LEGAL SYSTEM FOR BUSINESS

MODULE - 1

MEANING OF LAW
A system of rules and regulations which a country or society recognizes as binding
on its citizens, which the authorities may enforce, and violation of which attracts
punitive action.
DEFINITION OF LAW
In the words of Salmond, Law is the body of principles recognised and applied by
the state in the administration of justice.

ETHICS AND LAW

Ethics is the minimum standards of appropriate conduct within the legal
profession. It is the behavioral norms and morals which govern judges and
lawyers. It involves duties that the members owe one another, their clients,
and the courts. Respect of client confidences, candor toward the tribunal,
truthfulness in statements to others, and professional independence are
some of the defining features of legal ethics. Legal ethics can also refer to
the study or observance of those duties or the written regulations governing
those duties.
Law is a system of rules created and enforced through social or
governmental institutions to regulate behavior with its precise definition a
matter of longstanding debate.
SOURCES OF LAW
 Customs
 Religion & morality
 Judicial precedents
 Equity
 Scientific commentaries
 Legislation

1) Customs is an established mode of social behavior within a

community. It is one of the main and oldest sources of law in India.
According to Roscoe Pound, customary regulations comprises:

 Law formulated by customs of famous motion

 Law formulated through judicial choice
 Law formulated with the aid of doctrinal writings and clinical
discussions for legal standards
 Ingredients of customs as one of the sources of law in India:
  Antiquity
 Continuous
 Obligatory in nature
 Consistency
 Reasonability
 Peaceful Enjoyment
 Certainty

2) Religion and morality

In ancient times, human beings started to observe and enjoy the

natural powers. This has contributed to the rise of religion and
religious norms in culture. Faith began to control people's actions.
Individuals have been compelled to accept moral rule s through the
fear of the Gods. Religions also formulated and prescribed code of
conduct. Rules of morality have evolved to describe what was good or
right and what was evil or bad. The governments turned certain
spiritual and religious rules into its law.

3) Judicial Precedents

Judicial Precedents lays on the doctrine ‘stare decisis’, it simply

means adhering and relying on earlier decisions made by the courts;
i.e., for instance if high court decides on a particular case and a
similar situation comes to the lower court, the lowe r court will treat
the case alike and pass the judgement same as done by the high court.
This is because the high court has set a precedent for the lower court
and the lower court are bound to follow it.

4) Equity

In the words of Sir Henry Maine, Equity is “anybody of rules existing

by the side of the original civil law, founded on distinct principles
and claiming incidentally to supersede the civil law in virtue of a
superior sanctity inherent in those principles”. It is an “informal
method of making of new law or altering old law, depending on
intrinsic fairness or equality of treatment”.

5) Scieintific commentaries

A scientific commentator, “by collecting, comparing and logically

arranging legal principles, customs, decisions and laws lays down
guiding principles for possible cases. He shows the omission and
deduces principles to govern them. He provides the basis for new
law, not the new law itself.

6) Legislation

The term ‘Legislation’ is derived from the Latin words ‘Legis’

meaning regulation and ‘latum’ which means making. The legislation
is considered as a primary source of law in India, legislation has a
wide ambit and it is used to regulate, authorize, to enable, to provide
funds, to prescribe, to sanction, grant, declare or to restrict. The
legislature is framed by the parliament in the form of new acts, new
laws, repeal and amendment of old laws. The procedure for this is
prescribed in the constitution of India.

So legislation as one of the sources of law is further devided into two

parts :

Supreme legislation: It is the parent law that originates from the

sovereign strength of the nation. It cannot be repealed, annulled or
managed by other legislative authority.

Subordinate Legislation: The subordinate legislation are dependent

on the supreme legislation for their validity and existence.
CLASSIFICATION OF LAWS

There are 2 types of law

Pubic law and private law (civil law)

1) Public Law

Public law is the law that is concerned with the relationship of the
citizens and the state. This consists other different specialist areas
such as constitutional law and administrative law.

Constitutional law ;- It is concerned with Indian constitution. It

covers within its twenty five parts and 25 schedules the composition
and procedures of parliament, the functioning of central and local
govt, citizenship and the fundamental rights and liabilities of a
number of govt agencies.

Administrative law; It is the law that is brought to for better and

convenient administration of the govt and the govt bodies. The
branch of public law concerning with procedures, rules and
regulations of a number of govt agencies.

Examples for public law ;-Criminal law, constitutional law,

Administration law, Taxation law

2) Private Law;- Private law is the law that is predominantly

concerned with the rights and liabilities of individuals towards each
other. The involvement of the states in this area of law is restricted
to providing a proper method of resolving the dispute which has
arisen, therefore, the legal process gets started by t he citizen who is
aggrieved and not by the state. Private law is also known as civil law
and often it is in contrast with criminal laws,

Eg;- Contract law, Property law, Family law, Tort law, Commercial
law.
 NATURAL JUSTICE

natural justice is technical terminology for the rule against bias and
the right to a fair hearing. While the term natural justice is often
retained as a general concept, it has largely been replaced and
extended by the general "duty to act fairly".

The principles of natural Justice means the principle relating to the

procedure to be followed by authorities entrusted with the task of
deciding disputes between the parties when no procedure is laid
down by the rules.

NATUARAL JUSTICE PRINCIPLES;-

1) Nemo debet essc judex in propria caus a

The first principle of impartiality roughly trans lated into English

means nobody shall be a judge in his own cause or in a cause in which
he is interested. This principle is more popularly known as the
Doctrine of Bias. That is the authority sitting in judgment should be
impartial and act without bias. To instill co nfidence in the system,
justice should not merely be done but seen to be done.

2) Audi Alteram Partem

The second principle of natural justice literally means ―to hear the
other side. This is necessary for providing a fair hearing and no do ubt
the rule against bias would also be a part of the procedure. A
corollary has been deduced from the above two rules and particularly
the audi alteram partem rule, namely “qui aliquid statuerit parte
inaudita alteram actquam licet dixerit, haud acquum facerit” that is,
he who shall decide anything without the other side having been
heard, although he may have said what is right, will not have been
what is right‘ or in other words, as it is now expressed, justice should
not only be done but should manifestly be seen to be done‘.
INDIAN JUDICIAL SYSTEM

The Indian judicial system follows the common law system based on
recorded judicial precedents as inherited from the British colonial
legacy. The court system of India comprises the Supreme Court of
India, the High Courts and subordinate courts at district , municipal
and village levels.

1. Supreme Court: It is the Apex court of the country and was

constituted on 28th January 1950. It is the highest court of appeal
and enjoys both original suits and appeals of High Court judgments.
The Supreme Court is comprised of the Chief Justice of India and 25
other judges. Articles 124-147 of the Constitution of India lay down
the authority of the Supreme Court.

2. High Courts: High Courts are the highest judicial body at the State
level. Article 214 lays down the authority of High Courts. There are
25 High Courts in India. High Courts exercise civil or criminal
jurisdiction only if the subordinate courts in the State are not
competent to try the matters. High Courts may even take appeals
from lower courts. High Court judges are appointed by the President
of India upon consultation with the Chief Justice of India, the Chief
Justice of the High Court and the Gover nor of the State.

3. District Courts: District Courts are established by the State

Governments of India for every district or group of districts based on
the caseload and population density. District Courts are under the
direct administration of High Courts and are bound by High Court
judgments. Every district generally has two kinds of courts:

a. Civil Courts

b. Criminal Courts
District Courts are presided over by District Judges. Additional
District Judges and Assistant District Judges may be appointed based
on the caseload. Appeals against District Court judgments lie in the
High Court.

Introduction to Business Law

Business law encompasses all of the laws that dictate how to form
framed by the state in the administration of justice. This include all of
the laws that govern how to start, buy, manage and close or sell any
type of business.
The Indian Contract ACT

The law relating to contracts is contained in the Indian Contract

Act,1872. The Act deals with (1) the general principle of the la w of
contract (secs 1 to 75 ),and (2) some special contracts only (sec.124
to 238).

CONTRACT

A contract is an agreement made between two or more parties which

the law will enforce. Sec 2 (h) defines contract as an agreement
enforceable by law. Every agreement and promise enforceable at law
is a contract.

AGREEMENT

An agreement is defined as every promise and every set of promises,

forming consideration for each other (sec.2(e)). A promise is defined
thus ; When the person to whom the proposal is made sig nifies his
assent thereto, the proposal is said to be accepted. A proposal when
accepted, becomes a promise. In other words , means that an
agreement is an accepted proposal. To form an agreement , there
must be a proposal or offer by one party and its acc eptance by the
other.

Agreement= Offer + Acceptance.

OFFER

A explicit proposal to contract which, if accepted, completes the

contract and binds both the person that made the offer and the
person accepting the offer to the terms of the contract.
TYPES OF OFFER

1) Specific Offer

A specific offer refers to an offer made to a specific individual or

group of individuals. It can only be accepted by the individual or
group of individuals to whom it is directed.

2) General Offer

When an offer is made to the general public, it is called a general

offer and can be taken up by any person who wishes to fulfill the
terms of the offer. When an offer is accepted by the individual to
whom it is directed, the offeror and the offeree enter into a contract.

If the offer is accepted by a large number of people, the number of

contracts formed will be equal to the number of individuals who
accept the offer. If a reward is offered for completing a certain task,
only the person who completes the task can accept the offer.

3) Counter offer

In the event that the offeree is only willing to accept the offer if
certain modifications are made, he or she is offering a counteroffer. A
counteroffer is itself an offer, and it is considered a rejection of the
initial offer. It is a new offer that terminates the initial offer, making
it impossible to be revived at a later time.

A counteroffer can be accepted or rejected by the party who offered

the initial offer. If that party accepts the counteroffer, a contract is
established.

4) Cross Offer

A cross offer is made when two parties make the same offer to one
another without knowing the other party has made an offer, and the
terms of both offers are identical. In this situation, there will not be a
contract because it cannot be construed that one party's offer is
accepted by the other party.

5) Standing Offer

An offer is regarded as a standing offer if it is meant to remain open

for a certain amount of time and can be accepted any time before the
deadline. When a company needs a large quantity of products from
time to time, it usually invites tenders for the supply of the products
through an advertisement. Such a tender or offer is referred to as an
open, continuing, or standing tender of offer.

When a party accepts the tender or offer made by t he offeror, it does

not result in the formation of a legally binding contract until an
actual order is placed. It only means that the offer or tender will
remain open for a specified amount of time and can lead to a binding
contract when the required quantity is ordered. As such, a contract
only exists when an order is placed in accordance with the terms and
conditions of the offer.

6) Express and Implied Offers

When an offer is expressly communicated by the offeror, it is

regarded as an express offer. The communication of an express offer
can be written or verbal. An offer that can be understood by
circumstances of case or the conduct of parties is known as an
implied offer.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

1)There must be two parties;-

promisor’ or ‘offeror’ and ‘promisee’ or ‘offeree’.Offer [Sec2(a)]-when

one person signifies to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent of that other
to such act or abstinence, he is said to make a proposal
Acceptance [Sec 2(b)]- the assent given to a proposal may be
understood as acceptance.

A proposal when accepted becomes a promise.

2. Offer and Acceptance.

In order to create a valid contract, there must be a 'lawful offer' by

one party and 'lawful acceptance' of the same by the other party. Any
contract has to have an offer from one party which has to be accepted
by other party

3. Intention to Create Legal Relationship

This is stated in the definition of the contract. If the parties do not

wish to create a Legal Relationship, there is no necessity of a contract
and hence, it is not considered as a contract at all.

4. Lawful Consideration.

Consideration is something which is paid by the offering party to the

offered party. It may be time, money, know ledge, service etc. Without
a Lawful consideration one cannot fight a case in the court.

5. Capacity of parties.

The parties to an agreement must be competent to contract. If either

of the parties does not have the capacity to contract, the contract is
not valid. According the following persons are incompetent to
contract. (a) Miners, (b) Persons of unsound mind, and (c) persons
disqualified by law to which they are subject.
6. Free Consent.

'Consent' means the parties must have agreed upon the same thing in
the same sense.

Consent is said to be free when it is not caused by -

*Coercion

*Undue influence

*Fraud

*Misrepresentation

*Mistake

An agreement should be made by the free consent of the parties.

7. Lawful Object.

Object has nothing to do with consideration. It means the purpose or

design of the contract. Thus, when one hires a house for use as an
office for an e-Commerce company, the object of the contract is to run
an e-Commerce Company.

The Object is said to be unlawful if - (a) it is forbidden by law; (b) it is

of such nature that if permitted it would defeat the provision of any
law; (c) it is fraudulent; (d) it involves an injury to the person or
property of any other; (e) the court regards it as immoral or opposed
to public policy.

8. Certainty of Meaning.

Agreement the meaning of which is not Certain or capable of being

made certain are void. A poorly drafted agreement which is
ambiguous in nature is not legally valid.

9. Possibility of Performance.
If the act is impossible in itself, physically or legally, if cannot be
enforced at law. For example, Mr. A agrees with B to discover
treasure by magic. Such Agreements is not enforceable. Hence all
agreements need to be physically and legally enforceable.

10. Not Declared to be void

The agreement though satisfying all the conditions for a valid

contract must not have been expressly declared void by any law in
force in the country. For example an agreement to form a cartel to
curb competition is illegal in India.

11. Legal Formalities. An oral Contract is a perfectly valid contract,

except in those cases where writing, registration etc. is required by
some statute. In India writing is required in cases of sale, mortgage,
lease and gift of immovable property, negotiable instruments;
memorandum and articles of association of a company, etc.
Registration is required in cases of documents coming within the
scope of section 17 of the Registration Act.
CLASSIFICATION OF CONTRACTS

On the Basis of Enforceability:

1)Contract: According to Section 2 (h) of the Indian Contract Act,

1872, a contract is an agreement enforceable by law.

2)Voidable Contract: According to Section 2(i), an agreement which is

enforceable by the law at the option of one or more of the parties
thereto, but not at the option of the other, is a voidable contract.

3)Void Contract: According to Section 2(j), a void contract is the one

which ceases to be enforceable by the law.

4)Unenforceable Contract: A contract that is good in substance but

becomes unenforceable because of some techn ical error and
therefore cannot be enforced by the law is an unenforceable contract.

5)Illegal Agreement: When the object and consideration of an

agreement are unlawful, it is said to be an illegal agreement and such
an agreement is void.

On the Basis of Formation:

1)Express Contract: When the terms of the contract are expressly
agreed upon either in words written or spoken, at the time of the
formation of the contract, such an agreement is said to be an express
contract.

2)Implied Contract: An implied contract is the one that is inferred

from the act or conduct of the parties and the circumstances of the
case.

3)Quasi Contracts: Sections 68-72 contained in Chapter V of the

Indian Contract Act, 1872 deal with “Quasi Contracts” or “certain
relations resembling those created by contract”. Such contracts are
created by law on the basis of the principle of equity which states
that a party must not be allowed to enrich itself at the cost of the
other party. In this case, the parties do not have any intention to
enter into any legal obligations but the same is imposed upon them
by the law.

Kinds of Quasi Contracts

1) Claim for necessaries supplied to person incapable of contracting,

or on his account (Section 68) -

" If a person, incapable of entering into a cont ract, or anyone whom

he is legally bound to support, is supplied by another person with
necessaries suited to his condition in life, the person who has
furnished such supplies is entitled to be reimbursed from the
property of such incapable person.

2) Reimbursement of person paying money due by another, in

payment of which he is interested (Section 69) –

A person who is interested in the payment of money which another

is bound by law to pay, and who therefore pays it, is entitled to be
reimbursed by the other.

3) Obligation of person enjoying benefit of non -gratuitous act

(Section 70). -
Where a person lawfully does anything for another person, or
delivers anything to him, not intending to do so gratuitously, and
such another person enjoys the benefit thereof, the letter is bound to
make compensation to the former in respect of, or to restore, the
thing so done or delivered.

4) Responsibility of finder of goods (Section 71) -

A person who finds goods belonging to another, and takes them into
his custody, is subject to the same responsibility as a bailee.

5) Liability of person to whom money is paid, or thing delivered, by

mistake or under coercion (Section 72) -

A person to whom money has been paid, or anything delivered, by

mistake or under coercion, must repay or return it.

On the Basis of Performance:

1)Executed Contract: A contract is said to be executed when both the

parties have performed their respective contractual obligations and
as such nothing is left to be performed.

2)Executory Contract: An executory contract is the one in which

either one or both the parties to the contract have to perform their
respective contractual obligations in a future time. Such a contract is,
therefore, either wholly unperformed or partially performed .
PERFORMANCE OF A CONTRACT (Sec 37)

In legal sense “performance” means the fulfilment or the completion

of the obligations which they have towards the other party by virtue
of the contract entered into by them.

Section 37 of the Contract Act talks about perform ance. According to

the Section, there are two types of performance which are:

1) Actual performance: Actual performance of the contract means the

actual discharge of the liability or obligation which a person has
undertaken to perform and there remains no other task which he is
obliged to discharge under the promise. He is said to have made the
actual performance of the promise.

2) Attempted performance: At times when the performance becomes

due. The promisor is not able to discharge his obligation or perfo rm
his duty because he is prevented by the promisee in doing so. This
situation where the promisor actually intended to perform his
obligation or discharge his duty but is prevented from doing so by an
intervening disability is known as the attempted perfo rmance of a
promise.

According to Section 38, if a valid offer/tender is made and is not

accepted by the promisee, the promisor shall not be responsible for
non-performance nor shall he lose his rights under the contrac t. A
tender or offer of performance to be valid must satisfy the following
conditions:

1. It must be unconditional.

2. It must be made at proper time and place, and performed in the

agreed manner.

PERSONS ENTITLED TO DEMAND PERFORMANCE

1) Promisor - The promise may be performed by promisor himself, or

his agent or by his legal representative.
2) Agent - the promisor may employ a competent person to perform
it.

3) Legal Representative - In case of death of the promisor, the Legal

representative must perform the promise unless a contrary intention
appears from the contract.

4) Promisee - Only the promisee can demand ‘the performance of the

contract, and not a. third party. Even if the contract is for its benefit.
For example, A promises B to pay Rs. 500 to C. It’s B who can demand
performance and not C.

5)Third Party - Only under some exceptional case, like beneficiary in

case of trust, can also demand performance of the contract even
though he is not a party to the contract.

CONTRACTS, WHICH NEED NOT BE PERFORMED ;-

I. If the parties mutually agree to substitute the original contract by a

new one or to rescind or alter it

2. If the promisee dispenses with or remits, wholly or in part the

performance of the promise made to him or extends the time for such
performance or accepts any satisfaction f or it.

2. If the person, at whose option the contract is voidable, rescinds it.

4. If the promisee neglects or refuses to afford the promisor

reasonable facilities for the performance of his promise .

TENDER OF PERFORMANCE ( Sec 38)

The offeror should offer the performance of an obligation under the

contract to the offeree. The offer is made is called the “tender of
performance”. It is the discretion of the promisee to accept the offer.
In case the promisee chooses not to accept the offer then neither the
offeror could be held liable for the non-performance of the terms of
the contract nor he loses his rights under the terms of the contract.
Therefore, it is a settled principle that non-acceptance of the tender
of performance would result in the exclusion o f the promisor from
further performance of the terms of the contract and he is also
entitled to sue the other party for not performing the terms of the
contract. Section 38 of the Contract Act makes it clear that a tender of
performance tantamounts to performance. Every tender of
performance must fulfil a certain essential condition:

Section 38(1): The offer should be unconditional;

Section 38(2): The offer must be made at a proper time and place so
as to allow the party to have a reasonable time for ascert aining that
the person who is making the offer to him is competent to enter into
a contract;

Section 38(3): If the offer to the offeree is such as to deliver some

goods addressed to the offeree then it is the duty of the offeror to
provide reasonable time to the offeree in which he can ascertain that
the goods offered to him is the same by which the offeror is bound
under the terms of the contract.
DISCHARGE OF CONTRACT

Discharge of contract means termination of the contractual

relationship between the parties. A contract is said to be discharged
when it ceases to operate, when the rights and obligations created by
it come to an end .

MODES OF DISCHARGE OF A CONTRACT

1] Discharge by Performance

When the parties to a contract fulfil the obligations arising under the
contract within the time and manner prescribed, then the contract is
discharged by performance.

2)Discharge by Agreement

A contract can also be discharged by the fresh agreement between

the same parties. A contract may be terminated by agreement in any
of the following ways:

A) Novation:

Novation of contract means replacement of an existing contract by

another contract. In novation the parties may change. If the parties
are not changed then the material terms of the contract must be
altered in the new contract because a mere variation of some of the
terms of a contract is not novation but alteration.

B) Alteration:

Alteration of a contract takes place when one or more of the terms of

the contract are changed. If a material alteration in a written contract
is made with the consent of all the parties the original contract is
discharged by alteration and a new contract takes its place. An
alteration may be a change in the amount of money, the rate of
interest, or the names of the parties. Al teration results in the
discharge of the original contract.

C) Rescission:

Means cancellation of contract by mutual consent. A contract may be

cancelled ‘by agreement between the parties at any time before it is
discharged by performance. The cancellation of agreement releases
the parties form their obligation arising out of the contract.

D) Remission:

Remission means the acceptance of lesser sum than what was due
from promisor. According to the section 63, a person who has a right
to demand the performanc e of a contract may:

* Remit or give up the whole or part of a debt.

* Extend the time for performance.

Where a promise remits a part of the debt and gives a discharge for
the whole debt on receiving a smaller amount, such discharge is
valid.

3] Discharge by the Impossibility of Performance

If it is impossible for any of the parties to the contract to perform

their obligations, then the impossibility of performance leads to a
discharge of the contract. If the impossibility exists from the start,
then it is impossibility ab-initio. However, the impossibility might
also arise later due to:

a) An unforeseen change in the law

b) Destruction of the subject -matter essential to the performance

c)The non-existence or non-occurrence of a particular state of things
which was considered a given for the performance of the contract

d) A declaration of war

4] Discharge of a Contract by Lapse of Time

The Limitation Act, 1963 prescribes a specified period for

performance of a contract. If the promisor fails to perform and th e
promisee fails to take action within this specified period, then the
latter cannot seek remedy through law. It discharges the contract due
to the lapse of time.

5] Discharge of a Contract by Operation of Law

A contract can be discharged by operation of l aw which includes

insolvency or death of the promisor.

6] Discharge by Breach of Contract

If a party to a contract fails to perform his obligation according to the

time and place specified, then he is said to have committed a breach
of contract.

Also, if a party repudiates a contract before the agreed time of

performance of a contract, then he is said to have committed an
anticipatory breach of contract.

In both cases, the breach discharges the contract. In the case of;-

 An actual breach, the promisee retains his right of action for

damages.
 An anticipatory breach of contract, the promisee cannot file a
suit for damages. It also discharges the promisor from
performing his part of the contract.
REMEDIES FOR BREACH OF CONTRACT

When a promise or agreement is broken by any of the parties we call

it a breach of contract. So when either of the parties does not keep
their end of the agreement or does not fulfil their obligation as per
the terms of the contract, it is a breach of contract. Following are the
remedies for breach of contract;-

1) Rescission of the contract

2) Suit for damages

3) Suit upon quantum meruit

4) Suit for specific performance of the contract

5) Suit for injunction

1] Recession of Contract

When one of the parties to a contract does not fulf il his obligations,
then the other party can rescind the contract and refuse the
performance of his obligations.

