imitation of an invention. Immaterial variation in the invention. Mechanical equivalent. Taking essential features of the invention.

666. Remedies against infringement Whenever a monopoly right of a patentee is violated, his rights can be secured by instituting a suit for infringement. A suit for infringement shall be instituted in any court not inferior to a District court having jurisdiction to try the suit. The procedure to be followed in conducting a suit for infringement is governed by the Provision of Code of Civil Procedure, 1908.

667. The Trademarks Act, 1999 Legal Environment of Business

668. Introduction For the protection of the interest of the trader and consumer, some definite symbol which marks out the origin of goods is to be attached with the goods. Such symbol is called a trademark.

669. Definition A trademark is a visual representation attached to goods for the purpose of indicating their trade origins.

670. Salient features of trademark act, 1999 Providing for registration of trademarks for services. Providing for an appellate board for speedy disposal of appeals. Transferring the final authority relating to registration of certification trade mark to registrar. Providing enhanced punishments for the offenses related to trademarks. Increasing the period of registration and renewal from 7 years to 10 years.

671. Functions of trademarks It identifies the product and its origin. It guarantees its established quality. It advertises the product. It creates an image of the product in the minds of the public particularly consumers.

672. Registration of trademark Apply in writing to the registrar in the prescribed manner for the registration of trademark. Every application shall be filed in the office of trade mark registry. On receipt of the application, the registrar may accept or refuse to accept the application. When accepted, the registrar shall advertise it in the prescribed manner. Registrar will wait for three months from advertising to know the objections. After disposal of objections, the registrar shall register the said trademark with effect from date of application.

673. Term of a trademark A unique feature of trademark is its perpetual life. Though initially the registration of a trade mark shall be for a period of 10 years, it can be periodically renewed and can be used for indefinite period unless it is removed from register or prohibited by court order.

674. Rights of the trademark holder To use the trade mark in relation to goods or services in respect of which the trademark is registered. To transfer his rights through license or assignment of his trademark. To obtain legal relief against alleged infringement of a registered trade mark. To apply for correction of register with regards to name, address or description of registered proprietor or to cancel the entry of a trademark on the register.

675. Infringement of trademarks In order to constitute infringement, following requirements must be fulfilled. The person is not authorized to use the trademark. The infringing trademark is either similar or identical or deceptively similar to the already registered trade mark. The infringing trademark must be used in the course of regular trade in which the registered proprietor or user is already engaged. The use of infringing trademark must be printed.

676. Legal remedies against infringement When there is an infringement, the aggrieved can file a suit for infringement. In the case of falsification of trademarks, criminal proceedings can be initiated in addition to civil suit.

677. Assignment and transmission A registered trade mark is assignable and transmissible. The proprietor of a registered trade mark can assign his registered trade mark by way of sale, mortgage, lease or license. On death of the proprietor of a registered trademark, the trade mark shall be transmitted to the legal heirs.

678. Collective marks Whereas the trademark belongs to an individual, a collective mark belongs to an association of persons, other than partnership firm.

679. Certification trade mark Certification trade mark means a mark capable of distinguishing the goods or services in connection with which it is used in the course of trade which are certified by the proprietor.

680. Certification trade mark The features of certification trade mark are It is a mark capable of distinguishing the certified goods or services from that are not certified. It is a mark by which the proprietor of certification trade mark certifies the origin, material, mode of manufacturing of good or performance of services. It is a mark which can be registered as Certification trade mark under the act and the applicant as the proprietor of certification trade mark.

681. Prepared By Kindly restrict the use of slides for personal purpose. Please seek permission to reproduce the same in public forms and presentations. Manu Melwin Joy Assistant Professor Ilahia School of Management Studies Kerala, India. Phone – 9744551114 Mail – [email protected]