LESSON -3 DISCHARGE OF CONTRACT

Structure
3.0 Objectives

3.1 Introduction

3.2 Discharge of Contract: Meaning

3.3 Modes of Discharge of Contract

3.4 Remedies for Breach of Contract

3.4.1 Rescission of the Contract

3.4.2 Suit for Damages

3.4.3 Suit upon Quantum Meruit (Sections 65 and 70)

3.4.4 Suit for Specific Performance

3.4.5 Suit for an Injunction

3.5 Summary

3.6 Key words

3.7 Check Your Progress

3.8 Answers to Check Your Progress

3.9 Self-assessment Questions

3.10 References/Suggested Readings

3.0 OBJECTIVES
After studying this unit, you should be able to:

 Understand discharge of a contract;

 Examine various modes of getting a contract discharged;
 Describe legal remedies for breach of a contract;
 Explain various kinds of damages; and
 Analyze rule of quantum meruit and its application.

3.1 INTRODUCTION
Formation of a contract results in the creation of certain rights and obligations on the part of the parties.
These rights and obligations can be claimed in the court of law. These are also known as contractual
relationship between the parties making a contract. The rights on the part of one party become obligations
for another and vice versa. In this unit you will study meaning of discharge of contract, various modes of
getting a contract discharged, legal remedies for breach of a contract and also rule of quantum meruit.

3.2 DISCHARGE OF CONTRACT: MEANING

Discharge of a contract implies termination of the contractual relationship between the parties. On
the termination of such relationship the parties are released from their obligations in the contract. And in
this way contract comes to an end. In other words, a contract is said to be discharged, when rights and
obligations created by it comes to an end. Broadly the contract may be discharged either by the act of the
parties or by operation of the law. The parties of a contract may be released from the obligations either by
fulfilling or discharging them or the law may exempt them from their obligations in the contract.
3.3 MODES OF DISCHARGE OF CONTRACT
The contract may be discharged by in any one of the following ways which are known as modes of
discharging contract:
1. Discharge of Contract by Performance:
When a contract is duly performed by both the parties, the contract comes to a happy ending and nothing
more remains. The contract, in such a case, is discharged or terminated by due performance. But, if one
party only performs his promise, he alone is discharged. Such a party gets a right of action against the other
party who is guilty of breach. Performance may be of actual performance or attempted performance or
Tender.
(a) Actual Performance:
When each party to a contract fulfils his obligation arising under the contract within the time and in the
manner prescribed, it amounts to actual performance of the contract and the contract comes to an end or
stands discharged.
(b) Attempted Performance or Tender

When the promisor offers to perform his obligation under the contract, but is unable to do so because the
promisee does not accept the performance it is called ‗attempted performance‘ or ‗Tender.‘ Thus ‗tender‘
is not actual performance but is only an ‗offer to perform‘ the obligation under the contract. A valid tender
or offers of performance is equivalent to performance. A valid tender or offer of performance must fulfill
the following conditions.

1. It must be unconditional. A conditional tender is no tender. For example, A, who is a debtor of

company B, offers to pay if shares are allotted to him at par. It is not a valid tender.
2. It must be made at proper time and place. A tender before or after the due date or at a place other
than agreed upon is not a valid tender. For example, A is a tenant of B. He offers him rent at a
marriage party. B is not bound to accept as the tender is not made at a proper place.
3. It must be of the whole obligation contracted for and not only of the part. Thus, deciding at his own
to pay in installments and offering the first installment was held an invalid tender as it was not of
the whole amount due (Behari Lal Vs. Ram Gulam).
4. If the tender relates to delivery of goods, it must give a reasonable opportunity to the promisee for
inspection of goods, so that he may be sure that the goods tendered are of contract description.
5. It must be made by a person who is in a position and is willing to perform the promise. A tender by
a minor or idiot is not a valid tender.
6. It must be made to the proper person i.e. the promisee or his duly authorized agent. Tender made to
a stranger is invalid.
7. If there are several joint promisees, an offer to any one of them is a valid tender. But the actual
payment must be made to all joint promisees, and not to any one of them, for a valid discharge of
the contract. Section 45 provides that when a promise is made to two or more persons jointly, the
right to claim performance rests with all of them jointly.
8. In case of tender of money, exact amount should be tendered in the legal tender money. Tendering
a smaller or larger amount is an invalid tender e.g., tendering Rs. 100 currency note to a conductor
of a bus for a two rupees ticket is not a valid tender. Similarly, a tender by a cheque is invalid as it
is not legal tender but if the creditor accepts the cheque, he cannot afterwards raise an objection.
The effect of refusal to accept a properly made ‗offer of performance‘ is that the contract is deemed to
have been performed by the promisor i.e., tenderor, and the promisee can be sued for breach of contract. A
valid tender, thus, discharges the contract.
2. Discharge by Mutual Consent or Agreement:

Since a contract is created by means of an agreement, it may also be discharged by another agreement
between the same parties. Sections 62 and 63 deal with this subject and provide for the following methods
of discharging a contract by mutual agreement:
(a) Novation:

Novation occurs when a new contract is substituted for an existing contract, either between the same parties
or between different parties, the consideration mutually being the discharging of the old contract. If parties
are not changed then the nature of obligation (i.e. material terms of the contract) must be altered
substantially in the new substituted contract. When the parties to a contract agree for novation, the original
contract is discharged and need not be performed. For example, A is indebted to B and B to C. By mutual
agreement B‖s debt to C and B‖s loan to A are cancelled and C accepts A as his debtor. There is novation
involving change of parties. Take another example. A owes B Rs. 10,000. A enters into an agreement with
B, and gives B a mortgage of his (A‖s) estate for Rs. 5,000 in place of the debt of Rs. 10,000. This is a new
contract and extinguishes the old.
(b) Alteration:

Alteration of a contract means change in one or more of the material term of a contract. If a material
alteration in a written contract is done by mutual consent, the original contract is discharged by alteration
and the new contract in its altered form takes its place. A material alteration is one which alters the legal
effect of the contract, e.g. a change in the amount of money to be paid or a change in the rate of interest.
Immaterial alteration, e.g. correcting a clerical error in figures or the spelling of a name has no effect on the
validity of the contract and does not amount to alteration in the technical sense. It is relevant to state that a
material alteration made in a written contract by one party without the consent of the other will make the
whole contract void and no person can maintain an action upon it. It comes under ‗discharge of a contract
by operation of law‘ which will be discussed later. The difference between ‗novation‘ and ‗alteration‘
may be noted. In case of novation there may be a change of parties also, while in case of alteration parties
remain the same, only the terms of a contract are altered.
(c) Rescission:

A contract may be discharged before the date of performance by agreement between the parties to the effect
that it shall no longer bind them. Such an agreement amounts to ‗rescission‘ or cancellation of the contract,
the consideration for mutual promises being the abandonment by the respective parties of their rights under
the contract. An agreement of rescission releases the parties from their obligations arising out of the
contract. Such agreements are to be distinguished from ‗agreements in restraint of legal proceedings‘
which are void as per Section 26. For example, A contracts to marry B, it is a valid contract. But if A
contracts with B not to marry C, it is a void agreement ‗being in restraint of marriage‘ as per Section 26.
Hence ‗an agreement to execute performance‘ is valid, while ‗an agreement not to sue for breach‘ is void,
although in practical life both may mean the same. For example, A promises to deliver certain goods to B
on a certain date. Before the date of performance, A and B mutually agree that the contract will not be
performed. The contract stands discharged by rescission. There may also be an implied rescission of a
contract e.g., where there is non-performance of a contract by both the parties for a long period. Without
complaint, it amounts to an implied rescission. Notice that in the case of rescission, the existing contract is
cancelled by mutual consent without substituting a new contract in its place.
(4) Remission:

Remission may be defined ‗as the acceptance of a lesser sum than what was contracted for or a lesser
fulfillment of the promise made.‘ Section 63 deals with remission of performance and lays down that a
promisee may remit or give up wholly or in part, the performance of the promise made to him, and a
promise to do so is binding even though there is no consideration for it. Section 63 further provides that an
agreement to extend the time for the performance of a promise also does not require consideration to
support it on the ground that it is a partial remission of performance. For example, if the promisee agrees to
accept Rs. 2,000 in full satisfaction of a claim of Rs. 5,000, the promise is enforceable and the promisee
cannot in future bring a suit for the recovery of Rs. 5,000. (In England it would have been only ‗accord‘
which is unenforceable and the actual payment of Rs. 2,000 and its acceptance in full satisfaction of the
claim by the other party would have been ‗accord and satisfaction‘ which alone would have discharged the
old contract. ‗Accord‘ without ‗satisfaction‘ is no discharge of the contract in English law).
(e) Waiver:
Waiver means the deliberate abandonment or giving up of a right which a person is entitled to under a
contract whereupon the other party to the contract is released from his obligation. Strictly speaking there is
no need of an agreement for a waiver but because we are discussing it as a method of discharge under
―mutual consent,‖ we presume that the other party consents to it. Thus, where A promises to tailor, a shirt
for B if he will sing a song at his birthday party and accordingly B sang the song but afterwards B forbids
A to tailor the shirt, to which A consents, the contract is terminated by waiver.
3. Discharge by Subsequent or Supervening Impossibility or Illegality/ Frustration of a
Contract Impossibility at the Time of Contract:

There is no question of discharge of a contract which is entered into to perform something that is obviously
impossible e.g., an agreement to discover treasurere by magic because in such a case there is no contract to
perform, it being an agreement void ab-initio by virtue of Section 56, which provides an agreement to do an
act impossible in itself is void. Notice that this paragraph of the section speaks of something which is
impossible inherently or by its very nature and which may or may not be known to both the parties at the
time when the contract is made. But, if the impossibility is not obvious and the promisor alone knows of
the impossibility or illegality then existing or the promisor might have known as such after using
reasonable diligence, such promisor is bound to compensate the promisee for any loss he may suffer
through the non-performance of the promise, inspite of the agreement being void ab-initio [Section 56, Para
3]. For example, A contracts to marry B being already married to C, and being forbidden by the law to
which he is subject to practice polygamy. A must make compensation to B for the loss caused to her by the
non-performance of his promise.

A contract will be discharged on the ground of supervening impossibility in the following cases:
(a) Destruction of Subject-matter:

When the subject-matter of a contract, subsequent to its formation, is destroyed, without the fault of the
promisor‖ or promisee, the contract is discharged. Note that it is so only when specific property or goods
are destroyed which cannot be regained. For example, A music hall was agreed to be let out for a series of
concerts on certain days. The hall was destroyed by fire before the date of the first concert. The plaintiff
sued the defendant for damages for the breach of contract. It was held that the contract has become void
and the defendant was not liable (Taylor Vs. Caldwell).
(b) Failure of Ultimate Purpose:

Where the ultimate purpose for which the contract was entered into fails, the contract is discharged
although there is no destruction of any property affected by the contract and the performance of the contract
remains possible in literal sense. The leading case of Krell Vs. Henry is a good illustration on the point: H
hired a room in London from K for two days to witness the coronation procession of King Edward VII.
Owing to the King‖s illness, the procession was postponed. H consequently could not use the room
although he could go there and sit but with no purpose as there was no procession. K filed a suit for the
recovery of rent. It was held that H need not pay the rent as the contract was discharged on failure of the
ultimate purpose or on postponement of the procession which was the foundation of the contract.
(c) Death or Personal Incapacity of Promisor:

Where the performance of a contract depends upon the personal skill or qualification or the existence of a
given person, the contract is discharged on the illness or incapacity or the death of that person. For
example, A and B contract to marry each other. Before the time fixed for the marriage, A becomes mad.
The contract becomes void.
(d) Subsequent Change of Law:

A subsequent change in law may render the contract illegal and in such cases the contract is deemed
discharged. The law may actually forbid the doing of some act undertaken in the contract, or it may take
from the control of the promisor something in respect of which he has contracted to act or not to act in a
certain way. For example, A sold to B 100 bags of wheat at Rs. 700 per bag. But before delivery the
Government rendered the sale and purchase of wheat by private traders illegal under the Defence of India
Rules. The contract was discharged by impossibility created by subsequent change in law.
(e) Outbreak of War:

All contracts entered into with an alien enemy during war are illegal and void ab initio. Contracts entered
into before the outbreak of war are suspended during the war and may be revived after the war is over
provided they have not already become time-barred. It may be noted that if war is declared between the
countries of the contracting parties then only the contract is suspended during war. If war is declared
between the country of one of the parties to the contract and a third country, the contract remains binding,
and if the party of the country now at war could not perform the contract because of dislocation of transport
etc. it will be treated as ‗difficulty in performance‘ only and does not discharge the contract (Tsakiroglou
& Co.Ltd. vs. Noble Thorp).

Some of the cases where impossibility of performance is not an excuse are as follows:
(i) Difficulty of Performance:
Increased or unexpected difficulty and expense do not, as a rule, excuse from performance. For example, A
sold to B a certain quantity of Finnish birch timber. A found it impossible to fulfill this contract because of
the outbreak of war disorganized the transport and A could not get any supply of timber from Finland.
Held, B, was not concerned with the way in which A was going to get timber and therefore there was no
frustration. Held impossibility of getting timbers from that country could not excuse performance
(Blackburn Bobbin Co., Lid. vs Allen & Sons Ltd.)
(ii) Commercial Impossibility:

When in a transaction profits dwindle to a very low level or actual loss becomes certain, it is said that the
performance of the contract has become commercially impossible. Such a situation may arise on account of
higher price of the raw material or increase in the wage bill etc. commercial impossibility so does not
discharge a contract (Sachindra Vs. Gopal).
(iii) Impossibility Due to the Default of a Third Person:

The doctrine of supervening impossibility does not cover where the contract could not be performed
because of the impossibility created by the failure of a third person on whose work the promisor relied. For
example, A, a wholesaler, enters into a contract with B for the sale of certain goods to be produced by Z, a
manufacturer of those goods. Z does not manufacture those goods. A is liable to B for damages. The words
―to be produced by Z‖ simply indicate quality of goods here.
(iv) Strikes and Lock-outs

A strike by the workmen or a lock-out by the employer also does not excuse performance because the
former is manageable (as labour is available otherwise) and the latter is self-induced. Where the
impossibility is not absolute or which it is due to the default of the promisor himself, Section 56 would not
apply. As such these events also do not discharge a contract. For example, the lessor of certain saltpans,
failed to repair them according to the terms of the contract, on the ground of a strike of the workmen. Held,
a strike by the workmen was not sufficient reason to excuse performance of the contract (Hari Laxman vs
Secretary of State for India).
(v) Failure of One of the Objects:

When a contract is entered into for several objects, the failure of one of them does not discharge the
contract. For example, A company agreed to let out a boat to H (a) for viewing a naval review on the
occasion of the coronation of King Edward VII and (b) to sail round the fleet. Due to illness of the King,
the naval review was later cancelled but the fleet was assembled. Held, the contract was not discharged
because the holding of the review was not the sole basis of the contract. To sail round the fleet which
formed an equally basic object of the contract was still capable of attainment (R Steamboat Co. Vs.
Hutton).
4 Discharge by Lapse of Time:

The Limitation Act lays down that in case of breach of a contract legal action should be taken within a
specified period, called the period of limitation, otherwise the promisee is debarred from instituting a suit in
a court of law and the contract stands discharged. Thus, in certain circumstances lapse of time may also
discharge a contract. For example, the period of limitation for simple contracts is three years under the
Limitation Act, and therefore on default by a debtor if the creditor does not file a suit of recovery against
him within three years of default, the debt becomes time-barred on the expiry of three years and the creditor
will be deprived of his remedy at law. This in effect implies discharge of contract. Again, where ‗time is of
essence in a contract,‘ if the contract is not performed at the fixed time, the contract comes to an end, and
the party not at fault need not perform his obligation and may sue the other party for damages.
5 Discharge by Operation of Law:

A contract terminates by operation of law in the following cases:

(a) Death:

Where the contract is of a personal nature, the death of the promisor discharges the contract. In other
contracts the rights and liabilities of the deceased person pass on to the legal representatives of the dead
man.
(b) Insolvent:

A contract is discharged by the insolvency of one of the parties to it when an Insolvency Court passes an
‗order of discharge‘ exonerating the insolvent from liabilities on debts incurred prior to his adjudication.
(c) Merger :

Where an inferior right contract merges into a superior right contract, the former stands discharged
automatically. For example, where a man holding property under a contract of tenancy buys the property
his rights as a tenant are merged into the rights of ownership and the contract of tenancy stands discharged
by operation of law.
(d) Unauthorized Material Alteration:
A material alteration made in a written document or contract by one party without the consent of the other,
will make the whole contract void. Thus, where the amount of money to be received is altered, or an
additional signature is forged on a promissory note by a creditor, he cannot bring a suit on it and the pro-
note cannot be enforced against the debtor even in its original shape. The effect of making such an
alteration is exactly the same as that of cancelling the contract (Gour Chunder Vs. Prasanna). However, the
document, though altered, can be used as proof of the transaction and the creditor may be allowed to claim
refund of money actually advanced by him under Section 65 of the Contract Act which is based on the
equitable doctrine of restitution (Ananthrao Vs. Kandikanda).
6 Discharge by Breach of Contract:

Breach of contract by a party thereto is also a method of discharge of a contract, because ‗breach‘ also
brings to an end the obligations created by a contract on the part of each of the parties. Of course the
aggrieved party i.e., the party not at fault can sue for damages for breach of contract as per law; but the
contract as such stands terminated. Breach of contract may be of two kinds:
(a) Anticipatory Breach:

An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance
has arrived. It may take place in two ways:
(i) Expressly By Words Spoken or Written:

Here a party to the contract communicates to the other party, before the due date of performance, his
intention not to perform it. For example, A contracts with B to supply 100 bags of wheat for Rs 60,000 on
1st March. On 15th February, A informs B that he will not be able to supply the wheat. There is express
rejection of the contract.
(b) Impliedly by the Conduct of One of the Parties:

Here a party by his own voluntary act disables himself from performing the contract. For example, (i) a
person contracts to sell a particular horse to another on 1st of June and before that date he sells the horse to
somebody else; (ii) A agrees to marry B but before the agreed date of marriage she marries. In both the
above cases there occurs an anticipatory breach of contract brought about by the conduct of one of the
parties. Section 39 of the Contract Act deals with anticipatory breach of contract and provides as follows:
‗When a party to a contract has refused to perform, or disabled himself from performing his promise in its
entirety, the promisee may put an end to the contract, unless he has signified, by words, his acquiescence in
its continuance.
When there is an anticipatory breach of contract, the promisee is excused from performance or from further
performance. Further, it gives an option to the promisee (i.e., the aggrieved party) whereby: (i) he may
either treat the contract as rescinded by the other party for damages for breach of contract immediately
without waiting until the due date of performance, or (ii) he may elect not to rescind but to treat the contract
as still operative, and wait for the time of performance and then hold the other party responsible for the
consequence of non-performance. But, in that case, he will keep the contract alive for the benefit of the
other party as well as his own, and the guilty party, if he so decides on reconsideration, may still perform
his part of the contract and can also take advantage of any supervening impossibility which may have the
effect of discharging the contract. For example, A agrees to employ B as a clerk, the service to commence
from 1st June. On the 20th of May he informs B that his services will not be required. B is exonerated from
his obligation under the contract and may at once sue A for damages for breach of contract without waiting
until the time fixed for performance (Mersey Steel and Iron Co. Vs. Naylor).

A, agrees to sell his house to B for Rs. 8,50,000 on 1st of March. But on 10th February he changes his mind
and writes to B that he will not be able to sell his house. There is an anticipatory breach of contract. Two
courses are open to B: (i) he may treat the contract as rescinded and at once sue A for damages, or (ii) he
may wait till 1st of March. B adopts the second course. On 28th February the house is destroyed by fire. The
contract stands discharged by supervening impossibility. A is entitled to take advantage of this supervening
impossibility and B cannot recover any damages from him. If the house did not catch fire, A could have
taken back his letter of repudiation and asked B to take possession of the house on payment as per
agreement.
(b) Actual Breach:

Actual breach may also discharge a contract. It occurs when a party fails to perform his obligation upon the
date fixed for performance by the contract, as for example, where on the appointed day the seller does not
deliver the goods or the buyer refuses to accept the delivery. It is important to note that there can be no
actual breach of contract by reason of non-performance so long as the time for performance has not yet
arrived. Actual breach entitles the party not in default to elect to treat the contract as discharged and to sue
the party at fault for damages for breach of contract.

3.4 REMEDIES FOR BREACH OF CONTRACT

There are two parties in a contract. They make mutual exchange of promises them. These promises are
known as contractual obligations. When a party does not fulfill his promise or refuse to perform it, breach
of contract takes place. In that contract, another party is technically known as aggrieved party. Such
aggrieved party has got various legal remedies, which he can use against the party making a breach of
contract. These legal remedies are as under:

3.4.1 Rescission of the Contract

When there is a breach of contract by one party, the other party may rescind the contract and need not
perform his part of the obligations under the contract and may sit quietly at home if he decides not to take
any legal action against the guilty party. But, in case the aggrieved party intends to sue the guilty party for
damages for breach of contract, he has to file a suit for rescission of the contract. When the court grants
rescission, the aggrieved party is freed from all his obligations under the contract; and becomes entitled to
compensation for any damage which he has sustained through the non-fulfillment of the contract (Sec. 75).
For example, A contracts to supply 100 kg of tea leaves for Rs 8,000 to B on 15 April. If A does not
supply the tea leaves on the appointed day, B need not pay the price. B may treat the contract as rescinded
and may sit quietly at home. B may also file a suit for rescission and claim damages. Thus, applying to the
court for ―rescission of the contract‖ is necessary for claiming damages for breach or for availing any other
remedy. In practice a ―suit for rescission‖ is accompanied by a ―suit for damages,‖ etc. It is worth noting that
in certain cases a suit for ―rescission of the contract‖ may be filed even when no damages are to be
claimed, for example, in case of pledge of movable goods, say gold ornaments, if the pledger does not pay
as per agreement, the pledgee may file a suit for rescission of the contract (of course within the period of
limitation which is 30 years in this case), in order to free himself from his obligation to return the
ornaments on payment and to become entitled to sell the ornaments in order to realise his debt.

3.4.2 Suit for Damages

Damages are monetary compensation allowed to the injured party for the loss suffered by him as a result of
the breach of contract. The fundamental principle underlying damages is not punishment but compensation.
By awarding damages the court aims to put the injured party into the position in which he would have been
had there been performance and not breach, and not to punish the defaulter party. As a general rule,
‗compensation must be commensurate with the injury or loss sustained, arising naturally from the breach‘.
If actual loss is not proved, no damages will be awarded.
Assessment of Damages

The rules in this regard have been laid down by Section 73. Accordingly, an injured party is entitled to
receive from the defaulter party:
(a) Such damages which naturally arose in the usual course of things from such breach. No
compensation is to be given generally for any remote or indirect loss sustained by reason of the
breach (Ordinary Damages).

(b) Such damages which the parties knew, when they entered into the contract, as likely to result from
the breach (Special Damages).

(c) In estimating the loss or damage caused to a party by breach, the means which existed of
remedying the inconvenience caused by the breach must also be taken into account.
Different Kinds of Damages:

Damages may be of four kinds i.e. ordinary or general or compensatory damages (i.e., damages arising
naturally from the breach); special damages (i.e., damages in contemplation of the parties at the time of
contract); exemplary, punitive or vindictive damages; and nominal damages. These are explained as
follows:
(a) Ordinary Damages:

When a contract has been broken, the injured party can, as a rule, always recover from the guilty party
ordinary or general damages. These are such damages as may fairly and reasonably be considered as arising
naturally and directly in the usual course of things from the breach of contract itself. In other words,
ordinary damages are restricted to the ‗direct or proximate consequences‘ of the breach of contract and
remote or indirect losses, which are not the natural and probable consequence of the breach of contract, are
generally not regarded. For example, the leading case of Hadley Vs. Baxendale, which is said to be the
foundation of modern law of damages in England and India (as Sec. 73 is almost based on the rules laid
down in this case) is an authority on the point. In that case: H‖s mill was stopped by a breakage of the
crankshaft. H delivered the shaft to B, a common carrier, to take it to the manufacturers at Greenwich as a
pattern for a new one. The only information given to B was that the article to be carried was the broken
shaft of the mill. It was not made known to B that delay would result in loss of profits. By some neglect on
the part of B the delivery of the shaft was delayed beyond a reasonable time. In consequence the mill
remained idle for a longer period than should have been necessary. H brought an action against B claiming
damages for loss of profits, which would have been made during the period of delay. Held that B was not
liable for loss of profits caused by the delay because it was a remote consequence, and only nominal
damages were awarded. The Court pointed out that B, the defendant, was never told that the delay in the
delivery of the shaft would entail loss of profits of the mill; the plaintiffs might have had another shaft, or
there might have been some other defect in the machinery to cause the stoppage, or for any other reason
there might have been loss actually. Accordingly it was not a direct consequence of the breach and hence
not recoverable.
(b) Special Damages:

Special damages are those which arise on account of the special or unusual circumstances affecting the
plaintiff. In other words, they are such remote losses which are not the natural and probable consequences
of the breach of contract. Unlike ordinary damages, special damages cannot be claimed as a matter of right.
These can be claimed if the special circumstances which would result in a loss in case of breach of contract
are brought to the notice of the other party. It is important that such damages must be in contemplation of
the parties at the time when the contract is entered into. Subsequent knowledge of the special circumstances
will not create any special liability on the guilty party. E.g. A, having contracted with B to supply B 1,000
tons of iron at Rs 100 a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons
of iron at Rs 80 a ton, telling C that he does so for the purpose of performing his contract with B, C fails to
perform his contract with A, and A could not procure other iron, and B, in consequence rescinds the
contract. C must pay to A Rs 20,000 being the profit which A would have made by the performance of his
contract with B. (If C was not told of B‖s contract then only the difference in contract price and market
price, if any, could be claimed.)
(c) Exemplary or Vindictive Damages :

These are such damages which are awarded with a view to punishing the guilty party for the breach and not
by way of compensation for the loss suffered by the aggrieved party. As observed earlier, the cardinal
principle of the law of damages for a breach of contract is to compensate the injured party for the loss
suffered and to punish the guilty party. Hence, obviously exemplary damages have no place in the law of
contract and are not recoverable for a breach of contract. There are, however, two exceptions to this rule
such as (i) Breach of a contract to marry: In this case the amount of the damages will depend upon the
extent of injury to the party‖s feelings. One may be ruined, other may not mind so much. (ii) dishonour of
a cheque by a banker when there are sufficient funds to the credit of the customer. In this case the rule of
ascertaining damages is, ‗the smaller the cheque, the greater the damage.‘ Of course, the actual amount of
damages will differ according to the status of the party.
(d) Nominal Damages:

Nominal damages are those which are awarded only for the name sake. These are neither awarded by way
of compensation to the aggrieved party nor by way of punishment to the guilty party. These are awarded to
establish the right to decree for breach at contract when the injured party has not actually suffered any real
damage and consist of a very small sum of money, say, a rupee or two. For example, in a contract of sale
of goods if the contract price and the market price is almost the same at the date of breach at the contract
then the aggrieved party is entitled only to nominal damages.