As per section 65 of the Indian Contract Act, the party that rescinds
the contract must restore any benefits he got under the said
agreement. And section 75 states that the party that rescinds the
contract is entitled to receive damages and/or compensation for such
a recession.

2) Suit for damages

Section 73 clearly states that the party who has suffered, since the
other party has broken promises, can claim compensation for loss or
damages caused to them in the normal course of business.
Such damages will not be payable if the loss is abnormal in nature,
i.e. not in the ordinary course of business. There are two types of
damages according to the Act,

 Liquidated Damages: Sometimes the parties to a contract will

agree to the amount payable in case of a breach. This is known
as liquidated damages.

 Unliquidated Damages: Here the amount payable due to the

breach of contract is assessed by the courts or any appropriate
authorities.

3) Suit upon quantum meruit

Quantum meruit literally translates to “as much is earned”. At times

when one party of the contract is prevented from finishing his
performance of the contract by the other part y, he can claim quantum
meruit.

So he must be paid a reasonable remuneration for the part of the

contract he has already performed. This could be the remuneration of
the services he has provided or the value of the work he has already
done.

4) Suit for specific performance of the contract

This means the party in breach will actually have to carry out his
duties according to the contract. In certain cases, the courts may
insist that the party carry out the agreement.

So if any of the parties fails to perform the contract, the court may
order them to do so. This is a decree of specific performance and is
granted instead of damages.

5) Suit for injunction

An injunction is basically like a decree for specific performance but
for a negative contract. An injunction is a court order restraining a
person from doing a particular act.

So a court may grant an injunction to stop a party of a contract from

doing something he promised not to do. In a prohibitory injunction,
the court stops the commission of an act and in a mandatory
injunction, it will stop the continuance of an act that is unlawful.

LAW OF AGENCY

The contract which create the relationship of principal and agent is

known as “ Law of Agency” .
Sec 182-238 of the ICA 1872

AGENT AND PRINCIPAL ( SEC.182)

Agent;- The Indian Contract Act, 1872 defines an ‘Agent’ in Section

182 as a person employed to do any act for another or to represent
another in dealing with third persons.

Principal ;- According to Section 182, The person for whom such act
is done, or who is so represented, is called the “principal”. Therefore,
the person who has delegated his authority will be the principal.
LEGAL RULES FOR VALID CONTRACT OF AGENCY

*There must an agreement b/w principal and agent

*The agreement may be express or implied

*The agent must act in the representative capacity

*The principle must be competent to contract

*The agent need not be competent to contract

*Consideration is not necessary

KINDS OF AGENTS

Agents are classified into two. They are

1) Mercantile or commercial agent

2) Non- mercantile or Non- commercial Agent

1) Mercantile or commercial agent

According to Sec.2(9) of the sale of Goods Act, the term Mercantile

Agent may be defined as an agent who has authority to sell or consign
goods or to buy goods or raise money on t he security of the goods on
behalf of his principal. Following are some of the important
mercantile agent.

1) Broker

He is one who is employed to make contracts for the purchase and

sale of goods. He is not entrusted with the possession of goods. He
simply act as a connecting link and bring it to parties together to
bargain and if the circumstances materialise he becomes entitled to
his commission called brokerage. He makes a contract in the name of
his Principal. Thus, a broker is an agent primarily emplo yed to
negotiable a contract between two parties where he is a broker for
sale he has no position of the goods to be sold.

2) Factor

A factor is a mercantile agent to home goods are entrusted for sale.

He enjoys Wide discretionary powers in relation to th e sale of goods.
A Factor is an agent who is entrusted with the possession and
contract of the goods to be said by him for his Principal.

He has possession of the goods, authority to sell them in his own

name and a general discretion as to this sale. He ma y sale on the
usual term of credit may receive the price and give a good discharge
to the buyer.

3) Auctioneers

An auctioneer is an agent to sell property at a public auction. He is

primary an agent for the seller, but upon the property being knocked
down he becomes also the agent of the buyer. He is mercantile agent
within the meaning of Section 2(9) of the Sale of goods Act.

4) De Credere Agent

He is one who in consideration of an extra commission guarantee his

Principal that the third person with whom he enters into contracts on
behalf of the principal shall perform their financial obligations that
is, if the buyer does not pay, he will pay. Thus he occupies the
position of a surety it as well as an Agent. He is not answerable to his
principle for the failure of the third person to perform the contract. A
del credere agent constituted an exception to this r ule.

2) Non- mercantile or Non- commercial Agent

Non – mercantile agent may be defined as an agent who does not

usually deal in the buying and selling of the goods. They are the agent
appointed by the principal to do some act which are not done by the
mercantile agents.

Examples;- Insurance agents and Advocates.

CLASSIFICATION OF AGENTS

On the point of view of the extent of their authority and th e nature of

the work performed by them agents may be Classified under the
following heads : -

1) Universal Agent

A Universal agent is one who is authorised to do all the acts which

the Principal can lawfully do and can delegate.

2) Special Agent

A Special Agent is one who is employed to do some particular act or

represent his Principal in some particular transactions.

for example, An agent employed to sell a Bike. If the special agent

does anything outside his authority, the principal is not bound by it
and third parties are not entitled to assume that the agent has
unlimited powers.

3) General Agent

A General Agent is one was employed to do all acts connected with

particular business or employment.

For example, A manager of a firm. He can bind the pri ncipal by doing
anything which falls within the ordinary scope of that business.
Whether he is actually authorised for any particular act or not, is
immaterial provided that third party acts bona fide.
DUTIES OF AN AGENT

1. To follow the instructions of the principal (211)

2. To carry out the work with care and skill (212)
3. To render accounts to the principal (213)
4. To communicate & pass information to the principal(214)
5. Not to deal on his own accounts(215)
6. Not to make secret profits from agency(216)
7. To pay the amount received for the principal(217)
8. Not to set up adverse title (218)
9. To protect the interest of the principal incase of death or
insanity (209)
10. Not to delegate his authority (190)

RIGHTS OF AN AGENT

1. Right to retain money due to the principal (217)

2. Right to receive remuneration (219)
3. Right to Lien (221)
4. Right to be indemnified (all lawful act) (222)
5. Right to be indemnified against consequences of acts done
good faith (223)
6.Right to compensate (due to principles neglect)(225)

LIABILITIES OF PRINCIPAL TO THIRD PARTY

1. Acts of an Agent within the Scope of his Authority (226)

If an act is carried on by an agent within his authority, his acts are

binding on the principal. However, the act done should be la wful.
2. Acts of an Agent Exceeding his Authority ;-

It can be discussed under two heads

a) If the work is separable (227)

Where an agent exceeds his agency to do the work of the principal,

the principal is bound by that part of the work which is within hi s
authority if it can be separated from the part of the work which is
beyond his authority.

b) If the work is non separable (288)

When an agent does more than what he is authorized to do, and such
act cannot be separated from that which is within his auth ority, the
principal is not bound by the transaction. He is in such a case entitled
to repudiate the whole transaction. So if the agent does something in
excess of his powers, the transaction is not binding on the principal.

3. Misrepresentation or fraud by an agent (238)

The principal is liable for the misrepresentation or fraud committed

by his agent while acting in the course of his business. It is
immaterial whether the misrepresentation or fraud has been
committed for the benefit of the principal or o f the agent himself.

4. Agent Acting for an Unnamed Principal

When an agent contracts, as an agent for a principal but does not

disclose his name, the principal is liable for the contract of the agent.
But the unnamed principal should be in existence at t he time of the
contract and the acts must be within the scope of agent’s authority.
5. Agent Acting for an Undisclosed Principal

In case of an agent acting for an undisclosed principal, the mutual

rights and liabilities of the agent, principal and the th ird party are as
follows:

a) Rights and Liabilities of Agent

Here agent contracts in his own name. So he is bound by the contract.

He is personally liable to the third party also. On such contracts, he
can sue and be sued in his own name because in the ey es of law he is
the real contracting party. In such cases, the principal and the agent
have their respective rights against each other.

b) Rights and Liabilities of Third Party

If the third party has discovered that there is a principal, he may file
a suit against the principal, or his agent or both. In such a case, the
third party must allow the principal, the benefit of all payments
received by him from the agent.

c) Rights and Liabilities of Principal

The principal has the right to intervene and require the performance
of the contract from the third party. In such cases, the other party
may sue either the principal or the agent or both. The principal if he
likes may also require the performance of the contract from the other
party. But in such a case, he should allow, the benefit of all payments
made by the third party to the agent, to the third party.
DELEGATION OF AUTHORITY BY AN AGENT

“An agent cannot lawfully employ another to perform acts which he

has expressly or impliedly undertaken to perform personally…” sub-
agent may not enjoy the confidence of the principal [“A sub -agent is a
person employed by, and acting under the control of, the original
agent in the business of the agency” (Sec.191).

DELEGATUS NON POTEST DELEGARE

An agent cannot in ordinary circumstances delegate the duty that was

delegated to him. The principle is based upon the idea that when a
Principal appoints an agent, he does so by placing his confidence and
trust in the agent and might not have similar trust in the work of
another person

SUB-AGENT

An agent may sometimes delegate the duty that has been delegated to
him by the Principal to somebody else. Ordinarily, an agent cannot
delegate the duty he is supposed to perform himself to another
person (delegatus non potest delegare) except in particular
circumstances where he must, out of necessity, do so. Section 191 of
the Indian Contract Act, 1872 defines a sub -agent to be a person
employed by and acting under the control of the original agent in the
business of the agency.

SUBSTITUTE AGENT

A Substituted agent is a person who is named by the Agent for

performing such part of the business of the agency as is entrusted to
him. Substituted Agent works under the control of the Principle and
he is an agent of the agent. Substituted Agent is responsible to the
principal. The agent is not responsible for the acts of the substituted -
agent. There is privity of Contract between the Principal and
substituted-agent.

TERMINATION OF AGENCY

In a contract of agency, a person appoints another to act on his behalf

with the third party it is called 'Agency'. According to Section 183 of
the said Act, Principal must be competent to contract. Any person
may be an agent (Section 184). According to Section 185, in the
contract of agency, consideration is not necessary. Termination of
agency means putting an end to the legal relationship between
principal and agent. Section 201 to 210 of the Indian Contract Act
1872 lay down the provision relating to the termination of Agency.

Agecy can be terminated in 2 ways.

1) By act of the parties

2) By the operation of law

1) By act of the parties -

i) By agreement - The Contract of Agency can be terminated at any

time by mutual agreement between the principal and agent

ii) By revocation of the principal - The Principal revoke agency at any

time by giving notice to the agent

iii) By Renunciation of an agent - Renunciation which means

withdrawing from responsibility as Agent. Like Principal, Agent can
also renounce the agency. According to Section 206 of the Ind ian
Contract Act 1872, the agent must give to his Principal reasonable
notice of renunciation. Otherwise, he will be liable to make good for
the damage caused to the principal for want of such notice.
2) By operation of law -

i) By the completion of agency - Agency can become to an end after

the completion of work for which the agency is created.

ii) By expiry of the time - Agency can also be terminated by the expiry
of time. if the agency is created for the specific period, it is
terminated after the expiry of the time.

iii) Death or insanity of principal or agent - Section 209 of the Indian

Contract Act 1872 imposes an agent, duty to terminate the contract of
agency on the death of the principal. In other words, Agency comes to
an end on the death or insanity of the principal or agent.

iv) Insolvency of principal - According to Section 201 of the Indian

Contract Act 1872, an insolvent or bankrupt is a person who is unable
to run the business due to Excess of liabilities over assets. In this
way, if the principal becomes an insolvent agency can be terminated.

v) Destruction of the subject matter - If this subject matter of the

agency is destroyed agency comes to an end.

vi) Principal becoming an alien enemy - If the Principal becomes an

alien enemy the contract of agency comes to an end.

vii) Dissolution of company or firm - A Firm or company may be

regarded as a Principal in the contract of Agency. If the company or
firm is dissolved the agency comes to an end .
BAILMENT

Meaning of bailment- The word ‘Bailment’ is derived from French

word ‘baillier’ which means to deliver. According to sec 14, a
“Bailment’ is the delivery of goods by one person to another for some
purpose, with a condition to return the goods when t he purpose is
over or otherwise disposed off according to the direction of the
person delivering them.

Parties in bailment contract;-

Bailor- The person delivering the goods is called the bailor.

Bailee- The person to whom the goods are delivered is called the
bailee.

ESSENTIAL ELEMENTS OF A VALID BAILMENT

 Agreement between bailor and bailee

 Delivery of goods
 Ownership not change
 Only movable goods
 Delivery for some purpose
 Change in forms
 Return of goods

1) There must be an agreement between the bailor and bailee. This

agreement may be express or implied. However, a bailment may be
implied by law as it happens in the case of find er of lost goods.

2)In bailment, it is necessary that the g oods should be delivered to

the bailee. It is the essence of the contract of bailment. It is further
necessary that the possession of the goods should be voluntarily
transferred and is in the accordance with the contract. Delivery may
be of two types: 1-Actual delivery, 2- constructive delivery.

Example- 1. Delivery of a car for repair to a workshop dealer is an

actual delivery.
2. Delivery of the key of a car to a workshop dealer for the repairof
car is a constructive delivery.

3)In a bailment the ownership rem ains with the bailor and is not
transferred to the bailee or anyone as because if the owner ship is
transferred then it is not a bailment contract. It becomes a contractof
sale.

4)Bailment is only for movable goods and not for immovable goods.

5) The goods must be delivered to t he bailee for some purpose. The

purpose could be the safe custody, use of the goods, transportation of
the goods, repair of the goods etc.

6) If the goods which are bailed are changed like a cloth is converted
into a shirt than still the contract remains a bailment.

7) The goods shall be returned to the bailor or disposed off according

to his direction .

Example – The amount deposited by a person in various accounts like

saving, current account etc. is note treat ed as bailment because the
bank is not bound to return the same identical coins or currency
notes which are deposited. This has been stated in the various
decisions given by the judges in different cases from time to tim e. But
if a person keeps of his valuable items like jewelry or money etc. in
the bank locker for safe custody, it is treated as a case of bailment
contract.

DUTIES OF BAILOR

1) The duty of a bailor to disclose all faults. If bailor fails to disclose

such faults then he will be responsible for the damage caused to
goods or loss suffered by the bailee.

2) The bailor is under the duty to pay the extraordinary ex penses

incurred by the bailee for such bailment.
3) It is the duty of the bailor to accept the goods after the purpose for
which such goods were bailed is accomplished.

4) It is the duty of the bailor to indemnify the bailee for the cost
incurred due to the defective title of goods bailed to the bailee.

DUTIES OF BAILEE

1. Take proper care of goods

According to section 151, it is the duty of a bailee to take care of

goods bailed to him. Bailee should take care of these goods as an
ordinary man will take c are of his goods of the same value, quality,
and quantity.

Thus, if the bailee takes due care of goods then he will not be liable
for any loss, deterioration of such goods. Also, the bailee needs to
take the same degree of care of goods whether the bailmen t is for
reward or gratuitous.

However, the bailee is not liable for any loss due to the happening of
any act by God or public enemies though he agrees to take special
care of the goods.

2. Not to make unauthorized use

As per section 153, the Bailee shall not make any unauthorized use of
goods bailed. In case he makes any unauthorized use, then bailor can
terminate the bailment.

Bailor can also claim for damages caused to goods bailed due to
unauthorized use as per Section 154.

3. Keep goods separate

The bailee needs to keep the goods separately from his own goods. He
should not mix the goods under bailment with his own goods. In case
bailee mixes the goods with his own goods without t he consent of the
bailor, then Bailor also has an interest in the mixture. If the goods
can be separated or divided, the property in the goods remains with
both the parties. But, the bailee bears the expenses of separation or
any damages arising from the mixture.

If it is not possible to separate the goods, the bailee shall com pensate
the bailor for the loss of goods.

4. Not set adverse title

A bailee must not set an adverse title to the goods bailed.

5. Return Goods

The duty of the bailee is to return the goods without demand on the
accomplishment of the purpose or the expirat ion of the time period.
In case of his failure to do so, he shall be liable for the loss,
destruction, deterioration, damages or destruction of goods even
without negligence.

6. Return increase or profits

A bailee shall return the goods along with any inc rease or profit
accruing to the goods to the bailor, in the absence of any contract to
the contrary.

For example, A leaves a hen in the custody of B. The hen gets a chick.
B shall deliver the hen along with the chick to A.
RIGHTS OF BAILOR

1. RIGHT TO ENFORCE

If the bailee neglects in any one of his duties, the bailor has a right to
enforce them by filing a suit against the bailee.

2. RIGHT TO AVOID THE CONTRACT

If the bailee does any act, which is inconsistent with the terms of the
bailment as regards the goods bailed, the bailor can terminate the
bailment.

Example: A lets a car to B for his private use only. But B used it as
taxi. A can terminate the bailment.

3. RIGHT TO RETURN THE GOODS LENT GRATUITOUSLY

When the goods are lent gratuitously, the b ailor can demand back the
goods at any time even before the expiry of the time fixed or the
achievement of the object.

Example: A, while going out of station delivered his ornaments to B

for safe custody for one month. But A returned to station after one
week. He may demand the return of his ornaments even though the
time of one month has not expired.

However, due to the premature return of the goods, if the bailee

suffers any loss, which is more than the benefit actually obtained by
him from the use of the goods bailed, the bailor has to compensate
the bailee.
4. RIGHT TO GET COMPENSATION

If any third person does some injury to the goods bailed or deprives
the bailee of the use of the goods, then the bailor may file a suit
against the wrong-doer, and recover compensation from him.

Example: A bailed 50 bags of rice to B, a godown keeper, for safe

custody. C a fraudulent man, prepared a fake delivery order for 10
bags of rice and claimed the delivery from B, the godown keeper. B
believing in good faith, that 10 bags have been sold by A to C,
delivered the same to C. Here A may file a suit against C to recover
the rice bags from him.

RIGHTS OF BAILEE

1.Right to deliver the goods to any one of the joint bailors

If several joint owners bailed the goods, the b ailee has a right to
deliver them to any one of the joint owners unless there was a
contract to the contrary.

2. Right to deliver the goods to bailor without title

If the bailor has no title to the goods, and the bailee in good faith
delivers them back to or according to directions of the bailor, the
bailee is not responsible to the owner in respect of such delivery.

3. Right to apply to court to decide the title to the goods

If the goods bailed are claimed by the person other than the bailor,
the bailee may apply to the court to stop its delivery and to decide
the title to the goods.
4. Right of lien

The bailee has a right to exercise lien i.e., to refuse to return the
goods to the bailor until his lawful charges are paid to him.

CONTRACT OF INDEMNITY

Contract of indemnity meaning is a special kind of contract. The term

‘indemnity’ literally means “security or protection against a loss” or
compensation. According to Section 124 of the Indian Contract Act,
1872 “A contract by which one party promises to sa ve the other from
loss caused to him by the conduct of the promisor himself, or by the
conduct of any other person, is called a contract of indemnity.”

Example: P contracts to indemnify Q against the consequences of any

proceedings which R may take against Q in respect of a certain sum of
money.

OBJECTIVE OF CONTRACT OF INDEMNITY

The objective of entering into a contract of indemnity is to protect

the promisee against unanticipated losses.

PARTIES TO THE CONTRACT OF INDEMNITY

A contract of indemnity has t wo parties.

1. The promisor or indemnifier

2. The promisee or the indemnified or indemnity -holder

The promisor or indemnifier: He is the person who promises to bear

the loss.

The promisee or the indemnified or indemnity -holder: He is the

people whose loss is covered or who are compensated.
In the above-stated example,

Q.

-holder as his
loss is covered by P.

ESSENTIALS OF CONTRACT OF INDEMNITY

1. PARTIES TO A CONTRACT: There must be two parties, namel y,

promisor or indemnifier and the promisee or indemnified or
indemnity-holder.

2. PROTECTION OF LOSS: A contract of indemnity is entered into for

the purpose of protecting the promisee from the loss. The loss may be
caused due to the conduct of the promisor or any other person.

3. EXPRESS OR IMPLIED: The contract of indemnity may be express

(i.e. made by words spoken or written) or implied (i.e. inferred from
the conduct of the parties or circumstances of the particular case).

4. ESSENTIALS OF A VALID C ONTRACT: A contract of indemnity is a

special kind of contract. The principles of the general law of contract
contained in Section 1 to 75 of the Indian Contract Act, 1872 are
applicable to them. Therefore, it must possess all the essentials of a
valid contract.

5. NUMBER OF CONTRACTS: In a contract of Indemnity, there is only

one contract that is between the Indemnifier and the Indemnified.

CONTRACT OF GUARANTEE

Contract of Guarantee means a contract to perform the promises

made or discharge the liabilities of the third person in case of his
failure to discharge such liabilities.

As per section 126 of Indian Contract Act, 1872, a contract of

guarantee has three parties: –
Surety: A surety is a person giving a guarantee in a contract of
guarantee. A person who takes responsibility to pay a sum of money,
perform any duty for another person in case that person fails to
perform such work.

Principal Debtor: A principal debtor is a person for whom the

guarantee is given in a contract of guarantee.

Creditor: The person to whom the guarantee is given is known as the

creditor.

For example, Mr. X advances a loan of 25000 to Mr. Y and Mr. Z

promise that in case Mr. Y fails to repay the loan, then he will repay
the same. In this case of a contract of guarantee, Mr. X i s a Creditor,
Mr. Y is a principal debtor and Mr. Z is a Surety.

KINDS OF GUARANTEE

1. Retrospective or prospective

2. Specific or continuing

3. Entire or partial debt

PLEDGE

“Pledge”, “pawnor” and “pawnee” defined [Section 172]: The

bailment of goods as security for payment of a debt or performance of
a promise is called “pledge”. The bailor is in this case called t he
“pawnor”. The bailee is called the “pawnee”.

Pledge is a variety or specie of bailment.

It is bailment of goods as security for payment of debt or

performance of a promise. The person who pledges [or bails] are
known as pledgor or also as pawnor, the bailee is known as pledgee
or also as Pawnee. In pledge, there is no change in ownership of the
property.
Under exceptional circumstances, the pledgee has a right to sell the
property pledged. Section 172 to 182 of the Indian Contract Act, 1872
deal specifically with the bailment of pledge.

Example: A lends money to B against the security of jewellery

deposited by B with him i.e. A. This bailment of jewellery is a pledge
as security for lending the money. B is a pawnor and A is a pawnee.