It is the duty of the injured party to mitigate damage suffered as a result of the breach of contract by the
other party. He must use all reasonable means of mitigating the damage, just as a prudent man would,
under similar circumstances in his own case. He cannot recover any part of the damage, traceable to his
own neglect to mitigate. The onus of proof, however, is on the defendant to show that the plaintiff has
failed in his duty of mitigation and the plaintiff is free from the burden of proving that he tried his best to
mitigate the loss (Pauzu Ltd. Vs. Saunders). The rule in regard to mitigation must be applied with
discretion and a man who has already put himself in the wrong by breaking his contract has no right to
impose new and extraordinary duties on the aggrieved party. Courts should take care to see that they have
put the plaintiff in the same position as if the contract had been performed. For example, where a servant is
dismissed, even though wrongfully; it is his duty to mitigate the damages by seeking other employment.
He can recover only nominal damages if he refuses a reasonable offer of fresh employment. But if it cannot
be proved that he has failed in his duty of mitigation, he will be entitled to the full salary for the whole of
the unexpired period of service, if the contract of employment was for a fixed period. If the contract of
employment was not for a fixed term, then the principle of awarding damages for a reasonable period of
notice comes into play (S. S. Shetty Vs. Bharat Nidhi Ltd.).
(e) Liquidated Damages and Penalty:

Let us first know what we mean by the two terms. ―Liquidated damages‖ means a sum fixed up in advance,
which is a fair and genuine pre-estimate of the probable loss that is likely to result from the breach.
―Penalty‖ means a sum fixed up in advance, which is extravagant and unconscionable in amount in
comparison with the greatest loss that may result the breach of contract. Thus, the essence of a penalty is a
payment of money stipulated as per the terms of the offending party. Sometimes the parties fix up at the
time of the contract the sum payable as damages in case of breach. In such a case, a distinction is made in
English Law as to whether the provision amounts to ―liquidated damages‖ or a ―penalty‖. Courts in England
usually allow ―liquidated damages‖ as stipulated in the contract without any regard to the actual loss
sustained. ―Penalty‖ clauses, however, are treated as invalid and the courts in that case calculate damages
according to the ordinary principles and allow only reasonable compensation. Under the Indian Law,
Section 74 does away with the distinction between ―liquidated damages‖ and ―penalty‖. This Section lays
down that the Courts are not bound to treat the sum mentioned in the contract, either by way of liquidated
damages or penalty, as the sum payable as damages for the breach. Instead the courts are required to allow
reasonable compensation so as to cover the actual loss sustained, not exceeding the amount so named in the
contract. Thus, according to the section the named sum regardless whether it is a penalty or not determines
only the maximum limit of liability in case of the breach of contract. The section does not confer a special
benefit upon any party; it merely declares the law that notwithstanding any term in the contract pre-
determining damages or providing for forfeiture of any property by way of penalty, the Court will award to
the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated.

There is, however, one exception provided for by Section 74 to the above rule. When any person enters into
any bail bond, recognizance or other instrument of the same nature or under the provisions of any law or
under the orders of the Government, gives any bond for the performance of any public duty or act in which
the public are interested, he shall be liable to pay the whole sum mentioned therein upon breach of the
condition of any such instrument.

3.4.3 Suit Upon Quantum Meruit (Sections 65 and 70)

The third remedy for a breach of contract available to an injured party against the guilty party is to file a
suit upon quantum meruit. The phrase quantum meruit literally means ‗as much as is earned‘ or ‗in
proportion to the work done.‘ A right to use upon quantum meruit usually arises where after part
performance of the contract by one party, there is a breach of contract, or the contract is discovered void or
becomes void. This remedy may be availed of either without claiming damages (i.e. claiming reasonable
compensation only for the work done) or in addition to claiming damages for breach (i.e., claiming
reasonable compensation for part performance and damages for the remaining unperformed part). The
aggrieved party may file a suit upon quantum meruit and may claim payment in proportion to work done or
goods supplied in the following cases:

(a) Where work has been done in pursuance of a contract, which has been discharged by the default of
the defendant. For example, P agreed to write a volume on ancient armour to be published, in a
magazine owned by C. For this he was to receive $ 100 on completion. When he had completed
part, but not the whole, of his volume, C abandoned the magazine. P was held entitled to get
damages for breach of contract and payment quantum meruit for the part already completed
(Planche Vs. Colburn).
(b) Where work has been done in pursuance of a contract which is discovered void or becomes void,
provided the contract is divisible. For example, C was appointed as managing director of a
company by the board of directors under a written contract which provided for his remuneration.
The contract was found void because the directors who constituted the ―Board‖ were not qualified
 to make the appointment. C nevertheless, purporting to act under the agreement, rendered services
to the company and sued for the sums specified in the agreement or alternatively for a reasonable
remuneration on a quantum meruit. Held, C could recover on a quantum meruit. (Craven Ellis Vs.
Canons Ltd. ).
(c) When a person enjoys benefit of non-gratuitous act although there exists no express agreement
between the parties. One of such cases is provided in Section 70. Section 70 lays down that when
services are rendered or goods are supplied by a person, (i) without any intention of doing so
gratuitously, and (ii) the benefit of the same is enjoyed by the other party, the latter must
compensate the former or restore the thing so delivered. For example, A, a trader, leaves certain
goods at B‖s house by mistake. B treats the goods as his own. He is bound to pay A for them.
(d) A party who is guilty of breach of contract may also sue on a quantum meruit provided both the
following conditions are fulfilled: (i) the contract must be divisible, and (ii) the other party must
have enjoyed the benefit of the part which has been performed, although he had an option of
declining it. For example, where a common carrier fails to take a complete consignment to the
agreed destination, he may recover pro-rata freight. (He will, of course, be liable for breach of the
contract.)
3.4.4 Suit for Specific Performance
Specific performance means the actual carrying out of the contract as agreed. Under certain circumstances
an aggrieved party may file a suit for specific performance, i.e., for a decree by the court directing the
defendant to actually perform the promise that he has made. Such a suit may be filed either instead of or in
addition to a suit for damages. A decree for specific performance is not granted for contracts of every
description. It is only where it is just and equitable so to do, i.e., where the regal remedy is inadequate or
defective, that the courts issue a decree for specific performance. It is usually granted in contracts
connected with land buildings articles and unique goods having some special value to the party suing
because of family association. Notice that in all these contracts monetary compensation is not an adequate
relief because the injured party will not be able to get an exact substitute in the market. Specific
performance is not granted, as a rule, in the following cases: (i) where monetary compensation is an
adequate relief. (ii) Where the court cannot supervise the actual execution of the contract, e.g., a building
construction contract. Moreover, in most cases damages afford an adequate remedy. (iii) Where the
contract is for personal services, e.g., a contract to marry or to paint a picture. In such contracts ―injunction‖
(i.e., an order which forbids the defendant to perform a like personal service for other persons) is granted in
place of specific performance.

3.4.5 Suit for an Injunction

―Injunction‖ is an order of a court restraining a person from doing particular act. It is a mode of securing the
specific performance of the negative terms of the contract. To put it differently, where a party is in breach
of negative term of the contract (i. e. where he is doing something which he promised not to do), the court
may, by issuing an injunction, restrain him from doing, what he promised not to do. Thus injunction is a
preventive relief. It is particularly appropriate in cases of anticipatory breach of contract where damages
would not be an adequate relief. For example, A agreed to sing at B‖s theatre for three months from 1st
April and to sing for no one else during that period. Subsequently she contracted to sing at C‖s theatre and
refused to sing at B‖s theatre. On a suit by B, the court refused to order specific performance of her positive
engagement to sing at the plaintiff‖s theatre, but granted an injunction restraining A from singing elsewhere
and awarded damages to B to compensate him for the loss caused by A‖s refusal.

3.5 SUMMARY
A contract may be discharged by different ways. In the present unit, we have elaborated these different
ways and explain relevant aspects like discharge by performance; discharge by mutual consent or
agreement and discharge by subsequent or supervening impossibility or illegality. Further, the way of
discharge of contract like death or personal incapacity of promisor; change of law; outbreak of war;
difficulty of performance; commercial impossibility; impossibility due to the default of a third person;
strikes and lock-outs; failure of one of the objects; discharge by lapse of time; discharge by operation of
law; and discharge by breach of contract. At last, we have discussed remedies for breach of contract. The
legal remedies for the breach of contract are rescission of the contract, suit for damages, suit for specific
performance, suit for injunction and suit upon quantum meruit.

3.6 KEY WORDS

Alteration: It means change in one or more of the material term of a contract.

Breach of Contract: A failure by a party to a contract to perform the obligations in that contract or an
indication of an intention not to do so. An indication that a contract will be breached in the future is called
repudiation or an anticipatory breach; it may be either expressed in words or implied from conduct.
Damage: Damages refers to the compensation awarded, as opposed to damage, which refers to the actual
injury or loss suffered.
Discharge of a Contract: It implies termination of the contractual relationship between the parties.

Novation: It occurs when a new contract is substituted for an existing contract, either between the same
parties or between different parties, the consideration mutually being the discharging of the old contract.
Remission: It may be defined as the acceptance of a lesser sum than what was contracted for or a lesser
fulfillment of the promise made.
Waiver: It means the deliberate abandonment or giving up of a right which a person is entitled to under a
contract whereupon the other party to the contract is released from his obligation.

3.7 CHECK YOUR PROGRESS

Check Your Progress A

Attempt the following problems, giving reasons for your answers:

1. The unloading of a ship was delayed beyond the date agreed with the ship owners owing to a strike
of dock laborers. On a suit by the ship owners for damages, the plea of impossibility of
performance was raised. Advise the ship owners.
2. A contract to marry B in two years time. Shortly afterwards he breaks off the engagement without
B‖s consent. B writes repeatedly begging him to adhere to the contract. Just before the expiry of
two years, a change in law makes it illegal for A to marry B. On the expiry of two years, B sues A
for the breach of the contract. Will she succeed?
3. A wine merchant contracts to sell to a customer five dozen bottles of a particular brand of
Champagne. At the time of the contract the wine merchant‖s whole stock of wine had been
destroyed by fire, but he was not aware of this fact. What is the effect on the legal rights of the
parties?
4. A agrees to sell his scooter to H a month after the date of the contract. But just after 10 days of the
contract he sells the scooter to C. Thereupon B sues A for the breach of contract. A contends that
he could still perform the contract by repurchasing the scooter from C. Decide the suit.
5. Breach of contract may be
(A) Actual breach (B) Anticipatory breach

(C) Both A & B (D) Express breach

Check Your Progress B

Attempt the following problems, giving reasons for your answers:

1. A contracts to pay a sum of money to B on a specified day. A does not pay the amount on that day.
B in consequence of not receiving the money on that day, is unable to pay his debts and, is totally
ruined. B claims heavy damages. Advise A.
2. A agreed to erect a plant for B by 31st March, 1976. A further agreed to pay Rs. 500 per month as
damages in case of delay beyond the agreed date. A was late by four months. B sued A for Rs.
4,500, the actual loss caused to him as a result of the delay. What damages will you award, and
why?
3. A employs B as manager of his factory for a term of three years at a monthly salary of Rs. 3,000.
Without any lapse on the part of B, A dismisses him after two years of service. B could not get an
alternate job elsewhere and files a suit for damages for breach of contract against A. Will he
succeed? If yes, assess the amount of damages recoverable by him.
4. A mate was engaged for a lump sum to be paid after the completion of voyage. The mate dies
when only of the voyage was completed. His legal representatives claim damages on quantum
meruit. Decide.
5. Match the following:
(A) Special damage 1. Quantum meruit

(B) Vindictive damage 2. Contemptuous damage

(C) Breach of contract 3. Breach of promise of marriage

(D) Nominal damage 4. Loss of profit

Check Your Progress C
1. ............................................ of a contract implies termination of the contractual relationship
between the parties.
2. When the promisor offers to perform his obligation under the contract, but is unable to do so
because the promisee does not accept the performance it is called .......................................
performance.
3. ....................................... occurs when a new contract is substituted for an existing contract, either
between the same parties or between different parties, the consideration mutually being the
discharging of the old contract.
4. .................................. means the deliberate abandonment or giving up of a right which a person is
entitled to under a contract whereupon the other party to the contract is released from his
obligation.
5. An anticipatory breach of contract is a breach of contract occurring ............................ the time
fixed for performance has arrived
6. ―Liquidated damages‖ means a sum fixed up in advance, which is a fair and genuine pre-estimate of
the .......................................... that is likely to result from the breach.
7. The phrase ......................................... literally means ‗as much as is earned‘ or ‗in proportion to
the work done.‘

3.8 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress A

1. The ship owners are bound to succeed in the suit. Strike by workmen renders performance only
difficult or expensive and not impossible and as such it is not covered under the doctrine of
supervening impossibility.
2. No. B will not succeed because when she files the suit for breach, the contract has already been
discharged by supervening impossibility and A is entitled to take advantage of that.
3. The legal rights of the parties remain unaffected. It is only the destruction of specific subject-
matter which cannot be replaced, that the contract is discharged under impossibility. As it is not so
here and the bottles can be procured from somewhere else, the wine merchant is bound to supply.
4. Here there is anticipatory breach of contract by conduct from A‖s side and therefore his contention
will not be upheld. B is entitled to elect to treat the contract as rescinded and sue A for the breach
of contract immediately.
5. C.
Check Your Progress B

1. A is liable to pay interest only from the specified day upto the date of payment. In other words B
can claim only ordinary damages. B cannot claim heavy damages unless A had notice of the
special circumstances resulting in the special loss at the time of entering into the contract.

2. B is entitled to recover Rs. 2,000 only, because when a sum is named in the contract as the amount
to be paid in case of breach, the court will allow only reasonable compensation so as to cover the
actual loss sustained, within the limits stated in the contract.

3. Yes, B will succeed. If it cannot be proved that B has failed in his duty to mitigate the loss
subsequent upon the breach, B will be entitled to full salary for the whole of the unexpired period
of service i.e. one year. Hence, the amount of damages recoverable by B amounts to Rs. 36,000.

4. The legal representatives of the mate cannot recover anything as the doctrine of quantum meruit is
inapplicable under the circumstances. The rule of law on the point is that ―party in default‖ cannot
sue upon quantum meruit, if the contract is ―indivisible‖ and a lump sum is to be paid for the job as
a whole, because no money is due till the job is done.

5. A-4, B-3, C-1, D-2.

Check Your Progress B
1. Discharge, 2. Attempted, 3. Novation, 4. Waiver, 5. Before, 6. Probable Loss
7. Quantum Meruit
3.9 SELF-ASSESSMENT QUESTIONS
1. Describe the meaning of discharge of a contract. Explain the methods of discharge of a contract.
2. What are the remedies available to an aggrieved party in case of breach of a contract?
3. What are the different kinds of damages? Explain.
4. Define quantum meruit. When and how does it come into operation?
5. ‗Impossibility of performance is one of the modes in which a contract is discharged‘. Explain.
3.10 REFERENCES/SUGGESTED READINGS
1. P.P.S. Gogna, Mercantile Law, S. Chand & Company, New Delhi.
2. N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.
3. S.C. Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi.
4. S. S. Gulshan and G. K. Kapoor, Business Law including Company Law, New Age International
Publishers, New Delhi.
5. K.R. Balchandari, Business Law for Management, Himalaya Publication House, New Delhi.
6. S.K. Aggarwal, Business Law, Galgotia Publishing Company, New Delhi.

7. M. C. Kuchhal and Deepa Prakash, Business Legislation for Management, Vikas Publishing House
Pvt. Ltd., New Delhi.

8. Commercial Law – D.K. Kulshrestra.

9. Business Law – N.D. Kapoor.

10. Business Law – K.R. Bulchandani.

11. Principles of Mercantile Law – Avtar Singh.

12. Student‖s guide to Mercantile & commercial Law – Rohini Aggarwal.

13. Business Law – P.C. Tulsian.

14. Kapoor, N.D. (2003), ‗Elements of Mercantile Law,‘ Sultan Chand and Sons, New Delhi.

15. M.C. Kucchal (2002), ‗Business Law‘, Vikas Publishing House Pvt. Ltd, Delhi.

16. P.C. Tulsian (2002), ‗Business Law‘, Tata McGraw Hill Pvt. Ltd, Delhi.

17. Rohini Aggarwal (2003), ‗Student‖s Guide To Mercantile and Commercial Laws,‘ Tata McGraw
Hill Pvt. Ltd, Delhi.
Subject: Business Legislation

Course Code: CP-302 Author: Dr. Gagan Singh

Lesson No.: 6 Vetter: -Prof. M.C. Garg

CONDITIONS AND WARRANTS

Structure
6.0 Objectives

6.1 Introduction

6.2 Meaning of Conditions and Warranties

6.2.1 Difference between Conditions and Warranty

6.2.2 When a Breach of Condition is Taken as a Breach

6.3 Express and Implied Conditions and Warranties

6.3.1 Implied Conditions

6.3.2 Implied Warranties

6.4 Doctrine of Caveat Emptor

6.5 Summary

6.6 Keywords

6.7 Self Assessment Questions

6.8 Suggested Readings

6.0 Objectives
After studying this unit, you should be able to:

 Define the concept of ‘condition’ and ‘warranty’ in a contract of sale.

 Describe the implied conditions and warranties in a contract of sales.
 Describe the legal rules regarding conditions and warranties.
 Explain the concept of ‘doctrine of caveat emptor’.
6.1 Introduction
Whether a stipulation in a contract of sale is a condition or a warranty, depends upon the circumstances
and the construction of the contract as a whole. Ram bought a washing machine from Shyam. While using
the machine he found that the machine is not fit for washing cloths. He cannot do anything about it. He
himself is responsible for making a bad choice. Another instance, Ram asked Shyam to give a washing
machine which if fit for washing woolen cloths. Shyam suggested him a machine, and Ram bought it.
When Ram used it to wash woolen cloths, they got damaged. The machine turned out to be unfit for the
purpose. This is breach of express condition by Shyam. Ram can return this machine to Shyam and get
back the price paid. Alternatively, Ram found that although the machine is fit for washing woolen cloths,
but it turned out to be a stolen machine. He was compelled to return it to its true owner. This is a breach
of implied warranty, and Ram can claim compensation from Shyam for the price paid.

When Ram went to buy the machine that, this machine is having best features in comparison to all the
other machines available. Ram found that different machines available. Ram also found that different
machines were having different superior features than that of this machine. Ram cannot do anything about
it because the remark given by Shyam was not a condition or warranty, it was a statement of opinion
which in no way binds anybody.

As a general rule, when a person buys something, it is his duty to see whether that something suits his
purpose or not. He cannot hold any body responsible for making a bad choice. This is known as ‗doctrine
of caveat emptor’. But when a seller gives express condition or warranty regarding a product, he is bound
to honour that. In case the goods bought do not comply with such condition or warranty, the seller is
liable to compensate the buyer. Even in the absence of express stipulations by the seller, law presumes
that products should meet certain conditions and warranties, breach of which has the same effect as the
breach of express stipulations. However, when a seller makes any statement amounting to a statement of
opinion, it does not bind him in anyway. The Act recognize ‗condition‘ and ‗warranty‘ separately
although both the terms denote the promise made by the seller. The difference lies in the nature of
promise. If the promise is such that it effects the very basis of the contract, it is a condition. If the promise
is collateral to the main purpose of the contract, it is ‗warranty‘. Definitely the severity of the
consequences of breach differs accordingly.

In this lesson, we will study when a stipulation amounts to a condition, when it is warranty, when law
presupposes stipulation in a contract, what are the consequences of their breach in the given
circumstances, and in which circumstances the doctrine of caveat emptor will not apply.

6.2 Meaning of Conditions And Warranties

It is usual for the seller to make certain statements about the goods he is selling before a contract of sale is
concluded. These statements or representations may or may not form part of the contract depending on
this fact whether they amount to stipulations or mere expression of opinion. A representation made by the
seller will be taken as a stipulation if he assumes to assert a fact of which the buyer is ignorant. However,
if he merely states a judgment upon a matter of which he has no special knowledge and on which the
buyer may also be expected to have an opinion, representation made by him will simply amount to an
expression of an opinion. A stipulation is considered to be a part of the contract of sale and its breach
provides remedy to the buyer against the seller. The nature of remedy depends on whether the stipulation
is a condition or a warranty. While an expression of an opinion is not considered to be a part of the
contract, and therefore, it creates no obligation on the seller.

Examples
(i) A wants to sell his horse. He says to B, an intending buyer.

―The horse is a beauty and is worth ₹ 1,000‖. In this case A is simply commending his goods and his
representation is a mere expression of an opinion. The buyer in such a case will not have any remedy
against the seller if later on the representation proves to be incorrect.

(ii) If in the above case A says B, ―the horse is a beauty and only yesterday he bought it for ₹ 1,000‖.
Here in the later of his statement the seller is making an assertion about which the buyer is ignorant. This
amounts to a stipulation. The remedy of the buyer in case of the stipulation providing to be untrue will
depend upon this fact whether it is a condition or a warranty.

The terms ‗condition‘ and ‗warranty‘ have been defined by the Sale of Goods Act as under:

Condition: ‗A condition is a stipulation essential to the main purpose of the contract, the breach of which
gives rise to a right to reject goods and treat the contract as repudiated‘ [Sec. 12(2)].

Warranty: ‗A warranty is stipulation collateral to the main purpose of the contract, the breach of which
gives rise to claim for damages but not a right to reject goods and treat the contract as repudiated‖ [Sec.
12(3)].

―Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the
construction of the contract. A stipulation may be a condition, though called a warranty in the contract‖
[Sec. 12(4)].

Examples

(i) A goes to B, a horse dealer and says, ―I want a horse which can run at a speed of 40 mph‖. The
horse dealer out at a particularly horse and says, ―This will suit you‖. A buys the horse. Later on, A finds
that horse can run only at the speed of 30 mph.

There is a breach of condition because the stipulation made by the seller forms the, very basis of the
contract.

(ii) A goes to B a horse dealer, and says, ―I want a good horse‖. The horse dealer shows him a horse
and says, ―it can run at a speed of 60 mph‖. A buys the horse. Later on, A finds that the horse can run at a
speed of 30 mph.

There is a breach of warranty because the stipulation made by the seller was only a collateral one.

Stipulations as to Time: Unless a different intention appears from the terms of the contract, stipulations
as to time of payment are not deemed to be of essence in a contract of sale. Whether any other stipulation
as to time is of the essence of the contract or not depends on the terms of the contract (Sec. 11). But in
mercantile contracts, time for delivery of goods is always taken as of essence unless otherwise agreed.

Examples

(i) There was a sale of goods C.I.F. Antwerp to be shipped in October. The buyer was to reject
delivery even if there was any difference in the type or value or grade specified. The goods could not be
shipped till November on account of strike at the port. It was held that the buyer could refuse to take
delivery of the goods.

(ii) There was a sale of some oak trees on the term that the trees might remain on the seller‘s land for
four months and the buyer should pay for them within twelve weeks from the date, the contract was made.
The buyer failed by the price on due date. Further time for payment was asked for, but it was not granted
by the seller who treated the contract as at an end. The buyer then tendered the price which the seller
refused to accept. The seller then sold away the oak trees to some other buyer. It was held that the first
buyer was entitled to damages as there was a wrongful avoidance of the contract.

6.2.1 Difference Between Condition And Warranty

The difference between a condition and a warranty can be summarized as follows:

1. Nature: Condition is essential to the main purpose of the contract. It is of a fundamental nature.
The main purpose of the contract cannot be fulfilled without the prior fulfillment of this
stipulation.

Warranty is only collateral to the main purpose of the contract. It is of a subsidiary of inferior
character. Fulfillment of the main purpose of the contract does not depend upon the fulfillment of
the warranty.

2. Remedies for Breach: Breach of condition gives right to the party not at fault either to repudiate
the contract or to claim damages or to do both.