ESSENTIALS OF PLEDGE:

Since Pledge is a special kind of bailment, therefore all the essentials

of bailment are also the essentials of the pledge. Apart from that, the
other essentials of the pledge are:

a. There shall be a bailment for security against payment or

performance of the promise,

b. The subject matter of pledge is goods,

c. Goods pledged for shall be in existence,

d. There shall be the delivery of goods from pledger to pledgee

PLEDGE V/S BAILMENT
RIGHTS AND DUTIES OF PAWNEE

1) Right of retainer:

The pawnee may retain the goods pledged until his dues are
paid. He may retain them not only for the payment of the debt
or the performance of the promise, but for (a) the interest due
on the debt , and (b)all necessary expenses incurred by him in
respect of the possession or for the preservation of the goods
pledged(Sec. 173)

2) Rights of retainer subsequent advances:

When the Pawnee is lends money to the same pawnor after the
date of right retainer over the pledged goods extends to
subsequent advance also .this presumption can be rebutted only
by a contract to the contrary.

3. Right to extraordinary expenses:

The Pawnee is entitled to receive from the pawnor

extraordinary expenses incurred by him for the preservation of
the goods pledged. or such expenses, he has no right to retain
the goods; he can only sue to recover them.

4. Rights against true owner:

when the pawonor’s title is def ective .when the pawnor has
obtained possession of the goods pledegd by him under a
voidable contract has not been rescided at the time of the
pledge , the panwee acquires a goods title to the goods
,provided he acts in good faith and without notice of the
pawnor’s defect of title.

5. Pawnee’s righs where pawnor makes default:

Where the pawnor fails to redeem his pledge, the Pawnee can
exercise the following rights:
 (1) he may file a suit against the pawnor upon the debt or
promise and may retain the goods pledged as a collateral
security.

(2) he may sell the goods pledged after giving the pawnor a
reasonable notice of the sale . out of these rights , while the right
to retain or sed the pawned goods are not concurrent, the right
to sue and sell are concurrent rights,i.e the Pawnee may sue and
at the same time retain the goods as concurrent security or sell
them after giving reasonable notice of the seal to pawnor.

(3) he can recover any deficiency arising on the sale of he

goods by him from the pawnor .but the shall have to hand over
the suprplus, I any , realized on the sale of the goods to the
pawnor.
RIGHTS AND DUTIES OF PAWNOR

Following are the duties of pawnee :

1. Right to get back goods:

On the performance of promise or repayment of loan and

interest, if any, the pawnor is entitled to get back the goods
pledged.

2. Right to redeem debt:

Quite often a time is stipulated for the payment of the debt,

or performance of the promise, for which the pledge is made.
In such a case if the pawnor makes default to payment of the
debt or performance of the promise at the stipulated time, he
may still that case , pay, in addition, any expenses which have
arisen from his default.

3. Preservation and maintenance of the goods :

The pawnor has a right to see that the pawnee, like bailee,
preserves the goods pledged and properly maintains them.
 4. Rights of an ordinary debtor :

The pawnor has, in assition to the above rights, the rights of

an ordinary debtor which are conferred on him by various
statutes meant for the protection of debtors.

MORTGAGE

A lien on real property that is given by the buyer to the

lender as a security for money borrowed.

DIFFERENCE BETWEEN PLEDGE, HYPOTHECATION AND MORTGAGE

E-CONTRACT

E-contract is one of the divisions of e-business. It is similar to a

traditional business wherein goods and services are switched for a
particular amount of consideration. The important factor involved is
that the contract takes place through a digital mode of
communication. It provides an opportunity for the sellers to reach
the end of consumer directly without the involvement of the
middlemen.

E-contract is any kind of contract formed in the course of e -

commerce by the interaction of two or more individuals using
electronic means, such as e-mail, the interaction of an individual with
an electronic agent, such as a computer program, or the interaction of
at least two electronic agents that are programmed to recognize the
existence of a contract.

ESSENTIALS OF AN ELECTRONIC CONTRACT:

1. An offer requirements to be made

2. The offer needs to be acknowledged

3. There has to be legal consideration

4. There has to be an intention to create lawful relations

5. The parties must be able to contract

6. There must be free and unaffected consent

7. The object of the contract need to be lawful

8. There must be conviction and possibility of performance

TYPES OF ONLINE CONTRACT OR E-CONTRACT

1. Shrink-wrap agreements

Shrink wrap contracts are usually a licensing agreement for software

purchases. In the case of shrink-wrap agreements, the terms and
conditions for access to such software products shall be enforced by
the person buying it, with the initiation of the packaging of the
software product. Tightening -up agreements are simply the
agreements that are accepted by users, for instance, Nokia pc -suite,
at time of installing the software on a CD -ROM. Sometimes, after
loading the product onto your computer, additional conditions may
only be observed and then, if the buyer disagrees, he has an
opportunity to return the software product. The shrink-wrap
Agreement provides protection by exonerating the product
manufacturer of any violation of copyright or intellectual property
rights as soon as the purchaser tears the product or the coverage for
accessing the product. However, the validity of shrink-wrap
agreements does not exist in India with a stable judgment or
precedent.

2. Click or web-wrap agreements

Click-wrap contracts are web-based contracts that require the user’s

consent or consent through the “I Accept,” or “OK” button. The user
must accept the terms of use of the particular software with the click
wrap agreements. Users who disagree with the terms and conditions
cannot use or purchase the product after cancellation or refusal.
Someone almost regularly observes web-wrap agreements. The terms
of use shall be set down before acceptance by the users. For instance,
online shopping agreement, etc.

3. Browse-wrap agreements

A browsing wrap agreement can be called an agreement which is to

be binding on two or more parties through the use of the website. In
case of an agreement on browsing, an ordinary user of a given
Website is to accept the terms and conditions of use and other
website policies for continuous use. We usually witness such kinds of
online contracts in our daily lives. Although this online agreement is
becoming common in all of our businesses, there is no precise judicial
precedent regarding its validity and enforceability. Other countries,
such as courts in the USA, have dealt with those onli ne agreements
and held that both Shrink-wrap Agreements and Click-Wrap
Agreements are enforceable as far as the general principles of the
contract are not violated.

4. Employment Contracts

The Information Technology is determined by manpower in Indian

context and thus employment contracts are vital. With a high erosion
rate as well as the confidentiality involved in the work employment
contracts become crucial. Apart from that Indian Labour practices are
based on tough labour laws and not the hire and fire processes of the
first world. In this background copyright issue of software
development assumes vital importance. Apart from that contracts for
on-site development and sending the workforce abroad and security
clauses will play a crucial role in employment contracts. Firms hiring
personnel abroad apart from their personnel need to include the
relevant employment contract of the place of action.

5. Consultant Agreements

The normal requirements of Indian Contracts Act of 1872 will apply

on any consultant agreement. But particularly in Information
Technology industry where the infrastructure to function is low and
connectivity is very high consultancy with experience marketing and
business development and technology development is a very
dominant mode of contract. Here proper care to be taken in
Consultant agreements where issues of Intellectual Property Rights,
privacy will play an important role. If care is not taken it may lead to
cost of business and loss of clients.

6. Contractor Agreements

As manufacturing companies subcontract their business, Information

Technology also subcontract their work due to changing orders and
would like to cut on the cost of regular workforce and attendant legal
and financial problems. At the same time in manufacturing business,
tough labour laws like the Contract Labour (Abolition and
Regulation) Act of 1970 in force could lead to a different type of legal
twist. However if care is taken to subcontract keeping the
requirements of the contract Act and the Contract Labour abolitio n
act the anticipated objectives could be met. Here again privacy,
consumer liability and copy right issues assume great importance and
care to be taken in representation such contracts.

7. Non-Disclosure Agreements

Non-Disclosure Agreements are part of IT contracts, which identify

binding agreements with employees apart from the standard
confidentiality agreements. The Indian Contract Act 1872 has
provisions for the same and it undertakes importance in an industry
which is purely knowledge based and one wh ich can be easily
repeated ruining the business.

8. Source Code Escrow Agreements

In software development many principal firms who participate in

development are keen to guard the source code of the software,
which is the most appreciated and cautious part of the computer
programme. Copyright owners of such source code may have to
disclose this to countless developers who will be developing definite
software based on the source code. In these conditions, the copyright
owner will credit the source code to specified source code escrow
agents who will release the code on the development of the product
upon agreed terms. In cyber contracts, such agreements and also the
terms and conditions to contract with the escrow agents become
vital.

9. Sales, Re-Seller and Distributor Agreements

A framework agreement or contract for services and business

management that obliges the distributor to purchase and sell the
supplier’s goods in its own name and on its own account on the basis
of independent contracts and that integ rates the distributor into the
system of distribution of the supplier.

10. Software developer and licensing agreements

Software license agreements are entered into when an owner or

a developer of software wants to provide his product to the market
without selling it. The agreement lays down the terms and conditions
of the usage of the software and protects the rights of both the owner
and the user.
FORMATION OF ONLINE CONTRACTS OR ELECTRONIC CONTRACTS

Like an ordinary contract, e-contracts consisting of an offer and

acceptance are enforceable. The conduct of the parties, such as
exchanging e-mails or acceptance of a condition or terms or by
downloading can also imply a contract. A variety of procedures are
available for forming electronic/online contract s:

Email: The parties may create a valid contract by exchanging e -mail

communications. Offers or acceptances can be completely exchanged
via e-mail, or combined with paper documents, faxes, and oral
debates.

Website Forms: In many cases, an e-commerce website offers for sale

goods or services that are ordered by customers, by filling in and
submitting an on-screen order form. The seller will enter into a
contract once the order has been accepted. The products and services
can be delivered off -line physically. A contract would also be valid for
the terms of use of a website once the user accepts the contract by
clicking “I Agree.”

EULA: The End User License Agreements also form valid contracts in
which end users click “I Accept” or “I Accept the Terms.”

In summary, an e-contract is very different from a traditional

contract: it is paperless and it is sometimes not possible for the
parties to meet face to face. Here we try to analyze and examine
various aspects of a conventional online contract.

Specific Exclusions

In particular, the IT Act 2000 excludes from electronic transactions

the following documents:

• Negotiable Instruments

• Power of Attorney

• Trust Deed

• Will
• Sale Deed or Conveyance deed with respect to the immovable
property of any documents relating to any interest in an immovable
property.
 MODULE 2
THE COMPANY ACT 2013
Introduction
The Company Act, 1956 is replaced by the Company Act, 2013, which has already been passed
by the parliament of India. This Act aimed at easing the process of doing business in India and
improving corporate governance by making companies more accountable.

Meaning of Company
The term company means an association of a group of persons who have come together for a
common purpose that is to do business and earn profit.

Definition of Company Law

According to Sec. 2(20) of the Companies Act, 2013 a ‘company’ means a company
incorporated under this Act, or under any previous company act.

Definition of Company (Lord Justice Lindley)

A Company is an association of many. persons who contribute money or. money’s
worth to a common stock. and employ it in some common trade or business, and who
share the profit or loss arising therefrom.

CHARACTERISTICS OF A COMPANY
The main characteristics of a company are :

Incorporated association: A company needs to be registered under the Companies

Act, 2013. Any other organisation incorporated with the Registrar of Companies, and
subsequently not registered cannot be considered as a company.

Artificial Person: A company comes into existence by incorporation. On incorporation, a

company becomes an artificial person in the eye of law with a distinct name and perpetual
succession.

Separate Legal Entity: A company exists as a separate legal entity which is different from
its shareholders and members. Due to this feature, shareholders can enter into a contract
with the company and can also sue the company and be sued by the company.

Limited Liability: As the company exists as a separate entity, members of the company are
not liable for the debts of the company. Liability of members of a company is limited to
the extent of the shares that are held by them or by the extent of the guarantee amount

Transferability of Shares: Shareholders of a public limited company can transfer their

shares as per the rules laid down in the articles of association. However, in case of a
private limited company, there might be some restrictions on the transfer of shares.
Common Seal: The firm is an artificial entity or a person, and therefore cannot sign its
name by itself. It creates the necessity of a common seal that can be used for representing
the decisions made on behalf of the company.

Perpetual Succession: The company being an artificial person established by law

perpetuates to exist regardless of the differences in its membership. In simple words, a
company is an artificial person. Therefore, it does not have any restrictions on age. The
factors like death, insolvency, retirement or the insanity of one or all of the members do
not impact the company status.

Capacity to sue and being sued: A company is a legal person in the eye of law. It can
therefore, hold the property in its own name. All the property in the name of the company
is its separate property which is controlled, managed and disposed of by the company in
its own name. Thus, the company is the owner of its assets and capital. The members
cannot claim to be the owner of the company’s property.

Number of Members: As per the Companies Act, 2013, the minimum number of members
required to start a public limited company is seven while for a private limited company, it
is two. The maximum number of members for a public limited company can be unlimited
while it is restricted to 200 for a private limited company.

TYPES OF COMPANY
Companies can be classified on the basis of:

A. Incorporation
B. Liability
C. Number of members
D. Control.
.

A. Classification of Companies by Mode of Incorporation.

1. Chartered Companies
2. Statutory Companies.
3. Registered Companies
.

1. Chartered companies.
These are incorporated under a special charter by a monarch. The East India Company
and The Bank of England are examples of chartered incorporated in England. The powers
and nature of business of a chartered company are defined by the charter which
incorporates it. A chartered company has wide powers. It can deal with its property and
bind itself to any contracts that any ordinary person can. In case the company deviates
from its business as prescribed by the charted, the Sovereign can annul the latter and
close the company. Such companies do not exist in India.

2. Statutory Companies.
These companies are incorporated by a Special Act passed by the Central or State
legislature. Reserve Bank of India, State Bank of India, Industrial Finance Corporation,
Unit Trust of India, State Trading corporation and Life Insurance Corporation are some of
the examples of statutory companies. Such companies do not have any memorandum or
articles of association. They derive their powers from the Acts constituting them and enjoy
certain powers that companies incorporated under the Companies Act have. Alternations
in the powers of such companies can be brought about by legislative.

3. Registered or incorporated companies.

These are formed under the Companies Act, 1956 or under the Companies Act passed
earlier to this. Such companies come into existence only when they are registered under
the Act and a certificate of incorporation has been issued by the Registrar of Companies.
This is the most popular mode of incorporating a company.

B. Classification on the basis of liability.

1.Companies limited by shares
2.Companies limited by guarantee
3. Unlimited Company

1) Companies limited by shares

These types of companies have a share capital and the liability of each member or the
company is limited by the Memorandum to the extent of face value of share subscribed
by him. In other words, during the existence of the company or in the event of winding
up, a member can be called upon to pay the amount remaining unpaid on the shares
subscribed by him. Such a company is called company limited by shares. A company
limited by shares may be a public company or a private company. These are the most
popular types of companies.

2) Companies Limited by Guarantee:

These types of companies may or may not have a share capital. Each member promises
to pay a fixed sum of money specified in the Memorandum in the event of liquidation of
the company for payment of the debts and liabilities of the company [Sec 13(3)] This
amount promised by him is called ‘Guarantee’. The Articles of Association of the company
state the number of member with which the company is to be registered [Sec 27 (2)]. Such
a company is called a company limited by guarantee. Such companies depend for their
existence on entrance and subscription fees. They may or may not have a share capital.
Non-trading or non-profit companies formed to promote culture, art, science, religion,
commerce, charity, sports etc. are generally formed as companies limited by guarantee.
3) Unlimited Companies:
Section 12 gives choice to the promoters to form a company with or without limited
liability. A company not having any limit on the liability of its members is called an
‘unlimited company’ [Sec 12(c)]. An unlimited company may or may not have a share
capital. If it has a share capital it may be a public company or a private company. If the
company has a share capital, the article shall state the amount of share capital with which
the company is to be registered [Sec 27 (1)]

.
C. On the Basis of Number of Members
On the basis of number of members, a company may be :
(1) Private Company
(2) Public Company.

1. Private Company.
A private company means a company by its Articles of Association.
1) Restricts the right to transfer its shares.
2) Limits the number of its members to 200(As per Companies Act, 2013).
3) Prohibits an invitation to the public to subscribe its shares or debentures.
4) Puts the minimum paid up capital to be rupees one lakh.
A private company can be formed with a minimum number of two persons. A private
company must add the ward 'private limited' or (P) Ltd or (Pvt.) Ltd. in its name.

2. Public company
A public company is one which is not a private company. In other words, it is a company
which by its Articles of Association.
1) Put no restrictions on the right of its members to transfer their shares.
2) Does not limit the number of members to 200.
3) It is free to make an invitation to the general public to subscribe its shares or
debentures.
4) Puts the minimum paid up capital to be rupees five lakh.
Minimum number of shareholders to start a public company is 7. A public company must
add the word limited or Ltd to its name. Eg:- Reliance Industries Ltd., Bajaj Auto Ltd.,
Federal Bank Ltd.
.
 D. On the basis of Control
On the basis of control, a company may be classified into:
1. Holding companies
2. Subsidiary Company

1. Holding Company.
A holding company is a company which controls or holds one or more other companies by
holding majority shares in that company or companies. In other words, a holding company is
one which holds more than 50percent of the shares of the other company or companies. A
holding company is one which has control over another company.
As per Sec. 2 (45) of companies Act, 2013,” a holding company in relation to one or more
other companies means a company of which such companies are subsidiary companies”.

2. Subsidiary Company.
A subsidiary company is a company of which more than 50 percent of the shares are held by
another company known as holding company .in other words, a subsidiary company is one
which is controlled by another company known as holding company.

Lifting of The Corporate Veil

The term ‘Lifting of corporate veil’ means ignoring the separate legal entity of the company,
and looking into the realities. It is an important doctrine in the company law, according to
which in certain circumstances, the separate legal entity of the company I not taken into
account. The company and its members re treated as one person.

FORMATION OF A COMPANY
Company is an artificial person. It is a legal entity. The company is formed, brought up and
even wound up after following legal formalities. Formation of a company is a very time
consuming, lengthy and complex process. It involves a lot of formalities and legal procedures.
It consists of four stages:
1. Promotion
2. Incorporation
3. Subscription of capital
4. Commencement of business
A Public Ltd Company has to complete all the above four stages. But a private company is
required to undergo only the first two stages viz, promotion and incorporation.

1. PROMOTION
Promotion is the first stage in the formation of the company. Promotion simply means the
sum total of all activities which are necessary for bringing the company into existence. It
involves discovery of business idea, its investigation and assembling of necessary resources
to set-up business as a profitable concern.

2. INCORPORATION OF THE COMPANY

Incorporation is the second stage in the formation of a company. Incorporation refers to the
registration of the company under the companies Act, 2013.

3. CAPITAL SUBSCRIPTION
After the company is incorporated, the next stage for the public company is to raise the
necessary capital. A public company can raise the required funds by issuing shares and
debentures.

4. COMMENCEMENT OF BUSINESS
After receiving the minimum subscription through new issue of shares, a public company
makes an application to the registrar for issue of certificate of commencement of Business.

Promoters
Promoter is a person who performs the work of promotion and brings a company into
existence. Promoter is a person who undertakes to form a new company and carries out all
preliminary work in connection with its establishment as a going concern. A promoter may be
an individual, firm or a company. The idea of business opportunity is first born in the mind of
a promoter. He analyses its prospects by conducting detailed investigation. If he is convinced,
he arranges men, money and materials to translate his idea into a business unit. Meanwhile,
he completes the legal formalities, prepare documents like Memorandum of Association,
Articles of Association, settles the preliminary contracts and pays preliminary expenses in
connection with the formation of a company. In order to perform the task of promotion
successfully, a promoter must have several essential qualities. Fertile imagination, sound
judgment, initiative, resource fullness and organizing ability are the main qualities of a
successful promoter.

Functions of Promoters or Stages in Promotion

The promoter performs the following functions. These functions are also known as steps in
promotion stages:
1. Discovery of business idea
The promotion stage begins with the discovery of an idea to set up a business. There may be
several ideas in his mind and he has to decide which is the most feasible and profitable one.
The business idea may relate to commercial use of a new invention or exploitation of an
untapped natural resource.
2. Feasibility study
After analyzing all the concepts related to the idea discovered, the promoter starts doing
detailed investigation to give practical shape to the idea. He does detailed investigation
regarding cost, profitability, production process, demand of the product etc.While doing this,
the promoter takes the help of a specialists or experts such as charted accountant, engineers
etc. Feasibility study includes technical feasibility, economic feasibility, financial feasibility etc.
3. Appointment of bankers, brokers, solicitors and under writers
The promoter appoints the brokers and underwriters to ensure the availability of capital by
sale of a company’s securities and solicitors are appointed to deal with then legal matters of
the company. Bankers are appointed to have smooth financial dealings.

4. Assembling the factors of production

Once satisfied with practicability and profitability of the proposal, the promoter assembles
the factors of production like land, labour, capital and managerial personnel. Assembly of
resources involves making contracts for purchase of material, land, machinery, recruitment
of staff etc. Promoters also find out persons who are willing to act as the first directors of the
company.
5. Preparation of Preliminary Documents
The promoter takes up the steps to prepare necessary documents of the company which have
to be submits to the Registrar at the time of incorporation. The required documents are: -
a) The Memorandum of Association
b) The Articles of Association
c) The Prospectus / Statement in lieu of prospectus.
d) A list of directors - their full address and occupation.
e) A written consent by directors stating that they have agreed to act as directors.
f) A statement of authorized capital
g) A statutory declaration by a Chartered Accountant or an advocate of Supreme Court or
High Court that all provisions of the Companies Act have been complied with.
6. Entering into preliminary Contracts
The promoters enter into contracts with different parties before registration of the company.
After registration the company approves these contracts.
7. Name approval Two companies can’t have identical names. It is necessary for every
company to gets its name approved from the Registrar so that it does not match with any
other companies’ name.
Duties of Promoter:
The duties of promoters are as follows:
1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any secret profit, it is his duty
to disclose all the money secretly obtained by way of profit. He is empowered to deduct the
reasonable expenses incurred by him.
2. To disclose all the material facts:
The promoter should disclose all the material facts. If a promoter contracts to sell the
company a property without making a full disclosure, and the property was acquired by him
at a time when he stood in a fiduciary position towards the company, the company may either
repudiate the sale or affirm the contract and recover the profit made out of it by the
promoters.
3. The promoter must make good to the company what he has obtained as a trustee:
A promoters stands in fiduciary position towards the company. It is the duty of the promoter to
make good to the company what he has obtained as trustee and not what he may get at any time.

4. Duty to disclose private arrangements:

It is the duty of the promoter to disclose all the private arrangement resulting him profit by the
promotion of the company.

5. Duty of promoter against the future allottees:

When it is said the promoters stand in a fiduciary position towards the company then it does not mean
that they stand in such relation only to the company or to the signatories of memorandums of
company and they will also stand in this relation to the future allottees of the shares.

Liabilities of Promoter:
The liabilities of promoters are given below:

1. Liability to account in profit:

Promoter stands in a fiduciary position to the company. The promoter is liable to account to the
company for all secret profits made by him without full disclosure to the company. The company may
adopt any one of the following two courses if the promoter fails to disclose the profit.

(i)The company can sue the promoter for an amount of profit and recover the same with interest.

(ii) The company can rescind the contract and can recover the money paid.

2. Liability for mis-statement in the prospectus:

Section 62(1) holds the promoter liable to pay compensation to every person who subscribes
for any share or debentures on the faith of the prospectus for any loss or damage sustained
by reason of any untrue statement included in it. Sec. on 62 also provides certain grounds on
which a promoter can avoid his liability. Similarly Sec. 63 provides for criminal liability for mis-
statement in the prospectus and a promoter may also become liable under this section.The
promoter may also be imprisoned for a term which may extend to two years or may be
punished with the fine upto Rs. 5,000 for untrue statement in the prospectus. (Sec. 63).
3. Personal liability:
The promoter is personally liable for all contracts made by him on behalf of the company until
the contracts have been discharged or the company takes over the liability of the promoter.
The death of promoter does not relieve him from liabilities.

4. Liability at the time of winding up of the company:

In the course of winding up of the company, on an application made by the official liquidator,
the court may make a promoter liable for misfeasance or breach of trust. (Sec. 543).Further
where fraud has been alleged by the liquidator against a promoter, the court may order for
his public examination. (Sec. 478).

Remuneration to the Promoter

The promoter has no right to claim any remuneration. But in practice, the promoter is allowed
to take reasonable remuneration for his services. Generally, he is paid in any one of the
following ways:
1. He may be paid a lump sum in cash.
2. He may be given fully paid up shares in the company or partly in cash and partly in shares
or debentures.
3. He may be paid a commission on the shares sold.
4. If he sells his own business, he may be paid on the basis of the profit disclosed by him.

Legal position of a promoter

Promoter has a fiduciary relationship with the company which is based on trust and
confidence. Therefore, a promoter is obliged to disclose all the relevant facts and any secret
profit which is made by him in relation with the formation of the Company.

Memorandum of Association
The Memorandum of Association is the principal or most important document of a company.
It is the charter or 'Magna carta' of the company. Memorandum of Association defines the
objectives of a company and determines the boundary line beyond which the company can't
operate. It defines the powers of a company and company's relationship with outside world.
The purpose of the MOU is to enable the shareholders, creditors and others who deal with
the company to know the scope of the company’s operations. The MOU sets out the
constitution of the company. It is a public document.
Contents of Memorandum of Association .
The Memorandum of Association is divided into Six clauses.
1.Name Clause
2.Situation or domicile Clause
3.Object Clause
4.Liability Clause
5.Capital Clause
6.Association Clause.
1. Name of Clause
This clause contains the complete name of the company. The name of the company must be
stated in this clause. The name should not be identical with, or similar to the name of an
existing company.
Alteration of name clause.
The name of a company can be altered only by a special resolution of the company and with
the prior approval of the Central Government.
2. Situation Clause or Domicile Clause
This clause specifies the name of the state in which the registered office of the company is
situated. This clause determines the jurisdiction of the registrar of joint stock companies and
of the court. The registered office is the place where all the statutory books and other
important documents of the company are kept. This address is used for correspondence from
Registrar of Companies.
Alteration of Situation clause
The clause can be altered in the following ways:-
a) If the registered office is to be shifted from one state to another, by passing a special
resolution and obtaining the sanction from company law board.

b) If the office is to be shifted from one town to another town in the same state, by passing a
special resolution. c) If the office is to be shifted from one locality to another in the same
town, by passing an ordinary resolution.
3. Objective Clause
It is the most important clause of the Memorandum of Association. It contains the main object
of the company and other secondary objective which the company may pursue. This clause
defines the scope and limitations of the activities of the company. A company can take up any
of the activities mentioned in the Memorandum. Any acts beyond the powers in the objects
clause are ‘ultra vires’ and hence void and illegal.
Alteration of objective clause
A company has only limited power to alter the object clause of the memorandum. A change
can be made only for such purpose as mentioned in section 17 of the companies Act, 1956,
by a special resolution and obtain confirmation from the company law board.
4. Liability Clause
This clause defines the liability of the members of the company. In case of a company limited
by shares, the liability is limited to the nominal values of shares held by a share holder. In case
of company limited by guarantee, the liability of a member of shareholder is limited to the
amount which he has undertaken to pay at the time of liquidation of the company.
Alteration of Liability Clause
The liability clause can be altered in the following ways.
a) Any additional liability on its members can be imposed by passing a unanimous resolution
in a meeting of members. b) The liability of directors, managing director or managers can be
made unlimited by passing a special resolution, if the article so permit.

5. Capital Clause.
This clause states the total capital of the company with which the company is registered. It is
known as authorized, registered or nominal capital. Accompany can issue only that number
of shares which are authorized by its memorandum. The shares may be preference shares or
equity share. The number of shares in each category should also be mentioned in this clause.
Alteration of Capital Clause. A company can increase its share capital by passing an ordinary
resolution. A special resolution and confirmation of the resolution by court is necessary for
reduction of capital.
6. Association or Subscription Clause
This clause is in the form of a declaration. It states that the subscribers of memorandum
express their willingness to from a company. The memorandum must be signed at least two
persons in the case of a private company and at least seven persons in case of a public
company. The signatories must take at least one share of the company. The full address and
occupations of subscribers and witness must also be given.
Alteration of Association Clause
The association clause can't be altered.
Articles of Association
Every company needs a set of rules and regulations to manage its internal affairs. There are
two important business documents of a company, namely, Memorandum of Association
(MOA) and Articles of Association (AOA). The AOA specifies the internal regulations of the
company.

The AOA contains the bye-laws of the company. Therefore, the director and other members
must perform their functions as regards the management of the company, its accounts, and
audits in accordance with the AOA.

Contents of Articles of Association

Contents of Articles of Association of a limited company is prescribed in Table-F of the

Companies Act, 2013. Generally, the contents of AOA are as follows:

• Interpretation
• Private Company
• Share Capital and Variation Of Rights
• Preference Shares
• Alteration to Memorandum
• Control of Shares
• Shares held Jointly
• Increase of Capital
• Lien on Shares
• Calls on Shares And Transfer Of Shares
• Transmission of Shares
• Forfeiture of Shares
• Alteration of Capital
• Capitalisation of Profits
• Buy-Back of Shares
• Issue of Shares In Kind
• General Meetings
• Proceedings at General Meetings
• Voting Rights and Proxy
• Directors
• Proceedings of The Board
• Chief Executive Officer, Manager, Company Secretary or Chief Financial Officer.
• Common Seal
• Borrowing Powers
• Operation of Bank Accounts
 • Dividends and Reserve
• Accounts
• Audit
• Winding Up
• Secrecy
• Indemnity
• Execution Clause

Difference between Memorandum and Articles of Association

Parameter MOA AOA

It defines and delimits the objectives of a It lays down the rules and regulations for the
Objectives company. Further, it specifies internal management of the company. Hence, it
the conditions of incorporation. also contains the bye-laws of the company.

It defines the relationship of the company with It defines the relationship between the
Relationship
the outside world. company and its members.

It can be altered only under special

circumstances. Also, it usually requires the
Alteration It can be altered by passing a special resolution.
permission of the Regional Director or the
Tribunal.

Acts which are ultra vires the AOA can be

Acts beyond the scope of the MOA are ultra
ratified by a special resolution of
Ultra Vires vires and void. Furthermore, even unanimous
the shareholders. However, such acts should
consent of all shareholders cannot ratify it.
not be ultra vires the MOA.
prospectus
A prospectus is defined as a legal document describing a company's securities that have been
put on sale. The prospectus generally discloses the company's operations along with the
purpose of the securities being offered.

public offering
A public offering is the sale of equity shares or other financial instruments such as bonds to
the public in order to raise capital. The capital raised may be intended to cover operational
shortfalls, fund business expansion, or make strategic investments.

pledge
A pledge is a bailment that conveys possessory title to property owned by a debtor (the
pledgor) to a creditor (the pledgee) to secure repayment for some debt or obligation and to
the mutual benefit of both parties. The term is also used to denote the property which
constitutes the security.

Contract of indemnity
Contract of indemnity can be defined as a legal contract between two persons whereby one
party commits to indemnify, i.e. to compensate or reimburse, the loss incurred to the other
party, by the conduct of the party, who is making the promise or by the conduct of the third
party.
Therefore, it does not cover the loss caused by – Conduct of promisee, Accident and An act
of God, i.e. any kind of natural calamity such as earthquake, floods etc. Nevertheless, the
contracts of insurance, i.e. Fire and Marine Insurance will be covered under the contract of
indemnity, but life insurance is not covered in it.

Contract of Guarantee
A Contract to perform the promise, or discharge the liability, of a third person in case
of his default is called Contract of Guarantee. A guarantee may be either oral or
written.
1. The person who gives the guarantee is called the Surety
2. The person on whose default the guarantee is given is called the Principal Debtor
3. The person to whom the guarantee is given is called the Creditor.
Law of Agency

When one party delegates some authority to another party whereby the latter performs his
actions in a more or less independent fashion, on behalf of the first party, the relationship
between them is called an agency. Agency can be express or implied. Chapter X of the Indian
Contract Act, 1872 deals with the laws relating to Agency. It is important to know the law
relating to agency because nearly all business transactions worldwide are carried out through
agency. All corporations, big or small, carry their work out through agency. Therefore, laws
relating to the agency are an important area of Business Law. Relationships relating to
principal and agent involve three main parties: The Principal, the Agent, and a Third Party.

Who is an Agent?
The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do
any act for another or to represent another in dealing with third persons.

Who is a Principal?
According to Section 182, The person for whom such act is done, or who is so represented, is
called the “principal”. Therefore, the person who has delegated his authority will be the
principal.
Creation of Agency
An agency can be created by:
1. Direct (express) appointment– The standard form of creating an agency is by direct
appointment. When a person, in writing or speech appoints another person as his agent, an
agency is created between the two.
2.Implication– When an agent is not directly appointed but his appointment can be inferred
from the circumstances, an agency by implication is created.
3.Necessity– In a situation of necessity, one person can act on behalf of another to save the
person from any loss or damage, without expressly being appointed as an agent. This creates
an agency out of necessity.
4.Estoppel– An agency can also be created by estoppel. In a situation where one person
behaves in such a manner in front of a third person, as to make someone believe he is an
authorized agent on behalf of someone, an agency by estoppel is created.
5.Ratification– When an act of a person, who acted as another person’s agent (on his behalf)
without his knowledge is later ratified by that person, this creates an agency by ratification
between the two.
Types of Agents

• Special Agent- Agent appointed to do a singular specific act.

• General Agent- Agent appointed to do all acts relating to a specific job.
• Sub-Agent-An agent appointed by an agent.
• Co-Agent- Agents together appointed to do an act jointly.
• Factor- An agent who is remunerated by a commission (one who looks like the
apparent owner of the things concerned)
• Broker- An agent whose job is to create a contractual relationship between two
parties.
• Auctioneer- An agent who acts a seller for the Principal in an auction.
• Commission Agent- An appointed to buy and sell goods (make the best purchase) for
his Principal
• Del Credere- An agent who acts as a salesperson, broker and guarantor for the
Principal. He guarantees the credit extended to the buyer.

Private placement
A private placement is a sale of stock shares or bonds to pre-selected investors and
institutions rather than on the open market. It is an alternative to an initial public offering
(IPO) for a company seeking to raise capital for expansion.

Meetings
A company can be defined as a legal establishment encompassing a group of individuals
engaged in operating a business. Management of a company requires efforts undertaken by
a lot of individuals who discuss and deliberate upon issues before a decision is taken. The
decisions are often taken in meetings which is a formal dialogue between administration of
the company (generally the directors and in some cases members too) who discuss the affairs
and business of the company. The article deals with the meetings that are held in companies
and procedure followed thereof.

Meetings under company law

There are certain kinds of meetings that take place in a company which are discussed as
follows:

Annual general meeting(AGM)-

According to section 96[i] of the companies Act 2013, every company public and private
company is required to hold one general meeting in a year supervised by its directors to
evaluate the progress of the company and plan future course of action which is known as
annual general meeting.
Notification[ii] – The meeting has to be pre notified which has to be generally not less than
21 days before the scheduled day. In some cases the meeting can be called on a short notice
Time and place of meeting – It has to be scheduled in the course of business hours of the
company on a working day and cannot be on a national holiday. Generally, it has to be the
registered office of the company where the meeting has to take place. It could also be some
other place in the city where the main office is registered.
Due date of the meeting – The meetings are stipulated to be held within nine months from
closing of first financial year of the company and six months from the closing in subsequent
years. Time elapse between two meetings cannot be more than 15 months. The section also
provides that it is on the discretion of the registrar to extend the time of AGM (not more than
3months).
Tribunal calling the meeting – In case of failure to hold meeting in required time under section
96, the Act provides power to the Tribunal[iii] (which is a quasi-judicial body made to
adjudicate disputes arising out of company law) on submission by any member might call or
provide directions for calling the meeting[iv].
Punishment for default – section 99[v] of the companies Act 2013 provides that whosoever is
liable for defaulting would be penalised with a fine extending up to one lakh depending on
the circumstances.
Delaying the meeting – There may arise sometime situations where the directors of the
company are not able to hold the annual general meeting though the time has elapsed. No
liability on part of directors arises in such cases as laid down by learned judge in one of the
cases[vi]: “…I am satisfied that the delay in holding the annual general meeting…was due to
unavoidable reasons and that neither the company nor any of its directors…are individually
responsible for the delay which was due to circumstances entirely beyond their control.”
Validity after delay – Although legal world has been divided on the validity of an AGM called
after defaulting but it is generally considered valid in the eyes of law after the defaulting
members pay a fine [vii]
First Annual General Meeting – After its formation companies hold a meeting either
immediately or within six months. It is called first AGM or “statutory meeting”[viii]. It was a
compulsory provision until 2013 amendment of company law. Now it is on discretion of the
company to hold this meeting.
Extraordinary general meeting (EOGM) –

Section 100 of companies Act lays down the guidelines for the board to call a general meeting
extraordinary in nature to deliberate upon some matter requiring immediate attention.
Calling the meeting– The board of directors has been vested with powers to call extraordinary
general meeting (they cannot call AGM). Also the Act provides calling the meeting on
requisition made by members holding not less than 1/10 of shares on day of voting or holding
not less than 1/10 of total voting power. Also national company tribunals can call EOGMs.
Time – The meeting is called between two AGMs to discuss matter requiring serious attention.
Nature of business–The matters discussed in the meeting are special in nature other than
mere discussion on dividends, auditors etc. The matter of urgent importance for instance can
be unforeseen costs incurred or change in association of the company. The matters are the
ones which are not discussed in statutory or general meetings.
Notice of meeting– There has to be an explanation provided with the notice of the meeting
giving details about the objectives of the meeting. In case of only forwarding a requisition,
the company is not bound to provide an explanation.
Requisitioning the meeting– The requisitions can call the meeting within 3 months of issuing
a requisition notice if the board fails to do so within 45 days (though they have the duty to
call it within 21 days). The requisitions are permitted to go to tribunals if they have been
denied the permission to hold EOGM required that they apply for it first themselves.

Board meetings-
Section 173 of Companies’ act 2013[xiii] provide for meeting of board of directors where they
exercise their powers and functions. This is to ensure that board of directors supervise the
company efficiently.

First board meeting – The first meeting should be held within 30 days of the incorporation of
the company. The board of directors use their expertise and knowledge and discuss strategies
to run the company.
Time and due date – In a year not less than 4 meetings are to be held and not more than 4
months should pass between two meetings. In other words, every board meeting has to be
held within 3 months to complete the required provision.
Presence of directors – The directors are not required to physically present in every meeting,
they can be present through other video or audio means. But there may be certain matters
which cannot be discussed through video conferencing or audio visual means and in such
cases central government may prohibit the use of the same. Also a director can only remain
absent if granted permission by the chairman.
Notice- Every director has to be pre notified about the meeting at his registered address and
notice should be given in not less than 7 days. Moreover the decisions of the meetings are to
be notified to directors who were absent from it. If the person responsible for notifying
defaults from his duty, he is liable to be penalised. Compliance with the law is ascertained
when directors are notified. [xiv]
Quorum[xv]– A definite number of members or directors have to be present in the meeting
according to section 174. The board meeting is to comprise of 1/3 of total members or two
directors (whatever is feasible).
Other meetings – There are certain other kinds of meetings that take place in a company.
There are no well-defined sections for such meetings but have been part of company law
through various judicial cases and interpretation.
Creditor’s meetings- Under section 230[xvi] of the Act, companies can make arrangements
with creditors. Such arrangements are often discussed in meeting between the directors,
board and creditors. It is known as meeting of creditors. In some cases the judiciary may also
play an important role in calling meeting of the creditors[xvii].
Meeting of debenture holders- Companies are entitled to issues debentures[xviii] and to
implement the same it calls meeting of debenture holders. It is between the board of directors
and debenture holders to discuss the rights and responsibilities related to debentures.
Audit committee meetings – Section 177 of companies Act provides that companies can have
audit committee comprising of directors of companies similar to the main company. These
auditors have their own meeting to deliberate upon various issues in meetings of audit
committee.

Procedure of meetings
All the meetings held in companies have to follow certain well defined rules and procedure
for their efficacious functioning. There may be certain variations but general procedure is
same. There are some steps that have to be mandatorily followed:

Issuance of notification– The board of directors and all the concerned members have to be
informed beforehand about the meeting to ensure their presence. It can be a long term or
short notice depending on the situation.
Contents of notice– The notice has to specify place, date , time, description about the matter
of importance to be discussed and some brief about business. It has to be duly signed by the
convener with the date of issuance.
Quorum[xix] – The person responsible for notifying the meeting has to ensure that the
meeting has been pre notified to appropriate quorum which has to be present in the meeting
as specified in the Act. The quorum has to be maintained throughout the meeting. [xx]
Chairman[xxi] – Every meeting has to be compulsorily presided by a chairperson. Generally,
the chairman of the Board of Directors is the Chairman of the meeting.[xxii] He is responsible
to initiate the discussion of motions in the meeting and conclude the same. It’s his
responsibility to ensure smooth functioning of the meeting. The chairman can also be selected
by voting through hands.
Resolutions– These are the decisions taken in every meeting. When these are put to
consideration and voting there are certain procedures and rules to be followed. These are
provided in various sections[xxiii].
Voting – There might be matters on which there is no general consensus and voting has to be
done. After detailed discussion, the chairperson may call the matters (if undecided) for voting.
There have been specified requirements for voting in different meetings in the companies
Act, 2013[xxiv]. The process of voting is supervised by the chairman.
Adjournment and Minutes – After careful consideration and discussion, the meeting is
concluded which is called as adjournment and subsequently dissolution where members
disperse. These deliberations have to be documented in an official document of the company
providing gist of every meeting which are called minutes of meeting. Every important detail
of the meeting has to be included as said in companies’ act 2013. [xxv]
Report[xxvi] – companies are required to prepare report of the meeting as in case of AGM
detailing the conduct of the meeting. The copy of the same has to be filed with the registrar.

Directors
The supreme executive authority controlling the management and affairs of a company vests
in the team of directors of the company, collectively known as its Board of Directors. At the
core of the corporate governance practice is the Board of Directors which oversees how the
management serves and protects the long term interests of all the stakeholders of the
Company. The institution of board of directors was based on the premise that a group of
trustworthy and respectable people should look after the interests of the large number of
shareholders who are not directly involved in the management of the company. The position
of board of directors is that of trust as the board is entrusted with the responsibility to act in
the best interests of the company. Although the Board comprises individual directors, yet the
actions and deeds of directors individually functioning cannot bind the company, unless a
particular director has been specifically authorized by a Board resolution to discharge certain
responsibilities on behalf of the company.
The Companies Act, 2013 does not contain an exhaustive definition of the term “director”.
Section 2 (34) of the Act prescribed that “director” means a director appointed to the Board
of a company. A director is a person appointed to perform the duties and functions of director
of a company in accordance with the provisions of the Companies Act, 2013.

Board of Directors
A company, though a legal entity in the eyes of law, is an artificial person, existing only in
contemplation of law. It has no physical existence. It has neither soul nor body of its own. As such, it
cannot act in its own person. It can do so only through some human agency. The persons who are in
charge of the management of the affairs of a company are termed as directors. They are collectively
known as Board of Directors or the Board. The directors are the brain of a company. They occupy a
pivotal position in the structure of the company. Directors take the decision regarding the
management of a company collectively in their meetings known as Board Meetings or at the meetings
of their committees constituted for certain specific purposes.

Section 2 (10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”, in relation to
a company, means the collective body of the directors of the company.

Minimum/Maximum Number of Directors in a Company

Section 149(1) Section 149(1) of the Companies Act, 2013 requires that every company shall have a
minimum number of 3 directors in the case of a public company, two directors in the case of a private
company, and one director in the case of a One Person Company. A company can appoint maximum
15 fifteen directors. A company may appoint more than fifteen directors after passing a special
resolution in general meeting and approval of Central Government is not required.

A period of one year has been provided to enable the companies to comply with this requirement.

Number of directorships- Section 165

Maximum number of directorships, including any alternate directorship a person can hold is 20. It has
come with a rider that number of directorships in public companies/ private companies that are either
holding or subsidiary company of a public company shall be limited to 10. Further the members of a
company may restrict abovementioned limit by passing a special resolution.

Any person holding office as director in more than 20 or 10 companies as the case may be before the
commencement of this Act shall, within a period of one year from such commencement, have to
choose companies where he wishes to continue/resign as director. There after he shall intimate about
his choice to concerned companies as well as concerned Registrar.

Residence of a director in India

Section 149 (3) of the Act has provided for residence of a director in India as a compulsory i.e. every
company shall have at least one director who has stayed in India for a total period of not less than 182
days in the previous calendar year.

Woman Director
Every listed company shall appoint at least one-woman director within one year from the
commencement of the second proviso to Section 149(1) of the Act.

Every other public company having paid up share capital of Rs. 100 crores or more or turnover of Rs.
300 crore or more as on the last date of latest audited financial statements, shall also appoint at least
one-woman director within 1 years from the commencement of second proviso to Section 149(1) of
the Act.

Independent Directors
Section 2(47) of the Act prescribed that “Independent director” means an independent director
referred to in sub section (5) of section 149 of the Act. In fact, reference should have been made to
sub section (6) of 149 as it specified the qualifications of independent director with clarity.

Every listed public company shall have at least one-third of the total number of directors as
independent directors (fraction is to be rounded off to one). Central Government has prescribed under
Rule 4, public companies with specified limits as on the last date of latest audited financial statements
mentioned below shall also have at least 2 directors as independent directors: -

paid up share capital of Rs. 10 crore or more; or

turnover of Rs. 100 crore or more;

or in aggregate, outstanding loans/borrowings/ debentures/ deposits/ exceeding Rs. 50 crore or more.

Board's powers and restrictions thereon

General powers of Board

Subject to the provisions of this Act, the Board of directors of a company shall be entitled to exercise
all such powers, and to do all such acts and things, as the company is authorised to exercise and do.

However, the Board shall not exercise any power or do any act or thing which is directed or required,
whether by this or any other Act or by the memorandum or articles of the company or otherwise, to
be exercised or done by the company in general meeting.