3. Condition as Warranty and Vice- versa: A breach of condition may be treated as a breach of
warranty.

A breach of warranty cannot be treated as a breach of condition.

6.2.2 When a Breach of Condition is Taken as a Breach of Warranty

In the following two cases a breach of condition will be taken as a breach of warranty:

1. Voluntary Waiver: The buyer may, if he so desires, treat the breach of a condition by the seller
as a breach of warranty and make him liable only for paying damages [Sec. 13(1)]. However, if the buyer
prevents the possibility of the seller fulfilling the conditions he will be deemed to have waived it.

It is to be noted that once the buyer decides to waive the condition, he cannot afterwards insist on its
fulfillment.

2. Compulsory Treatment of a Condition as a Warranty: Where a contract is not severable and

the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller
can only be treated as a breach of warranty, unless there is a contrary term in the contract, express or
implied to that effect [Sec. 13(2)].

Examples
(i) B agrees to buy from A twenty five sacks of flour by sample, the flour is delivered to B who pays
the price. B, upon examination, finds it not equal to sample but uses two sacks and sells one. He cannot
now rescind the contract and recover the price. But he is entitled to get compensation from A for any loss
caused by the breach of warranty.

(ii) A bought a bale of dhotis from B and resold it to C, C found the bale infested with white ants, and
therefore, returned it to A. It was held that A must be deemed to have accepted goods, and therefore, he
could not repudiate the contract but could claim only damages.

6.3 Express and Implied Conditions And Warranties

Conditions and warranties may be express or implied. Express conditions and warranties are those which
have been expressly agreed upon by the parties at the time of the contract of sale. Implied conditions and
warranties are those which the law incorporates into the contract unless the parties stipulate to the
contrary. They may be cancelled or varied by an express agreement or by the course of dealings or by
usage and custom (Sec. 62).

But such exclusion by an express agreement or otherwise does not entitle a party to give up his
fundamental obligation under the contract. For example, if a person agrees to deliver a car, he cannot
escape his liability by delivering a pig even though parties might have agreed to exclude all conditions
and warranties express or implied.

6.3.1 Implied Conditions (Sec. 14 to 17)

1. Condition as to Title: Unless a different intention appears from the contract, there is an implied
condition that the seller has a right to sell the goods in the case of a sale, and he will have a right to sell
the goods in the case of an agreement to sell at the time when the property is to pass. Buyer is entitled to
repudiate the contract if he finds the title of the seller to the goods defective [Sec. 14(a)]. If the goods
delivered can only be sold by infringing a trade mark, the seller shall be deemed to have broken the
condition that he has a right to sell the goods.

Examples

(i) R bought a motor car from D and used it for four months. D had no title to the car. R was forced
to return the car to the true owner. R can claim back the price paid to D notwithstanding the fact that he
had used the car for four months because of the breach of implied condition as to title.

(ii) A bought 3,000 tonnes of preserved milk from U.S.A. The tins were labeled in such a way as to
infringe Neselle‘s trade mark. As a result they were detained by custom authorities. To get the clearance
from the custom authorities, A had to remove the labels and had to sell the tins at a loss. Held, the seller
had broken the condition that he had a right to sell because goods could be sold only by infringing the
trade mark.

It is to be noted that if a seller who had no title to the goods at the time of sale, subsequently acquire title
to the goods, he will purify both the title of the original buyer and the sub-buyer. Similarly, if the true
owner leads the buyer to believe that the seller is either the owner of the goods or has the authority to sell
the goods, the buyer purchasing the goods in good faith shall acquire a good title.
2. Condition as to Description: Where there is a contract of sale of goods by description there is an
implied condition that the goods shall correspond with the description (Sec. 15). The term ‗correspond to
description‘ means that the buyer must get the ‗article‘ that was described in the contract. Thus, where a
seller described a car as of 10 h. p. when it was of 8 h. p., it was held that there was a breach of condition.

In Bowes v. Shand, the learned judge observed: ―If you contract to sell peas you cannot oblige a party to
take beans. If the description of the article tendered is different in any respect, it is not the article
bargained for the other party is not bound to take it‖.

Examples

(i) A wants to sell his typewriter. He says to B, intending buyer who has not send the machine, that it
is a brand new machine. B agrees to purchase it. On delivery B finds that the machine is old and repaired.
B can repudiated the contract.

(ii) In a contract for the sale of a quantity of seed described as ―Common English Sainfoin‖ the seed
supplied was of a different kind, though the difference was not discoverable except by sowing. The defect
also existed in the sample. Held, the buyer was entitled to recover damages for the breach of condition.

(iii) In a contract for the sale of a quantity of cases of Australian canned fruit, the goods were stated in
cases containing thirty tins each. The seller tendered the whole quantity but nearly half the cases
contained twenty-four tins each. On the buyer refusing to take delivery, it was held that the buyer was
entitled to reject the whole consignment.

The condition as to description is applicable in all those cases where the buyer has not seen the goods but
relies solely on the description given by the seller. It is also applicable in those cases where the buyer has
seen the goods but relies not on what he has seen but what was stated to him and the ―deviation of the
goods from the description is not apparent‖.

Example

A set of line napkins and table cloths, described as of seventeenth century, was sold at an auction sale to
an antique dealer who had seen the set. Later on, it was found by the dealer that the set was of eighteenth
century and, therefore, he wanted to reject the set. Held, he could do so since he relied on the description
given by the auctioneer and the discrepancy between the actual quality and the description could not have
been discovered by a causal examination.

3. Condition as to Sample: A contract of sale is a contract of sale by sample when there is a term in
the contract express or implied to that effect. In the case of a contract for the sale of goods by sample,
there is' an implied condition :

(a) that the bulk of the goods shall correspond with the sample quality;

(b) that the buyer shall have reasonable opportunity of comparing the bulk with sample;

(c) that the goods shall be free from any defect, rendering them unmerchantable, which would not be
apparent on reasonable-examination of the sample (Sec. 17).
Example

Some mixed worsted coatings were sold by sample. It was found that owing to a latent defect, coats made
out of it were not fit to stand ordinary wear. The same defect appeared in the sample but could not be
detected on reasonable examination. Held, the buyer could reject the goods.

In case goods have been sold by description as well as by sample, they must correspond to both.

Example

A seller undertakes to supply 100 tones of Java sugar warranted to be equal to the sample. The sugar
when supplied, corresponds to the sample but is not Java sugar. The buyer can repudiate the contract.

It is to be noted that it does not follow merely because a sample is exhibited that the seller intends to sell
by sample because he may by express warranty exclude its operation or may exhibit the specimen merely
to enable the purchaser to form his-own reasonable opinion. Lord Macanaughten also observed, "The
office of a sample is to present to the eye the real meaning and intention of the parties with regard to the
subject matter of the contract which owing to the imperfection of language, it may be difficult or
impossible to express in words." It is open for the seller to show the sample but decline to sell by it, and
require the buyer to purchase at his own risk. Similarly, the buyer may not trust the sample and ask the
seller to give a specific warranty to that effect.

4. Condition as to Quality or Fitness (Sec. 16): Normally in a contract of sale there is no implied
condition as to quality or fitness of the article for any particular purpose. It is the duty of the buyer to see
and satisfy himself whether the article will be suitable for the purpose for which he requires.

Following points in this connection are important to note:

1. (a) Where the goods are required for a particular purpose which the buyer makes known to the
seller either expressly or impliedly, (b) the buyer relies on the seller's skill and judgment and (c) it is the
seller's business to supply goods of that description (whether he is the manufacturer or producer or not),
there will be an implied condition that the goods must be reasonably fit for the purpose intended. The
buyer cannot be said to rely on the seller's skill and judgment, when he selects the article himself after
inspection.

Example: An order was placed for six lorries to be used for' heavy traffic in a hilly country.' Five lorries
were supplied by the seller which were unfit for this purpose and broke down. It was held that there was a
breach of condition as to fitness.

2. Where the article can be used for only one particular purpose, the buyer needs not to tell the seller
the purpose for which he requires the goods.

A 'particular purpose' is not some purpose necessarily distinct from a general purpose. In the case of food
items, eating is both a general as well as a particular purpose. Thus, even if the purpose is not expressly
made known to the seller, it will be deemed to be known to him if it can be readily gathered from a
description of the goods.
Example: A purchased a hot water bottle from B, a chemist. A was draper, who could not be expected to
have special knowledge with regard to hot water bottles. While being used by A's wife, the bottle burst
and injured her. Held, the seller was responsible for damages.

3. In case the article can be used for a number of purposes, the buyer should tell the seller the
purpose for which he requires the goods if he wants to make the seller responsible.

Example: There was a sale by sample of indigo cloth to a tailor who required the cloth for the purpose of
making it into liveries. The purpose was not made known to the seller. The cloth was unfit for that
purpose owing to a latent defect but could be used for other purposes. Held, the buyer could not reject the
contract.

4. In case the goods are purchased under a patent or other trade name, there is no implied condition
as to their fitness for' any particular purpose.

Example: A, the owner of a brewery placed an order with B, a manufacturer, to supply him his patent
smoke consuming furnace for fitting up in his (A's) brewery. The furnace was supplied but it was not fit
for the buyer's purpose. Held, the purchase was of a defined and well known type of furnace and B, the
seller, was not liable for its unsuitability for the buyer's purpose.

It is to be noted that the mere fact that an article sold is described in the contract by its trade does not
necessarily make the sale, a sale under a trade name. For this it is necessary that the buyer should specify
the article under its trade name in such a way as to indicate that he is satisfied, rightly or wrongly that it
will answer his purpose, and that he is not relying on the skill or judgment of seller, however great skill or
judgment may be. If the buyer takes the goods because they are recommended by the seller as being
suitable for the purchase intended, there is an implied condition of fitness for the purpose.

Examples

(i) A went to a car dealer and\said that he wanted a car for touring purposes. The seller
recommended 'Bugatti' car for the purpose. The buyer ordered for one. The car was found unfit for the
purpose. Held, that the buyer can claim damages because condition as to fitness had been broken though
the sale was under as trade mark. .

(ii) In the above example if the buyer had told the seller that he had been recommended by some one
Buggatti car for touring purposes and he would like to have one such car. The seller should not be liable if
the car is found unfit for the purpose.

5. In case the seller supplies an article of the description in which he usually deals, under its patent
or trade name, there is an implied condition that goods will be fit for the purpose for which it is generally
used.

Example: A, a dealer in refrigerators sells a 'Godrej' refrigerator to B. The name or the article itself
implies that the sever warrants the machine to be fit for a particular purpose.

6. An implied condition as to quality or fitness for a particular purpose may also be fixed or annexed
by the usage of trade [Sec. 16(6)].
5. Condition as to Merchantability: Where goods are brought by description from a seller who
deals in goods of that description (whether he is the manufacturer or producer or not) there is an implied
condition that the goods shall be of merchantable quality [Sec. 16(2)]. Even sold under a patent or trade
mark must be of a merchantable quality.

Merchantable quality implies that the goods should be of such quality and in such a condition that a
reasonable man acting reasonably would accept the goods after a full examination under the same
circumstances whether he buy for his own use or reselling. In other words, goods should be such as are
reasonably saleable under the description by which they are known in the market. However, this does not
mean that there will be buyers ready to by the goods or that the goods will comply with the law of a
foreign country in order to be saleable there. Goods will be unmerchantable if they have defect which will
make them unfit for ordinary use or are such that a reasonable person knowing of their conditions would
not buy them.

Example A agreed to sell B some motor horns. Goods were to be delivered by installments. The first
installment was accepted but the second contained a substantial quantity of horns which were damaged
owing to bad packing. Held, the buyer was entitled to reject the whole installment, as the goods were not
of a merchantable quality.

It is to be noted that there is no implied condition as regards those defects which could have been revealed
if the buyer had examined the goods. But if the examination of the buyer does not reveal the defects and
he approves and accepts the goods but when put to work the goods are found to be defective, there is
breach of condition of merchantability.

Examples

(i) X wanted to purchase some glue. The glue was stored in the seller's warehouse in barrels. Every
facility was given to X for its inspection. X did not have the barrels opened but only looked at the outside
of the barrels. The glue was found to have defects which would have been found out if X has inspected
the contents of the cases. Held, there was no breach of any implied condition as to merchantability.

(ii) A, a dealer in watches of a particular make, sells one watch to B, a layman with the usual
guarantee of keeping the watch in running condition for a period of one year. The watch was found to be
very unsatisfactory within one year. B wanted a new watch or its price. State on what basis such a claim
can be made. Can B succeed?

The claim should be made on the basis of breach of an implied condition as to merchantability.
Merchantability does not merely mean that a thing is saleable in the market because it apparently looks all
right. An article may be considered to be unmerchantable if it has latent defects rendering it unfit for its
only proper use. In the instant case, B had an opportunity to examine that watch, but the defect was latent
which could not have been found out by a buyer like B. Therefore, B must succeed.

The implied condition as to fitness for a particular purpose and merchantability must be construed
reasonably, and a seller will not be liable when the unsuitability of the article arises from state of affairs
relating to the buying of which the seller was not made aware, e.g., when an article is sold to a customer
who is allergic to it, there is a duty on the customer to disclose known peculiarity.
Example: G, a woman with abnormally sensitive skin bought a Haris tweed coat and got rashes through
wearing it. She was not allowed to claim any compensation. There was no breach of condition as she had
not disclosed the fact of her skin being abnormally sensitive.

6. Condition as to Wholesomeness: This condition applies in the case of provisions and foodstuffs.
The provisions supplied must not only answer to description and be merchantable but also wholesome,
pure unadulterated and suitable for consumption at the time of sale.

Examples

(i) A purchased tinned salmon from B a grocer and provisions merchant. The salmon was poisonous and
A and his wife, who ate, fell ill. While A recovered from his illness, his wife died from the effects of the
poison. A claimed damages against B both for his illness and for the death of his wife, which deprived
him of the services rendered by her. Held, A was entitled to get damages because the condition of
wholesomeness was violated by the seller.

(ii) X purchased milk from Y, a milk dealer. The milk contained typhoid germs. Wife of X, on taking
the milk, got infection and died. Held, X was entitled to get damages.

6.3.2 Implied Warranties

The implied warranties can be put as follows:

1. Warranty of Quiet Enjoyment: This warranty implies the buyer shall have and enjoy quiet
possession of the goods [Sec. 14(c)].

Example: A had given his bicycle on hire for a period of ten days to B. Soon after A sold it to C without
disclosing to him that B was entitled to use bicycle on account of the hire agreement. B claims the bicycle
from C. C‘s possession is disturbed. He is entitled to get damages from A.

The breach of implied condition as to title may also result in breach of warranty as to quiet possession.
The buyer, therefore, will be entitled to recover compensation for breach of both a condition as well as a
warranty.

Example: M purchased a second-hand typewriter from B. M spent some money on its repairs but was
dispossessed of it after six months by the true owner. It was held that M was entitled to recover from B
not only price paid but also cost of repair.

2. Warranty of Freedom From Encumbrance: This warranty implies that the goods shall be free
from any charge or encumbrance in favour of a third party not declared or known to the buyer before or at
the time when the contract was made [Sec. 16(3)]. Buyer shall have no right of action if the seller had
disclosed the charge or encumbrance at the time of contract.

Example: A pledges his bicycle with C for a loan of ₹ 100 and promises him to give its possession the
next day. Soon after he sells the bicycle to B, an innocent buyer, who does not know about the fact of
bicycle being pledged. B may either ask A to clear the loan or may himself pay the money and then file a
suit against A to recover this money with interest.
 3. By 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 [Sec. 16(3)].

Where drugs are sold by auction and where it is a usage of trade to disclose beforehand any sea damage,
such disclosure must be made. In case, no such disclosure has been made, the goods are found to be
defective, it will be taken as a breach of warranty.

4. Dangerous Goods: Where the goods are dangerous and the seller knows that the buyer is
ignorant about the dangerous nature of the goods, the seller should warn the buyer about the probable
danger otherwise, he will be liable for damages to the buyer for the injury caused to the buyer because of
the dangerous quality of the goods:

Example: A sold a tin of disinfectant powder to C. A knew that the tin was to be opened with special care
otherwise it might prove dangerous. He also knew that C was ignorant about it. He did not warm C. C
opened the tin and his eyes were injured by the powder. Held, A was liable as he should have warned C of
the probable danger.

6.4 Doctrine of Caveat Emptor

It means ‗let the buyer beware'.

In sale of goods, the seller is under no duty to reveal unflattering truths about the goods sold. Therefore,
when a person buys some goods, it is his duty to example them thoroughly. If the goods turn out to be
defective or do not suit the purpose, or when he depends upon his own skill and judgment and makes a
bad selection, he cannot blame anybody except himself. The buyer has to bear the consequences of his
wrong selection of goods. Under Section 16, the seller does not need to guarantee the quality of goods or
suitability of goods for a particular purpose unless quality or fitness is made an express condition in the
contract.

Exceptions to the Rule (Sec. 16): Following are the exceptions to the Doctrine of Caveat Emptor:

(1) Fitness for Buyers' Purchase: Under Section 16(1), where the buyer, expressly or by
implication, makes known to the seller the particular purpose for which he requires the goods and
relies upon seller's skill or judgment, and the goods are of a description which is in the course of
seller's business to supply, the seller must supply the goods which shall be fit for buyer's purpose.

(2) Sale under a Patent or Trade Name: As per provision to Section 16(1), in the case of a contract
of sale of a specified article under its patent or other trade name, there is an implied condition that
the goods shall be reasonably fit for any particular purpose.

(3) Merchantable Quality: Under Section 16(2), where goods of that description, bought by
description from a seller who deals in goods of that description, there is an implied condition that
the goods shall be of merchantable quality. But where the buyer has examined the goods, there is
no implied condition as regards the defects, which such examination ought to have revealed.

6.5 Summary
A condition a stipulation which is essential to the main purpose of the contract, the breach of which gives
rise to a right to treat the contract as repudiated‖. A warranty is a stipulation collateral to the main purpose
of the contract, the breach of which gives rise to claim for damages, but not a right to treat the contract as
repudiated. Whether a stipulation in a contract of sale is a condition or a warranty, depends upon the
circumstances and the construction of the contract as a whole. Express conditions and warranties are those
which are agreed upon between the parties at the time of entering into the contract of sale and have been
expressly provided in the contract. Implied conditions and warranties are those which are not expressly
agreed upon between the parties at the time of entering into the contract. They are treated to be implied
either under the law or as per customs of the trade.

Caveat Emptor means 'Let the buyer beware.' In sale of goods, the seller is under no duty to reveal
unflattering truths about the goods sold. Therefore, it is the duty of the buyer to examine the goods
thoroughly. The buyer has to bear the consequences of his wrong selection of goods.

6.6 Keywords
Condition: A stipulation essential to the main purpose of the contract.

Warranty: A stipulation collateral to the main purpose of the contract.

Caveat Emptor: It implies ‗let the buyer beware‘

6.7 Self Assessment Questions

1. Distinguish between a ‗condition and a ‗warranty‘. What condition and warranties an implied in a
contract of sale?

2. What is meant by ‗sale of sample‘? What are the conditions implied in such a sale?

3. Explain the Doctrine of Caveat Emptor with its exceptions.

6.8 Suggested Readings

1. P.P.S. Gogna, Mercantile Law, S. Chand & Company, New Delhi.

2. N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.
3. S.C. Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi.
4. S. S. Gulshan and G. K. Kapoor, Business Law including Company Law, New Age
International Publishers, New Delhi.
5. K.R. Balchandari, Business Law for Management, Himalaya Publication House, New
Delhi.
Subject: Business Legislation

Course Code: CP-302 Author: Dr. Gagan Singh

Lesson No.: 12 Vetter: Prof. M.C.Garg

MEMORANDUM OF ASSOCIATION

Structure
12.0 Objectives

12.1 Introduction

12.2 Meaning of Memorandum of Association

12.3 Forms, Printing and Signing of Memorandum of Association

12.4 Contents of Memorandum of Association

12.4.1 Name Clause

12.4.2 Situation Clause

12.4.3 Objects Clause

12.4.4 Liability Clause

12.4.5 Capital Clause

12.5 Alteration of Memorandum of Association

12.6 The Doctrine of Ultra-vires

12.7 Summary

12.8 Keywords

12.9 Self Assessment Questions

12.10 Suggested Readings

12.0 Objectives
After going through this lesson, you will be able to:

 Define memorandum of association.

 Explain different clauses of memorandum of association.
 Explain the procedure of different clauses of alteration of memorandum of association.
 Describe the implications of Doctrine of Ultra-vires.

12.1 Introduction
The memorandum of association of a company is its principal document. It is a document of great
importance in relation to the proposed company. No company can be registered without a memorandum
of association and that is why it is sometimes called a life giving document. In this lesson, you will learn
about memorandum of association, different clauses of memorandum of association, procedure of
alteration of different clauses of memorandum of association and the implications of Doctrine of Ultra-
vires.

12.2 Meaning of Memorandum of Association

The Memorandum of Association is an important document in relation to the affairs of a company. It is
the main document of the company which defines its objects and lays down the fundamental conditions
upon which alone the company is allowed to be formed. It is the charter of the company. It governs the
relationship of the company with the outside world and defines the scope of its activities. Its purpose is to
enable shareholders, creditors and those who deal with the company to know what exactly is permitted
range of activities. It enables these parties to know the purpose, for which their money is going to be used
by the company and the nature and extent of risk they are undertaking in making investment.
Memorandum of Association enable the parties dealing with the company to know with certainty as
whether the contractual relation to which they intend to enter with the company is within the objects of
the company.

Thus, the Memorandum of Association is a document which sets out the constitution of the company and
is the foundation on which the structure of the company stands. It defines as well as confines the powers
of the company. If the company enters into contract or engages in any trade or business which is beyond
the powers conferred on it by the memorandum, such a contract or the act will be ultra vires the company
and hence void. However, the Companies Act, 2013 shall override the provisions in the memorandum of
a company, if the latter contains anything contrary to the provisions in the Act.

The first step in the formation of a company is to prepare a document called the Memorandum of
Association. In fact, memorandum is one of the most essential pre-requisites for incorporating any form
of company under the Companies Act, 2013 (hereinafter referred to as ‗Act‘). According to Section 2(56)
of the Act ―memorandum‖ means the memorandum of association of a company as originally framed and
altered, from time to time , in pursuance of any previous company law or this Act. Section 4 of the Act
specifies in clear terms the contents of this important document which is the charter of the company. The
Memorandum of Association of a company contains the objects of the company which it shall pursue.

12.3 Forms, Printing and Signing of Memorandum of Association

Section 4(6) of the Act provides that the memorandum of association should be in any one of the Forms
specified in Tables A, B, C, D or E of Schedule I to the Act, as may be applicable in relation to the type of
company proposed to be incorporated or in a Form as near thereto as the circumstances admit. Sections 4
and 5 of the Companies Act, 2013 has given five forms of Memorandum of Association in Schedule I.
These are as follows:

Table AMemorandum of Association of a company limited by Shares.

Table B Memorandum of Association of a company limited by guarantee and not having a share
capital.

Table C Memorandum of Association of a company limited by guarantee and having a share

capital.

Table D Memorandum of Association of an unlimited company and not having share capital.

Table E Memorandum of Association of an unlimited company and having share capital.

Every company is required to adopt one of these forms or any other form as near there to as
circumstances admit.

Printing and Signing of Memorandum of Association

The Memorandum and Articles of Association of the company shall be signed in the
following manner, namely:
(1) The memorandum and Articles of Association of the company shall be signed by each
subscriber to the memorandum, who shall add his name, address, description and
occupation, if any, in the presence of at least one witness who shall attest the signature
and shall likewise sign and add his name, address, description and occupation, if any and
the witness shall state that ―I witness to subscriber/subscriber(s), who has/have subscribed
and signed in my presence (date and place to be given); further I have verified his or their
Identity Details (ID) for their identification and satisfied myself of his/her/their
identification particulars as filled in‖.
(2) If a subscriber to the memorandum is illiterate, he shall affix his thumb impression or
mark which shall be described as such by the person, writing for him, who shall place the
name of the subscriber against or below the mark and authenticate it by his own signature
and he shall also write against the name of the subscriber, the number of shares taken by
him.
(3) Such person shall also read and explain the contents of the memorandum and articles of
association to the subscriber and make an endorsement to that effect on the memorandum
and articles of association.
(4) If the subscriber to the memorandum is a body corporate, the memorandum and articles of
 association shall be signed by director, officer or employee of the body corporate duly
authorized in this behalf by a resolution of the board of directors of the body corporate
and where the subscriber is a Limited Liability Partnership, it shall be signed by a partner
of the Limited Liability Partnership, duly authorized by a resolution approved by all the
partners of the Limited Liability Partnership:
Provided that in either case, the person so authorized shall not, at the same time, be a
subscriber to the memorandum and articles of association.
(5) If subscriber to the memorandum is a foreign national residing outside India-
(a) in a country in any part of the Commonwealth, his signatures and address on the
memorandum and articles of association and proof of identity shall be notarized
by a Notary (Public) in that part of the Commonwealth.
(b) in a country which is a party to the Hague Apostille Convention, 1961, his
signatures and address on the memorandum and articles of association and proof
of identity shall be notarized before the Notary (Public) of the country of his
origin and be duly apostillised in accordance with the said Hague Convention.
(c) in a country outside the Commonwealth and which is not a party to the Hague
Apostille Convention, 1961, his signatures and address on the memorandum and
articles of association and proof of identity, shall be notarized before the Notary
(Public) of such country;
(d) visited in India and intended to incorporate a company, in such case the
incorporation shall be allowed if, he/she is having a valid Business Visa.
12.4 Contents of Memorandum of Association
As per Section 4(1), the memorandum of a limited company must state the following:

(a) the name of the company with ―Limited‖ as its last word in the case of a public company; and
―Private Limited‖ as its last words in the case of a private company;
(Name Clause)

(b) the State in which the registered office of the company is to be situated;

(Situation Clause)

(c) the objects for which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof; (Objects Clause)
(d) the liability of members of the company, whether limited or unlimited, and also state,
(Liability Clause)

(e) in the case of a company having a share capital, (Capital Clause)

(f) in the case of a One Person Company, the name of the person who, in the event of the death of
the subscriber, shall become the member of the company.

The above clauses are compulsory and are designated as ―conditions‖ prescribed by the Act on the basis
of which a company is incorporated.

12.4.1 Name Clause

A company being a legal entity must have a name of its own to establish its separate identity. The name
of the company is a symbol of its independent corporate existence. The first clause in the memorandum of
association of the company states the name by which a company is to be known. The company may adopt
any suitable name provided it is not undesirable.

According to section 4(2), the name stated in the memorandum shall not—

(a) be identical with or resemble too nearly to the name of an existing company registered under this
Act or any previous company law; or

(b) be such that its use by the company—

(i) will constitute an offence under any law for the time being in force; or

(ii) is undesirable in the opinion of the Central Government.

Section 4(3) provides that without prejudice to the provisions of Section 4(2), a company shall not be
registered with a name which contains—

(a) any word or expression which is likely to give the impression that the company is in any way
connected with, or having the patronage of, the Central Government, any State Government, or
any local authority, corporation or body constituted by the Central Government or any State
Government under any law for the time being in force; or

(b) such word or expression, as may be prescribed, unless the previous approval of the Central
Government has been obtained for the use of any such word or expression.

As stated above, Section 4(2) provides that the name stated in the memorandum shall not be such that its
use by the company, in the opinion of the Central Government, is undesirable. A name which is identical
to or too nearly resembles, the name by which a company in existence has been previously registered, will
be deemed to be undesirable.

The Central Government under Section 16 is empowered to direct a company, at any point of time to
rectify its name if by inadvertence it has been registered with a name which is identical to or too nearly
resembles the name of an existing company whether registered under this Act or the previous company
law. The company shall change its name within a period of three months from the issue of the above
direction after passing an ordinary resolution for the purpose. Where a company changes its name or
obtains a new name, it shall within a period of fifteen days from the date of such change, give notice of
the change to the Registrar along with the order of the Central Government, who shall carry out necessary
changes in the certificate of incorporation and the memorandum.

12.4.2 Situation Clause

The name of the State in which the registered office of the company is to be situated must be given in the
memorandum. But the exact address of the registered office is not required to be stated therein. According
to Section 12 of the Act within 15 days of company‘s incorporation, and at all times thereafter, the
company must have a registered office to which all communications and notices may be sent. The
company must also furnish to the Registrar verification of its registered office within a period of thirty
days of its incorporation in such manner as may be prescribed. (e-form INC-22)

Publication of Name and Address of the Company

As per Section 12(3), every company is required to display its name and address in legible letters in
conspicuous position and in all its business letters, bill heads, letter papers. Accordingly, the company
shall—

(a) paint or affix its name, and the address of its registered office, and keep the same painted or
affixed, on the outside of every office or place in which its business is carried on, in a
conspicuous position, in legible letters, and if the characters employed therefore are not those of
the language or of one of the languages in general use in that locality, also in the characters of
that language or of one of those languages;
(b) have its name engraved in legible characters on its seal, if any;
(c) get its name, address of its registered office and the Corporate Identity Number along with
telephone number, fax number, if any, e-mail and website addresses, if any, printed in all its
business letters, billheads, letter papers and in all its notices and other official publications; and
(d) have its name printed on negotiable instruments such as hundies, promissory notes, bills of
exchange.
However, where a company has changed its name or names during the last two years, it shall paint
or affix or print, as the case may be, along with its name, the former name or names so changed during
the last two years.

12.4.3 Objects Clause

The third compulsory clause in the memorandum sets out the objects for which the
company has been formed. Under Section 4(1)(c) of the Act, all companies must state in their
memorandum the objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof.
This clause is of great importance because it determines the purpose and the capacity of the company. It
indicates the purpose for which the company has been set up and its actual capability, besides its sphere
of activities. It states affirmatively the ambit and extent of powers of the company and, stated negatively,
that nothing should be done beyond that ambit and that no attempt shall be made to use the company for
any other purpose than that which is specified. The purpose of the objects clause is to enable the persons
dealing with the company to know its permitted range of activities. The acts beyond this ambit are ultra
vires and hence void. Even the entire body of shareholders cannot ratify such acts.

The subscribers to the memorandum of association enjoy almost unrestricted freedom to choose the
objects. The only restriction is that objects should not be illegal and against the provisions of the
Companies Act, 2013. The memorandum of association of a company is its charter defining the objects of
its existence and operations. As pointed out in Cotman v. Brougham 1918 AC 514, its purpose is ‗to
enable the shareholders, creditors and those dealing with the company to know that what is the permitted
range of the enterprise. The objects clause or clauses in the memorandum are to be so construed as to
confer on the company all powers reasonably required to the attainment of the objects.‘

12.4.4 Liability Clause

Section 4 1(d) of the Act states that the liability of members of the company is to be
specifically mentioned in the Memorandum of Association. It is provided that the liability of
member may either be limited or unlimited, further it shall also state that,—
(i) in the case of a company limited by shares, the liability of its members is limited to the
amount unpaid, if any, on the shares held by them; and
(ii) in the case of a company limited by guarantee, the amount up to which each member
undertakes to contribute—
(i) to the assets of the company in the event of its being wound-up while he is a
member or within one year after he ceases to be a member, for payment of the
debts and liabilities of the company or of such debts and liabilities as may have
been contracted before he ceases to be a member, as the case may be; and
(ii) to the costs, charges and expenses of winding-up and for adjustment of the rights
of the contributories among themselves;
12.5.5 Capital Clause

This clause shall state the amount of the capital with which the company is registered.
The shares into which the capital is divided must be of fixed value, which is commonly known as
the nominal value of the share. The capital is variously described as nominal, authorized or
registered.
 The amount of nominal capital is determined having regard to the present as well as
future requirements of the company with reference to its objects. The usual way to state the

capital in the memorandum is: ―The capital of the company is `10,00,000 divided into 1,00,000

equity shares of `10 each‖. This amount lays down the maximum limit beyond which the

company cannot issue shares without altering the memorandum as provided by Section 61 of the
Companies Act, 2013.
If there are both equity and preference shares, then the division of the capital is to be
shown under these two heads. A company is not authorized to issue capital beyond its
authorized/nominal/registered capital. If it receives applications for shares beyond the shares
covered by the authorized capital, the amount received on excess number of shares should be
returned. Out of the issued capital, the total amount actually subscribed or agreed to be
subscribed is known as subscribed capital, and this subscribed capital again may be wholly paid
or partly paid, in which latter case the balance would be payable on future calls when made. The
amount actually paid by the shareholders is called the paid-up capital. According to Section 60 of
the Act, if the amount of the authorized capital (nominal capital), of the company is stated in any
notice, advertisement, official publication, business letter, bill head or letter paper, it shall also
contain a statement in an equally prominent position and in equally conspicuous terms the
amount of capital which has been subscribed and the amount paid-up.
The subscribers to the memorandum declare: ―We, the several persons whose names and
addresses are subscribed below, are desirous of being formed into a company in pursuance of
this memorandum of association, and we respectively agree to take the number of shares in the
capital of the company set opposite our respective names‖. Then follow the names, addresses,
description, occupations of the subscribers, and the number of shares each subscriber has agreed
to take and their signatures attested by a witness.
The statutory requirements regarding subscription of memorandum are that:
 each subscriber must take at least one share;
 each subscriber must write opposite his name the number of shares which he agrees to
take. [Section 4(1)(e)]
12.5 Alteration of Memorandum of Association
 Section 13(1) of the Act provides that a company may, by a special resolution and after
complying with the procedure specified in this section, alter the provisions of its memorandum.
The memorandum of association of a company may be altered in the following respects:
(1) By changing its name [Sections 13(2)].
(2) By altering it in regard to the State in which the registered office is to be situated [Section
13(4) & (7)].
(3) By altering its objects [Section 13 (1) & (9).
(4) By altering its share capital (Section 61).
(5) By reorganising its share capital (Sections 230 to 237).
(6) By reducing its capital (Section 66).
The provisions or conditions of the memorandum of association relating to the name
clause, situation clause, the objects clause, limited liability clause, subscriber‘s share clause as
provided in Section 4 of the Companies Act, 2013 or any other specific provisions contained
therein, can be altered by following the prescribed procedure laid down in the Act. Strict
compliance of the prescribed procedure is demanded by law. Failure to comply with the express
provisions made under the Act for the purpose of alteration of the provisions or conditions
contained in the memorandum will be deemed as a nullity.
Further, Section 13(6) provides that a company shall, in relation to any alteration of its
memorandum, file with the Registrar the special resolution passed by the company under Section
13(1). Section 13(10) provides that no alteration made under this section shall have any effect
until it has been registered in accordance with the provisions of the said section.
Contents of the Memorandum of association can be altered as under:

1. Alteration of Name Clause

The name of the company can be altered by a special resolution and with the approval of
the Central Government in writing. Approval of the Central Government is not required, in case
where the change in the name of the company relates to the addition/deletion of the word
‗Private‘ to the name of the company consequent to the conversion of a company into a public
company and vice versa. [Section 13 (2)]
When any change in the name of a company is made under section 13(2), the Registrar
shall enter the new name in the register of companies in place of the old name and issue a fresh
certificate of incorporation with the new name and such change in the name shall be complete
and effective only on the issue of such a certificate [Section 13(3)]. According to Rule 29 of
Companies (Incorporation) Rules, 2014, the change of name shall not be allowed to a company
which has not filed annual returns or financial statements due for filing with the Registrar or
which has failed to pay or repay matured deposits or debentures or interest thereon. Provided that
the change of name shall be allowed upon filing necessary documents or payment or repayment
of matured deposits or debentures or interest thereon as the case may be. An application shall be
filed in Form No. INC-24 along with the fee for change in the name of the company and a new
certificate of incorporation in Form No. INC-25 shall be issued to the company consequent upon
change of name.
Under Section 16 of the Act, rectification of the name of the company is required to be carried out if,
through inadvertence or otherwise, a company (whether on its first registration or on its registration by a
new name) is registered by a name which is identical to or too nearly resembles the name of a company
already in existence. The rectification of the name must also be carried out if the Central Government so
directs at any point of time after the registration of the company. The direction of the Central Government
is required to be complied with by the company within a period of three months from the date of issue
thereof. Further where a company changes its name or obtains a new name under section 16 (1), it shall
within a period of fifteen days from the date of such change, give notice of the change to the Registrar
along with the order of the Central Government, who shall carry out necessary changes in the certificate
of incorporation and the memorandum. Any default in complying with the direction issued by the Central
Government would render the company liable for punishment with fine which may extend to one
thousand rupees for every day during which default continues and its officers in default shall be liable for
fine which shall not be less than five thousand rupees but which may extend to one lakh rupees.

Effect of Change
The change of name shall not affect any rights or obligations of the company, or render
defective any legal proceedings by or against it, and any legal proceedings which might have
been continued or commenced by or against the company in its former name may be continued
by or against the company in its new name.
However, where a company changes its name and the new name has been registered by the Registrar, the
commencing of legal proceedings in the former name is not valid [Malhati Tea Syndicate Ltd. v. Revenue
Officer, (1973) 43 Com Cases 337]. In spite of a change in name the entity of the company continues. The
company is not dissolved nor does any new company come into existence. If any legal proceeding is
commenced, after change in the name, against the company in its old name, the company should be treated
as if it is not in existence. It is not an incurable defect and the plaint can be amended to substitute the new
name [Pioneer Protective Glass Fibre (P) Ltd. v. Fibre Glass Pilkington Ltd., (1986) 60 Com Cases 707
(Cal.)].

2. Alteration of Situation Clause

The alteration in the registered office clause can be made in the following manner:

(A) Change within the Local Limits of Same Town

The change of registered office of the company within the local limits can be
implemented by the Board of Directors. A company by passing Board Resolution can change the
situation of its registered office within the limits of same city, town or village. An intimation of
the change of registered office and verification of registered address shall be given to the
registrar in e-form INC-22, within fifteen days of such change. This does not involve alteration
of memorandum.
(B) Change Outside the Local Limits of any City, Town or Village
According to Section 12(5) of the Act except on the authority of a special resolution
passed by a company, the registered office of the company shall not be changed,—
(a) in the case of an existing company, outside the local limits of any city, town or village
where such office is situated at the commencement of this Act or where it may be
situated later by virtue of a special resolution passed by the company; and
(b) in the case of any other company, outside the local limits of any city, town or village
where such office is first situated or where it may be situated later by virtue of a special
resolution passed by the company.
In case the company is eligible for conducting business through postal ballot any
change in place of registered office outside the local limits of any city, town or village the
same shall be transacted only by means of voting through a Postal Ballot [Rule 22 of
Companies (Management and Administration) Rules, 2014.
(C) Change within the same State from the jurisdiction of one Registrar of Companies to
the jurisdiction of another Registrar of Companies
No company shall change the place of its registered office from the jurisdiction of one Registrar to
the jurisdiction of another Registrar within the same State unless such change is confirmed by the
Regional Director. Proviso to Section 12(5) provides that confirmation by the Regional Director will be
necessary for changing registered office of a company from one place to another if the change of
registered office is from the jurisdiction of one Registrar to the jurisdiction of another within the same
State.

Change of Registered Office From One State to Another

The change of registered office from one State to another State involves alteration of
memorandum, and the change can be effected by a special resolution of the company which must
be confirmed by the Central Government on an application made to it [Section 13(4)]. According
to Section 13(1), a company may, by special resolution and after complying with the procedure
specified alter the provisions of its memorandum.
Further, the alteration of the provisions of the memorandum relating to the change of the place of its
registered office from one State to another shall not take effect unless it is confirmed by the Central
Government on an application made to it in the prescribed form and manner [Section 13(4)]. A company
shall, in relation to any alteration of its memorandum involving change of registered office from one State
to another, file with the Registrar the special resolution passed by it. [Section 13(6)].

Where an alteration of the memorandum results in the shifting of the registered office of a company from
one State to another, a certified copy of the order of the Central Government approving the alteration shall
be filed by the company with the Registrar of each of the States within such time and in INC-22, who
shall register the same, and the Registrar of the State where the registered office is being shifted to, shall
issue a fresh certificate of incorporation indicating the alteration. [Section 13(7)].

3. Alteration of Objects Clause

Object clause is a main clause of the memorandum because it works out the objects and indicates the
sphere of its activities. A company cannot legally perform any business going beyond to its objects
specified under this clause. If somehow it is done beyond the limits of the aforesaid then it will be
considered as ultra- vires and void. This rule is meant to protect the members of the company, the public
and the creditors as well.

According to Section 13(1), a company may, by a special resolution and after complying
with the procedure specified in this section, alter the provisions of its memorandum. It means
that a company can change its objects by passing a special resolution. Further, Section 13(6)(a)
provides that a company shall, in relation to any alteration of its memorandum, file with the
Registrar the special resolution passed by the company under Section 13(1). As per Section
13(9), the Registrar shall register any alteration of the memorandum with respect to the objects
of the company and certify the registration within a period of thirty days from the date of filing
of the special resolution in accordance with Section 13(6)(a).
Consequently pursuant to Section 13(1), a company can change its objects clause by passing a special
resolution. Further in case the company is eligible for conducting business through postal ballot any
alteration in the objects clause of the Memorandum of Association, shall implement the same through
Postal Ballot in terms of section 110.

Further, Section 13(8) lays down that a company, which has raised money from public
through prospectus and has any unutilised amount out of the money so raised, shall not change
its objects for which it raised the money through prospectus unless a special resolution is passed
by the company and—
(i) the details, as may be prescribed, in respect of such resolution shall be published in the
newspapers (one in English and one in vernacular language) which is in circulation at the
place where the registered office of the company is situated and shall also be placed on the
website of the company, if any, indicating therein the justification for such change;
(ii) the dissenting shareholders shall be given an opportunity to exit by the promoters and
shareholders having control in accordance with regulations to be specified by the Securities
and Exchange Board.
Also for deleting any portion of the objects clause, the procedure laid down in this section has to
be followed.
A company may wish to alter its objects stated in its memorandum due to various reasons e.g. if a
company wishes to cut-back i.e. where it feels it has diversified in various directions and that
management of the company has become difficult or uneconomical, it may alter its objects to sell or
dispose of whole or part of its undertaking(s).

4. Alteration of Liability Clause

This clause requires a clarification about the nature of liability of the members of a company. The liability
of a company may be limited or unlimited as discussed earlier. In the case of the company with limited
liability, the liability clause must state that liability of members is limited by further stating whether
limited by shares or by guarantee. In the case of unlimited liability company, this clause need not be given
in the memorandum of association.

According to Section 13(1), a company may, by a special resolution and after complying with the
procedure specified in this section, alter the provisions of its memorandum. It means that a company can
change the liability clause of its memorandum of association by passing a special resolution. Further,
Section 13(6)(a) provides that a company shall, in relation to any alteration of its memorandum, file with
the Registrar the special resolution passed by the company under section 13(1).

5. Alteration of Capital Clause

A limited company having a share capital may make the following types of alterations in
its memorandum by an ordinary resolution, if so authorized by its articles, at its general meeting
to (Section 61)—
(i) increase its authorised share capital by such amount as it thinks expedient;
(ii) consolidate and divide all or any of its share capital into shares of a larger amount than its
existing shares:
(iii) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully
paid-up shares of any denomination;
(iv) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
memorandum, so, however, that the proportion between the amount paid and unpaid shall
remain the same.
(v) cancel shares which, at the date of the passing of the resolution in that behalf, have not
been taken or agreed to be taken by any person, and diminish the amount of its share
capital by the amount of the shares so cancelled.
All the above alterations do not require the confirmation by the Tribunal except that
alteration relating to consolidation and division which results in changes in the voting percentage
of shareholders shall not take effect unless it is approved by the Tribunal on an application made
in the prescribed manner.
These alterations are, however, required to be notified and a copy of the resolution should be
filed with the Registrar within 30 days of the passing of the resolution along with an altered
memorandum. [Section 64(1)]
The Registrar shall record the notice and make any alteration which may be necessary in the
company‘s memorandum or articles or both. It must be noted that cancellation of shares in pursuance of
Section 61(1) does not amount to reduction of share capital.

Registration of Alteration
Section 13(6)(a) provides that a company shall, in relation to any alteration of its
memorandum, file with the Registrar:
(a) the special resolution passed by the company under section 13(1); and
(b) the approval of the Central Government under section 13(2), if the alteration involves any
change in the name of the company.
The special resolution shall be filed with the Registrar within thirty days of the passing or
making thereof in the prescribed manner and payment of prescribed fees within the time
specified under section 403. As per Section 13(9), the Registrar shall register any alteration of
the memorandum with respect to the objects of the company and certify the registration within a
period of thirty days from the date of filing of the special resolution in accordance with Section
13 (6)(a).
Further, Section 13(7) provides that where an alteration of the memorandum results in the transfer of the
registered office of a company from one State to another, a certified copy of the order of the Central
Government approving the alteration shall be filed by the company with the Registrar of each of the
States within such time and in such manner as may be prescribed, who shall register the same, and the
Registrar of the State where the registered office is being shifted to, shall issue a fresh certificate of
incorporation indicating the alteration.

12.6 The Doctrine of Ultra-Vires

This is another important doctrine of Company Law. The word ‗Ultra‘ stands for beyond the limit and
‗vires‘ stands for power. Hence an Ultra-vires act implies an act which is beyond the power. Ultra-vires of
Article of Association means an act beyond article of association‘s power. Similarly an act beyond the
purview of memorandum of association is considered as ultra-vires to the company. The company is
formed for the achievement of some specific objectives described in its Memorandum of Association. The
company cannot do any act which goes beyond the powers given by the Memorandum of Association. It
cannot easily alter its object clause. The Memorandum of Association defines and confines the objectives
of the company in a clear manner so that everybody dealing with the company may have a clear picture of
the scope of activities of the company. The company has a right to perform all the necessary activities for
the achievement of its objectives as described in its Memorandum. So the Memorandum draws a line of
activities which the company cannot cross in any way. If the company does so, the activity will be
considered ultra-vires activity.

This doctrine provides that those transactions of a company which are beyond the scope of the
Memorandum or are against the provisions of the Companies Act or the general laws of the land are ultra-
vires. The ultra-vires transactions are absolutely null and void and even the whole body of shareholders
cannot ratify them and make them binding on the company. However, it is not necessary that an ultra-
vires act must be illegal. It may or may not be. It is pertinent to note that this doctrine does not restrain a
company from doing such things as are reasonably fair and incidental to its objects.

In the case of a company whatever is not stated in the memorandum as the objects or
powers is prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires is void,
and does not bind the company. Neither the company nor the contracting party can sue on it.
Also, as stated earlier, the company cannot make it valid, even if every member assents to it.
The general rule is that an act which is ultra vires the company is incapable of ratification. An act which
is intra vires the company but outside the authority of the directors may be ratified by the company in
proper form [Rajendra Nath Dutta v. Shilendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.)].

The rule is meant to protect shareholders and the creditors of the company. If the act is ultra vires
(beyond the powers of) the directors only, the shareholders can ratify it. If it is ultra vires the articles of
association, the company can alter its articles in the proper way. The memorandum of the company in the
said case defined its objects thus: ―The objects for which the company is established are to make and sell,
or lend or hire, railway plants to carry on the business of mechanical engineers and general
contractors…………………………… ‖.

The company entered into a contract with M/s. Riche, a firm of railway contractors to finance the
construction of a railway line in Belgium. On subsequent repudiation of this contract by the company on
the ground of its being ultra vires, Riche brought a case for damages on the ground of breach of contract,
as according to him the words ―general contractors‖ in the objects clause gave power to the company to
enter into such a contract and, therefore, it was within the powers of the company. More, so because the
contract was ratified by a majority of shareholders.

The House of Lords held that the contract was ultra vires the company and, therefore, null and void. The
term ―general contractor‖ was interpreted to indicate as the making generally of such contracts as are
connected with the business of mechanical engineers. The Court held that if every shareholder of the
company had been in the room and had said, ―That is a contract which we desire to make, which we
authorise the directors to make‖, still it would be ultra vires. The shareholders cannot ratify such a
contract, as the contract was ultra vires the objects clause, which by Act of Parliament, they were
prohibited from doing.

Loans, Borrowings, Guarantees and Ultra Vires Rule

An ultra vires borrowing does not create a relationship of a debtor and creditor. In a case,
a company had accepted deposits from outsiders which was outside the scope of the
Memorandum. When the company was ordered to be wound up, a question was raised whether
the depositors were creditors of the company and whether the contributories could be asked to
contribute towards payment of deposits. The Court held that the relationship between the
company and the depositors was not that of debtor and creditor. But if the lender had lent the
amount for discharging lawful expenses, he may recover the amount.
Whether a transaction is ultra vires the company can be decided on the basis of the following:
(1) if a transaction entered into by a company falls within the objects, it is not ultra vires and
hence not void;
(2) if a transaction is outside the capacity (objects) of the company, it is ultra vires;
(3) if a transaction is in excess or abuse of the company‘s powers, such transaction will be
set aside by the shareholders;
Shareholder’s Right in Respect of Ultra Vires Acts

A shareholder can get back the money paid by him to the company under an ultra vires allotment
of shares. A transferee of shares from him would not have been so allowed. [Margarate Linz v. Electric
Wire Co. of Salestine Ltd. (1948) 18 Com Cases 201, 205: AIR 1949 PC 51]. Sometimes, an act or
transaction is beyond the powers of the directors or beyond the scope of the Articles but within the
powers of the company. The company can ratify these acts or transactions by means of a resolution at a
general meeting.

Effects or Consequences of Ultra-vires Transactions

When a company does an ultra-vires act or transaction, it brings the following consequences:
(i) Void ab initio: The ultra vires acts are null and void ab initio. The company is not bound
by these acts. Even the company cannot sue or be sued upon [Ashbury Railway Carriage
and Iron Company v. Riche ].
Ultra vires contracts are void ab initio and hence cannot become intra vires by reason of estoppel
or ratification.

(ii) Injunction: The members can get an injunction to restrain a company wherein ultra vires
act has been or is about to be undertaken [Attorney General v. Gr. Eastern Rly. Co.,
(1880) 5 A.C. 473].
(iii) Personal Liability of Directors: It is one of the duties of directors to ensure that the
corporate capital is used only for the legitimate business of the company and hence if
such capital is diverted to purposes alien to the company‘s memorandum, the directors
will be personally liable to replace it. In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4
Bom. HCR (1855)], the Bombay High Court held, ―A shareholder can maintain an action
against the directors to compel them to restore to the company the funds of the company
that have by them been employed in transactions that they have no authority to enter into,
without making the company a party to the suit‖. In case of deliberate misapplication,
criminal action can also be taken for fraud.
However, a distinction must be drawn between transactions which are ultra vires
the company and the transactions which are ultra vires the directors. Where the directors
exceed their authority the same may be ratified by the general body of the shareholders.
Provided the company has the capacity to do that transaction as per its memorandum of
association.
(iv) Where a company‘s money has been used ultra vires to acquire some property, the
company‘s right over such property is held secure and the company will be the right party
to protect the property. This is because, though the property has been acquired for some
ultra vires object, it represents the money of the company.
(v) Ultra vires borrowing does not create the relationship of creditor and debtor [In Re.
Madras Native Permanent Fund Ltd., (1931) 1 Com Cases 256 (Mad.)].
12.7 Summary
The preparation of Memorandum of Association is the first step in the formation of a company. It is a
document which contains the fundamental conditions upon which the company is allowed to be
incorporated. The contents of the memorandum are called compulsory clauses and are name clause,
situation clause, objects clause, liability clause, and capital clause. Section 16 of the Companies Act
provides that the company cannot alter the conditions contained in the Memorandum of Association
except in the cases and in the mode and to the extent express provision has been made in the Act. The
activities of the company are confined strictly to the objects mentioned in its memorandum, and if they
beyond these objects, then such acts will be ultra-vires. The object of declaring such acts as ultra-vires is
to protect the interests of shareholders and all others who deal with the company.