Certain powers to be exercised by Board only at meeting

The Board of directors of a company shall exercise the following powers on behalf of the company,
and it shall do so only by means of resolutions passed at meetings of the Board: -

• the power to make calls on shares holders in respect of money unpaid on their shares
• the power to issue debentures
• the power to borrow moneys otherwise than on debentures
• the power to invest the funds of the company
• the power to make loans

Restrictions on powers of Board

The Board of directors of a public company, or of a private company which is a subsidiary of a public
company, shall not, except with the consent of such public company or subsidiary in general meeting:-
1.sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the
company, or where the company owns more than one undertaking, of the whole, or substantially the
whole, of any such undertaking

2.remit, or give time for the re-payment of, any debt due by a director except in the case or renewal
or continuance of any advance made by a banking company to its director in the ordinary course of
business

3.invest, otherwise than in trust securities, the amount of compensation received by the company in
respect of compulsory acquisition of any such undertaking as is referred to in clause (a), or of any
premises or properties used for any such undertaking and without which it cannot be carried on or
can be carried on only with difficulty or only after a considerable time

4.borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by
the company, (apart from temporary loans obtained from the company's bankers in the ordinary
course of business) will exceed the aggregate of the paid-up capital of the company and its free
reserves

5.contribute, to charitable and other funds not directly relating to the business of the company or the
welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed fifty
thousand rupees, or five per cent of its average net profits during the three financial years immediately
preceding, whichever is greater.

Lifting Of Corporate Veil:

At times it may happen that the corporate personality of the company is used to commit frauds and
improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent,
the façade of corporate personality might have to be removed to identify the persons who are really
guilty. This is known as ‘lifting of corporate veil’.

It refers to the situation where a shareholder is held liable for its corporation’s debts despite the rule
of limited liability and/of separate personality. The veil doctrine is invoked when shareholders blur the
distinction between the corporation and the shareholders. A company or corporation can only act
through human agents that compose it. As a result, there are two main ways through which a company
becomes liable in company or corporate law: firstly, through direct liability (for direct infringement)
and secondly through secondary liability (for acts of its human agents acting in the course of their
employment).

Doctrine of Ultra Vires

The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of a
company, as specified in its Memorandum of Association, can be departed from only to the extent
permitted by the Act. Hence, if the company does an act, or enters into a contract beyond the powers
of the directors and/or the company itself, then the said act/contract is void and not legally binding
on the company.

The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only to the acts performed
in excess of the legal powers of the doer. This works on an assumption that the powers are limited in
nature. Since the Doctrine of Ultra Vires limits the company to the objects specified in the
memorandum, the company can be:
 • Restrained from using its funds for purposes other than those specified in the Memorandum
• Restrained from carrying on trade different from the one authorized.

The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If a company
supplies goods or offers service or lends money on an ultra vires contract, then it cannot obtain
payment or recover the loan.

Winding up of a Company
Mode # 1. Compulsory Winding Up by the Court:
Winding up of a Company by an order of the court is called the compulsory winding up. Section 433
of the Companies Act lays down the circumstances under which a Company may be compulsorily
wound up.

They are:

(a) If the Company has by special resolution, resolved that the Company may be wound up by the
court.

(b) If default is made in delivering the statutory report to the Registrar or in holding the statutory
meeting.

(c) If the Company does not commence its business within a year from its incorporation or suspends
it for a whole year.

(d) If the number of members is reduced, in the case of a public Company below seven, and in the
case of a private company below two.

(e) If the Company is unable to pay its debts.

(f) If the court is of the opinion that it is just and equitable that the company should be wound up.

Persons Entitled to Apply for Liquidation:

The Petition for winding up of a Company may be presented by any of the following persons (Sec.
439):

(1) The Company.

(2) The creditors which include contingent creditors, prospective creditors, secured creditors,
debenture holders, or a trustee for debenture holders.

(3) The contributories – comprise present and past shareholders of a Company (Secs. 426 and 428).

(4) The Registrar.

(5) Any person authorised by the Central Government on the-basis of report of inspectors.

Mode # 2. Voluntary Winding Up:

A voluntary winding up occurs without the intervention of the court. Here the Company and its
creditors mutually settle their affairs without going to the court.
This mode of winding up takes place on:

(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the
Company is to be dissolved, and adoption by the Company in general meeting of an ordinary
resolution to wind up voluntarily; or

(b) The passing of a special resolution by the Company to wind up voluntarily.

Section 488 provides for two types of voluntary winding up;

(a) Member’s voluntary winding up and

(b) Creditor’s voluntary winding up.

(a) Member’s Voluntary Winding Up:

This type of winding up occurs only when the Company is solvent. It requires a declaration of the
Company’s solvency at the meeting of Board of Directors. The declaration must specify the director’s
opinion that the Company has no debt or it will be able to pay its debts in full within three years of
the commencement of the winding up.

The company in general meeting must then appoint a liquidator and fix his remuneration. With his
appointment, all the powers of the Board and the managing director or manager cease unless the
company in general meeting sanctions otherwise.

The liquidator must annually call a general meeting to lay before it an account of his dealings and the
conduct of the winding up.

When the company’s affairs are fully wound up, he must:

(a) Prepare an Account – Liquidator’s Final Statement of Account – to show the disposition and
disbursement of the company’s property;

(b) Call a final meeting of the company of laying the final account before it, and

(c) Send a copy of the account and a return of the meeting to the Registrar of Companies. The company
thereafter dissolves.

(b) Creditor’s Voluntary Winding Up:

It occurs in the absence of declaration of solvency i.e., when the company is insolvent. Hence, the Act
empowers the creditors of dominate over the members in this mode of winding up so as to effectively
protect their interest. It requires the company to hold the creditors’ meeting wherein the Board must
make a full statement of the company’s affairs together with a detailed list of creditors including their
estimated claims.

Both the members and creditors at their respective meeting nominate a liquidator and, on their
disagreement,, the creditor’s nominee is appointed as the liquidator. All the powers of the Board then
cease unless the creditor’s meeting sanctions otherwise.
The liquidator must annually call here not only the members’ meeting but also the creditors’ meeting
to lay an account of his dealings and the conduct of the winding up. So also, he must call a final general
meeting of the members and creditors for the company’s dissolution as in the case of member’s
winding up.

Mode # 3. Winding Up Subject to Supervision of the Court:

Windings up with the intervention of the court are ordered where the voluntary winding up has
already commenced. As a matter of fact, it is the voluntary winding up but under the supervision of
the court. A court may approve a resolution passed by the Company for voluntary winding up but the
winding up should continue under the supervision of the court.

The court will issue such an order only under the following circumstances:

(a) If the resolution for winding up was obtained by fraud by the company; or

(b) If the rules pertaining to winding up are not being properly adhered to; or

(c) If the liquidator is found to be prejudicial or is negligent in releasing the assets of the company.

The Court may exercise the same powers as it has in the case of compulsory winding up under the
order of the court.
 M0DULE 3

partnership

A partnership is an arrangement where parties, known as business partners, agree to cooperate to

advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-
based organizations, schools, governments or combinations.

THE INDIAN PARTNERSHIP ACT’ 1932 Section.4 of the Indian Partnership Act, 1932 defines Partnership
in the following terms: “ Partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all.”

Kinds of Partnership

The distinction between partnerships can be done on the basis of two criteria. They are as follows With
Regard to the Duration of the partnership – either Partnership at Will or Partnership for Fixed Duration
With regards to the extent of the business carried by the partnership – either General Partnership or
Particular Partnership

1.Partnership at Will

When forming a partnership if there is no clause about the expiration of such a partnership, we call it a
partnership at will. According to Section 7 of the Indian Partnership Act 1932, there are
two conditions to be fulfilled for a partnership to be a partnership at will. There is no agreement about a
fixed period for the existence of a partnership.No provision with regards to the determination of a
partnership So if there is an agreement between the partners about the duration or the determination
of the firm, this will not be a partnership at will. But if a partnership was entered into a fixed term and
continues to operate beyond this term it will become a partnership at will from the expiration of this
term.

2] Partnership for a Fixed Term

Now during the creation of a partnership, the partners may agree on the duration of this arrangement.
This would mean the partnership was created for a fixed duration of time.Hence such a partnership will
not be a partnership at will, it will be a partnership for a fixed term. After the expiration of such a
duration, the partnership shall also end.However, there may be cases when the partners continue their
business even after the expiration of the duration. They continue to share profits and there is an
element of mutual agency. Then in such a case, the partnership will now be a partnership at will.
3] Particular Partnership

A partnership can be formed for carrying on continuous business, or it can be formed for one particular
venture or undertaking. If the partnership is formed only to carry out one business venture or to
complete one undertaking such a partnership is known as a particular partnership. After the completion
of the said venture or activity, the partnership will be dissolved. However, the partners can come to an
agreement to continue the said partnership. But in the absence of this, the partnership ends when the
task is complete.

4] Partner by Estoppel

If a person holds out to another that he is a partner of the firm, either by his words, actions or conduct
then such a partner cannot deny that he is not a partner. This basically means that even though such a
person is not a partner he has represented himself as such, and so he becomes partner by estoppel or
partner by holding out.

5] Partner in Profits Only

This partner will only share the profits of the firm, he will not be liable for any liabilities. Even when
dealing with third parties he will be liable for all acts of profit only, he will share none of the liabilities.

6] Minor Partner

A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be
admitted to the benefits of a partnership if all partner gives their consent for the same. He will share
profits of the firm but his liability for the losses will be limited to his share in the firm.Such a minor
partner on attaining majority (becoming 18 years of age) has six months to decide if he wishes to
become a partner of the firm. He must then declare his decision via a public notice. So whether he
continues as a partner or decides to retire, in both cases he will have to issue a public notice.

True Test of a Partnership

The true test of a partnership is a way for us to determine whether a group or association of persons is a
partnership firm or not. It also helps us recognize the partners of the firm and separate them from
the third parties.
The idea behind such a true test is to examine the relevant facts and determine the real relations
between parties and conclude about the presence of a partnership. Let us take a look at the three
important aspects of a true test of a partnership, namely agreement, profit sharing and mutual agency.

1] Agreement/Contract between Parties

For there to be a partnership between two or more persons there has to be an agreement of
partnership between them. The partnership cannot arise family status or any operation of law. There
has to be a specific agreement between the partners. So if family members of a HUF are running
a business together this is not a partnership. Because there is no agreement of partnership between
them. The members of HUF are born into the HUF, so they cannot be partners.

2] Profit Sharing

Sharing of profits is an aspect of the true test of a partnership. However, profit sharing is only a prima
facie evidence of a partnership. The Act does not consider profit sharing as a conclusive evidence of a
partnership. This is because there are cases of profit sharing that are still contradictory to a partnership.
Let us see some such cases Sharing of profits/ gross receipts from a property that two or more persons
own together or have a joint interest in is not a partnership A share of profits given to an agent or
servant does not make him a partner If a share of the profit is given to a widow or child of a deceased
partner does not make them partners Part of the profits shared with the previous owner as a part of
goodwill or as a form of consideration will not make him a partner. Now ascertaining this motive
becomes difficult if there is no express agreement between the concerned parties. In such a case we will
consider the cumulative effect of all relevant facts. This will help us to determine the true relationship
between the parties.

3] Mutual Agency

This is the truest test of a partnership, it I the cardinal principle of a partnership. So if a partner is both
the principle as well as an agent of the firm we can say that mutual agency exists. This means that the
actions of any partner/s will bind all the other partners as well. So whenever there is a confusion about
the existence of a partnership between people we check for the presence of a mutual agency. If such an
agency exists between the parties who run a business together and share profits it will be deemed that a
partnership exists.

Partnership Deed

Partnership Deed is a document containing the terms and conditions of a partnership business. It is an
agreement in writing signed by all the partners duly stamped and registered. It defines the rights, duties,
and obligations of partners. The partnership deed must not contain any term which is contrary to the
provisions of The Indian Partnership Act 1932. Even though it is not necessary to have a written
agreement, a written agreement is helpful in preventing and resolving disputes among the partners. The
terms and conditions of a partnership deed can be changed with the consent of all the partners.
A partnership deed normally contains the following clauses:

1. Name of the firm.

2. Nature of the firm’s business

3. The principal place of business.

4. Duration of partnership, if any

5. Names and addresses of partners

6. Amount of capital to be contributed by each partner

7. The amount which can be withdrawn by each partner.

8. The profit-sharing ratio.

9. Rate of interest, if any

10. Amount of Salary or commission payable to partners.

11. Allocation of work among partners.

12. Mode of valuation of goodwill.

13. Procedure for admission, retirement, etc. of a partner.

14. Procedure for maintaining accounts and getting them audited.

15. Procedure to be followed in the event of the dissolution of the firm and settlement of accounts.

16. The arbitration clause in case of disputes among partners.

17. Loans and advances by partners and rate of interest payable on them.

Partnership Property

Section 14 of the Indian Partnership Act, 1932, details the law surrounding the property of the firm
or partnership property. Further, section 15 explains the various applications of such property. In this
article, we will endeavor to understand partnership property and its applications.

1.Partnership Property (Section 14)

The property of a firm is also known as partnership property, partnership assets, joint stock, common
stock, or joint estate. A partnership property includes all property and rights, and interest in property
that the partnership firm purchases.These purchases can also be made for the purpose and in course of
the business of the firm, including the goodwill of the firm. All partners collectively own such properties.
Hence, a partnership property comprises of the following items if there is no agreement between the
partners showing any contrary intention: All property and rights and interest in property that the
partners purchase in the common stock as their contribution to the common business. All property and
rights and interest in property that the firm purchases either for the firm or for the purpose and in
course of the business of the firm.

2.Goodwill of the business.

Determining whether a particular property is partnership property depends on the true intention or
agreement between the partners. Hence, if a firm uses the property of a partner for its purposes, it does
not make it a partnership property unless that was the real intention. At any time, the partners may
agree to convert the property of a partner or partners into partnership property. If such a conversion is
made in good faith, then it would be effectual between the partners and against the creditors of the
firm. The partners may also agree to convert the separate property of any partners into the property of
the firm.

3.Goodwill

Section 14 specifies that the goodwill of a business is the property of the firm and is subject to
a contract between the partners. However, it does not define the term goodwill. Goodwill is the value of
the reputation of a business in respect of the expected future profits OVER AND ABOVE the profits that
a firm earns in the same class of business. It is a part of partnership property. The firm can sell the
goodwill separately or along with other properties. When a partnership firm dissolves, all partners have
a right to have the goodwill sold for the benefit of all the partners unless there is an agreement contrary
to the same. After the firm sells the goodwill, any partner may make an agreement with the buyer to not
carry on any business similar to that of the firm within a certain time-period or local limits. Such an
agreement is notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872 and is
valid if the restrictions are reasonable.

4.Application of Partnership Property (Section 15)

According to section 15, the partnership property should be held and used exclusively for the purpose of
the firm. While all partners have a community of interest in the property, during the subsistence of the
partnership no partner has a proprietary interest in the assets of the firm. Each partner has a right to his
share in the profits of the firm until the firm subsists. He also has a right to see that the application and
use of the assets of the firm are for the purpose of the business of the partnership

5. limited liability partnership

A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the
jurisdiction) have limited liabilities. It therefore can exhibit elements of partnerships and corporations.
In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence. This is
an important difference from the traditional partnership under the UK Partnership Act 1890, in which
each partner has joint (but not several) liability. In an LLP, some or all partners have a form of limited
liability similar to that of the shareholders of a corporation. Unlike corporate shareholders, the partners
have the right to manage the business directly.[1] In contrast, corporate shareholders must elect a
board of directors under the laws of various state charters.[1] The board organizes itself (also under the
laws of the various state charters) and hires corporate officers who then have as "corporate" individuals
the legal responsibility to manage the corporation in the corporation's best interest. An LLP also
contains a different level of tax liability from that of a corporation. Limited liability partnerships are
distinct from limited partnerships in some countries, which may allow all LLP partners to have limited
liability, while a limited partnership may require at least one unlimited partner and allow others to
assume the role of a passive and limited liability investor. As a result, in these countries, the LLP is more
suited for businesses in which all investors wish to take an active role in management.

In some countries, an LLP must have at least one person known as a "general partner", who has
unlimited liability for the company.There is considerable difference between LLPs as constituted in the
U.S. and those introduced in the UK under the Limited Liability Partnerships Act 2000 and adopted
elsewhere. The UK LLP is, despite its name, specifically legislated as a corporate body rather than as a
partnership.

NEGOTIABLE INSTRUMENT

A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either
on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a
document contemplated by or consisting of a contract, which promises the payment of money without
condition, which may be paid either on demand or at a future date. The term has different meanings
depending on the use of the term as it is used in the application of different laws, and depending in
which country and context it is used.

"Negotiable Instrument" means a piece of paper in writing entitling a right to the holder, a certain sum
of money. It is a piece of paper which contains some value and is transferable by simple delivery or
sometimes by endorsement and delivery.

Characteristics of a Negotiable Instrument

1. Freely transferable. The property is a negotiable instrument passes from the one person to another by
delivery, if the instrument is payable to bearer, and endorsement and delivery if it is payable order

2. The title of holder free from all defects .a person taking in an instrument bona fide and for value,
known as the holder in due course, gets the instrument free from all defects in the title of the
transferor. He is not in any way affected by any defect in the title of the transferor of any prior party .he
is not affected by certain defense which might be available against the previous holder, for example,
fraud, provided he him self is not a party to it
3. Recovery, the holder in due course can sue upon a negotiable instrument in his own name for the
recovery of the amount further he need not give notes of the instrument to pa

4. Presumption. The Certain presumption applies to all negotiable instruments unless the contrary is
provided. This presumption is dealt with in secs, 118 and 119 and are as follows

(a) Consideration. Every negotiable is presumed to have been made drawn, accepted, indorsed,
negotiable or transferred for consideration. This would help a holder to get a decree from a court
without any difficulty.

(b) Date. Every negotiable instrument bearing a date is presumed to have been made or drawn on such
date.

(c) Time of acceptance. When a bill of exchange has been accepted, it is presumed that it was accepted
within a reasonable time of its date and before its maturity

(d) Time of transfer. Every transfer of negotiable instrument is presumed to have been made before its
maturity.

(e) Order of endorsements. the endorsement appearing upon a negotiable are presumed to have been
made in the order in which they appear thereon

(f) Stamp. When an instrument has been lost it is presumed that it duly stamped.

(g) Holder a holder in due course. Every holder of a negotiable instrument is presumed to be holder in
due course (sec 118)

(h) Proof of protest .in a suit upon an instrument which has been dishonor, the court, on proof of the
protest presumes the fact of dishonor, unless and such fact is disproved (sec 119).

Types of Negotiable Instrument

1.Promissory note

A promissory note, sometimes referred to as a note payable, is a legal instrument (more particularly, a
financing instrument and a debt instrument), in which one party (the maker or issuer) promises in
writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable
future time or on demand of the payee, under specific terms.

The terms of a note usually include the principal amount, the interest rate if any, the parties, the date,
the terms of repayment (which could include interest) and the maturity date. Sometimes, provisions are
included concerning the payee's rights in the event of a default, which may include foreclosure of the
maker's assets. In foreclosures and contract breaches, promissory notes under CPLR 5001 allow
creditors to recover prejudgement interest from the date interest is due until liability is
established.[1][2] For loans between individuals, writing and signing a promissory note are often
instrumental for tax and record keeping. A promissory note alone is typically unsecured.
2. Bill of Exchange

A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another party as
of a predetermined date or on demand. Bills of exchange are primarily used in international trade. Their
use has declined as other forms of payment have become more popular. There are three entities that
may be involved with a bill of exchange transaction. They are as follows:

Drawee. This party pays the amount stated on the bill of exchange to the payee.

Drawer. This party requires the drawee to pay a third party (or the drawer can be paid by the

drawee).Payee. This party is paid the amount specified on the bill of exchange by the drawee.

A bill of exchange normally includes the following information:

Title. The term "bill of exchange" is noted on the face of the document.

Amount. The amount to be paid, expressed both numerically and written in text.

As of. The date on which the amount is to be paid. Can be stated as a certain number of days after an
event, such as a shipment or receipt of a delivery.

Payee. States the name (and possibly the address) of the party to be paid.

Identification number. The bill should contain a unique identifying number.

Signature. The bill is signed by a person authorized to commit the drawee to pay the designated amount
of funds.

Issuers of bills of exchange use their own formats, so there is some variation from the information just
noted, as well as in the layout of the document.A bill of exchange is transferable, so the drawee may
find itself paying an entirely different party than it initially agreed to pay. The payee can transfer the bill
to another party by endorsing the back of the document. A payee may sell a bill of exchange to another
party for a discounted price in order to obtain funds prior to the payment date specified on the bill. The
discount represents the interest cost associated with being paid early.A bill of exchange does not usually
include a requirement to pay interest. If interest is to be paid, then the percentage interest rate is stated
on the document. If a bill does not pay interest, then it is effectively a post-dated check.If an entity
accepts a bill of exchange, its risk is that the drawee may not pay. This is a particular concern if the
drawee is a person or non-bank business. No matter who the drawee is, the payee should investigate
the creditworthiness of the issuer before accepting the bill. If the drawee refuses to pay on the due date
of the bill, then the bill is said to be dishonored
3.CHEQUE

cheque, or check (American English; see spelling differences), is a document that orders a bank to pay a
specific amount of money from a person's account to the person in whose name the cheque has been
issued. The person writing the cheque, known as the drawer, has a transaction banking account (often
called a current, cheque, chequing or checking account) where their money is held. The drawer writes
the various details including the monetary amount, date, and a payee on the cheque, and signs it,
ordering their bank, known as the drawee, to pay that person or company the amount of money stated.

Difference between Cheque and Bill of Exchange

1. A cheque is always drawn on a banker, while a bill of exchange may be drawn on any one, including a
banker.

2. A cheque can only be drawn payable on demand; a bill of exchange may be drawn payable on
demand, or on the expiry of a certain period after date or sight.

3. A cheque does not require acceptance and is intended for immediate payment while a bill of
exchange must be accepted before payment can be demanded.

4. A grace of three days is allowed in the case of payment of a time bill of exchange, while no grace is
given in case of a cheque.

5. The drawer of a bill of exchange is discharged, if it is not presented for payment, but the drawer of a
cheque is discharged only if he suffers any damage by delay in presentation for payment.

6. Notice of dishonour of a bill of exchange is necessary, but not in the case of a cheque.

7. A cheque being a revocable mandate, the authority may be revoked by countermanding payment,
and is determined by notice of the customer’s death or insolvency. This is not so in the case of a bill of
exchange.

8. A cheque may be crossed, but not a bill of exchange.

9. A cheque does not require any stamp whereas except in certain cases, a bill of exchange must be
stamped.

Characteristics of Negotiable Instrument presumption

Section 46 in The Negotiable Instruments Act, 1881

46. Delivery.—The making, acceptance or indorsement of a promissory note, bill of exchange or cheque
is completed by delivery, actual or constructive. As between parties standing in immediate relation;
delivery to be effectual must be made by the party making, accepting or indorsing the instrument, or by
a person authorized by him in that behalf. As between such parties and any holder of the instrument
other than a holder in due course, it may be shown that the instrument was delivered conditionally or
for a special purpose only, and not for the purpose of transferring absolutely the property therein. A
promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof. A
promissory note, bill of exchange or cheque payable to order is negotiable by the holder by indorsement
and delivery thereof.

Section 47 in The Negotiable Instruments Act, 1881

47. Negotiation by delivery.—Subject to the provisions of section 58, a promissory note, bill of exchange
or cheque payable to bearer is negotiable by delivery thereof.