12.8 Keywords
Memorandum of Association: It is the document which defines the objects and lays down the
fundamental conditions upon which along the company is allowed to be incorporated.

Doctrine of Ultra-vires: A doctrine declaring that any act contrary or in excess of the scope of the
activity of the company will be null and void and not binding on the company.

12.9 Self Assessment Questions

1. What is a Memorandum of Association? Discuss its various clauses.

2. How the alteration in the different clauses of Memorandum of Association can be made?

3. Discuss the Doctrine of Ultra-vires with reference to the Memorandum of Association of a

limited company.

4. What are the steps necessary for alteration of objects clause of the Memorandum of Association?

5. What do you understand by the memorandum of association? What is its purpose?

6. ―Memorandum of association is a charter of the company‖. Comment upon the statement and
explain the clauses which are included in a memorandum of association of a company.

7. What is the importance of the objects clause of the memorandum of association? If a company
undertakes to do anything which is not either expressly or impliedly provided for by the objects
clause, what would be the consequences?

12.10 Suggested Readings

1. P.P.S. Gogna, Mercantile Law, S.Chand & Company, New Delhi.
2. N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.
3. S. S. Gulshan and G K Kapoor, Business Law including Company Law, New Age
International Publishers, New Delhi.
4. K.R. Balchandari, Business Law for Management, Himalaya Publication House, New
Delhi.
5. M. C. Kuchhal and Deepa Prakash, Business Legislation for Management, Vikas Publishing
House Pvt. Ltd., New Delhi.
Subject: Business Legislation

Course Code: CP-302 Author: Dr. Gagan Singh

Lesson No.: 13 Vetter: Prof. M.C. Garg

ARTICLES OF ASSOCIATION

Structure
13.0 Objectives

13.1 Introduction

13.2 Meaning of Articles of Association

13.3 Contents of Articles of Association

13.4 Alteration of Articles of Association

13.5 Difference Between Memorandum of Association and Articles of Association

13.6 Legal Effect of Memorandum and Articles of Association

13.7 Doctrine of Constructive Notice

13.8 Doctrine of Indoor Management

13.9 Summary

13.10 Keywords

13.11 Self Assessment Questions

13.12 Suggested Readings

13.0 Objectives
After going through this lesson, you will be able to:
 Define articles of association and enumerate the contents of articles of association.
 Describe the procedure regarding the alteration of articles of association.
 Explain the binding effects of company’s articles of association.
 Explain the concept of Doctrine of Constructive Notice and Doctrine of Indoor
Management.
13.1 Introduction
 The preparation of articles of association is the next step in the formation of the company.
The articles of association may be understood as a document containing regulations for the
internal management of the affairs of the company. They prescribe the rules and bye-laws for the
general management of the company and for the attainment of its objects as given in the
memorandum of association. The articles of association is considered second most important
document of the company which is submitted to the registrar at the time of formation of
company. It contains bye-laws related to the company‘s internal management. This document is
prepared satisfying broad objectives laid in the memorandum.
According to Section 2(5) of the Companies Act, 2013, ‗articles‘ means the articles of
association of a company as originally framed or as altered from time to time or applied in
pursuance of any previous company law or of this Act. It also includes the regulations contained
in Table A in Schedule I of the Act, in so far as they apply to the company. In terms of Section
5(1), the articles of a company shall contain the regulations for management of the company.
The articles play a very important role in the affairs of a company. It deals with the rights of the
members of the company inter se. They are subordinate to and are controlled by the
memorandum of association.
13.2 Meaning of Articles of Association
The articles of association of a company are its bye-laws or rules and regulations that govern the
management of its internal affairs and the conduct of its business. Every company is required to file
Articles of Association along with the Memorandum of Association with the Registrar at the time of its
registration. Companies Act defines Articles as ―Articles of Association of a company as originally
framed or as altered from time to time in pursuance of any previous companies Acts‖. They also include,
so far as they apply to the company, those in the Table A in Schedule I annexed to the Act or
corresponding provisions in earlier Acts. They may be described as the internal regulation of the company
governing its management and embodying the powers of the directors and officers of the company as well
as the powers of the shareholders. They lay down the mode and the manner in which the business of the
company is to be conducted.

The articles of a company are subordinate to and subject to the memorandum of association and any
clause in the Articles going beyond the memorandum will be ultra vires. But the articles are only internal
regulations, over which the members of the company have full control and may alter them according to
what they think fit. Only care has to be taken to see that regulations provided for in the articles do not
exceed the powers of the company as laid down by its memorandum [Ashbury v. Watson, (1885) 30 Ch.
D 376 (CA)]. Articles that go beyond the company‘s sphere of action are inoperative, and anything done
under the authority of such article is void and incapable of ratification.
 Every type of company whether public or private and whether limited by shares or
limited by guarantee having a share capital or not having a share capital or an unlimited liability
company must register their articles of association. The articles of a company shall be in
respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such
company either in totality or otherwise. [Section 5(6)] The articles must be printed, divided into
paragraphs, numbered consecutively, stamped adequately, signed by each subscriber to the
memorandum and duly witnessed and filed along with the memorandum. The articles must not
contain anything illegal or ultra vires the memorandum, nor should it be contrary to the
provisions of the Companies Act 2013.
13.3 Contents of Articles of Association
The articles set out the rules and regulations framed by the company for its own working.
The articles should contain generally the following matters:
1. Exclusion wholly or in part of Table F.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
14. Dematerialisation.
15. Conversion of shares into stock.
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18. Directors, their appointment and delegations of powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.
27. Directors meetings.
28. Borrowing powers.
29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Indemnity.
33. Capitalisation of reserves.
Utmost caution must be exercised in the preparation of the articles of association of a company. At the
same time, certain provisions of the Act are applicable to the company "notwithstanding anything to the
contrary in the articles". Therefore, the articles must contain provisions in respect of all matters which are
required to be contained therein so as not to hamper the working of the company later.

13.4 Alteration of Articles of Association

A company has a statutory right to alter its articles of association. But the power to alter
is subject to the provisions of the Act and to the conditions contained in the memorandum.
Section 14(1) provides that subject to the provisions of this Act and the conditions contained in
its memorandum, if any, a company may, by a special resolution, alter its articles including
alterations having the effect of conversion of a private company into a public company; or a
public company into a private company. First provision to section 14(1) lays down that where a
company being a private company alters its articles in such a manner that they no longer include
the restrictions and limitations which are required to be included in the articles of a private
company under this Act, the company shall, as from the date of such alteration, cease to be a
private company. Second provision to Section 14(1) stipulates that any alteration having the
effect of conversion of a public company into a private company shall not take effect except with
the approval of the Tribunal which shall make such order as it may deem fit.
Every alteration of the articles under this section and a copy of the order of the Tribunal approving the
alteration as per section 14(1) shall be filed with the Registrar, together with a printed copy of the altered
articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same
[Section 14 (2)]. Any alteration of the articles registered under section 14(2) shall, subject to the
provisions of this Act, be valid as if it were originally in the articles [Section 14(3)]. The right to alter the
articles is so important that a company cannot in any manner, either by express provisions in the articles
or by independent contract, deprive itself of the powers to alter its articles [Walker v. London Tramway
Co. (1879) 12 Ch. D. 705].

Limitations Regarding Alteration of Articles

However, in spite of the power to alter its articles, a company can exercise this power
subject only to certain limitations. These are:
1. The alteration must not exceed the powers given by the memorandum. In the event of
conflict between the memorandum and the articles, it is the memorandum that will
prevail.
2. The alteration must not be inconsistent with any provisions of the Companies Act or any
other statute.
Similarly, where a resolution was passed expelling a member and authorising the
director to register the transfer of his shares without an instrument of transfer, the
resolution was held to be invalid as being against the provisions of the Act [Madhava
Ramachandra Kamath v. Canara Banking Corporation [1941] 11 Com Cases 78
(Mad)].
On the other hand, articles may impose on the company conditions stricter than those
provided under the law; for example, they may provide that a matter should be passed by a
special resolution when the Act requires it to be passed by an ordinary
resolution.
3. The Articles must not include anything which is illegal or opposed to public policy.
4. The alteration must be bona fide for the benefit of the company as a whole.
5. The alteration must not constitute a fraud on the minority by a majority. If the alteration
is not for the benefit of the company as a whole, but for majority of shareholders, then the
alteration would be bad. [All India Railway Mens Benefit Fund v. Jamadar
Baheshwarnath Bali (1945) 15 Com Cases 142 (Nag.)]
6. Articles cannot be altered so as to compel an existing member to take or subscribe for
 more shares or in any way increase his liability to contribute to the share capital, unless
he gives his consent in writing (Section 38).
7. By effecting alteration in its articles, a company cannot defeat escape from its contractual
obligation with any person. The company will always be liable in such a case.
8. The Articles of Association cannot be altered so as to have retrospective effects. The
articles only operate from the date of the amendment [Pyare Lal Sharma v. Managing
Director, J.K. Industries Ltd. (1989) 3 Comp LJ (SL) 70].
9. The alteration must not be inconsistent with an order of the Court under Sections 397 or
398 and 404 of the Companies Act, 1956.
Effect of Altered Articles

Alteration binds members in the same way as original articles. The altered articles shall bind the
company and the members to the same extent as if they had been signed by the company and by each
member, means the articles as originally framed, or as they may from time to time stand altered are valid
under the provisions of the Act. There is clear power to alter the articles, and as altered, they bind
members just in the same way as did the original articles. Section 8(4)(i) provides that a company
registered under section 8 i.e. companies with charitable objects shall not alter the provisions of its
memorandum or articles except with the previous approval of the Central Government.

13.5 Difference between Memorandum of Association and Articles of

Association
The difference between memorandum of association and articles of association is as
under:
1. Meaning: Memorandum of Association is the charter of the company. It contains those
fundamental conditions upon which alone the company is granted incorporation. Articles of
Association contain the rules and regulations framed to govern the internal management of the
company.

2. Mode of Alteration: Different clause of the Memorandum cannot be easily altered. They can be
altered for specified purposes and in accordance with the mode prescribed by the Act. Alteration
of some of them requires the permission of the Company Law Board while in other cases sanction
of the court is necessary. Members have full control over the articles. They can alter the articles
by passing a special resolution provided other conditions are satisfied. Permission of the court or
the government is not required for ordinary alteration.

3. Scope: Memorandum defines the objects and powers of the company. It fixes up the scope and
the extent of the activities of the company. Articles form the bye-laws of the company and
provide those regulations by which the objects and powers of the company can be carried out.
 Moreover, though both are public documents, yet Memorandum defines the relation between the
company and the outsiders, while the Articles regulate the relation between the company the
members as members atone or members inter se.

4. Contents: Memorandum of Association cannot include any clause contrary to the provisions of
the Companies Act. Articles of Association is subsidiary to both the Companies Act and
Memorandum of Association. Articles cannot be framed in contravention of the provisions of law
and the Memorandum.

5. Ratification: Things done by a company beyond the scope of the Memorandum are absolutely
void and cannot be ratified even by a unanimous vote of all the shareholders. But things done by
a company beyond the Articles are simply irregular and not void and can easily be confirmed or
subsequently ratified by the shareholders.

13.6 Legal Effect of Memorandum and Articles of Association

The memorandum and articles, when registered, bind the company and its members to
the same extent as if they have been signed by the company and by each member to observe and
be bound by all the provisions of the memorandum and of the articles. Also, all monies payable
by any member to the company under the memorandum or articles shall be a debt due from him
to the company (Section 10).
We shall examine the extent to which the memorandum and articles bind:
(a) the members to the company;
(b) the company to the members;
(c) the members inter se; and
(d) the company to outsiders.

Members Bound to the Company

The memorandum and articles constitute a contract binding the members of the
company. The members, as members, are bound to the company. Each member must,
therefore, observe the provisions of the memorandum and articles. Each member is bound
by the covenants of the Memorandum as originally made and as altered from time to time
[Malleson v. National Insurance Co.]. In another case, the shareholders could not enter
into an agreement which was contrary to or inconsistent with the articles of association of
the company [V.B. Rangaraj v. V.B. Gopalkrishnan (1992) 73 Com Cases 201 (SC)].
Company Bound to the Members
 Since the articles constitute a contract binding the company to its members in their
capacity as members, a member can bring an action against the company for infringement by it
of the memorandum or articles. For example, an individual member can sue the company for an
injunction restraining it from improper payment of dividend [Hoole v. Great Western Railway
(1867) 3 Ch. D. 262]. Further, the company is bound to individual members in respect of their
ordinary rights as members, e.g. the right to receive share certificate in respect of shares allotted
to them, or to receive notice of general meeting, etc. Normally, action for breach of articles
against the company can be brought only by a majority of the members. Individual or minority
members cannot bring such a suit except when it is intended for enforcement of personal rights
of members or to prevent the company from doing any ultra vires or illegal act, fraud, or
oppression and mismanagement.
Member Bound to Member
As between the members inter se each member is bound by the articles to the other
members but that does not mean the memorandum and articles create an express contract among
the members of the company. Thus, a member of a company has no right to bring a suit to
enforce the articles in his own name against any other member or members. It is the company
alone which can sue the offender so as to protect the aggrieved member. It is in this way that the
rights of members inter se are regulated. A shareholder may, however, sue in his own name to
restrain another, or others from doing fraudulent or ultra vires acts. Articles do not affect or
regulate the rights arising out of a commercial contract, with which the members have no
concern, i.e., rights completely outside the company‘s relationship.
Company Not Bound to Members
The term ―outsider‖ signifies a person who is not a member of the company even if he is
a director of or solicitor to the company. Even in regard to members, the articles bind the
company to them in their capacity as members. As between outsiders and the company, neither
the memorandum nor the articles would give any contractual rights to outsiders against the
company or its members even though the names of outsiders are mentioned in those documents
in connection with the arrangements that the company might have contemplated for carrying on
its business. The articles do not confer any contractual rights even upon a member in a capacity
other than that of a member. To succeed, the party suing must prove a contract outside and
independent of the articles [Eley v. Positive Life Insurance Co., (1876) 1 E.X.D. 88]. In this case
the articles provided that the solicitor to the company would not be removed from office except
for misconduct. Eley acted as solicitor to the company and also became a member of the
company. The company discontinued his services and then he sued the company for damages for
breach of contract. It was held that he had no cause of action because the articles did not
constitute any contract between the company and himself. His action was dismissed.
13.7 Doctrine of Constructive Notice
The memorandum and articles, when registered, become public documents and can be
inspected by anyone on payment of nominal fee. Therefore, every person who contemplates
entering into a contract with a company has the means of ascertaining and is consequently
presumed to know, not only the exact powers of the company but also the extent to which these
powers have been delegated to the directors, and of any limitations placed upon the exercise of
these powers. In other words, every person dealing with the company is deemed to have a
―constructive notice‖ of the contents of its memorandum and articles. In fact, he is regarded not
only as having read those documents but also as having understood them according to their
proper meaning [Griffith v. Paget, (1877) Ch. D. 517]. Consequently, if a person enters into a
contract which is beyond the powers of the company, as defined in the memorandum, or outside
the limits set on the authority of the directors, he cannot, as a general rule, acquire any rights
under the contract against the company [Mohony v. East Holyfrod Mining Co., (1875) L.R. 7
H.L. 869]. For example, if the articles provide that a bill of exchange to be effective must be
signed by two directors, a person dealing with the company must see that it is so signed;
otherwise he cannot claim under it.
In another case, the articles required that all documents should be signed by the managing
director, secretary and the working director on behalf of the company. A deed of mortgage was
executed by the secretary and the working director only and the Court held that no claim would
lie under such a deed. The Court said that the mortgagee should have consulted the articles
before the deed was executed. Therefore, even though the mortgagee may have acted in good
faith and the money borrowed applied for the purpose of the company, the mortgage was
nevertheless invalid [Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 579]. The doctrine of
indoor management protects third parties who are entitled to an assurance that all the procedural
aspects of a transaction are carried out.
 Outsiders dealing with incorporated bodies are bound to take notice of limits imposed on
the corporation by the memorandum or other documents of constitution. Nevertheless they are
entitled to assume that the directors or other persons exercising authority on behalf of the
company are doing so in accordance with the internal regulations as set out in the Memorandum
and Articles of Association.
13.8 Doctrine of Indoor Management
Doctrine of Indoor Management protects an outsider against company in contrast to the doctrine of
constructive notice. According to this doctrine it is presumed that the person dealing with company is not
well versed with the company‘s internal affairs. Rather he may not know where there is a fault in
company‘s internal matters? It is the duty of the officer concerned of the company to look into the matter.
The rule is that persons dealing with the company in good faith have a right to assume that the internal
requirements prescribed in public documents have been observed. They are not bound to enquire into the
regularity of the internal proceedings. The doctrine of indoor management is an exception to the rule of
constructive notice. A person dealing with a company is deemed to have knowledge of the memorandum
and the articles of association of the company. So, if he enters into a transaction with the company which
is ultra-vires of the memorandum or articles, he cannot treat the transaction as binding on the company.
On the other hand, if the transaction appears to be proper one, when compared with the memorandum and
articles, it would be grossly unfair if the company could escape liability under it by showing that there
was some irregularity in the conduct of the company‘s affairs leading upto the transaction, when the other
party did not know of the irregularity and had no means of discovering it.

While the doctrine of constructive notice seeks to protect the company against the
outsiders, the principal of indoor management operates to protect the outsiders against the
company. According to this doctrine, as laid down in Royal British Bank v. Turquand, (1856)
119 E.R. 886, persons dealing with a company having satisfied themselves that the proposed
transaction is not in its nature inconsistent with the memorandum and articles, are not bound to
inquire the regularity of any internal proceedings. In other words, while persons contracting with
a company are presumed to know the provisions of the contents of the memorandum and articles,
they are entitled to assume that the provisions of the articles have been observed by the officers
of the company. It is no part of the duty of an outsider to see that the company carries out its own
internal regulations.
Section 176 provides for the validity of acts of directors. No act done by a person as a
director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his
appointment was invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in this Act or in the articles of the company provided that nothing in
this section shall be deemed to give validity to any act done by the director after his appointment
has been noticed by the company to be invalid or have been terminated.
The object of the section is to protect persons dealing with the company - outsiders as well as members-
by providing that the acts of a person acting as director will be treated as valid although it may afterwards
be discovered that his appointment was invalid or that it had terminated under any provision of this Act or
the Articles of the company [Ram Raghubir Lal v. United Refineries (Burma) Ltd., (1932) 2 Com Cases
359; AIR 1931 Rang 139].

Exceptions to the Doctrine Indoor Management

The above noted ‗doctrine of indoor management‘ is, however, subject to certain
exceptions. In other words, relief on the ground of ‗indoor management‘ cannot be claimed by an
outsider dealing with the company in the following circumstances:
1. Where the Outsider had Knowledge of Irregularity — The rule does not protect any
person who has actual or even an implied notice of the lack of authority of the person
acting on behalf of the company. Thus, a person knowing fully well that the directors do
not have the authority to make the transaction but still enters into it, cannot seek
protection under the rule of indoor management. In Howard v. Patent Ivory Co. (38 Ch.
D 156), the articles of a company empowered the directors to borrow upto one thousand
pounds only. They could, however, exceed the limit of one thousand pounds with the
consent of the company in general meeting. Without such consent having been obtained,
they borrowed 3,500 pounds from one of the directors who took debentures. The
company refused to pay the amount. Held that, the debentures were good to the extent of
one thousand pounds only because the director had notice or was deemed to have the
notice of the internal irregularity.
2. No Knowledge of Memorandum and Articles — Again, the rule cannot be invoked in
favour of a person who did not consult the memorandum and articles and thus did not
rely on them. In Rama Corporation v. Proved Tin & General Investment Co. (1952) 1All.
ER 554, T was a director in the company. He, purporting to act on behalf of the company,
entered into a contract with the Rama Corporation and took a cheque from the latter. The
articles of the company did provide that the directors could delegate their powers to one
of them. But Rama Corporation people had never read the articles. Later, it was found
that the directors of the company did not delegate their powers to T. The plaintiff relied
 on the rule of indoor management. Held, they could not because they even did not know
that power could be delegated.
3. Forgery — The rule of indoor management does not extend to transactions involving
forgery or to transactions which are otherwise void or illegal ab initio. In the case of
forgery it is not that there is absence of free consent but there is no consent at all. The
person whose signatures have been forged is not even aware of the transaction, and the
question of his consent being free or otherwise does not arise. Consequently, it is not that
the title of the person is defective but there is no title at all. Therefore, howsoever clever
the forgery might have been, the personates acquire no rights at all. Thus, where the
secretary of a company forged signatures of two of the directors required under the
articles on a share certificate and issued certificate without authority, the applicants were
refused registration as members of the company. The certificate was held to be nullity
and the holder of the certificate was not allowed to take advantage of the doctrine of
indoor management [Rouben v. Great Fingal Consolidated (1906) AC 439].
Forgery, in the case of a company, can take different forms. It may, besides
forgery of the signatures of the authorised officials, include the execution of a document
towards the personal discharge of an official‘s liability instead of the liability of the
company. Thus, a bill of exchange signed by the manager of a company with his own
signature under words stating that he signed on behalf of the company, was held to be
forgery when the bill was drawn in favour of a payee to whom the manager was
personally indebted [Kreditbank Cassel v. Schenkers Ltd. (1927) 1 KB 826]. The bill in
this case was held to be forged because it purported to be a different document from
what it was in fact; it purported to be issued on behalf of the company in payment of its
debt when in fact it was issued in payment of the manager‘s own debt.
4. Negligence — The ‗doctrine of indoor management‘, in no way, rewards those who
behave negligently. Thus, where an officer of a company does something which shall not
ordinarily be within his powers, the person dealing with him must make proper enquiries
and satisfy himself as to the officer‘s authority. If he fails to make an enquiry, he is
estopped from relying on the Rule. In the case of Underwood v. Bank of Liverpool (1924)
1 KB 775, a person who was a sole director and principal shareholder of a company
deposited into his own account cheques drawn in favour of the company. Held, that, the
 bank should have made inquiries as to the power of the director. The bank was put upon
an enquiry and was accordingly not entitled to rely upon the ostensible authority of
director.
Similarly, in the case of Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd. AIR 1942
Oudh 417, an accountant of a company transferred some property of a company in favour
of Anand Behari. On an action brought by him for breach of contract, the Court held the
transfer to be void. It was observed that the power of transferring immovable property of
the company could not be considered within the apparent authority of an accountant.
5. Again, the doctrine of indoor management does not apply where the question is in regard
to the very existence of an agency. In Varkey Souriar v. Keraleeya Banking Co. Ltd.
(1957) 27 Com Cases 591 (Ker.), the Kerala High Court held that the ‗doctrine of indoor
management‘ cannot apply where the question is not one as to scope of the power
exercised by an apparent agent of a company but is with regard to the very existence of
the agency.
6. This Doctrine is also not applicable where a pre-condition is required to be fulfilled before
company itself can exercise a particular power. In other words, the act done is not merely ultra
vires the directors/officers but ultra vires the company itself — Pacific Coast Coal Mines v.
Arbuthnot (1917) AC 607.
In the end, it is worthwhile to mention that Section 6 of the Companies Act, 2013 gives
overriding force and effect to the provisions of the Act, notwithstanding anything to the contrary
contained in the memorandum or articles of a company or in any agreement executed by it or for
that matter in any resolution of the company in general meeting or of its board of directors. A
provision contained in the memorandum, articles, agreement or resolution to the extent to which
it is repugnant to the provisions of the Act, will be regarded as void.
Doctrine of Alter Ego

It is used by the courts to ignore the status of shareholders, officers, and directors of a
company in reference to their liability in their respective capacity so that they may be held
personally liable for their actions when they have acted fraudulently or unjustly. In Lennards
Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] AC 705, Viscount Haldane propounded
the ―alter ego‖ theory and distinguished it from vicarious liability. The House of Lords stated
that the default of the managing director who is the ―directing mind and will‖ of the company,
would be attributed to him and he be held for the wrong doing of the company. It is to be noted
that every gathering or assembly does not constitute a meeting. Company meetings must be
convened and held in perfect compliance with the various provisions of the Companies Act,
2013 and the rules framed thereunder. A company is composed of members, though it has its
own entity distinct from members. The members of a company are the persons who, for the time
being, constitute the company, as a corporate entity. However, a company, being an artificial
person, cannot act on its own. It, therefore, expresses its will or takes its decisions through
resolutions passed at validly held meetings. The primary purpose of a meeting is to ensure that a
company gives reasonable and fair opportunity to those entitled to participate in the meeting to
take decisions as per the prescribed procedures. Convening of one such meeting every year is
compulsory. Holding of more general meetings is left to the choice of the management or to a
given percentage of shareholders to exercise their power to compel the company to convene a
meeting. Shareholder democracy, class action suits and protection of interest of investors are the
essence and attributes of the Companies Act, 2013.
13.9 Summary
The articles of association contain the rules with regard to the internal management of the company. The
articles should not be contrary to the provisions of the Companies Act and not any other law for the time
being in force. The articles must be printed, divided into paragraphs and signed by each subscriber of the
memorandum of association. The memorandum of association and articles of association, when registered
become public documents and can be inspected by anyone on the payment of a nominal fee in the office
of Registrar of companies. When, it is so, every person dealing with the company is presumed to have the
known the contents of the two important public documents of the company. Imputation of knowledge as
to the contents of memorandum of association and articles of association is known as constructive notice
of the public documents. There is, however, one limitation to the doctrine of constructive notice, namely,
doctrine of indoor management.