(Exception) —A promissory note, bill of exchange or cheque delivered on condition that it is not to take
effect except in a certain event is not negotiable (except in the hands of a holder for value without
notice of the condition) unless such event happens. Illustrations

(a) A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep for B. The
instrument has been negotiated.

(b) A, the holder of a negotiable instrument payable to bearer, which is in the hands of A’s banker, who
is at the time the banker of B, directs the banker to transfer the instrument to B’s credit in the banker’s
account with B. The banker does so, and accordingly now possesses the instrument as B’s agent. The
instrument has been negotiated, and B has become the holder of it.

Section 48 of Negotiable Instruments Act 1881: "Negotiation by indorsement"

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to order,
is negotiable by the holder by indorsement and delivery thereof.

Section 49 of Negotiable Instruments Act 1881: "Conversion of indorsement in blank into indorsement in
full"

The holder of a negotiable instrument indorsed in blank may, without signing his own name, by writing
above the indorser's signature a direction to pay to any other person as indorsee, convert the
indorsement in blank into an indorsement in full; and the holder does not thereby incur the
responsibility of an indorser.

Section 50 of Negotiable Instruments Act 1881: "Effect of indorsement"

The indorsement of a negotiable instrument followed by delivery transfers to the indorsee the property
therein with the right of further negotiation; but the indorsement may, by express words, restrict or
exclude such right, or may merely constitute the indorsee an agent to indorse the instrument, or to
receive its contents for the indorser, or for some other specified person
Section 51 of Negotiable Instruments Act 1881: "Who may negotiate Indorser who excludes his own
liability or makes it conditional"

Every sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payees or
indorsees, of a negotiable instrument may, if the negotiability of such instrument has not been
restricted or excluded as mentioned in section 50, indorse and negotiate the same.

Section 52 of Negotiable Instruments Act 1881: "Who may negotiate Indorser who excludes his own
liability or makes it conditional"

The indorser of a negotiable instrument may, by express words in the indorsement, exclude his own
liability thereon, or make such liability or the right of the indorsee to receive the amount due thereon
depend upon the happening of a specified event, although such event may never happen.Where an
indorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate
indorsers are liable to him.

Section 53 of Negotiable Instruments Act 1881: "Holder deriving title from holder in due course"

A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon
of that holder in due course.

Section 54 of Negotiable Instruments Act 1881: "Instrument indorsed in blank"

Subject to the provisions hereinafter contained as to crossed cheques, a negotiable instrument indorsed
in blank is payable to the bearer thereof even although originally payable to order.

Section 55 of Negotiable Instruments Act 1881: "Conversion of indorsement in blank into indorsement in
full"

If a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it
cannot be claimed from the indorser in full, except by the person to whom it has been indorsed in full,
or by one who derives title through such person.

Section 56 of Negotiable Instruments Act 1881: "Indorsement for part of sum due"

No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to
transfer only a part of the amount appearing to be due on the instrument; but where such amount has
been partly paid, a note to that effect may be indorsed on the instrument, which may then be
negotiated for the balance.
Section 57 of Negotiable Instruments Act 1881: "Legal representative cannot by delivery only negotiate
instrument indorsed by deceased"

The legal representative of a deceased person cannot negotiate by delivery only a promissory note, bill
of exchange or cheque payable to order and indorsed by the deceased but not delivered.

Section 58 of Negotiable Instruments Act 1881: "Instrument obtained by unlawful means or for unlawful
consideration"

When a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder
thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or indorsee who
claims through the person who found or so obtained the instrument is entitled to receive the amount
due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such
possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course.

Section 59 of Negotiable Instruments Act 1881: "Instrument acquired after dishonour or when overdue"

The holder of a negotiable instrument, who has acquired it after dishonour, whether by non-acceptance
or non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights
thereon of his transferor:

Section 60 of Negotiable Instruments Act 1881: "Instrument negotiable till payment or satisfaction"

A negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity)
until payment or satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not
after such payment or satisfaction

Crossing of cheques

A crossed cheque is a cheque that has been marked specifying an instruction on the way it is to be
redeemed. A common instruction is for the cheque to be deposited directly to an account with a bank
and not to be immediately cashed by the holder over the bank counter. The format and wording varies
between countries, but generally, two parallel lines may be placed either vertically across the cheque or
on the top left hand corner of the cheque. By using crossed cheques, cheque writers can effectively
protect the instrument from being stolen or cashed by unauthorized persons.
Types of crossingEdit

General crossingEdit

A crossed cheque generally is a cheque that only bears two parallel transverse lines, optionally with the
words 'and company' or '& Co.' (or any abbreviation of them) on the face of the cheque, between the
lines, usually at the top left corner or at any place in the approximate half (in width) of the cheque.[2] In
the UK, the crossing is across the cheque by the person who originally wrote the cheque (the drawer), or
it can legitimately be added by the person the cheque is payable to (the payee), or even by the bank
that the cheque is being paid into.[3]Generally-crossed cheques can only be paid into a bank
account,[4] so that the beneficiary can be traced.[5][citation needed]A crossed cheque on its own does
not affect the negotiability of the instrument

Restrictive or special crossingsEdit

Where some customary instruction is written between the two parallel transverse lines (constituting
crossing of cheque) that may result in imposing certain restrictions on the collecting or paying banker, it
is called restrictive crossing. The example is "State Bank of India". In these cases, the respective
restrictions mandate to pay the cheque through State Bank of India (acting as collecting banker) only

Dishonour of Cheque

A cheque is said to be honoured, if the banks give the amount to the payee. While, if the bank refuses to
pay the amount to the payee, the cheque is said to be dishonoured. In other words, dishonour of
cheque is a condition in which bank refuses to pay the amount of cheque to the payee.

Whenever the cheque is dishonoured, the drawee bank instantly issues a ‘Cheque Return Memo’ to the
payee banker specifying the reasons for dishonour. The payee banker provides the memo and the
dishonoured cheque to the payee. The payee has an option to resubmit the cheque within three months
of the date specified on the cheque after fulfilling the reason for the dishonour of cheque.

Reasons for Dishonour of Cheque

1. If the cheque is overwritten. Know ‘How to write a Cheque?’

2. If the signature is absent or the signature in the cheque does not match with the specimen signature
kept by the bank.

3. If the name of the payee is absent or not clearly written.

4. If the amount written in words and figures does not match with each other.
5. If the account number is not mentioned clearly or is altogether absent.

6. If the drawer orders the bank to stop payment on the cheque.

7. If the court of law has given an order to the bank to stop payment on the cheque.

8. If the drawer has closed the account before presenting the cheque.

9. If the fund in the bank account is insufficient to meet the payment of the cheque.

10. If the bank receives the information regarding the death or lunacy or insolvency of the drawer.

11. If any alteration made on the cheque is not proved by the drawer by giving his/her signature.

12. If the date is not mentioned or written incorrectly or the date mentioned is of three months before.

Section 138 in The Negotiable Instruments Act, 1881

18 [ 138 Dishonour of cheque for insufficiency, etc., of funds in the account. —Where any cheque drawn
by a person on an account maintained by him with a banker for payment of any amount of money to
another person from out of that account for the discharge, in whole or in part, of any debt or other
liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of
that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from
that account by an agreement made with that bank, such person shall be deemed to have committed an
offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment
for 19 [a term which may be extended to two years], or with fine which may extend to twice the amount
of the cheque, or with both: Provided that nothing contained in this section shall apply unless—

(a) the cheque has been presented to the bank within a period of six months from the date on which it is
drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the
payment of the said amount of money by giving a notice in writing, to the drawer of the
cheque, 20 [within thirty days] of the receipt of information by him from the bank regarding the return
of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or,
as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the
said notice.

Section 139 in The Negotiable Instruments Act, 1881

1[139. Presumption in favour of holder.—It shall be presumed, unless the contrary is proved, that the
holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in
whole or in part, of any debt or other liability.
Section 140 in The Negotiable Instruments Act, 1881

1[140. Defence which may not be allowed in any prosecution under section 138.—It shall not be a
defence in a prosecution for an offence under section 138 that the drawer had no reason to believe
when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated
in that section.]

Section 141 in The Negotiable Instruments Act, 1881

21 [ 141 Offences by companies. —

(1) If the person committing an offence under section 138 is a company, every person who, at the time
the offence was committed, was in charge of, and was responsible to the company for the conduct of
the business of the company, as well as the company, shall be deemed to be guilty of the offence and
shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this
sub-section shall render any person liable to punishment if he proves that the offence was committed
without his knowledge, or that he had exercised all due diligence to prevent the commission of such
offence: 22 [Provided further that where a person is nominated as a Director of a company by virtue of
his holding any office or employment in the Central Government or State Government or a financial
corporation owned or controlled by the Central Government or the State Government, as the case may
be, he shall not be liable for prosecution under this Chapter.]

(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been
committed by a company and it is proved that the offence has been committed with the consent or
connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other
officer of the company, such director, manager, secretary or other officer shall also be deemed to be
guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation.— For the purposes of this section,—

(a) “company” means any body corporate and includes a firm or other association of individuals; and

(b) “director”, in relation to a firm, means a partner in the firm.]

Section 142 in The Negotiable Instruments Act, 1881

23 [ 142 Cognizance of offences. —Notwithstanding anything contained in the Code of Criminal

Procedure, 1973 (2 of 1974)—
(a) no court shall take cognizance of any offence punishable under section 138 except upon a complaint,
in writing, made by the payee or, as the case may be, the holder in due course of the cheque;

(b) such complaint is made within one month of the date on which the cause of action arises under
clause (c) of the proviso to section 138: 24 [Provided that the cognizance of a complaint may be taken by
the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause
for not making a complaint within such period.]

(c) no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall
try any offence punishable under section 138.] COMMENTS

(i) Consequent upon the failure of the drawer to pay the money within the period of 15 days as
envisaged under clause (c) of the proviso to section 138, the liability of the drawer for being prosecuted
for the offence he has committed, arises, and the period of one month for filing the complaint under
section 142 is to be reckoned accordingly; Sadanandan Bhadran v. Madhavan Sunil Kumar, AIR 1998 SC
3043.

(ii) A manager or any other person authorised by the company can represent it during the course of legal
proceedings before the court and file a complaint; Salar Solvent Extractions Ltd. v. South India Viscose
Ltd., (1994) 3 Crimes 295 (Mad).

(iii) The Magistrate while taking cognizance has to look into the question whether the ingredients of an
offence have been made out or not; M/s. Pearey Lal Rajendra Kumar Pvt. Ltd. v. State of Rajasthan,
(1994) 3 Crimes 308 (Raj).

(iv) The cause of action for filing complaint would arise after the completion of 15 days from the date
the drawer receives the notice and fails to pay the amount within that period; V.N. Samant v. M/s.
K.G.N. Traders, (1994) 3 Crimes 725 (Karn).

(v) The payee cannot lodge a complaint after the completion of one month from the date on which the
cause of action arose as there is a bar under clause (b) of section 142; V.N. Samant v. M/s. K.G.N.
Traders, (1994) 3 Crimes 725 (Karn).

(vi) So long as the period of notice does not expire there can be no cause of action with the payee to
make the drawer liable criminally; T.K. Khungar v. Sanjay Ghai, (1994) 3 Crimes 802 (P & H).

(vii) It is well settled that it is not necessary for the Magistrate to specifically state that he is taking
cognizance of the offence. If he takes steps as provided under section 200, of the Code of Criminal
Procedure then it necessarily means that he has taken cognizance of the offence; R. Rajendra Reddy v.
M/s. Sujaya Feeds, (1994) 3 Crimes 692 (Karn).

(viii) The complainant must allege in his complaint that the cheque was dishonoured due to want of
sufficient amount in the account, even if the payment was stopped; Ballakrishna Pillai v. Abdullakutty,
(1994) 2 Crimes 327 (Ker).

(ix) Once a cause of action has arisen, the limitation will begun to run and it could not be stopped by
presenting the cheque again so as to have a fresh cause of action and fresh limitation; M/s. Chahal
Engineering and Construction Ltd. v. M/s. Verma Plywood Co., (1994) 1 Crimes 845 (P & H).
(x) The criminal prosecution has to be launched within one month of the expiry of 15 days' period from
the issuance of notice as provided by section 142(b) of the Act; M/s. Chahal Engineering and
Construction Ltd. v. M/s. Verma Plywood Co., (1994) 1 Crimes 845 (P & H).

(xi) When the cheque stood issued in favour of a company, a complaint under section 138 of the Act can
be filed by its Manager, Partner, Director or any person authorised by the company; M/s. Ruby Leather
Exports v. K. Venu, (1994) 1 Crimes 820 (Mad).

(xii) There is no ambiguity in clause (a) of section 142 of the Act, which prohibits or excludes complaints
being initiated by Power of Attorney, agents of the payee or the holder in due course. A Power of
Attorney, will be competent to initiate a private complaint by stepping into the shoes of the payee or
the holder in due course; M/s. Ruby Leather Exports v. K. Venu, (1994) 1 Crimes 820 (Mad).

CYBER LAW

Introduction Of The Information Technology Act, 2000

The Information Technology Act, 2000 provides legal recognition for transactions carried out by means
of electronic data interchange and other means of electronic communication, commonly referred to
as“electronic commerce”, which involve the use of alternatives to paper-based methods of
communication and storage of information, to facilitate electronic filing of documents with the
Government agencies and further to amend The Indian Penal Code, The Indian Evidence Act, 1872, The
Banker’s Books Evidence Act, 1891 and The Reserve Bank of India Act, 1934 and for matters connected
therewith or incidental thereto.

The Information Technology Act, 2000 extend to the whole of India and it applies also to any offence or
contravention thereunder committed outside India by any person.

Salient Features of The Information Technology Act, 2000

The salient features of The IT Act, 2000 are as follows −

Digital signature has been replaced with electronic signature to make it a more technology neutral act.It
elaborates on offenses, penalties, and breaches.It outlines the Justice Dispensation Systems for cyber-
crimes.

The Information Technology Act defines in a new section that cyber café is any facility from where the
access to the internet is offered by any person in the ordinary course of business to the members of the
public.

It provides for the constitution of the Cyber Regulations Advisory Committee.

The Information Technology Act is based on The Indian Penal Code, 1860, The Indian Evidence Act, 1872,
The Bankers’ Books Evidence Act, 1891, The Reserve Bank of India Act, 1934, etc.
It adds a provision to Section 81, which states that the provisions of the Act shall have overriding effect.
The provision states that nothing contained in the Act shall restrict any person from exercising any right
conferred under the Copyright Act, 1957.

Cybercrime

Cybercrime, or computer-oriented crime, is a crime that involves a computer and a network.[1] The
computer may have been used in the commission of a crime, or it may be the target.[2] Cybercrime may
threaten a person, company or a nation's security and financial health.[3]

There are many privacy concerns surrounding cybercrime when confidential information is intercepted
or disclosed, lawfully or otherwise. Internationally, both governmental and non-state actors engage in
cybercrimes, including espionage, financial theft, and other cross-border crimes. Cybercrimes crossing
international borders and involving the actions of at least one nation-state is sometimes referred to
as cyberwarfare.

Intellectual property

Intellectual property (IP) is a category of property that includes intangible creations of the human
intellect.[1][2] There are many types of intellectual property, and some countries recognize more than
others.[3][4][5][6][7] The most well-known types are copyrights, patents, trademarks, and trade secrets.
The modern concept of intellectual property developed in England in the 17th and 18th centuries. The
term "intellectual property" began to be used in the 19th century, though it was not until the late 20th
century that intellectual property became commonplace in the majority of the world's legal systems.
 MODULE 4

Sale of Goods Act 1930 (Sec 2- Sec 11)

Scope of the Act

The sale of Goods Act deals with ‘Sale of Goods Act,1930,’contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in goods to the buyer
for a price.” ‘Contract of sale’ is a generic term which includes both a sale as well as an
agreement to sell.

Essential elements of Contract of sale

1. Seller and buyer

There must be a seller as well as a buyer.’Buyer’ means a person who buys or agrees to buy
goods[Section 2910].’Seller’ means a person who sells or agrees to sell goods [Section
29(13)].

2. Goods

There must be some goods.’Goods’ means every kind of movable property other than
actionable claims and money includes stock 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[Section 2(7)].

3. Transfer of property

Property means the general property in goods,and not merely a special property[Section
2(11)].General property in goods means ownership of the goods. Special property in goods
means possession of goods.Thus,there must be either a transfer of ownership of goods or an
agreement to transfer the ownership of goods.The ownership may transfer either immediately
on completion of sale or sometime in future in agreement to sell.

4. Price

There must be a price.Price here means the money consideration for a slae of goods[Section
2(10)].When the consideration is only goods,it amounts to a ‘barter’ and not sale.When there
is no consideration ,it amounts to gift and not sale.

5. Essential elements of a valid contract

In addition to the aforesaid specific essential elements,all the essential elements of a valid
contract as specified under Section 10 of Indian Contract Act,1872 must also be present since
a contract of sale is a special type of a contract.

Meaning and types of goods

Meaning of goods[Section 2(7)]

Goods means every kind of movable property other than actionable claims and money,and
includes the following:

• Stock and share

• Growing crops,grass and thing attached to or forming part of the
land which are agreed to be served before sale or under the
Contract of sale.
Types of Goods[Section 6]

1.Existing Goods
Existing goods mean the goods which are either owned or possessed by the seller at the time
of contract of sale.The existing goods may be specific or ascertained or unascertained as
follows:

a) Specific Goods[Section 2(14)]:

These are the goods which are identified and agreed upon at the time when a contract of sale
is made-For example,specified TV,VCR,Car,Ring.

b) Ascertained Goods:
Goods are said to be ascertained when out of a mass of unascertained goods,the quantity
extracted for is identified and set aside for a given contract.Thus,when part of the goods
lying in bulk are identified and earmarked for sale,such goods are termed as ascertained
goods.

c) Unsanctioned Goods:
These are the goods which are not identified and agreed upon at the time when a contract of
sale is made e.g. goods in stock or lying in lots.

2. Future Goods[Section 2(6)]

Future goods mean goods to be manufactured or produced or acquired by the seller after the
making of the contract of sale.There can be an agreement to sell only.There can be no sale in
respect of future goods because one cannot sell what he does not possess.

3. Contingent Goods [Section 6(2)]

These are the goods the acquisition of which by the seller depends upon a
contingency which may or may not happen.
Price Of Goods
Meaning[Section 2(10)]
Price means the money consideration for a sale of goods.
Modes of determining Price [Section 9(1)]
There are three modes of determining the price as under:

• It may be fixed by the contract or

• It may be left to be fixed in an agreed manner
• It may be determined by the course of dealing between the parties.
• Thus,the price need not necessarily be fixed at the time of sale.
Consequences of not determining the Price in any of the Mode [Section 9(2)]
Where the price is not determined in accordance with Section 9(1),the buyer must pay seller a
reasonable price.What is a reasonable price is a question of fact dependent on the
circumstances of each particular case.It may be noted that a reasonable price need not be
market price.

Consequence of not Fixing Price by third party[Section 10(1)]

The agreement to sell goods becomes void if the following two conditions are fulfilled.

• If such agreement provided that the price is to be fixed by the valuation of a third
party,

• If such third party cannot or does not make such valuation.

Duty of buyer
A buyer who has received and appropriated the goods,must pay a reasonable price therefor.

Right of party not at fault to sue

Where such a third party is prevented from making the valuation by fault of the seller or
buyer,the party not at fault may maintain a suit for damages against the party in fault.

Conditions and Warranties

It is usual for both seller and buyer to make representations to
each other at the time of entering into a contract of sale. Some of these representations are
mere opinions which do not form a part of contract of sale.Whereas some of them may
become a part of contract of sale.Representations which become a part of contract of sale are
termed as stipulatuins which may rank as condition and warranty e.g. a mere commendation
of his goods by the seller doesn’t become a stipulatuin and gives no right of action to the
buyer against the seller as such representations are mere opinion on the part of the seller.But
where the seller assumes to assert a fact of which the buyer is ignorant,it will amount to a
stipulation forming an essential part of the contract of sale.

Meaning of Conditions [Section 12(2)]

A condition is a stipulation Which is essential to the main purpose of the contract The breach
of which gives the aggrieved party a right to terminate the contract.
Meaning of Warranty[Section 12(3)]
A warranty is a stipulation Which is collateral to the main purpose of the contract The breach
of which gives the aggrieved party a right to claim damages but not a right to reject goods
and to terminate the contract.

Conditions to be treated as Warranty[Section 13]

In the following three cases a breach of a condition is treated as a breach of a warranty:
Where the buyer waives a conditions; once the buyer waives a conditions,he cannot insist on
its fulfillment e.g. accepting defective goods or beyond the stipulated time amount to waiving
a conditions.

Where the buyer elects to treat breach of the condition as a breach of warranty;e.g. where he
claims damages instead of repudiating the contract.
Where the contract is not severable and the buyer has accepted the goods or part thereof,the
breach of any condition by the seller can only be treated as breach of warranty.It can not be
treated as a gorund for rejecting the goods unless otherwise specified in the
contract.Thus,where the buyer after purchasing the goods finds that some condition is not
fulfilled,he cannot reject the goods.He has to retain the goods entitling him to claim damages.

Express and Implied Conditions and Warranties

In a contract of sale of goods,conditions and warranties may be express or implied.

1.Express Conditions and Warranties.

These are expressly provided in the contract.For example,a buyer desires to buy a Sony TV
Model No. 2020.Here,model no. is an express condition.In an advertisement for Khaitan
fans,guatantee for 5 years is an express warranty.

2. Implied Conditions and Warranties

These are implied by law in every contract of sale of goods unless a contrary intention
appears from the terms of the contract.The various implied conditions and warranties have
been shown below:

Implied Conditions
1. Conditions as to title [ Section 14 (a)]
There is an implied condition on the part of the seller that

In the case of a sale,he has a right to sell the goods,and

In the case of an agreement to sell,he will have a right to sell the goods at the time when the
property is to pass.

2. Condition in case of sale by description [Section 15]

Where there is a contract of sale of goods by description,there is an implied condition that the
goods shall correspond with description.The main idea is that the goods supplied must be
same as were described by the seller.Sale of goods by description include many situations as
under:
i. Where the buyer has never seen the goods and buys them only onm the basis of description
given by the seller.
ii. Where the buyer has seen the goods but he buys them only on the basis of description
given by the seller.
iii. Where the method pf packing has been described.

3. Condition in case of sale by sample [Section 17]

A contract of sale is a contract for sale by sample when there is a term in the contract, express
or implied,to that effect.Such sale by sample is subject to the following three conditions:

The goods must correspond with the sample in quality.

The buyer must have a reasonable opportunity of comparing the bulk with the sample.
The goods must be free from any defect which renders them unmerchantable and which
would not be apparent on reasonable examination of the sample.Such defects are called latent
defects and are discovered when the goods are put to use.

4. Condition in case of sale by description and sample [Section 15]

If the sale is by sample as well as by description, the goods must correspond with the sample
as well as the description.