13.10 Keywords
Articles of Association: There are the rules, regulation and bye-laws for governing the internal affairs of
the company.

Doctrine of Constructive Notice: A doctrine declaring that both memorandum of association and articles
of association are public documents after being registered with the Registrar of Companies and everyone
dealing with the company is deemed to have constructive notice of them.

Doctrine of Indoor Management: A doctrine declaring that the outsiders dealing with the company are
entitled to presume that the internal formalities as required by the company‘s articles must have been
lawfully observed by the management of the company.
13.11 Self Assessment Questions
1. What is Articles of Association? What are its contents?
2. Distinguish between Memorandum of Association and Articles of Association.
3. ―Articles of association of a company constitute a contract between the members inter se
and between the company and the members qua member‖. Elucidate.
4. Enunciate the doctrines of constructive notice and indoor management. What are the
exceptions, if any, to doctrine of indoor management?
5. What are the binding effects of the articles of association? Indicate the limitations on the
powers of the company to alter its articles of association.
6. ―The doctrine of indoor management is a silver lining to strangers dealing with the
company‖. Explain.
7. ―The power of altering the articles is wide, yet it is subject to a large number of
limitations‖. Explain.
8. Discuss the extent to which articles of association binds:
(a) the members to the company,

(b) the company to the members,

(c) the members among themselves, and

(d) the company to the outsiders.

13.12 Suggested Readings

1. P.P.S. Gogna, Mercantile Law, S. Chand & Company, New Delhi.
2. N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.
3. S. S. Gulshan and G. K. Kapoor, Business Law including Company Law, New
Age International Publishers, New Delhi.
4. K.R. Balchandari, Business Law for Management, Himalaya Publication House, New
Delhi.
5. S.K. Aggarwal, Business Law, Galgotia Publishing Company, New Delhi.
Subject: Business Legislation

Course Code: CP-302 Author: Dr. Gagan Singh

Lesson No.: 14 Vetter: Prof. M.C. Garg

MEETINGS OF COMPANIES

Structure
14.0 Objectives

14.1 Introduction

14.2 Company Meetings

14.3 Requisites of a Valid Meeting

14.4 Types of Meetings

14.4.1 Annual General Meeting

14.4.2 Extraordinary General Meeting

14.4.3 Class Meeting

14.5 Resolutions

14.5.1 Ordinary Resolution

14.5.2 Special Resolution

14.5.3 Resolution requiring special notice

14.6 Summary

14.7 Key Words

14.8 Self Assessment Questions

14.9 Suggested Readings

14.0 Objectives
After going through this lesson, you will be able to:

 Understand the essentials of a valid meeting.

 Explain different types of company meetings.
 Describe the types of resolutions and when are they passed.
14.1 Introduction
A meeting is defined as coming together of two or more people at a certain time and place especially for
discussion. In case of a company, in certain exceptional cases, even one person may constitute a valid
meeting. A meeting may be generally defined as a gathering or assembly or getting together of a number
of persons for transacting any lawful business. There must be atleast two persons to constitute a meeting.
Therefore, one shareholder usually cannot constitute a company meeting even if he holds proxies for
other shareholders. However, in certain exceptional circumstances, even one person may constitute a
meeting. It is to be noted that every gathering or assembly does not constitute a meeting. Company
meetings must be convened and held in perfect compliance with the various provisions of the Companies
Act, 2013 and the rules framed thereunder. In this lesson, you will learn about company meetings, types
of meetings, essentials of valid meeting, resolutions and different types of resolution.

14.2 Company Meetings

The meaning of meeting as explained above is the coming together or gathering of persons for discussing
any lawful business. The meetings of a company can be of shareholders, creditors, debenture holders,
directors and contributories. A company is required to hold meetings of the members to take approval of
certain business items, as prescribed in the Act. The meetings to be held for seeking approval to ordinary
business and special business are called annual general meeting and extraordinary general meeting
respectively. In certain cases, a company may have to hold a meeting of the members of a particular class
of members.

14.3 Requisites of a Valid Meeting

The business at a meeting is said to have been ―validly transacted‖ if the members of the organisation or
body concerned, whether or not they were present, are bound by the decision made there at. They cannot
be so bound unless the meeting is validly held. The essentials of a valid meeting are that the meeting
should be:

(a) Properly Convened

(i) The meeting must be called by proper authority; and
(ii) Proper notice must be served in the manner specified under Section 101 and 102
of the Act.
(b) Properly Constituted
(i) Proper quorum must be present in the general meeting (Section 103 of the Act)
(ii) Proper chairman must preside the meeting (Section 104 of the Act)
(c) Properly Conducted
(i) The business must be validly transacted at the meeting i.e. resolutions must be
properly moved and passed, and voting by show of hands and on poll.
 (ii) Proper minutes of the meeting must be prepared. (Section 118 of the Act)
Procedure for Convening of a Valid General Meeting

Following are the requisites of a valid meeting of a company: ––

A. Proper Authority
B. Notice and Agenda of Meeting
C. Quorum of Meeting
D. Chairman of Meeting
E. Proxy
F. Voting
G. Minutes of Meeting
Let us understand them one by one:

A. Proper Authority

Proper authority means the complete power or right to do something. The proper authorities to call
meetings are Board of Directors, Shareholders and Central Government / Tribunal. Articles of
Association normally empower the Board of Directors to call general meetings. The shareholders, in
certain circumstances, can call an extraordinary meeting. The directors on requisition of such meeting by
shareholders have to call such meeting, failing them the requisitions to themselves. The Company Law
Board may on petition of any member can call annual general meeting as well as an extraordinary
meeting. The Board shall call meeting within 21 days from the receipt of requisition from members.

B. Notice and Agenda of Meeting (Section 101)

A general meeting of a company may be called by giving not less than 21 clear days‘
notice either in writing or through electronic mode. Notice through electronic mode shall be
given in such manner as may be prescribed. In case of section 8 company, 14 days‘ clear notice
is required instead of 21 days. ‗Clear days‘ means days exclusive of the day of the notice of
service and of the day on which the meeting is held. Where a notice of general meeting is sent by
post, it shall be deemed to be served at the expiration of 48 hours after the letter containing the
same is posted (Rule 35(6) of the Companies (Incorporation) Rules, 2014). Each of the 21 days
must be full or complete days. The day on which the notice is deemed to be served on the
member, and the day of the general meeting have to be in addition to the 21 days.
In case a valid special notice under the Act has been received from member(s), the company shall give
notice of the resolution to all its members at least seven days before the meeting, exclusive of the day of
dispatch of notice and day of the meeting, in the same manner as a notice of any general meeting is to be
given. Where this is not practicable, the notice shall be published in a vernacular newspaper in the
principal vernacular language of the district in which the registered office of the company is situated, and
in an English newspaper in English language, both having a wide circulation in that district, at least seven
days before the meeting, exclusive of the day of publication of the notice and day of the meeting. In case
of companies having a website, such notice shall also be hosted on the website.

Shorter Notice

A general meeting may be called after giving a shorter notice also if consent is given in writing or by
electronic mode by not less than 95% of the members entitled to vote at such meeting.

Contents of Notice: The contents of the notice are as follows:

(i) Place of Meeting (Section 96): The notice should state the place where the general meeting is
scheduled to be held. In case of an annual general meeting, the place of the meeting has to be either the
registered office of the company or some other place within the city, town or village in which the
registered office of the company is situated. Explanation to Rule 17(2) of Companies (Management and
Administration) Rules 2014 states that requisitionists should convene meeting at Registered Office or in
the same city or town where the Registered Office is situated and such meeting should be convened on
working day. Act provides Annual General Meetings shall be held either at the registered office of the
company or at some other place within the city, town or village in which the registered office of the
company is situated, whereas other General Meetings may be held at any place within India. In case of
Government company, AGM shall be held either at the registered office of the company or at such other
place as the Central Government may approve.

Notice shall contain complete particulars of the venue of the Meeting including route map and prominent
land mark for easy location.

(ii) Day of Meeting (Section 96): The day and date of the meeting should be clearly stated in the
notice. In case of an annual general meeting, the day should be one that is not a National Holiday. An
extraordinary general meeting can however be held on any day. However, as per the Companies Act, a
Meeting called by the requisitionists shall be convened only on a working day.

(iii) Time of Meeting (Section 96): Exact time of holding the meeting should be given in the notice. An
annual general meeting can be called during business hours only, i.e. between 9:00 a.m. and 6:00 p.m.
There is no restriction of timings in case of an extraordinary general meeting. In case of Section 8
Company, the time, date and place of each AGM are decided upon before-hand by the directors having
regard to directions, if any, given in this regard by the company in its general meeting.

(iv) Agenda (Section 102): A statement of the business to be transacted at the general meeting should
be given in the notice. In case, the meeting is to transact a special business, a explanatory statement
should be attached about such item. Every notice calling a meeting of a company which has a share
capital, or the articles of which provide for voting by proxy at the meeting, should carry with reasonable
prominence, a statement that a member entitled to attend and vote is entitled to appoint a proxy, or,
where that is allowed, one or more proxies, to attend and vote instead of himself, and that a proxy need
not be a member.
(v) Persons Entitled to Receive Notice: In terms of Section 101(3), notice of every meeting of the
company must be given to:

(a) every member of the company, legal representative of any deceased member or the
assignee of an insolvent member;
(b) the auditor or auditors of the company; and
(c) every director of the company.
A private company, which is not, a subsidiary of a public company may prescribe, by its
Articles, persons to whom the notice should be given. It does not always follow that all the
members of a company are entitled to receive notice of meetings of the company; the Articles
frequently provide that preference shareholders shall not be entitled to receive notice of and
vote at general meeting of the company, except in certain circumstances.
C. Quorum for Meetings (Section 103)

Quorum refers to the minimum number of members required to constitute a valid

meeting. Following are the minimum numbers provided in Section 103, for various categories of
companies. However, the Articles of Association of the company may provide for a higher
number.
 Public Company: 5 members personally present if the number of members as on
the date of meeting is not more than 1000; 15 members personally present if the
number of members as on the date of meeting is more than 1000 but up to 5000;
and 30 members personally present if the number of members as on the date of
the meeting exceeds 5000.
 Private Company: 2 members personally present, shall be the quorum for a
meeting of the company.
Members who have voted by remote e-voting have the right to attend the general meeting
and accordingly their presence shall be, counted for the purpose of quorum. A member who is
not entitled to vote on any particular item of business being a related party, if present, shall be
counted for the purpose of quorum. The stipulation regarding the presence of a quorum does not
apply with respect to items of business transacted through postal ballot.
Consequences of no Quorum- If the quorum is not present within half-an-hour from the time appointed
for holding a meeting of the company—

(a) the meeting shall stand adjourned to the same day in the next week at the same time and
 place, or to such other date and such other time and place as the Board may determine; or
(b) the meeting, if called by requisitionists (under Section 100), shall stand cancelled.
Notice of an Adjourned Meeting- Where the meeting stands adjourned to the same day in the
next week at the same time and place, or to such other day, not being a National Holiday, or at
such other time and place as the Board may determine, there the company shall give at least 3
days notice to the members either individually or by publishing an advertisement in 2
newspapers (one in English and one in vernacular language).
No Quorum in an Adjourned Meeting- If at the adjourned meeting also, a quorum is not present within
half- an-hour from the time appointed for holding meeting, the members present, being not less than two
in numbers, will constitute the quorum. If a meeting is adjourned sine-die or for a period of thirty days or
more, a notice of the adjourned meeting shall be given in accordance with the provisions contained
hereinabove relating to Notice.

D. Chairman of Meetings (Section 104)

Unless the articles of the company otherwise provide, the members personally present at
the meeting shall elect one of themselves to be the chairman thereof on a show of hands. If a poll
is demanded on the election of the Chairman, it shall be taken forthwith in accordance with the
provisions of this Act and the chairman elected on a show of hands shall continue to be the
chairman of the meeting until some other person is elected as chairman as a result of the poll,
and such other person shall be the chairman for the rest of the meeting.
Companies Act provides that the chairman of the Board shall take the chair and conduct
the meeting. If the chairman is not present within fifteen minutes after the time appointed for
holding the meeting, or if he is unwilling to act as chairman of the Meeting, or if no Director has
been so designated, the Directors present at the meeting shall elect one of themselves to be the
chairman of the meeting. If no Director is present within fifteen minutes after the time appointed
for holding the meeting, or if no Director is willing to take the chair, the members present shall
elect, on a show of hands, one of themselves to be the chairman of the meeting, unless otherwise
provided in the Articles.
If a poll is demanded on the election of the chairman, it shall be taken forthwith in
accordance with the provisions of the Act and the chairman elected on a show of hands shall
continue to be the chairman of the meeting until some other person is elected as chairman as a
result of the poll, and such other person shall be the chairman for the rest of the meeting. The
chairman shall ensure that the meeting is duly constituted in accordance with the Act and the
Articles or any other applicable laws, before it proceeds to transact business. The chairman shall
then conduct the meeting in a fair and impartial manner and ensure that only such business as has
been set out in the notice is transacted. The chairman shall regulate the manner in which voting is
conducted at the meeting keeping in view the provisions of the Act.
E. Proxies (Section 105)
A person who is appointed by a member to attend and vote at a meeting in the absence of
the member at the meeting is termed as proxy. Thus proxy is an agent of the member appointing
him. The term ‗proxy‘ is also used to refer to the instrument by which a person is appointed as
proxy. Section 105 of the Companies Act, 2013 provides that a member, who is entitled to attend
to vote, can appoint another person as a proxy to attend and vote at the meeting on his behalf.
This section also provides the manner of appointing proxy. The provisions are as follows:
(1) Who can Appoint a Proxy: Any member of a company who is entitled to attend and
vote at a meeting of the company shall be entitled to appoint another person as a proxy to
attend and vote at the meeting on his behalf.
Companies Act further added that where allowed, one or more proxies, to attend and vote
instead of himself and a proxy need not be a member. A proxy can act on behalf of
members not exceeding fifty and holding in the aggregate not more than ten percent of
the total share capital of the company carrying voting rights.
(2) Disabilities of Proxy: A proxy shall not have the right to speak at the meeting. A proxy
cannot vote on a show of hands. A proxy is not counted for the purpose of quorum.
(3) Rights of Proxy: A proxy has the right to attend the meeting. A proxy has the right to
vote only on a poll. A proxy, if eligible under section 109, has the right to demand a poll.
(4) Restriction on Proxy: A member of a company registered under section 8 (Not for Profit
company) shall not be entitled to appoint any other person as his proxy unless such other
person is also a member of such company. A person appointed as proxy shall not act as
proxy on behalf of more than fifty members and members holding in the aggregate more
than ten percent of the total share capital of the company carrying voting rights.
A member holding more than 10% of the total share capital of the company carrying
voting rights may appoint a single person as proxy, provided that such person shall not
act as proxy for any other person or shareholder.
(5) Time Limit for Deposit of Proxy Forms: The instrument appointing the proxy must be
 deposited with the company, 48 hours before the meeting. Any provision contained in
the articles, requiring a longer period than 48 hours shall have effect as if a period of 48
hours had been specified.
F. Voting

The Articles prescribe regulations and procedure for voting at general meetings subject to
the provisions of the Act. Every equity shareholder with voting right, whose name appears on the
register of members has the right to vote on every resolution placed before the general meeting.
Restriction on Voting Rights (Section 106): The articles of a company may provide that a
member shall not exercise any voting right in respect of any shares registered in his name
on which any calls or other sums presently payable by him have not been paid or on which
company has exercised any right or lien. No member can be prohibited from exercising his
voting right on any other ground.
Voting by Show of Hands (Section 107): At any general meeting, a resolution put to the vote of
the meeting shall in the first instance be decided on a show of hands, unless-
(a) A poll is demanded under section 109 of the Act.
(b) Voting is carried out electronically under section 108 of the Act.
A declaration by the chairman of the meeting of the passing of a resolution (that the
resolution has been passed or failed, as the case may be) on show of hands and an entry to that
effect in the minutes book shall be conclusive evidence of the fact of passing of such resolution.
No proof of numbers of votes casts in favor of and against the resolution is required.
Voting through Electronic Means (Section 108): General meetings of companies are held
at their registered offices and it is not possible for every member specially members
holding minor shares to travel up to the registered office of the company and participate
in the general meetings of the company. To eliminate this type of difficulty and to
enhance the participation of minority members, concept of e-voting has been introduced
by the Companies Act 2013. Now a member can cast his vote easily through electronic
mode without physically attending the general meeting. E-voting do not eliminate
members right to physically attend and vote at the general meeting. However member can
cast his vote through one mode only. A member after casting his vote through e-voting
can go and attend the general meeting but cannot cast vote in that general meeting.
The facility of Remote e-voting does not dispose with the requirements of holding a General
Meeting by the company.
Applicability: Section 108 of the Act shall apply to such companies as may be prescribed by the
Central Government. The prescribed class of companies, for this purpose, are-
(i) All companies whose equity shares are listed on a recognized stock exchange; and
(ii) All companies having 1000 or more members.
However, the provisions of Section 108 shall not apply company referred to in Chapter XB
(Companies listed on SME exchange) or Chapter XC (Companies listed on institutional trading
platform without IPO) of the SEBI (Issue of Capital and Depository Receipt) Regulations, 2009.
Following companies are out of ambit of e-voting:-
1. Companies having whose debenture/preference shares are only listed.
2. Companies listed on SME trading platform.
3. Companies listed on institutional trading platform.
Legal Requirement
(a) A company to which Section 108 is applicable, shall provide to its members facility to
exercise their right to vote on resolution proposed at general meetings by electronic
means.
(b) Once a resolution is proposed in general meeting, it shall not be withdrawn.
Demand for Poll (Section 109): Before or on the declaration of the result of the voting on any
resolution on show of hands, a poll may be ordered to be taken by the Chairman of the meeting
on his own motion, and shall be ordered to be taken by him on a demand made in that behalf by
the following person(s):
(a) in the case a company having a share capital: By the members present in person or by
proxy, where allowed, and having not less than one-tenth of the total voting power or
holding shares on which an aggregate sum of not less than ₹ 5,00,000/- or such higher
amount as may be prescribed, has been paid-up; and
(b) in the case of any other company: By any member or members present in person or by
proxy, where allowed, and having not less than one-tenth of the total voting power.
The chairman shall get the validity of the demand verified. The demand for a poll may be
withdrawn at any time by the persons who made the demand.
Time for Taking Poll and Declaring the Result: A poll shall be taken forthwith, if it is demanded for
adjournment of the meeting or appointment of chairman of the meeting. A poll shall be taken at such
time, not being later than 48 hours from the time when the demand was made on any other question.
The chairman shall announce the date, venue and time of taking the poll to enable members to have
adequate and convenient opportunity to exercise their votes. Further, the chairman may permit any
member who so desires to be present at the time of counting the votes. The chairman shall inform the
members, the modes and the time of such communication, which shall in any case be within 24 hours of
closer of meeting in case the date, venue not announced.

Where a poll is to be taken, the chairman of the meeting shall appoint such number of
persons, as he deems necessary, to scrutinize the poll process and votes given on the poll and to
report thereon to him in the manner as may be prescribed. The result of the poll shall be deemed
to be the decision of the meeting on the resolution on which the poll was taken.
Postal Ballot (Section 110): As per Section 2(65) ―postal ballot‖ means voting by post or
through any electronic mode. It includes voting by shareholders by postal or electronic mode
instead of voting personally for transacting businesses in a general meeting of the company.
Each item proposed to be passed through postal ballot shall be in the form of a resolution and
shall be accompanied by an explanatory statement which shall set out all such facts as would
enable a member to understand the meaning, scope and implications of the item of business and
to take a decision thereon.
A company shall send a notice and draft resolution by registered post to all shareholders
explaining the reasons and requesting them to send their assent or dissent in writing on a postal
ballot. If a resolution is assented to by the requisite majority of the shareholders by means of
postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that
behalf.
G. Minutes of Meeting

The minutes refer to a written record of business transacted at a meeting. Section 118 provides that every
company shall prepare, sign and keep minutes of proceedings of every general meeting, including the
meeting called by the requisitionists and all proceedings of meeting of any class of shareholders or
creditors or Board of Directors or committee of the Board and also resolution passed by postal ballot
within thirty days of the conclusion of every such meeting concerned. In case of meeting of Board of
Directors or of a committee of Board, the minutes shall contain name of the directors present and also
name of dissenting director or a director who has not concurred the resolution. The chairman shall
exercise his absolute discretion in respect of inclusion or non-inclusion of the matters which is regarded
as defamatory of any person, irrelevant or detrimental to company‘s interest in the minutes. Minutes kept
shall be evidence of the proceedings recorded in a meeting and containing fair and correct summary of the
proceeding thereat.
Precautions to be Taken While Preparing the Minutes
(1) Uniformity in the Manner of Maintaining Minutes: Minutes may be maintained
in electronic form in such manner as prescribed under the Act and as may be decided
by the Board. Minutes in electronic form shall be maintained with Time stamp.
Every company shall, however, follow a uniform and consistent form of maintaining
the minutes. Any deviation in such form of maintenance shall be authorized by the
Board.
(2) Page Numbering: The pages of the Minutes Books shall be consecutively
numbered. This shall be followed irrespective of a break in the book arising out of
periodical binding in case the minutes are maintained in physical form. This shall be
equally applicable for maintenance of minutes book in electronic form with time
stamp.
In the event any page or part thereof in the Minutes Book is left blank, it shall be
scored out and initialled by the chairman who signs the Minutes. Minutes shall not
be pasted or attached to the minutes book, or tampered with in any manner.
(i) Binding of Minutes: Minutes of meetings, if maintained in loose-leaf form,
shall be bound periodically depending on the size and volume. There shall
be a proper locking device to ensure security and proper control to prevent
removal or manipulation of the loose leaves.
(ii) Place of Keeping Minutes: Minutes Books shall be kept at the Registered
Office of the company or at such other place, as may be approved by the
Board.
Recording of Minutes: Minutes shall contain a fair and correct summary of the proceedings of
the meeting. The company secretary shall record the proceedings of the meetings. Where there is
no company secretary, any other person authorised by the Board or by the chairman in this
behalf shall record the proceedings. The chairman shall ensure that the proceedings of the
meeting are correctly recorded.
Inspection of Minute Book of General Meeting (Section 119)
(1) Place of Keeping Minutes Book: In terms of Section 119, the minute‘s book of general
meetings or of a resolution passed by postal ballot shall
(a) be kept at the registered office of a company; and
 (b) shall be open for inspection to members during business hours without any charge
subject to such restrictions as the company may, by its articles or in general
meeting, impose so, however, that shall not be less than two hours in each
business day are allowed for inspection.
(2) Issue of Copy of Minutes to the Member: Any member shall be entitled to be furnished, within
seven working days after he has made a request in that behalf to the company, with a copy of any
minutes of any general meeting, on payment of such sum as may be specified in the articles of the
company but not exceeding a sum of ten rupees for each page or part of any page. A member who
has made a request for provision of soft copy in respect of minutes of any previous general
meetings held during a period of immediately preceding three financial years shall be entitled to
be furnished, with the same free of cost.

14.4 Types of Meetings

The different types of meeting are given below:

a) Annual General Meeting

b) Extraordinary Meeting
c) Class Meeting
14.4.1 Annual General Meeting (Section 96)
Annual general meeting (AGM) is an important annual event where members get an
opportunity to discuss the activities of the company. Section 96 provides that every company,
other than a one person company is required to hold an annual general meeting every year.
Companies Act provides that the Board shall, every year, convene or authorize convening of a
meeting of its members called the annual general meeting to transact items of ordinary business
specifically required to be transacted at an annual general meeting as well as special business, if
any. If the Board fails to convene its annual general meeting in any year, any member of the
company may approach the prescribed authority, which may then direct the calling of the annual
general meeting of the company. Following are the key provisions regarding the holding of an
annual general meeting:
Holding of Annual General Meeting

1. Annual general meeting should be held once in each calendar year.

2. First annual general meeting of the company should be held within 9 months from the
closing of the first financial year. Hence, it shall not be necessary for the company to hold
any annual general meeting in the year of its incorporation.
3. Subsequent annual general meeting of the company should be held within 6 months from
the date of closing of the relevant financial year.
4. The gap between two annual general meetings shall not exceed 15 months.
One person company is exempt from holding an AGM.
Date, Time and Place for Holding an Annual General Meeting

An annual general meeting can be called during business hours, that is, between 9 a.m.
and 6 p.m. on any day that is not a national holiday. It should be held either at the registered
office of the company or at some other place within the city, town or village in which the
registered office of the company is situated. The Central Government is empowered to exempt
any company from these provisions, subject to such conditions as it may impose. In case of
Government Company, the Central Government may approve such other place for holding
AGM, if the place is other than registered office. In case of Section 8 company, the time, date
and place of each AGM are decided upon before-hand by the Board having regard to the
directions, if any, given in this regard by such company in the general meeting. ―National
Holiday‖ for this purpose means and includes a day declared as national holiday by the Central
Government.
Penalty for Default in Holding the Annual General Meeting [Section 99]

Section 99 provides that if any default is made in complying or holding a meeting of the
company, the company and every officer of the company who is in default shall be punishable
with fine which may extend to one lakh rupees and in case of continuing default, with a further
fine which may extend to five thousand rupees for each day during which such default continues.
If any default is made in holding the annual general meeting of a company, any member of the company
may make an application to the Tribunal to call or direct the calling of, an annual general meeting of the
company and give such ancillary or consequential directions as the Tribunal thinks expedient. Such
directions may include a direction that one member of the company present in person or by proxy shall be
deemed to constitute a meeting.