5. Condition as to quality or fitness [Section 16(1)]

There is no implied condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale.In other words,the buyer must satisfy himself about the
quality as well as the suitability of the goods.

Exception to this rule:

There is an implied condition that the goods shall be reasonably fit for a particular purpose
described if the following three conditions are satisfied:

1. The particular for which goods are required must have been
disclosed(expressly or impliedly) by the buyer to the seller.
2. The buyer must have relied upon the seller’s skill or judgement.
3. The seller’s business must be to sell such goods.
6. Condition as to merchantable quality[Section 16(2)]
Where the goods are 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.The
expression ‘ merchantable quality’ means that the quality and condition of the goods must be
such that a man of ordinary prudence would accept them as the goods of that
description.Goods must be free from any latent or hidden defects.
7. Condition as to wholesomeness
In case of eatables or provisions or foodstuffs,there is an implied condition as to
wholesomeness.Condition as to wholesomeness means that the goods shall be fit for human
consumption.

8. Coditions implied by custom [Section 16(3)]

Condition as to quality or fitness for a particular purpose may be annexed by the usage of
trade.

Implied warranties
a)Warranty as to quiet possession [Section14(b)]
There is an implied warranty that the buyer shall have and enjoy quiet possession of the
goods.The reach of this warranty gives buyer a right to claim damages from the seller.

b)Warranty of freedom from encumbrances [Section 14(c)]

There is an implied warranty that the goods are free from any charge or encumbrance in
favour of any third person if the buyer is not aware of such charge or encumbrance.The
breach of this warranty gives buyer a right to claim damages from the seller.

• Warranty as to quality or fitness for a particular purpose annexed

by usage of trade[Section 16(3)]
• Warranty to disclose dangerous nature of goods
In case of goods of dangerous nature the seller fails to do so, the buyer may make him liable
for breach of implied warranty.

Right of Unpaid seller

Meaning of an Unpaid Seller [Sec 45(1)(2)]

The seller of goods is deemed to be an ‘unpaid seller’-

When the whole of the price has not been paid or tendered
When a bill of exchange or other negotiable instrument(such as cheque) has been received as
conditional payment,and it has been dishonoured[Section 45(1)].
The term ‘seller’includes any person who is in the position of a seller(for instance,an agent of
the seller to whom the bill of lading has been endorsed,or a consignor or agent who has
himself paid,or is directly responsible for the price) [Section 4592)].

Rights of an Unpaid Seller [Section 46-52,54-56,60-61]

The rights of an unpaid seller can broadly be classified under the following two categories:

Rights against the goods

Rights against the buyer personally

I Rights against the goods where the property in the goods has passed to the buyer
a) Right of Lien [Section 47,48 and 49]
Meaning of Right of Lein:
The right of lien means the right to retain the possession of the goods until the full price is
received. Three circumstance under which right of lien can be exercised[Section 47(1)]

1.Where the goods have been sold without any stipulation to credit;
2.Where the goods have been sold on credit,but the term of credit has expired;
3.Where the buyer becomes insolvent.
Other provisions regarding right of lien[Sections 47(2),48,49(2)]
1.The seller may exercise his right of lien,even if he possesses the goods as agent or bailee
for buyer[Section 47(2)]
2.Where an unpaid seller has made part delivery of the goods,he may exercise his right of lien
on the remainder,unless such part delivery has been made under such circumstances as to
show agreement to waive the lien[Section 48].
3.The seller may exercise his right of lien even though he has obtained a decree for the price
of the goods[Section 49(2)].

Circumstances under which right of lien in the following cases:

1.When he delivers the goods to a carrier or other bailee for the purpose of transmission to
the buyer without reserving the right of disposal of the goods[Section 49(1)(a)].
2.When the buyer or his agent lawfully obtains possession of the goods [Section 49(1)(b)]
3.When the seller waives his right of lien[Section 49(1)(c)].
4.When the buyer disposes of the goods by sale or in any other manner with the consent of
the seller[Section 53(1)].
5.Where document of title to goods has been issued or lawfully transferres to any person as
buyer or owner of the goods and that person transfers the document by way of sale,to a
person who takes the document in good faith and for consideration.[Proviso to Section
53(1)].

b) Right of Stoppage of Goods in Transit

The right of stoppage of goods means the right of stopping the goods while they are in
transit,to regain possession and to retain them till the full price is paid.

Conditions under which right of stoppage in transit can be exercised[Section 50]

The unpaid seller can exercise the right of stoppage in transit only if the following conditions
are fulfilled:
1.The seller must have parted with the possession of goods,i.e. the goods must not be in the
possession of seller.
2.The goods must be in the course of transit.
3.The buyer must have become insolvent.

c)Right of Resale[Section 46(1) and 54]

An unpaid seller can resell the goods under the following three circumstance:
1.Where the goods are of a perishable nature.
2.Where the seller expressly reserves a right of resale if the buyer commits a default in
making payment.
3.Where the unpaid seller who has exercised his right of lien or stoppage in transit gives a
notice to the buyer about his intention to resell an dbuyer does not pay or tender within a
reasonable time.
II Rights against the goods where the property in the goods has not passed to the buyer
Right of withholding delivery[Section 46(2)]
Where the property in the goods has not been passed to the buyer, the unpaid seller, cannot
exercise right of lien, but get a right of withholding the delivery of goods, similar to and co-
extensive with lien and stoppage in transit where the property has passed to the buyer.

Rights of Unpaid Seller against the Buyer Personally

The unpaid seller, in addition to his rights against the goods as discussed above, has the
following three rights of action against the buyer personally:

1. Suit for price (Sec. 55). Where property in goods has passed to the buyer; or where the sale
price is payable ‘on a day certain’, although the property in goods has not passed; and the
buyer wrongfully neglects or refuses to pay the price according to the terms of the contract,
the seller is entitled to sue the buyer for price, irrespective of the delivery of goods. Where
the goods have not been delivered, the seller would file a suit for price normally when the
goods have been manufactured to some special order and thus are unsaleable otherwise.

2. Suit for damages for non-acceptance (Sec. 56). Where the buyer wrongfully neglects or
refuses to accept and pay for the goods, the seller may sue him for damages for non-
acceptance. The seller’s remedy in this case is a suit for damages rather than an action for the
full price of the goods.

3. Suit for Interest [Section 61(2)]

In case of breach of the contract on the part of seller, the buyer may sue the seller for interest
from the date on which the payment was made.

RIGHTS AND DUTIES OF BUYER AND SELLER

There are certain terms and conditions in a contract without which no contract can be
executed. These terms and conditions may include time, place of delivery of goods etc.
Basically, these terms and conditions are the rights and duties of the parties (buyer and seller)
to the contract which has to be fulfilled/ performed in its true spirit.

Seller : A person who sells his goods.

Buyer : A person to whom the goods are sold / a person who purchases the goods.
RIGHTS OF THE BUYER

1. Right to have delivery of goods

It is the basic right of the buyer to take the delivery of goods from the seller after
payment of consideration.
2. Right to Reject
It is the right of the buyer to reject the goods if it is found that the seller has delivered
him the goods of other quantity or quality or if buyer notices any defects in the goods
he may also refuse to take those defective goods.
3. Right to Cancel
It is another right of the buyer to cancel the contract if the seller does not perform his
part in the stipulated time or otherwise if the seller commits any negligence as to the
performance of a contract in that situation it is the right of the buyer to cancel the
contract.
4. Right to claim damages
If there is any defect in the Goods which may cause loss to the buyer or if due to the
negligence of a seller. The buyer sustains a loss, in such circumstance or eventuality,
it is the right of the buyer to be compensated or the buyer may claim damages.
5. Right to Examine
It is the right of the buyer to examine the goods before its purchase and to duly satisfy
himself as to be quality of goods.
6. Right to sue for performance
If the seller refuses to obey the terms and conditions of the contract which gives
irreparable loss to the buyer, the buyer has the right to knock or approach the
competent court of law to compel the seller for specific performance.
7. Right to take insurance
It is the duty of the seller to give notice to the buyer to be ensured the goods if the
seller delivers in a good way whether sea or by any other method/means due to which
apprehension that the goods may be destroyed then it is the right of the buyer to
ensure the goods before its delivery.
8. Right to sue for recovery of price
It is the right of the buyer to file a suit for recovery of the price which he has already
paid to the seller but even then, the seller refuses to perform his part.
9. Right to claim interest
It is the right of the buyer to claim an interest in the situation if the delay is caused by
the seller in the delivery of goods.

DUTIES OF THE BUYER

1. Duty to accept goods

After the execution of the agreement if the seller delivers the goods to the buyer to
accept the goods without any delay. If the buyer refuses to take the goods from the
seller and the goods sustain any damage, the seller cannot be held responsible for the
same.
2. Duty to pay the consideration
 It is the basic duty of the buyer to pay the agreed consideration to the seller on time.
3. Duty to pay damages
It is the duty of the buyer to pay damages to the seller if due to refusal of the buyer to
receive goods from seller and seller sustains any injury or for maintenance if the seller
incurs any cost over the goods.
4. Duty to perform agreement
It is the duty of the buyer to perform his part/obligation in true spirit as agreed
between buyer and seller and in case of his non-performance, the buyer can be held
liable for any loss to the seller.
5. Duty to apply for goods
It is another duty of the buyer to apply for delivery of goods to the seller. If it was
agreed that the seller would only deliver the goods if the buyer applies for its delivery.

RIGHTS OF THE SELLER

1. Right to have acceptance of goods

It is the right of the seller that goods delivered by a seller under a contract of sale must
be accepted by the buyer.
2. Right to claim loss
If the buyer unlawfully refuses to accept the delivery of goods, the seller has a right to
claim from the buyer the loss caused to him due to non-acceptance of the goods and
also reasonable charges for the care and custody of the goods.
3. Right to receive the price of goods
It is the right of the seller to receive the price of goods from the buyer as per the term
of the contract.
4. Right to take legal action
It is the right of a seller to take legal action against the buyer if the price is not paid to
him.
5. Right to interest
Seller is entitled to interest at a reasonable rate on the total unpaid price of goods sold,
from the time it was due and until it is actually paid to him.

DUTIES OF THE SELLER

1. Duty to Deliver goods

It is the duty of a seller to deliver the goods to the buyer according to the terms and
conditions of the contract. If the seller refuses to deliver the goods to the buyer, he
may sue the seller for damages for non-delivery.
2. Duty to put goods in deliverable state
Where it is necessary for the seller to do something with the goods in order to put
them into a deliverable state, he must do such thing to put the goods into a deliverable
state within a stipulated or reasonable time.
3. Duty to refund the price
 Where the seller fails to deliver the goods to the buyer, he must pay back the price of
the goods to the buyer which he had received in advance.
4. Duty to pay interest
Where the seller has already received the price but he fails to deliver the goods to the
buyer, he must pay interest at a reasonable rate on the total received price, from the
date of receiving such price and until it is actually paid back to the buyer.
5. Duty to pay damages for breach of warranty
Where there is a breach of warranty on the part of a seller, the seller is bound to pay
the damages to the buyer for the breach of warranty.

CONSUMER PROTECTION ACT 1986

The Consumer Protection Act, 1986 (COPRA) was an Act of the Parliament of India
enacted in 1986 to protect the interests of consumers in India. It was replaced by the
Consumer Protection Act, 2019.

Objectives & Importance of the Act

The Consumer Protection Act was implemented in order to provide better protection to the
rights of the consumers. Prior to the implementation of this Act, there was no special act for
protecting the consumers and the only remedy available to the consumers was under the Law
of Torts i.e filing a civil suit for damages against the shopkeeper or the service provider. This
act is based on the doctrine of Caveat Emptor which means that it is the responsibility of
the buyer to identify the defects in the good.

There are various objectives which are sought to be protected under the Consumer
Protection Act such as-

1. To promote and protect all the six rights of the consumers which will be discussed
later.
2. To provide simple and speedy disposal to the cases by providing quasi-judicial
machinery for the redressal of consumer disputes.
3. The act also aims to provide inexpensive redressal to the issues of the consumer.
4. A consumer dispute redressal forum called state commission has been set up in
order to settle the disputes of each and every consumer in all the states of the
country.
Who is a consumer?

According to Sec-2(1)(d) of the Act, a consumer is a person who purchases any goods or
services or hires or avails the services of some person for his own personal use and not for
manufacturing or resale of that good. For instance, a person purchasing wheat flour for his
own personal use is a consumer but a person purchasing wheat flour for baking bread which
he is going to sell in his bakery shape is not a consumer.

Rights and Duties of a Consumer

The Consumer Protection Act has recognised six rights of a consumer which are :

1. Right to Safety
2. Right to Information
3. Right to Choose
4. Right to be heard
5. Right to Redressal
6. Right to Consumer Education

Right to Safety

This right refers to as the right to be protected against the marketing of goods and services
which are hazardous to life and property of the consumers. This right has a very wide scope
of application, for instance, this right is available in the areas of electrical appliances,
healthcare, automobile, pharmaceuticals, housing, travel etc. Nowadays, each and every field
has an office for researchers who research and experiment and launch new products and
appliances accordingly. Most of these products are not tested by the producers which prove to
be harmful to the consumer. Therefore, after the implementation of this act, there is a
mandate for each and every field to get all their products which are a danger to the life to be
carefully tested and validated before launching it to the market.

Right to Information
It refers to the right of a consumer to be informed of the quality, quantity, potency, purity,
standard and price of the goods and services being sold by the shopkeeper. This right is given
to the consumer in order to protect them from the various unfair trade practices conducted by
the seller in order to earn more profits. Therefore, it is an obligation on the seller to provide
the consumer with all the relevant information of the product he wishes to purchase.

Right to Choose

It is defined in the act as the right to be assured, wherever possible, to have access to a variety
of goods and services at competitive prices. It is very common to find one product being sold
at different possible prices by different sellers. This reflects the age of market competition
which is found in almost all the countries. Therefore it is the right of all the consumers to
purchase any product at any price which according to him is the best. A consumer cannot be
forced to purchase a product of some particular brand or quality.

Right to be heard

It is referred to as the right to be heard and to be assured that consumers’ interests will
receive due consideration at appropriate forums. This right was introduced for a consumer in
order to ensure that all the complaints and issues of the consumers are heard duly under the
appropriate authority. This is because of this right that almost all the big selling companies
have a separate department known as the customer service to help the consumers in case of
any dispute or any complaint regarding the quality or quantity of the product.

Right to seek Redressal

If any consumer has been exploited by the seller or faced any unfair trade practices he can
seek redressal i.e. compensation or damages under this right. This right ensures that all the
issues of the consumers are dealt with and justice is done to him. A proper redressal
mechanism has been set up by the government of India such as the consumer courts and
forums at district and national level which is discussed later in this article.

Right to Consumer Education

It is the right of each and every person who is a citizen of India to have knowledge about all
the laws and policies relating to the consumer. Therefore it is made sure the material
regarding the consumer-related laws is easily available all over India but there is still a major
part of the population who is not aware of his laws and rights. This is the reason many
awareness programmes have been organized by the government of India such as ‘jago grahak
Jago’ and the camps organized by various lawyers in the remote areas of the country.

Duties of a consumer

Every consumer right comes with the opposite duty. Right of one consumer is the duty of the
others. Accordingly, there are various duties such as:-

• On purchasing of goods or hiring of any services, it is the duty of the consumer to

pay for the same.
• While purchasing something it is his duty to check weights, balances, prices etc.
and also to give a careful reading to the labels.
• It is the duty of the consumer to update himself about the various consumer
protection schemes.
• Duty to be careful while purchasing and not to fall in the trap of misleading
information and advertisements.
• It is the duty of the consumer to not purchase anything from the black markets.
• It is the duty of the consumer to be aware of his rights and duties and also
spreading the awareness of the same among others.
• It is the consumers’ duty to file a complaint if the goods which he purchased are
defective.
• Each and every consumer should secure the bills of the goods purchased or the
services availed so that if in the future he finds the goods or services to be
defective he can easily file a complaint against the same and can prove it.

CONSUMER DISPUTE

According to Section 2 (1) (e) of the Act, ‘Consumer Dispute’ means a dispute where the
person against whom a complaint has been made, denies or disputes the allegations
contained in the complaint. If the person agrees to the complaint, there is
no consumer dispute.
The consumer protection provides three consumer dispute they are;

(a) A Consumer Disputes Redressal Forum to be known as the "District Forum" established
by the State Government in each district of the State by notification: Provided that the State
Government may, if it deems fit, establish more than one District Forum in a district.

(b) A Consumer Disputes Redressal Commission to be known as the "State Commission"

established by the State Government in the State by notification; and

(c) A National Consumer Disputes Redressal Commission established by the Central

Government by notification.

RESTRICTIVE TRADE PRACTICES

A trade practice which restricts or reduces competition may be termed as Restrictive trade
practices and it harm the consumer interest.

Because of their adverse effect on the consumer and public interest,

they are sought to be regulated in almost every country of the world.

some of following Points are given below;

• Discriminatory dealing
• Re-sale price maintenance
• Control of manufacturing process
• Price control agreements
• Boycott
• Residual restrictive trade practice

UNFAIR TRADE PRACTICES

Unfair trade practice means a trade practice which, for the purpose of promoting the sale, use
or supply of any good or for the provision of any service, adopts any unfair or deceptive
practice.

Such as

• Misleading advertisement and false representation.

• Advertising of bargain price.
• Falsely representing second-hand goods as new.
CONSUMER REDRESSAL FORUM

Consumer Court Consumer Court is a special purpose court in India that deals with cases
regarding consumer disputes, conflicts and grievances. There are judiciary hearings set up by
the government to protect the consumer rights. Its main function is to maintain the fair
practices & contracts by sellers. Consumers can file a case against a seller if they are
cheated or exploited by sellers. The court will only give a verdict in favour of the
consumers/customers if they have proof of exploitation, i.e., bills or purchase memos. If a
consumer does not have the proper documents required for filing a case then it would be very
difficult for the consumer to win or even file a case.
Rights provided by consumer courts
The consumer rights provided by consumer courts in India are:
1. Right to Safety: The right to be protected from all types of hazardous goods and services
2. Right to Information: The right to be fully informed about the performance and quality of
all
goods and services
3. Right to Choose: The right to free choice of goods and services
4. Right to be Heard: The right to be heard in all decision-making processes related to
consumer
interest
5. Right to Redressal: The right to seek compensation, whenever consumer rights have been
infringed
6. Right to Consumer Education: The right to complete consumer education.
Types of Consumer courts
National Consumer Disputes Redressal Commission:
It is known as "National Commission" deals with complaints involving costs and
compensation higher than Rs. One Crore. State Consumer Disputes Redressal Commissions:
It is known as "State Commission, deals with complaints involving costs and
compensation higher than Rs. Twenty Lakhs and less than Rs. One Crore.
District Consumer Disputes Redressal Forums:
It is known as "District Forum, deals with complaints involving costs and
compensation less than
Rs. Twenty Lakhs.
Jurisdiction
If the cost of goods or services and compensation asked for is up to rupees twenty lakh ,then
the complaint can be filed in the District Forum which has been notified by the State
Government for the district where the cause of action has arisen or where the opposite party
resides. A complaint can also be filed at a place where the branch office of the opposite party
is located.If the cost of goods or services and compensation asked for is more than rupees
twenty lakh , but less than rupees one crore then the complaint can be filed before the State
Commission notified by the State Government or Union Territory Concerned. If the cost of
goods or services and compensation asked for exceed rupees one crore then the complaint can
be filed before the National Commission at New Delhi. Composition
Each District Forum shall consist of:

1. A person who is, or who has been or is qualified to be, a District Judge, who shall be its

President;

2. Two other members, one of whom shall be a woman, who shall have the following

qualifications, namely:-

i) be not less than thirty-five years of age,

ii) posses a bachelor's degree from a recognized university,

iii) be persons of ability, integrity and standing, and have adequate knowledge and experience
of at least ten years in dealing with problems relating to economics, law, commerce,
accountancy,

industry, public affairs or administration:

Each State Commission shall consist of:

A) A person who is or has been a Judge of a High Court, appointed by the State Government,
who shall be its President : Provided that no appointment under this clause shall be made
except after consultation with the Chief Justice of the High Court;

B) 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 :

The National Commission shall consist of:

A) 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:1[Provided that no appointment under this clause shall be
made except after consultation with the Chief Justice of India;

B) Not less than four, and not more than such number of members, as may be prescribed, and one of
whom shall be a woman, who shall have the following qualifications, namely:

i) be not less than thirty-five years of age;

ii) possess a bachelor's degree from a recognized university; and

iii) be persons of ability, integrity and standing and have adequate knowledge and experience of at

least ten years in dealing with problems relating to economics, law, commerce, accountancy,

industry, public affairs or administration.

Relief available to Consumer:

Depending on the facts and circumstances, the Redressal Forums may give order for one or more

of the following relief:

1. Removal of defects from the goods.

2. Replacement of the goods.

3. Refund of the price paid.

4. Award of compensation for the loss or injury suffered.

5. Removal of defects or deficiencies in the services;

6. Discontinuance of unfair trade practices or restrictive trade practices or direction not to repeat them.

7. Withdrawal of the hazardous goods from being offered to sale. Or

8. Award for adequate costs to parties.

The Industrial Disputes Act, 1947

The objective of Industrial disputes Act to secure industrial peace by maintaining a better
industrial relation and the settlement of industrial disputes. To achieve the defined objective
the act makes provisions for the constitution of various authorities for conducting investigation
and the settlement of industrial disputes. The appropriate Government have been authorised
for the settlement of industrial disputes, as the dispute in an industry not only affect the
concerned industry but the whole Nation’s economy. Hence, it has to be settled and the
obligation rests with the appropriate Government; and for this purpose, certain authorities are
constituted under the Act. The means of settling dispute are collective bargaining, conciliation,
adjudication, arbitration or resolution.

The Act extends to the whole of India and applies to every industrial establishments engaged
on any business, trade, manufacture or distribution of goods and services. The Act covers to
all workers employed in an establishment for hire or reward including contract labour,
apprentice and part-time workers to do any manual, clerical, skilled, unskilled, technical,
operational or supervisory work. The Act is not applicable to persons employed in managerial
and administrative category drawing wages exceeding the prescribed limit.

Section 2 (K) of the Act defines Industrial dispute as any disputes or difference between

(i) employer and employer,

(ii) employer and workmen, and
(iii) workmen and workmen,

in connection with

(a) employment or non-employment,

(b) terms of employment, and

(c) conditions of employment.

The Supreme Court consistently held that individual dispute (between workmen and employer)
by itself; is not an industrial dispute. It becomes an industrial dispute only if it had the backing
of substantial number of workmen or Union. However, a new provision has been inserted
whereby an individual dispute with regard to dismissal, termination of service or retrenchment
per se is an industrial dispute; backing of substantial number in this regard is not required.