Business to be Transacted at Annual General Meeting

Section 102(2)(a) provides that all other businesses transacted at an Annual General Meeting
except the following are special business:
(i) the consideration of financial statements and the reports of the Board of Directors and
auditors;
(ii) the declaration of any dividend;
(iii) the appointment of directors in place of those retiring;
(iv) the appointment of, and the fixing of the remuneration of, the auditors.
Explanatory statement is not required for transacting any item of ordinary business. All
business except specified above shall be deemed as special business at an AGM.
In case of any other meeting, all business shall be deemed to be special. Explanatory statement must be
annexed to the notice for transacting every items of special business. In case of non-disclosure or
insufficient disclosure in explanatory statement, any benefit accrues to a promoter, director, manager or
other key managerial personnel or their relatives, such person shall hold such benefit in trust for the
company, and shall compensate the company to the extent of benefit derived by him.

Report on Annual General meeting (Section 121)

Section 121 of the Companies Act, 2013 provides the preparation of report on each annual
general meeting which is to be filed with the Registrar.
(1) Report to be Prepared by the Listed Public Company: Every listed public company is
required to prepare a report on each annual general meeting including the confirmation to
the effect that the meeting was convened, held and conducted as per the provisions of the
Act and the rules made thereunder.
(2) Filing of the Report with the Registrar: A copy of the report is to be filed with the
Registrar in Form No. MGT. 15 within thirty days of the conclusion of annual general
meeting along with the prescribed fee or with such additional fees as may be prescribed,
within the time as specified, under section 403.
(3) Default in Filing of the Report: If the company fails to file the report before the expiry
of the period specified under section 403 with additional fee, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend
to five lakh rupees and every officer of the company who is in default shall be punishable
with fine which shall not be less than twenty-five thousand rupees but which may extend
to one lakh rupees.
14.4.2 Extra Ordinary General Meeting (Section 100)

There are so many matters relating to the business of a company, which requires approval or consent of
members in general meeting. It is always not possible for consideration of such matters to wait until the
next annual general meeting. The articles of association of the company make provisions for convening
general meeting other than the annual general meeting. All general meetings other than annual general
meeting are called extraordinary general meetings.
Following are the key provisions, provided in section 100, regarding calling and holding of an
extraordinary general meeting:
(1) By the Board Suo motu [Section 100 (1)]: The Board may, whenever it deems fit, call
an extraordinary general meeting of the company, as per SS-2 such EGM may be held at
any place within India.
(2) By Board on Requisition of Members [Section 100 (2)]:The Board shall, call an
extraordinary general meeting on receipt of the requisition from the following number of
members:
(a) in the case of a company having a share capital: Members who hold, on the
date of the receipt of the requisition, not less than one-tenth of such of the paid-
up share capital of the company as on that date carries the right of voting;
(b) in the case of a company not having a share capital: Members who have, on
the date of receipt of the requisition, not less than one-tenth of the total voting
power of all the members having on the said date a right to vote.
Matter Set Out for Consideration in Requisition: The requisition made as above, shall set out
the matters for the consideration of which the meeting is to be called and shall be signed by the
requisitionists and sent to the registered office of the company.
Time Period for Calling the Meeting: The Board is required to proceed to call a meeting within
21 days from the date of receipt of a valid requisition, to convene a meeting which should be
held within 45 days of such deposit of the requisition with the company.
(3) By Requisitionists [Section 100(4)]
(i) If the Board does not within 21 days from the date of receipt of a valid requisition in
regard to any matter, proceed to call a meeting for the consideration of that matter
on a day not later than 45 days from the date of receipt of such requisition, the
meeting may be called and held by the requisitonists themselves. However in such
case, the meeting should be held within a period of 3 months from the date of the
requisition.
Such requisition shall not pertain to any item of business that is required to be
transacted mandatorily through postal ballot.
Requisition for Convening of EGM by Members: The members may requisition
convening of an extraordinary general meeting, by providing such requisition in
 writing or through electronic mode at least clear twenty one days prior to the
proposed date of such extraordinary general meeting.
(ii) The notice shall specify the place, date, day and hour of the meeting and shall
contain the business to be transacted at the meeting.
The requistionists should convene meeting at registered office or in the same city or
town where registered office is situated and such meeting should be convened on
working day.
(iii) If the resolution is to be proposed as a special resolution, the notice shall be given as
required by sub-section (2) of Section 114.
(iv) Notice to be Signed: The notice shall be signed by all the requistionists or by a
requistionists duly authorized in writing by all other requistionists on their behalf or
by sending an electronic request attaching therewith a scanned copy of such duly
signed requisition.
(v) No Explanatory Statement Annexed to the Notice: No explanatory statement as
required under section 102 need be annexed to the notice of an extraordinary
general meeting convened by the requistionists and the requistionists may disclose
the reasons for the resolution(s) which they propose to move at the meeting.
(vi) Serving of Notice of the Meeting: The notice of the meeting shall be given to those
members whose names appear in the Register of members of the company within
three days on which the requistionists deposit with the company a valid requisition
for calling an extraordinary general meeting.
(vii) No Meeting Convened: Where the meeting is not convened, the requistionists shall
have a right to receive list of members together with their registered address and
number of shares held and the company concerned is bound to give a list of
members together with their registered address made as on twenty first day from the
date of receipt of valid requisition together with such changes, if any, before the
expiry of the forty-five days from the date of receipt of a valid requisition.
(viii) Mode of Giving Notice: The notice of the meeting shall be given by speed post or
registered post or through electronic mode. Any accidental omission to give notice
to, or the non-receipt of such notice by, any member shall not invalidate the
proceedings of the meeting.
(4) By Tribunal [Section 98]

Section 98 provides that if for any reason it is impracticable to call a meeting of a company or to hold or
conduct the meeting of the company, the Tribunal may, either suo motu or on the application of any
director or member of the company who would be entitled to vote at the meeting:

(a) order a meeting of the company to be called, held and conducted in such manner as the Tribunal
thinks fit; and

(b) give such ancillary or consequential directions as the Tribunal thinks expedient, including
directions modifying or supplementing in relation to the calling, holding and conducting of the
meeting, the operation of the provisions of this Act or articles of the company.

Such directions may include a direction that one member of the company present in person or by proxy
shall be deemed to constitute a meeting. Meeting held pursuant to such order shall be deemed to be a
meeting of the company duly called, held and conducted.

14.4.3 Class Meetings

Meetings of members of a company fall into two broad divisions, namely, general meetings and class
meetings. Class meetings are meeting of shareholders, holding a particular class of share which is held to
pass resolution which will bind only the members of the class concerned. Only members of the class
concerned may attend and vote at meeting. Usually the rules to voting apply to class meetings as they
govern voting at general meetings. These class meetings must be convened whenever it is necessary to
alter or change the rights or privileges of that class as provided by the articles. For effecting such changes,
it is necessary that these are approved at a separate meeting of the holders of those shares and supported
by a special resolution. Under section 48 of the Companies Act, 2013 (variation of shareholders‘ rights)
class meeting of the holders of different classes of shares shall be held if the rights attaching to these
shares are to be varied. Similarly, under Section 232 (Merger and Amalgamation of companies), where a
scheme of arrangement is proposed, meeting of several classes of shareholders and creditors are required
to be held.

14.5 Resolutions
A passed resolution is initially a proposal in question in the meeting which is accepted by members to
make it a resolution. In other words, a ‗Proposed Resolution‘ when passed by requisite majority of votes
by the shareholders becomes a company resolution. There are three types of resolutions that may be
passed in a meeting of a company: ––

1. Ordinary Resolution
2. Special Resolution
3. Resolution Requiring Special Notice
Section 114 relates to Ordinary and Special Resolution.

14.5.1 Ordinary Resolution

 A resolution shall be an ordinary resolution if the notice required under this Act has been
duly given and it is required to be passed by the votes cast, whether on a show of hands, or
electronically or on a poll, as the case may be, in favour of the resolution, including the casting
vote, if any, of the Chairman, by members who, being entitled so to do, vote in person, or where
proxies are allowed, by proxy or by postal ballot, exceed the votes, if any, cast against the
resolution by members, so entitled and voting.
14.5.2 Special Resolution

A resolution shall be a special resolution when:

(a) the intention to propose the resolution as a special resolution has been duly specified in
the notice calling the general meeting or other intimation given to the members of the
resolution;
(b) the notice required under this Act has been duly given; and
(c) the votes cast in favour of the resolution, whether on a show of hands, or electronically or
on a poll, as the case may be, by members who, being entitled so to do, vote in person or
by proxy or by postal ballot, are required to be not less than three times the number of the
votes, if any, cast against the resolution by members so entitled and voting.
If the notice convening the meeting (where at special business will be transacted) does not
state the nature of the special business, the meeting would be deemed to have been
convened irregularly. Consequently, that special business cannot be dealt with at the
meeting.
14.5.3 Resolutions Requiring Special Notice (Section 115)
Section 115 provides that where, by any provision contained in this Act or in the articles
of a company, special notice is required of any resolution, notice of the intention to move such
resolution shall be given to the company by such number of members holding not less than 1%
of total voting power or holding shares on which such aggregate sum not exceeding ₹ 5,00,000/-
as may be prescribed has been paid-up and the company shall give its members notice of the
resolution in the following manner as prescribed in Rules.
Provisions Contained in the Act Requiring Special Notice
The matters in respect of which special notice is required are:
(a) A resolution for appointment of a person as auditor at the annual general meeting other
than the retiring auditor for providing expressly that the retiring auditor shall not be re-
 appointed [Section 140(4)];
(b) A resolution for removing a director before the expiry of the period of his office and
appointing someone in the place of the director so removed [Section 169(2)].
Procedure for Special Notice

(A) Signing of Special Notice: A special notice required to be given to the company shall be
signed, either individually or collectively by such number of members holding not less
than one percent of total voting power or holding shares on which an aggregate sum of
not more than five lakh rupees has been paid up on the date of the notice.
(B) Sending of Notice to the Company: Such notice shall be sent by members to the
company not earlier than three months but at least 14 days before the date of the meeting
at which the resolution is to be moved, exclusive of the day on which the notice is given
and the day of the meeting.
(C) On Receipt of Notice by the Company: The company shall immediately after receipt of
the notice, give its members notice of the resolution at least seven days before the
meeting, exclusive of the day of dispatch of notice and day of the meeting, in the same
manner as it gives notice of any general meetings.
(D) Publication of Notice: Where it is not practicable to give the notice in the same manner
as it gives notice of any general meetings, the notice shall be published in English
language in English newspaper and in vernacular language in a vernacular newspaper,
both having wide circulation in the State where the registered office of the company is
situated. Such notice shall also be posted on the website, if any, of the company. Such
notice shall be published at least seven days before the meeting, exclusive of the day of
publication of the notice and day of the meeting.
Resolutions Passed at Adjourned Meeting
As per Section 116 where a resolution is passed at an adjourned meeting of a company;
or the holders of any class of shares in a company; or the Board of Directors, the resolution shall
be treated as passed on the day it was actually passed and not on any earlier date.
Resolutions and Agreements to be Filed With the Registrar
Section 117 provides that a copy of every resolution and an agreement in respect of
matters specified therein together with the explanatory statement shall be filed in Form No.
MGT.14 with the registrar within thirty days of its passing. The registrar shall register the same
and in case of any default, a company and every officer who is in default including the liquidator
shall be punishable with fine which shall not be less than one lakh rupees but which may extend
to five lakh rupees.
Resolutions and agreements to be filed with the Registrar are as under:

(a) special resolutions;

(b) resolutions which have been agreed to by all the members of a company, but which, if not
so agreed to, would not have been effective for their purpose unless they had been passed
as special resolutions;
(c) any resolution of the Board of Directors of a company or agreement executed by a
company, relating to the appointment, re-appointment or renewal of the appointment, or
variation of the terms of appointment of a managing director;
(d) resolutions or agreements which have been agreed to by any class of members but which,
if not so agreed to, would not have been effective for their purpose unless they had been
passed by a specified majority or otherwise in some particular manner; and all resolutions
or agreements which effectively bind such class of members though not agreed to by all
those members;
(e) resolutions passed by a company according consent to the exercise by its Board of
Directors of any of the powers under clause (a) and clause (c) of sub-section (1) of
section 180;
(f) resolutions requiring a company to be wound up voluntarily passed in pursuance of
section 59 of the Insolvency and Bankruptcy Code;
(g) resolutions passed in pursuance of sub-section (3) of section 179 provided that no person
shall be entitled under Section 399 to inspect or obtain copies of such resolutions (This
sub-clause is not applicable to private companies vide exemption notifications dated 5th
June, 2015); and
(h) any other resolution or agreement as may be prescribed and placed in the public domain.
14.6 Summary
Companies often encompass through problems and various decisions are taken to resolve them out. Some
decisions are taken at individual level but some of them require consensus of majority. Company
meetings are conducted to get either consent or denial on the subject involving board of directors, other
staff, and shareholders etc. As a lay man, we can say meeting means gathering of person to ponder over
subject in question. Company may hold different type of meetings which are Shareholders Meetings,
Annual general Meeting, Extraordinary General Meeting, Class Meeting, Board Meetings, Meetings of
Debenture Holders, and Meeting of Creditors. All general meetings conducted other than the annual
general meetings are known as extraordinary general meetings. At times it is impracticable to call or
conduct an extraordinary general meeting. The Company Law Board (Tribunal) may call or conduct the
meeting. Class meeting means a meeting of one particular class of shareholders.

When people in the meeting give their consensus by majority to do or to abstain the act in question, it is
said that resolution is passed. The Companies Act provides three kinds of resolutions that can be passed at
the general meeting of a company, i.e. (a) Ordinary resolution; (b) Special resolution; and (c) Resolution
requiring special notice. A resolution shall be called an ordinary resolution if the vote casted in favour of
the resolution exceeds the votes in against. Special resolution is passed by the ¾ majority of the members
present in the meeting.

14.7 Keywords
Agenda: An agenda means the business to be transacted the meeting. The notice must contain
agenda of the meeting.

Quorum: It means the minimum number of members who must be present at a meeting as per rules
or law.

Proxy: A proxy is a person who is representative of a member for purpose of voting.

Minutes: It means record of proceedings of a meeting.

Resolution: A passed resolution is initially a proposal in question in the meeting which is accepted by
members to make it a resolution.

14.8 Self Assessment Questions

1. What are the items that constitute ordinary business in an Annual General Meeting of a company?

2. Who shall be chairman of a general meeting of a company? What are the provisions of the
Companies Act, 2013 regarding his election?

3. Every Annual General Meeting of a company shall be called on a day which is not a National
holiday. Can an adjourned Annual General Meeting of a company be called on a National
holiday?

4. A shareholder having given proxy, personally attends and votes at the meeting. Comment.

5. What are the provisions of the Companies Act, in regard to the holding of a Extra Ordinary
General Meeting?

6. Write short notes on:

(i) Proxy; (ii) Special Business; (iii) Quorum; (vi) Scrutinizer.

7 What are the consequences for not calling annual general meeting?
8. Explain the requisites of a valid meeting.

9. Explain different types of resolutions. When and how can they be passed? When notice be given for
them?

14.9 Suggested Readings

1. P.P.S. Gogna, Mercantile Law, S. Chand & Company, New Delhi.
2. N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.
3. S.C. Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi.
4. S. S. Gulshan and G. K. Kapoor, Business Law including Company Law, New Age
International Publishers, New Delhi.
5. K.R. Balchandari, Business Law for Management, Himalaya Publication House, New
Delhi.
LESSON -16 CONSUMER PROTECTION ACT
Structure
16.0 Objectives

16.1 Introduction

16.2 Consumer: Meaning

16.3 Why Consumerism

16.4 Consumer Protection Act, 1986

16.4.1 Need of Consumer Protection Act

16.4.2 Features of Consumer Protection Act

16.4.3 Objects of Consumer Protection Act

16.5 Consumer Dispute

16.5.1 Complaint

16.5.2 Complainant

16.6 Consumer Protection Councils

16.7 Consumer Dispute Redressal Forums

16.7.1 Composition of the District Forum

16.7.2 Composition of the State Commission

16.7.3 Composition of the National Commission

16.8 Summary

16.9 Key words

16.10 Check Your Progress

16.11 Answers to Check Your Progress

16.12 Self-assessment Questions

16.13 References/Suggested Readings

16.0 OBJECTIVES
After studying this unit, you should be able to:

 Explain the consumer protection council.

 Explain the various rights of the consumers.

 Understand the three-tier consumer disputes redressal structure.

 Describe the composition, jurisdiction and redressal procedures.
16.1 INTRODUCTION
Everyone has to buy variety of goods and services in their day to day life. Whatever they buy they pay for
it and derive satisfaction from its consumption and use. But sometimes it may happen that they may not
feel satisfied with the product they buy. This may be on account of poor quality of the product,
overcharging by the shopkeeper, lower quality of contents, misleading advertisement, and so on. It is the
matter of great concern whether this practice should be allowed to be continued? If not, then is there any
remedy for such malpractice? The answer lies in the concept of consumerism and consumer protection.
Consumerism is a battle against this exploitation. It is the collective endeavor of the consumers to protect
their interests. It is a means of ascertaining their rights against the sellers. It is a social force to make
businesses more honest, efficient and responsible. It also pressurizes the Government to adopt necessary
legal measures to protect the interests of the consumers. It is basically a protest movement. It is generally a
non-official movement initiated by the public and voluntary consumer organizations.

Consumerism has been defined by various authors differently:

Marketing Guru Philip Kotler has defined the term consumerism as ‗a social movement seeking to
augment the rights and powers of the buyers in relation to sellers‘.

This definition clearly lays down that consumerism is a socialistic activity associated with entrusting rights
and power to the buyer against the seller so that apart from examining legal check, moral checks can also
be exercised.
Mrs. Virginia K, Knauer says consumerism may simply be expressed as ‗Let the seller beware‘ in
comparison to the age-old caveat emptor or ‗Let the buyer beware.‘
The definition is not an exhaustive one and does not clearly specify any special characteristics of
consumerism. It just lays impression about the legal aspect of caveat emptor.
The comprehensive and elaborate definition is one given by Craven and Hill which reads as
‗Consumerism is a social force within the environment designed to aid and protect the consumers by
exerting legal, moral and economic pressures on business‘.

This definition clearly specify the various constituents of consumerism which may be summed as social
forces acting within the business environment and which are air designed to protect and aid the customers
by means of legal, moral and economic forces.

16.2 CONSUMER: MEANING

In general terms consumer is a person which consumes or uses any goods and services. Goods may be
consumables like wheat, flour, salt, sugar, fruits etc. or durable items like television, refrigerator, toaster,
mixer etc. services refer to items like electricity, cooking gas, telephone, transportation etc. normally, it is
the consumption or use of goods and services that makes the person to be called as ―consumer‖. But in the
eyes of law, both who buy any goods or hires any services for consideration (price) and the one who uses
such goods and services with the approval of the buyer are termed as consumers. For example, if a person
buys certain goods and it is consumed by certain other person, the person buying as well as the person
consuming is treated as the consumers. Even in case of services, the buyer whether he buys it for himself
or for the consumption of some other person is treated as the consumer.

Under the consumer protection act 1986, the word consumer has been defined separately for the purpose of
goods and services.

For the purpose of goods a consumer means (i) one who buys any goods and consideration; and (ii) any
user of such goods other than the person who actually buys it, provided such use is made with the approval
of the buyer.

(The expression ―consumer‖ does not include a person who obtains such goods for resale or for any
commercial purpose)

For the purpose of services, a consumer means (i) one who hires any service or services for consideration;
and (ii) any beneficiary of such service(s) provided the service is availed with the approval of such person.

16.3 WHY CONSUMERISM

Exploitation of the consumer has been observed all around. They are not only subject to the exploitation of
private sector enterprises but also the exploitation of public sector enterprises like nationalized commercial
banks, State Electricity Boards, Telephone Departments etc. Although much legislation has been passed
from time to time but despite of a number of laws passed to protect the interests of the Indian consumers,
they are not aware of their rights.

Therefore, the need for consumerism or consumer protection has arisen because of the exploitation of
consumers by the business community. Most of the consumers often become the victims of adulterated,
spurious, hazardous, duplicate and substandard goods as well as incorrect weights and measurements. By
resorting to unethical, false and misleading advertisements, businesses make quick money at the cost of
consumers.

Mr. T. Thomas, Chairman of Hindustan Unilever Ltd., in his speech delivered at the 44th Annual General
Meeting of the Company rightly pointed out: ‗While the producer has the power or the right to design the
product, distribute, advertise and price it, the consumer has only the power of not buying it. One may argue
that the producer runs the greater risk inspite of having several rights because the veto power remains with
the consumers. However, the consumer often feels that while he has the power of veto, he is not always
fully equipped to exercise that power in his best interest. ‗This problem facing the consumer has led to
consumerism‘.

In many developed countries, consumers enjoy more protection as compared to Indian consumers.
Inspite of the various price control measures, the traders in India adopt their own dubious methods to get
still higher prices. Even educated people are cheated by businesses in a sophisticated way. Thus, the
various problems faced by the consumers led to the growth of consumerism.

16.4 CONSUMER PROTECTION ACT, 1986

With the view of protecting or safeguarding the interest of the consumers and in view of undesirable and
unfair trade practices being followed by businesses, Government has enacted certain legislations. These
legislations are mainly designed to control production, supply, distribution, price and quality of a large
number of goods and services. Among the various legislative measures one of the important legislative
measures is Consumer Protection Act 1986. This act provides for consumer protection more
comprehensively than any other law. Consumer seek legal remedy for a wide range of unfair practices not
only with respect to goods but also for deficiency in services like banking, insurance, financing, transport,
telephone, supply of electricity or other energy, housing, boarding and lodging, entertainment, amusement,
etc. This act also includes provisions for the establishment of consumer protection council at the centre and
the state. For the settlement of the consumer disputes, the Act has provided for semi-judicial system. It
consists of district forum, state commission and national commission for redressal of consumer disputes.
These may be regarded as consumer courts.

The Consumer Protection Act, 1986 is the most powerful piece of legislation the consumer has had to date.
It is the only legislation which directly pertains to the market place, and seeks to redress complaints arising
from it. It provides an effective protection to consumers against unfair trade practices, unsatisfactory
services and defective goods. The objective of the Act is to provide better protection to the interest of
consumers, by the establishment of consumer councils and other authorities for the settlement of
consumer‖s disputes and for matters connected therewith. The Act extends to the whole of India except the
State of Jammu and Kashmir.
16.4.1 NEED OF CONSUMER PROTECTION ACT

The necessity of adopting measures to protect the interest of consumers arises mainly due to the helpless
position of the consumers. There is no denying fact that the consumers have the basic right to be protected
from the loss or injury caused on account of defective goods and deficiency of services. But they hardly
use their rights due to lack of awareness, ignorance and lethargic attitude. However in view of the
prevailing malpractices and their vulnerability there to, it is necessary to provide them physical safety,
protection of economic interests, access to information, satisfactory product standard and statutory
measures for redressal of their grievances. The other main arguments in favour of consumer protection are
as follows:
1. Social Responsibility: The business must be guided by social and ethical norms it is the moral
responsibility of the business to serve the interest of the consumer. Keeping line with this principle,
it is the duty of produces and traders to provide right quality and quantity of goods at fair prices to
the consumers.
2. Increasing Awareness: The consumers are becoming more mature and conscious of their rights
against the malpractices by the business. There are many consumer organisation and association
who are making efforts to build consumer awareness. Taking up their cases at various level and
helping them to enforce their rights
3. Consumer Satisfaction: Father of nation Mahatma Gandhi had once given a call to manufactures
and traders to ‗treat your customers as god‘. Consumers‖ satisfaction is the key to success of
business. Hence, the businessmen should take every step to serve the interests of consumers by
 providing them quality goods and services at reasonable price.
4. Principles of Social Justice: Exploitation of consumers is against the directive principles of state
policy as laid down by the constitution of India. Keeping in line with this principle, it is expected
from the manufacturers, traders and services providers to refrain from malpractices and take care of
consumers‖ interest.
5. Principle of Trusteeship: According to Gandhian philosophy, manufactures and producers are not
the real owner of the business. Resources are supplied by the society. They are merely the trustees
of the resources and therefore, they should use such resources effectively for the benefit of the
society, which includes the consumers.
6. Survival and Growth of Business: The business has to serve consumer interests for their own
survival and growth on account of globalization and increased competition, any business
organisation which indulges in malpractices or fails to provide improved services to their ultimate
consumer shall find it difficult to continue. Hence, they must in their own long-run interest,
become consumer oriented.
16.4.2 FEATURES OF CONSUMER PROTECTION ACT

I) It covers all the sectors whether private, public, and cooperative or any person. The provisions of
the Act are compensatory as well as preventive and punitive in nature and the Act applies to all
goods covered by Sale of Goods Act and services unless specifically exempted by the Central
Government;
(II) It enshrines the following rights of consumers:
(a) right to be protected against the marketing of goods and services which are hazardous to life
and property; (b) right to be informed about the quality, quantity, potency, purity, standard and
price of goods or services so as to protect the consumers against unfair trade practices; (c) right to
be assured, wherever possible, access to a variety of goods and services at competitive prices; (d)
right to be heard and to be assured that consumers‖ interests will receive due consideration at the
 appropriate fora; (e) right to seek redressal against unfair trade practices or unscrupulous
exploitation of consumers; and (f) right to consumer education;
(III) The Act also envisages establishment of Consumer Protection Councils at the central, state and
district levels, whose main objectives are to promote and protect the rights of consumers; (v) To
provide a simple, speedy and inexpensive redressal of consumer grievances, the Act envisages a
three-tier quasi-judicial machinery at the national, state and district levels. These are: National
Consumer Disputes Redressal Commission known as National Commission, State Consumer
Disputes Redressal Commissions known as State Commissions and District Consumer Disputes
Redressal Forum known as District Forum; and
(IV) The provisions of this Act are in addition to and not in derogation of the provisions of any other
law for the time being in force.
16.4.3 SCOPE OF THE CONSUMER PROTECTION ACT, 1986

The Consumer Protection Act, 1986 was enacted for better protection of the interests of consumers. The
provisions of the Act came into force with effect from 15-4-87. Consumer Protection Act imposes strict
liability on a manufacturer, in case of supply of defective goods by him, and a service provider, in case of
deficiency in rendering of its services. The term ‗defect‘ and ‗deficiency‘, as held in a catena of cases, are
to be couched in the widest horizon of there being any kind of fault, imperfection or shortcoming.
Furthermore, the standard, which is required to be maintained, in services or goods is not to be restricted to
the statutory mandate but shall extend to that claimed by the trader, expressly or impliedly, in any manner
whatsoever.
Who is a Consumer for the Purpose of This Act?

Any person who buys any goods for a consideration (payment in cash or kind) is a ‗Consumer‘ as defined
under the Consumer Protection Act. But, a person who obtains such goods ‗for resale or for any
commercial purpose‘ is not a consumer. As a result, he cannot approach a consumer dispute redressal
agency alleging any defects in the goods he has purchased.
What is a Commercial Purpose?

When any goods are purchased with a view to use the same ‗for carrying on any activity on large-scale, for
the purpose of earning profit‘, it is a purchase for commercial purpose. This has been the consistent view
taken by the National Consumer Disputes Redressal Commission.
 In other words, if the goods purchased are used for a ‗large-scale‘ business activity intended ‗to earn
profit‘, the purchaser is not a consumer.
Meaning of Goods

The term ‗goods‘ in the Consumer Protection Act, has the same meaning as found in the Sale of Goods
Act, 1930. It defines goods as ‗every kind of movable property other than actionable claims and money;
and includes stocks and shares, growing crops, grass, and things attached to or forming part of the land,
which are agreed to be severed before sale or under the contract of sale‘.

In short, all movable goods which are capable of being sold are goods under the Consumer Protection
Act. Immovable goods such as land and things attached to it or embedded in it, which cannot be severed
from it, are not goods for the purpose of the Consumer Protection Act. Wood, crops, grass etc., which are
attached to the earth become goods when they are cut and severed from it.

A person who buys any goods for consideration is a consumer. If immovable properties are not
goods, the purchaser of such properties is not a consumer.
Services

A Consumer can also complain about deficiency of any services hired. Deficiency has been defined as
fault, imperfection, short-coming or inadequacy in the quality, nature or ―manner of performance‖, which is
required to be maintained by law. This term ―manner of performance‖ can be interpreted liberally.
According to the authoritative opinion, under the existing law, public utility services are to be performed
efficiently, economically, and on sound business principles. Thus, if a consumer has a complaint against
the Road Transport Corporation or Indian Railways, he can complain under this Act by alleging that the
performance is not upto the standards as prescribed by law.

Services include banking, financing, insurance, transport, processing, supply of electricity or other
types of energy, boarding or lodging, entertainment, amusement and information. Any service supplied free
of charge is not included. Personal services are excluded. Those services rendered by a servant in a master-
servant relations are thus outside the purview of the Act. The Consumer Protection (Amendment)
Ordinance 1993 includes house construction within the definition of services.

16.5 CONSUMER DISPUTE

A complaint, under this Act, does not automatically become a consumer dispute. If the person, against
whom a complaint has been made, denies or disputes the allegations contained in the complaint, it becomes
a consumer dispute.
16.5.1 Complainant

A ―Complainant‖ may be a consumer or any recognized consumer association or the Central or any State
Government.

Thus, the Consumer Protection Act recognizes three categories of complainants who can make a
complaint. It is to be noted that the Government need not be a consumer as defined in the Act, but can still
make a complaint.
16.5.2 Complaint

Under this Act, a ―Complaint‖ means any allegation in writing made by a complainant in regard to one or
more of the following:

(1) If the complainant has suffered loss or damage as a result of any unfair trade practice
adopted by any trader.
(2) If the goods delivered to the complainant have one or more defects.
(3) If the service rendered is deficient in any respect.
(4) If the trader charges a price for the goods that exceeds the price fixed by or under any
law for the time being in force or displayed on the goods or displayed on any package
containing such goods.
The consumer can also seek redressal against public services like: roads and their maintenance; public
toilet‖s, sewages and their maintenance; water distribution system; public electricity distribution system;
telephone system; public road transports; pollution control methods; public broadcasting system; medical
facilities etc.

16.6 CONSUMER PROTECTION COUNCILS

The Consumer Protection Act provides that the Central Government and the State Government of the
respective states shall be the responsible authority for the constitution of the Consumer Protection Council
at the centre and each of the state. The Act envisages the establishment of a Central Consumer Protection
Council at the national level by the Central Government and a Consumer Protection Council, at the state
level in each state by the State Government concerned. This Consumer Protection Council shall be
constituted for the promotion and protection of the various consumer rights provided in the Act. The
Minister in-charge of the Department of Food and Civil Supplies in the Central Government is the
Chairman of the Central Council. Apart from the Chairman, the Central Council consists of other officials
and non-official members representing several interests.

The major objectives of the Central Council are to protect the rights of the consumers. John F. Kennedy,
the then President of the USA declared the four basic rights of consumers They are, the right to safety, the
right to be informed, the right to choose and the right to be heard. Later, the International Organization of
Consumers Union added three more rights viz., the right to redress, the right to consumer education and the
right to a healthy environment.

 The Right to Choose: Consumers should be assured, wherever possible of access to a variety of
products and services at competitive prices. Even in a competitive market, consumers should have
an assurance of satisfactory quality and services at fair prices.
 The Right to be Informed: Consumers should be protected against fraudulent, deceitful or
grossly misleading information, advertising, labeling or other practices. They should be provided
with full information concerning the product or service such as the quality and performance
standards, ingredients of the product, operational requirements, freshness of the product, possible
adverse side effects etc. This right also enables consumers to make a better choice and to bargain.
 The Right to Safety: The goods or services used / bought should not be hazardous to the health or
life of consumers. The products available in the market should not bring any physical danger to
them.
 The Right to Redressal: This right ensures compensation to consumers for the loss suffered by
them or injury caused to them by the sellers. In a broader sense, the term ―redress‖ includes all the
means open to consumers to set right the perceived wrongs or to prevent future abuses.
 The Right to be Heard: Consumer should be assured that their interest will receive full and
sympathetic consideration in the formulation of government policy and fair and expeditious
treatment in its administrative tribunals.
 Right to a Healthy Environment: The products or services supplied to the public should not
bring any harmful effect to the physical environment. They should not pollute air or water. They
 should not adversely affect the lives of users as well as non-users. Every consumer has the right to
a healthy environment.
 The Right to Consumer Education: Mere legislative measures will not ensure protection to
consumers. Unless consumers are made aware of their rights and the remedies available to them,
they cannot protect themselves against the unfair and unethical trade practices of unscrupulous
traders. Therefore, consumers should be educated about their rights through consumer education.
Such education can be provided by educational institutions, voluntary organizations and
institutional agencies.
16.7 CONSUMER DISPUTE REDRESSAL FORUMS
The Act envisages the establishment of a three-tier consumer disputes redressal structure consisting of
District Forums at the district level, State Commission at the State level and a National Commission at the
Central level for solving consumer disputes.

Thus the Consumer Disputes Redressal Forums include:

(1) A District Forum in each district.

(2) A State Commission in each State.
(3) A National Commission at the Central level.
It is the responsibility of the State Government to establish a District Forum in each district and a State
Commission at the State level with the prior approval of the Central Government.

The Consumer Protection (Amendment) Ordinance, 1993 empowers the State Governments to establish
more than one District Forum in a District, if it deems fit. The National Commission was set up by the
Central Government in August 1988.
16.7.1 Composition of the District Forum

Each District Forum shall consist of:

(1) A person who is, or has been, or is qualified to be a District Judge, to be nominated by the State
Government, who shall be its president.
(2) A person of eminence in the field of education, trade or commerce.
 (3) A lady social worker.
Thus, the District Forum includes a representative of the judiciary, a person of eminence in education, trade
and commerce and a lady social worker. The inclusion of a woman social worker in the Forum is a
welcome provision. Since housewives are the major shoppers in the market place, especially for non-
durables, it is expected that their problems will now be adequately represented. The term of office of a
member of the District Forum is five years or up to the age of 65 years, whichever is earlier. However,
he/she is not eligible for reappointment.

The proceedings of the District Forum should be conducted in the presence of at least two members, of
whom one should be the President of the Forum. The orders of the Forum should be signed by these two
persons. When there is a difference of opinion among the two, the opinion of the third member should be
sought to make a majority judgment.
Jurisdiction of the District Forum—If the value of the goods or services and the compensation, if any,
claimed does not exceed Rs. 5 lakhs, the District Forum can entertain such complaints.
Time Limit for Filing a Complaint—The complainant should make his complaint to the Forum /
Consumer Court within one year from the date of the cause of action.
How to File a Complaint—The procedures for filing complaints and seeking redressal are simple and
speedy. There is no fee for filing a complaint and there is no necessity for an advocate. The consumer or
his authorized agent can present the complaint in person or send it by post to the President of the
appropriate Forum / Commission.

Every complaint should contain the following information, either typed or handwritten in English or the
vernacular language:

(1) Complainant's name, description and address.

(2) The name, description and address of the opposite parties, as the case may be, as they can
be ascertained.
(3) The facts relating to the complaint and when and where it arose.
(4) Documents, if any, in support of the allegations contained in the complaint.
(5) The relief that the complainant is seeking.
Procedure for Handling the Complaints Relating to Goods—If the complaint received by the District
Forum relates to goods, it will refer a copy of the complaint to the opposite party mentioned in the
complaint, directing him to give his version of the case within a period of 30 days or such extended period
not exceeding 15 days as may be granted by it.

If the opposite party denies or disputes the allegations mentioned in the complaint, or omits or fails to take
any action to represent his case within the time given by the District Forum, then the District Forum will
proceed to settle the consumer dispute as stated below:

The District Forum will obtain a sample of the goods from the complainant and send it to the appropriate
laboratory to find out whether such goods suffer from the defects alleged in the complaint. Appropriate
laboratories are those laboratories which are recognized by the Central Government or which are
maintained, financed or aided by the Government. The appropriate laboratory should send its report to the
District Forum within a period of 45 days from the receipt of the reference or within such extended period
as may be granted by the District Forum.

The Forum will require the complainant to pay a fee to the appropriate laboratory for carrying out the
necessary test or analysis. The object of this is presumably to discourage frivolous litigation. After
receiving the report from the appropriate laboratory, the Forum will send a copy of the report to the
opposite party and require the opposite party or the complainant to submit in writing his objections with
regard to the report, if any.

Thus, after giving a reasonable opportunity to the complainant as well as the opposite party to present their
views in respect of the report given by the appropriate laboratory, the District Forum will issue an
appropriate order under Section 14 of the Consumer Protection Act. Procedure for handling complaints
relating to goods which do not require laboratory test or if the complaint relates to any service—In this
case, the District Forum will refer a copy of the complaint to the opposite party, directing him to give his
version of the case within a period of 30 days or such extended period not exceeding 15 days as may be
granted by the District Forum. If the opposite party denies or disputes the allegations mentioned in the
complaint, or omits or fails to take any action to represent his case within the time given by the District
Forum, it will settle the consumer dispute on the basis of the evidence brought to its notice by the
complainant.

For the purpose of handling the complaint the District Forum is vested with all the powers of a Civil Court.
16.7.2 Composition of the State Commission

Each State Commission shall consist of:

(1) A person who is or has been a Judge of a High Court, appointed by the State Government, who
 shall be its President and
(2) Two other members who shall be persons of ability, integrity and standing and have adequate
knowledge or experience of or have shown capacity in dealing with problems relating to economics,
law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a
woman.
Jurisdiction of the State Commission—The State Commission can entertain complaints where the value
of the goods or services and compensation claimed, if any, exceeds Rs. 5 lakhs but does not exceed Rs. 20
lakhs. The State Commission will also entertain appeals against the orders of any District Forum within
the Sate.

Further, the Act empowers the State Commission to call for the records and pass appropriate orders in any
consumer dispute which is pending before or has been decided by any District Forum within the State,
where it appears to the State Commission that such District Forum has exercised a jurisdiction not vested
in it by law, or has failed to exercise a jurisdiction so vested, or has acted in exercise of its jurisdiction
illegally or with material irregularity.
Procedure for Handling Complaints- State Commission—The procedure for handling the complaint
followed by the State Commission is similar to that of the District Forum. Any person aggrieved by the
order of the State Commission can make an appeal to the National Commission within a period of 30 days
from the date of the order.
16.7.3 Composition of the National Commission

The National Commission shall consist of:

(1) a person who is or has been a Judge of the Supreme Court, to be appointed by the Central
Government, who shall be its President and
(2) Four other members who shall be persons of ability, integrity and standing and have adequate
knowledge or experience of or have shown capacity in dealing with, problems relating to
economics, law, commerce, accountancy, industry, public affairs or administration, one of whom
shall be a woman.
Jurisdiction of the National Commission—The National Commission will entertain complaints where
the value of the goods or services and compensation claimed, if any, exceeds Rs. 20 lakhs. It will also
entertain appeals against the orders of any State Commission. The Commission is empowered to call for
the records and pass appropriate orders in any consumer dispute which is pending before or has been
decided by any State Commission, where it appears to the National Commission that such State
Commission has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so
vested, or has acted in the exercise of its jurisdiction illegally or with material irregularity.
Procedure for Handling Complaints - National Commission — The procedure for handling the
complaint followed by the National Commission is similar to that of the District Forum. In the disposal of
any complaint or of any proceedings before it, the Commission will have all the powers of a Civil Court.

Any person aggrieved by the order of the National Commission can make an appeal against such an order
to the Supreme Court within a period of 30 days from the date of the order.
What is the Relief Available?

Depending on the nature of relief sought and the facts pertaining to the issue, the Redressal Forums may
pass orders for one or more of the following:

(1) Removal of the defects and deficiencies from the goods and services.
(2) Replacement of the goods with new goods of similar description.
(3) Refund of the price paid or the charges paid.
(4) Award of compensation for the loss or injury suffered by the consumer due to the negligence of
the opposite party.
Failure to comply with the order of the District Forum, the State Commission, or the National Commission
has been made punishable with imprisonment for any term not exceeding three years or with fine not
exceeding Rs. 10,000 or with both.
Time Limit for Disposing of a Complaint

The statutory time limit for disposing of a complaint is 90 days from the date of filing of case. But
complaints are pending for more than three years in many Consumer Courts. For instance, since
1989, only three percent of the total cases filed in all Consumer Courts in Tamil Nadu have been
disposed of within the time period.

16.8 SUMMARY
The Consumer Protection Act, 1986 was enacted for better protection of the interests of consumers. The
provisions of the Act came into force with effect from 15-4-87. Consumer Protection Act imposes strict
liability on a manufacturer, in case of supply of defective goods by him, and a service provider, in case of
deficiency in rendering of its services. It covers all the sectors whether private, public, and cooperative or
any person. The provisions of the Act are compensatory as well as preventive and punitive in nature and
the Act applies to all goods covered by sale of goods Act and services unless specifically exempted by the
Central Government. It enshrines the various rights of consumers like right to be protected, right to be
informed, right to be assured, right to be heard, right to seek redressal against unfair trade practices or
unscrupulous exploitation of consumers; and right to consumer education. The Act also envisages
establishment of Consumer Protection Councils at the central, state and district levels, whose main
objectives are to promote and protect the rights of consumers. Under the Consumer Protection Act,
Consumer Forums at the District, State and National level have been specifically constituted to adjudicate
claims of consumers for any ‗defect‘ in goods.

On arriving at a finding of defect in the goods according to Section 14 of Consumer Protection Act, the
jurisdictional Consumer Forum may direct one or more of the pronouncements. There exists no clear
pronouncement of the Supreme Court (the apex court in India) till date on whether the liability under the
CPA is strict or fault based. However, failure to conform to the standards required under any law, contract
or representations of the trader are sufficient to constitute a defect.

According to CPA ,where a trader or the complainant fails to comply with an order made by the relevant
consumer forum , such person is liable to a punishment with imprisonment for a term which is not less than
one month but which may extend to three years or with fine of not less than two thousand rupees but which
may extend to ten thousand rupees or with both

Today the consumers are very well aware about their rights and hence the protection of their rights is the
need of the hour. The Consumer Protection Act has thus provided for the establishment of a Central
Consumer Protection Council at the national level by the Central Government and a Consumer Protection
Council, at the State level in each State by the State Government concerned. The Minister in charge of the
Department of Food and Civil Supplies in the Central Government is the Chairman of the Central Council.
The Council also consists of other officials and non-official members representing several interests. The
major objectives of the Central Council are to protect the rights of the consumers. The Act envisages the
establishment of a three-tier consumer disputes redressal structure. The Consumer Disputes Redressal
Forums includes A District Forum in each district, A State Commission in each State and A National
Commission at the Central level. Each District Forum shall consist of a person who is, or has been, or is
qualified to be a District Judge, to be nominated by the State Government, who shall be its president, a
person of eminence in the field of education, trade or commerce, a lady social worker.
Each State Commission shall consist of a person who is or has been a Judge of a High Court, appointed by
the State Government, who shall be its President and two other members who shall be persons of ability,
integrity and standing and have adequate knowledge or experience. The State Commission can entertain
complaints where the value of the goods or services and compensation claimed, if any, exceeds Rs. 5 lakhs
but does not exceed Rs. 20 lakhs. The State Commission will also entertain appeals against the orders of
any District Forum within the Sate.

The National Commission shall consist of a person who is or has been a Judge of the Supreme Court, to be
appointed by the Central Government, who shall be its President and four other members who shall be
persons of ability, integrity and standing and have adequate knowledge or experience The National
Commission will entertain complaints where the value of the goods or services and compensation claimed,
if any, exceeds Rs. 20 lakhs. It will also entertain appeals against the orders of any State Commission.

16.9 KEY WORDS

Consumer: For the purpose of goods a consumer means one who buys any goods and consideration; and
any user of such goods other than the person who actually buys it, provided such use is made with the
approval of the buyer. For the purpose of services, a consumer means one who hires any service or services
for consideration; and any beneficiary of such service(s) provided the service is availed with the approval
of such person.
Commercial Purpose: When any goods are purchased with a view to use the same ‗for carrying on any
activity on large-scale, for the purpose of earning profit‘, it is a purchase for commercial purpose.
Goods: Goods means goods as defined in the Sale of Goods Act, 1930. Under that Act, goods means every
kind of movable property other than actionable claims and money and includes stocks and shares, growing
crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or
under the contract of sale.
Services: Services are the (set of) benefits which are triggerable, consumable and effectively utilizable for
any authorized service consumer and which are rendered to him as soon as he triggers one service. The
description of these benefits must be phrased in the terms and wording of the intended service consumers.
Complainant: A ―Complainant‖ may be a consumer or any recognized consumer association or the Central
or any State Government.
Complaint: Under the Consumer Protection Act, a ―Complaint‖ means any allegation in writing made by a
complainant in regard to one or more of the things provided under the Act.
Consumer Dispute: Consumer dispute means dispute where the person against whom a complaint has
been made, denies or disputes the allegation contained in the complaint.
Consumer Protection Council: Consumer Protection Council shall be the appropriate authority
constituted for the promotion and protection of the various consumer rights provided in the Act by the
Centre at the National level and State Government at each of the state.
Consumer Rights: The right to safety, the right to be informed, the right to choose and the right to be
heard, the right to redress, the right to consumer education and the right to a healthy environment are the
various consumer rights which has been incorporated under the Act for the benefit and in the interest of the
consumers.
District Forum: District Forum shall consist of a person who is, or has been, or is qualified to be a District
Judge, to be nominated by the State Government, who shall be its president, a person of eminence in the
field of education, trade or commerce, a lady social worker.
National Commission: The National Commission will entertain complaints where the value of the goods
or services and compensation claimed, if any, exceeds Rs. 20 lakhs. It will also entertain appeals against the
orders of any State Commission.
Redress: In a broader sense, the term ―redress‖ includes all the means open to consumers to set right the
perceived wrongs or to prevent future abuses.
State Commission: State Commission shall consist of a person who is or has been a Judge of a High
Court, appointed by the State Government, who shall be its President and two other members who shall be
persons of ability, integrity and standing and have adequate knowledge or experience. The State
Commission can entertain complaints where the value of the goods or services and compensation claimed,
if any, exceeds Rs. 5 lakhs but does not exceed Rs. 20 lakhs. The State Commission will also entertain
appeals against the orders of any District Forum within the Sate.

16.10 CHECK YOUR PROGRESS

Check Your Progress A (Fill in the Blanks)

1. .................................... is a social force within the environment designed to aid and protect the
consumers by exerting legal, moral and economic pressures on business.
2. ..................................is a person which consumes or uses any goods and services.
3. ................................................. means any allegation in writing made by a complainant in regard to
any unfair trade practice adopted by any trader or service rendered is deficient in any respect etc.
4. The major objectives of the Central Council are to protect the ...................... of the consumers.
5. It is the responsibility of the State Government to establish a .............................................. Forum
in each district.

Check Your Progress B (Write True or False against the following)

1. The Consumer Protection Act, 1986 extends to the whole of India.

2. The provisions of the Act came into force with effect from 15-4-87.
3. The Right to Safety ensures compensation to consumers for the loss suffered by them or injury
caused to them by the sellers.
4. The Dsitrict Commission can entertain complaints where the value of the goods or services and
compensation claimed, if any, exceeds Rs. 5 lakhs but does not exceed Rs. 20 lakhs.
5. Any person aggrieved by the order of the National Commission can make an appeal against such
an order to the Supreme Court within a period of 45 days from the date of the order.

16.11 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress A

1. Consumerism, 2. Consumer, 3. Complaint, 4. Rights, 5. District

Check Your Progress B

1. False 2. True 3. False 4. False 5. False

16.12 SELF-ASSESSMENT QUESTIONS

1. Define the term ―consumer‖ and ―consumerism‖. What are the salient features of Consumer
Protection Act 1986?
2. Explain the main provision of Consumer Protection Act 1986 as amended to the date. Has the Act
been able to protect the right and interests of the consumers?
3. What is the basic consumer right enshrined in the Consumer Protection Act 1986?
4. Give the leading characteristics of Consumer Protection Act 1986.
5. What is the role of Consumer Protection Council?
6. Explain the jurisdiction of a District Consumer Redressal Forum.
7. Explain the revisional jurisdiction of a State Commission or National Commission
8. What do you mean by consumerism?
9. Why is consumerism needed?
10. Who is a consumer?
11. Give the leading characteristics of Consumer Protection Act 1986.
12. What is the role of Consumer Protection Council?
13. Explain the jurisdiction of a District Consumer Redressal Forum.
14. Explain the revisional jurisdiction of a State Commission or National Commission.
16.13 REFERENCES/SUGGESTED READINGS
1. P.P.S. Gogna, Mercantile Law, S. Chand & Company, New Delhi.
2. N.D. Kapoor, Company Law, Sultan Chand & Sons, New Delhi.
3. S.C. Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi.
4. S. S. Gulshan and G. K. Kapoor, Business Law including Company Law, New Age International
Publishers, New Delhi.
5. K.R. Balchandari, Business Law for Management, Himalaya Publication House, New Delhi.
6. S.K. Aggarwal, Business Law, Galgotia Publishing Company, New Delhi.

7. M. C. Kuchhal and Deepa Prakash, Business Legislation for Management, Vikas Publishing House
Pvt. Ltd., New Delhi.

8. Commercial Law – D.K. Kulshrestra.

9. Business Law – N.D. Kapoor.

10. Business Law – K.R. Bulchandani.

11. Principles of Mercantile Law – Avtar Singh.

12. Student‖s guide to Mercantile & commercial Law – Rohini Aggarwal.

13. Business Law – P.C. Tulsian.

14. "Irda wins Ulip battle". Business Standard. 20 June 2010. http://www.business-
standard.com/india/storypage.php?autono=398840. Retrieved 2010-06-20. 2.
15. http://chdfood.gov.in/Word%20Documents/18C.P.Act.pdf.

16. IRDA Journal.

17. IRDA official website .

18. The IRDA Act 1999.