3.2.1 Authorities Under the Act

Harmonious relationship between workmen and employer to maintain industrial peace and
relation is the central objective of this Act. To achieve the objective the Act delegate certain
authorities to the appropriate Government to constitute various authorities to amicable settle
the industrial disputes. The means of the settlement of disputes is by way of conciliation,
arbitration and adjudication. Conciliation is the way by which the parties to the dispute with or
with out facilitator or mediator discuss and negotiate the dispute and end up with a mutual
consent or understanding. Work committee, Conciliation officer and Board of conciliation are
authorities constituted by the Act for the settlement of disputes by way of conciliation, and the
appropriate government is responsible for the appointment of conciliation officer and Board of
conciliation. The constituted agencies responsible for the settlement of dispute or concern by
way of discussion and negotiation. If the difficulty is settled, send the settlement report signed
by both the parties, and if the talk fails, send the failure report to the government stating the
steps taken for the settlement of dispute.

Arbitration refers to the settlement of industrial disputes by an independent third party without
the interference of Court. The independent third party hears to the parties to the disputes and
make judgement on the basis of material facts and evidences. Speedy and inexpensive
settlement of dispute without much interference of the court proceeding is the advantage of
arbitration. Court of inquiry is the means for the settlement of industrial dispute by way of
arbitration.

An industrial dispute can be settled with the intervention of court by way of adjudication. The
adjudicator or the judge hears the parties to the dispute and make judgements based on the
material evidences and facts supporting the disputes. The appropriate Government by
notification constituted Labour court, Industrial tribunal and National Tribunal for the
settlement of industrial disputes by adjudication.

(1) Work committee: The employer of the establishment employing 100 or more workers
must constitute a committee consisting the representatives of workers and employer in
equal number named work committee. The workers representatives to the work committee
shall be selected from among the workers employed in the prescribed manner in
consultation with the registered trade unions, if any. Amicable settlement of disputes,
promotion of measures for securing and preserving good relation between employer and
workmen, and comment upon the matters of common interest and concerns are the duties
of work committee.
(2) Conciliation officer: The appropriate Government by Official Gazette notification assigns
officers to mediate and stimulate the settlement of industrial disputes. Officers can be
appointed for a specified area or for definite industry either permanently or for a definite
period. To hold the conciliation process to settle the disputes harmoniously is the obligation
of conciliation officer.
(3) Board of conciliation: Board of conciliation is instituted by the appropriate Government
for the settlement of industrial dispute. Board of conciliation comprises of Chairman and
members. Chairperson is a self-governing person nominated by the government. Members
are from the agents of the parties to the arguments equal in number.
(4) Court of inquiry: Court of inquiry consist of an independent person chosen or constituted
by the appropriate Government to investigate into any matter associated with an industrial
dispute. The court consists of one or more than one member and in case of more than one
member there shall be a chairperson. This authority has the power of Civil Court under
CPC (the Code of Civil Procedure, 1908) and having the power to appoint persons having
special skills and knowledge of the matter under consideration, to advise the court.
(5) Labour Court: This is constituted by the appropriate government to adjudicate industrial
disputes legitimately and to deal with the following matters specified in the schedule II of
the Act.
(a) Legality of strikes and lockouts.
(b) Interpretation of standing orders.
(c) Legality of an order passed by an employer.
(d) Withdrawal of customary privileges or concessions.
(e) Discharge or dismissal of workers including replacement of those faultily
dismissed.
(f) All matters other than those detailed under schedule III.
(6) Industrial Tribunal: Established by the appropriate government for the settlement of
industrial dispute and to resolve matters specified under schedule III of the Act, i.e. wages,
period and mode of payment, compensatory and other allowances, rest interval, hours of
work, leave with wages and holidays, bonus, provident fund, gratuity, shifts, classification
of workers, rules of discipline, retrenchment and any other matter that may be prescribed.
(7) National Tribunal: Constituted by the central government to settle industrial disputes of
national significance. If an issue or dispute involves a question of national importance, it
may adversely affect industries in more than one state. The tribunal consists of one person,
to be competent to be appointed as a High Court Judge.
3.2.2 References of industrial disputes for settlement

The appropriate Government have to refer the industrial dispute for settlement or adjudication,
to the Conciliation Board, Court of Inquiry, Labour Court, Industrial Tribunal or National
Tribunal under section 10 of the Act. Reference of dispute is the process of directing the dispute
to the constituted authorities for intervening the process of resolution with a view to settle the
dispute.

Reference of disputes to various Authorities:

The appropriate Government by order in writing refer industrial dispute to the;

1. Conciliation board for promoting settlement of disputes,

2. Court of Inquiry, if the matter of dispute is investigatory in nature,
3. Labour court, if the dispute is connected or related to the matter specified under second
schedule for adjudication,
4. Tribunal, if the dispute is connected or related to the matter specified under second or
third schedule for adjudication,

The appropriate Government refers the disputes to National tribunal if the matter of dispute is
of national importance and the disputes is likely to affect more industries in more than one
state. It is mandatory for the appropriate Government to refer the disputes relate to public utility
service for adjudication

Reference on application of parties:

If the parties to the disputes, whether individually or jointly, applies in the prescribed manner,
for a reference to the disputes to the Boards, Court or Tribunal for conciliation, or adjudication,
the Appropriate Government, if satisfied that the persons applying represent the majority, shall
make the reference accordingly. Provided that where such industrial disputes are connected
with individual workman, no such period shall exceed three months

Voluntary reference of disputes to arbitration:

The employer and workmen under section 10-A agrees to refer the matter of dispute for
arbitration at any time before the dispute has been referred by the Appropriate Government
under section 10 to Labour Court, Industrial Tribunal or National Tribunal.

1. The employer and workmen through a written agreement, specifying the name of
arbitrator forward the matter for arbitration.
2. The arbitration agreement must be in the prescribed form signed by the parties involved.
 3. A copy of arbitration agreement shall be forwarded to the appropriate government and
the conciliation officer. The appropriate government within one month from the date of
the receipt of the copy, publish the same in Official Gazette.
4. The arbitrator or arbitrators investigates the dispute and submit the arbitration award
signed by the arbitrator or the arbitrators to the appropriate government.
5. The appropriate government by order prohibits strike or lock-out in connection with the
disputes during the pendency of the investigation.

Strikes and Lock-outs

Strike

Strike is the pause of work by the workers for a time under shared consideration to lay burden
over the employers, to enforce their demands. Strike is the defence on the hand of workers to
admit their demands against their employers. Bandh, gherao, sit down, go slow, hunger strike,
mass casual leave, etc. are the various methods of strike.

Lockout

Lockout refers to the temporary closing of the place of employment or cessation of work by
the employer or refusal to allow work for a time to put pressure on the workers. Lockout is the
tool used by the employers to enforce their demands over the workers.

Prohibition of strikes and Lock-outs (Sec. 22)

No person employed in public utility service shall not go on strike-

1. Without giving notice of strike to the employer within six weeks before striking, or
2. Within fourteen days of giving such notice, or
3. Before the expiry of the date of strike specified in any such notice as aforesaid, or
4. During the pendency of any conciliation proceeding before conciliation officer and
seven days after the conclusion of such proceedings.

No employer carrying on any public utility service shall lock-out any of his workmen-

1. Without giving notice of lock-out to the workmen within six weeks before locking-out,
or
2. Within fourteen days of giving such notice, or
3. Before the expiry of the date of lock-out specified in any such notice as aforesaid, or
4. During the pendency of any conciliation proceeding before conciliation officer and
seven days after the conclusion of such proceedings.
General prohibition of strikes and Lock-outs (Sec.23)

No workmen employed or no employer of workmen in an industrial establishment shall not

conduct strikes or lock-out;

1. During the pendency of conciliation proceedings and seven days after the award of such
proceedings,
2. During the pendency of adjudication proceeding and two moth after the award of such
proceedings,
3. During the pendency of arbitration proceedings and two months after the award of such
proceedings,
4. During any period in which any award or settlement is in operation, with regard to the
matter covered by the award or settlement.

Illegal Strikes and Lock-outs (Sec.24)

The strike or lockout conducted in violation of the provisions of the Act is illegal strike and
illegal lock-outs, and shall be punishable. A strike and lock-out shall be illegal if, it is
commenced or declared in contravention of Section 22 or 23 of the Act.

Any workmen who conducts an illegal strike is punishable with a fine which may extend to
rupees fifty, or imprisonment for a term which may extend to one moth or with both. An
employer who conducts an illegal lock-out is punishable with a fine which may extend to
rupees thousand, or imprisonment for a term which may extend to one moth or with both.

Lay-off and Retrenchment

Lay-off

Lay-off is the failure, refusal or inability of an employer to employ workers because of

(i) shortage of power, coal or any other raw materials,

(ii) (ii) accumulation of stocks,
(iii) (iii) breakdown of plant or machinery,
(iv) (iv) natural calamity, or
(v) (v) any other reason.

The employer is liable to compensate workers in case of layoff, subject to the following
exceptions, i.e. less than 50 employees are employed and the industry is of seasonal character.
In order to claim compensation for lay-off, the workmen must satisfy the following
requirements:
 (i) the workmen must not be casual and their names should bear in the muster roll,
(ii) not less than one-year continuous service,
(iii) should not refuse to accept suitable alternate employment, and
(iv) should present oneself on work in the premises of the establishment.

If lay-off was due to strike or slowdown of production or work or sabotage on the part of
workers, employers’ liability is limited.

Retrenchment

The termination of service of workers by the employer for any reason, otherwise as a
punishment, inflicted by way of disciplinary action is retrenchment. Voluntary retirement,
retirement by superannuation, termination on the ground of continued ill health or non-renewal
of contract does not amount to retrenchment.

Notice and compensation must be given to the retrenched workers. Retrenchment must be
based on the principle of “last in first go” and a statutory obligation on the part of employer to
provide opportunity to consider retrenched employee for re-employment when employer
decides to take employees.

lay-off and retrenchment without prior permission is prohibited under the Act and is punishable
with imprisonment for a period which may extend to one month, or with fine which may extend
to one thousand rupees, or with both.

Closure of undertaking

Closing of an undertaking refers to the permanent shutting down of an industrial establishment

wholly or partly by the employer due to certain unavoidable reasons beyond the control of the
employer. Section 2(cc) of Industrial Disputes Act 1947 defines closure of an undertaking as
the permanent closing down of a place of employment or part thereof. An undertaking is closed
down by reasons merely of-

a. financial constraints
b. accumulation of finished goods,
c. expiry of the lease or license period or
d. exhaustion of the minerals in the area in case of undertakings engaged in mining
operations.

Procedure for closure of undertakings

The employer who intends to close down the industrial establishment shall submit application
to the appropriate government seeking prior permission for the closure in the prescribed
manner at least ninety days prior to the intended closure date. The application must clearly
state the reasons for the intended closure. A copy of the application shall also be served to the
representatives of the workmen. The appropriate Government after receiving such application
conducts enquiry and hears the employer, workmen or any other interested parties to such
closure to check the genuineness of the reasons stated by the employer. The appropriate
Government serves notice to the employer and workmen the permission or refusal for the
closure of undertaking or refer the matter to tribunal for adjudication. If the appropriate
government does not issue notice granting or refusing such closure within sixty days from the
date of application, shall be deemed to have granted permission for closure on the expiration
of said sixty days.

The workmen in case of closure is entitled to compensation and if the closure is made contrary
to the provisions of the Act shall deemed to be illegal and the workmen shall be entitled to all
benefits under any law for the time being in force. If the closure of undertaking is in violation
to the provisions of the Act, the employer shall be punished with imprisonment for a term
which may extend to six months, or with a fine which may extend to five thousand rupees, or
with both.

Compensation to workmen in case of closure of undertakings.

Where an undertaking is closed on account of unavoidable reasons beyond the control, every
workman employed for not less than one year in that undertaking immediately before such
closure is entitled to receive notice and compensation, the amount of compensation shall not
exceed the average pay for three months.

Transfer of Undertaking

Transfer of undertaking occurs where the ownership and management of an undertaking wholly
or partly is taken over by another employer by way of agreement or by operation law. In the
case of transfer of undertaking every workman who has been in continuous service for not less
than one year in that undertaking immediately before such transfer shall be entitled to notice
and compensation if the workman had been retrenched.

The workmen are not entitled to compensation with regard to transfer of undertaking, if;

a. the service of workmen has not been interrupted by such transfer,

 b. The terms and conditions of service applicable to the workman after such transfer are
not in any way less favourable to the workman than those applicable to him
immediately before the transfer, and
c. The new employer is, under the terms of such transfer or otherwise, legally liable to
pay to the workman, in the event of his retrenchment, compensation on the basis that
his service has been continuous and has not been interrupted by the transfer.

Unfair Labour Practices

Unfair labour practice refers to any unfair act or omission that arise either on the part of
employer or workmen that are illegal and are punishable under Industrial Disputes Act.

No employer, workmen on registered trade union shall not conduct any unfair trade practice
and the penalty for such practices shall be imprisonment and fine which may extend to six
months and one thousand rupees respectively, or with both

The schedule five of Industrial Disputes Act deals with unfair labour practices on the part of
employers and workmen, and their trade unions, which read as,

1. Unfair trade practices on the part of employers and trade unions of employers.

(1) To interfere with, restrain from, or coerce, workmen in the exercise of their right to
organize, form, join or assist a trade union or to engage in concerted activities for the purposes
of collective bargaining or other mutual aid or protection, that is to say.-

(a) threatening workmen with discharge or dismissal, if they join a trade union;

(b) threatening a lock-out or closure, if a trade union is organized;

(c) granting wage increase to workmen at crucial periods of trade union organization,
with a view to undermining the efforts of the trade union at organization.

(2) To dominate, interfere with or contribute support, financial or otherwise, to any trade union,
that is to say,

(a) an employer taking an active interest in organizing a trade union of his workmen;
and
 (b) an employer showing partiality or granting favor to one of several trade unions
attempting to organize his workmen or to its members, where such a trade union is not
a recognized trade union.

(3) To establish employer sponsored trade unions of workmen.

(4) To encourage or discourage membership in any trade union by discriminating against any
workman, that is to say,

(a) discharging or punishing a workman, because he urged other workmen to join or

organize a trade union;

(b) discharging or dismissing a workman for taking part in any strike (not being a strike
which is deemed to be an illegal strike under this Act);

(c) changing seniority rating or workmen because of trade union activities;

(d) refusing to promote workmen of higher posts on account of their trade union
activities;

(e) giving unmerited promotions to certain workmen with a view to creating discord
amongst other workmen, or to undermine the strength of their trade union;

(f) discharging office-bearers or active members of the trade union on account of their
trade union activities.

(5) To discharge or dismiss workmen-

(a) by way of victimization;

(b) not in good faith, but in the colorable exercise of the employer’s rights;

(c) by falsely implicating a workman in a criminal case on false evidence or on

concocted evidence;

(d) for patently false reasons;

(e) on untrue or trumped up allegations of absence without leave;

 (f) in utter disregard of the principles of natural justice in the conduct of domestic
enquiry or with undue haste;

(g) for misconduct of a minor technical character, without having any regard to the
nature of the particular misconduct or the past record or service of the workman,
thereby leading to a disproportionate punishment.

(6) To abolish the work of a regular nature being done by workmen, and to give such work to
contractors as a measure of breaking a strike.

(7) To transfer a workman mala fide from one place to another, under the guise of following
management policy.

(8) To insist upon individual workmen, who are on a legal strike to sign a good conduct bond,
as a precondition to allowing them to resume work.

(9) To show favoritism or partiality to one set of workers regardless of merit.

(10) To employ workmen as "badlis", casuals or temporaries and to continue them as such for
years, with the object of depriving them of the status and privileges of permanent workmen.

(11) To discharge or discriminate against any workman for filing charges or testifying against
an employer in any enquiry or proceeding relating to any industrial dispute.

(12) To recruit workman during a strike which is not an illegal strike.

(13) Failure to implement award, settlement or agreement.

(14) To indulge in acts of force or violence.

(15) To refuse to bargain collectively, in good faith with the recognized trade unions.

(16) Proposing or continuing a lock-out deemed to be illegal under this Act.

2. Unfair trade practices on the part of workmen and trade unions of workmen.

(1) To advise or actively support or instigate any strike deemed to be illegal under this Act.
(2) To coerce workmen in the exercise of their right to self-organization or to join a trade union
or refrain from, joining any trade union, that is to say-

(a) for a trade union or its members to picketing in such a manner that non-striking
workmen are physically debarred from entering the work places;

(b) to indulge in acts of force or violence or to hold out threats of intimidation in

connection with a strike against non-striking workmen or against managerial staff.

(3) For a recognized union to refuse to bargain collectively in good faith with the employer.

(4) To indulge in coercive activities against certification of a bargaining representative.

(5) To stage, encourage or instigate such forms of coercive actions as willful, ,"go-slow",
squatting on the work premises after working hours or "gherao" of any of the members of the
managerial or other staff.

(6) To stage demonstrations at the residence of the employers or the managerial staff members.

(7) To incite or indulge in wilful damage to employer’s property connected with the industry.

(8) To indulge in acts of force or violence or to hold out threats of intimidation against any
workman with a view to prevent him from attending work.

5.3 The Minimum Wages Act, 1948

The aim of the Act is to provide minimum wages in certain employments as fixed from time to time
by appropriate government. The object of the act is to make sure that the workers employed were
paid with minimum rate of wages for the particular job. The Act prevents exploitation of the workers
by the employer with regard to wages. The employer is statutory obliged to provide minimum wages
fixed by the appropriate Government from time to time.

The Act extents to the whole of India and applies to every employment that employees more than
one thousand workers in the respective state. The act is not extended to the workers employed in
undertakings of Central Government or Railways. The provisions of the Act not applicable to the
service of workmen employed under the societies which are registered with the registration of co-
operative societies.
The Act defines wages as “all remuneration, capable of being expressed in terms of money, which
would, if the terms of the contract of employment, express or implied, were fruitful, be payable to a
person employed in respect of his employment or of work done in such employment and includes
house rent allowances, but does not include-

1. The value of any house accommodation, supply of light, water, medical attendance or any
other amenity of any service excluded by general or special order of the appropriate
Government,
2. Any contribution paid by the employer to any Pension Fund or Provident Fund or under any
scheme of social insurance,
3. Any travelling allowance or the value of any travelling concession,
4. Any sum paid to the person employed to defray special expenses entailed to him by the nature
of his employment, or
5. Any gratuity payable on discharge”

Minimum rate of wages

The minimum rate of wages is the wage rate, fixed or revised by the appropriate Government in
respect of scheduled employment under section 3 may consist of-

• Basic wage rate and special allowance in accordance with the fluctuations with cost of living index.

• Basic wage rate either along with or without the cost of living allowance.

• A comprehensive wage rate comprising of the cash value of the concessions, cost of living
allowance and the basic rate.

The value of concessions and cost of living allowances be determined by the competent authority in
appropriate intervals as per the directions of the appropriate Government.

Fixation of minimum wages

To enable the workers to be paid with just and fair wages for their hard work, the Minimum wages act
made compulsory payment of minimum wages to the workers working in factories. The minimum
wages shall be fixed by the appropriate Government for the workers employed in an employment
specified under part I and II of the schedule. The fixed wages shall be reviewed by the appropriate
Government in certain intervals not exceeding five years.

The appropriate Government may fix-

a) A minimum rate of wages for time work (minimum time rate)

 b) A minimum rate of wages for piece work (minimum piece rate)
c) A minimum rate of remuneration to apply case of employees employed on piece work for the
purpose of securing to such employees a minimum rate of wages on a time basis (guaranteed
time rate)
d) A minimum rate applies in substitution for the minimum rate which would otherwise
applicable in respect of overtime work done by employees (overtime rate)

The appropriate Government also fix and revise minimum rates of wages under

a) Different minimum rates of wages may be fixed-

I. Different scheduled employment
II. Different classes of work in the same scheduled employment
III. Adults, adolescents, children and apprentices
IV. Different localities
b) Minimum rates of wages may be fixed by any one or more of the following wage-period,
namely-
I. By the hour
II. By the day
III. By the month or
IV. By such other larger wage-period.

Procedure for fixing and revising minimum wages

The appropriate Government shall fix the minimum wages for scheduled employment for the first
time and revise the wages so fixed either-

a. Appoint as may committees and sub-committees to conduct enquiry and advise for fixation
and revision of minimum wages
b. By notification in the Official Gazette, publish its proposal for the information of person likely
to be affected thereby and specify a date, not less than two months from the date of
notification

The appropriate government can issue a notification in the Official Gazette after considering the advice
of the committee to fix or revise the minimum wage rate.

Authorities under the Minimum Wages Act

This Act empowers the appropriate government to constitute various authorities to advise, fix, and
revise minimum time rate, minimum piece rate, minimum guaranteed time rate, minimum overtime
rate for different employment, class of work, for adult and children, locality, etc.
 (a) Central Advisory Board: This board comprises of representatives of employees and employers.
The function of the board is to advise the Central Government in fixing and revising minimum
wage and to coordinate the functions of State Advisory Boards.
(b) State Advisory Board: The purpose of this board is to recommend State Government to fix and
revise the minimum wages and to coordinate the functions of Committees and Sub
Committees.
(c) Committees and Sub Committees: Committees and Sub Committees are aimed to conduct
enquiry and advise the State Advisory Board and the State Government.

Mode of payment of minimum wages

Minimum wages payable under the Act shall be paid in cash. If there is a custom to pay wages wholly
or partly in kind, the appropriate Government may, by notification in the Official Gazette, authorises
the payment of minimum wages either wholly or partly in kind. If the appropriate Government is of
the opinion that provisions should be made for the supply of essential commodities at concession
rates, it may authorise the provision of such supplies at concessional rates. The cash value of wages
in kind and of concession in respect of supplies of essential commodities at concessional rate
authorised under sections 2 and 3 shall be estimated in the prescribed manner.

Payment of Minimum wages

The employer shall pay minimum wages fixed by the appropriate Government to every employee
engaged in the scheduled employment without any deduction other than statutory deductions
authorised within such time and subject to such conditions.

Penalties for offences

Providing wages less than the minimum wages on the ground of less performance or productivity is
illegal, and shall be punishable with imprisonment for a period of six months or with a fine that may
extend to 500 rupees or with both.

The Factories Act 1948

The aim of the Act is to regulate the employment of labours in factories. The Act guarantees adequate
safety, health and welfare measures to the labours employed in factories. As per the Act the employer
of the factory is obliged to provide proper working conditions and measures to protect the life of the
labours and to promote their well-being and prosperity.
The Act extends to the whole of India and applies to all factories where ten or more workers are
working, or were working on any day of the preceding twelve months, and in any part of which a
manufacturing process is being carried on with the aid of power, or whereon twenty or more workers
are working, or were working on any day of the preceding twelve months, and in any part of which a
manufacturing process is being carried on without the aid of power. The expression does not include
a mine, mobile unit of armed force, a railway running shed or a hotel, restaurant or eating place.

It is mandatory for a factory to have a manufacturing process with in the premises of the factory. The
expression manufacturing process means any process of:

(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning,
breaking up, demolishing, or otherwise treating or adapting any article or substance with a
view to its use, sale, transport, delivery or disposal, or
(ii) pumping oil, water, sewage or any other substance; or
(iii) generating, transforming or transmitting power; or
(iv) composing types for printing, printing by letter press, lithography, photogravure or other
similar process or book binding; or
(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels; or
(vi) preserving or storing any article in cold storage;
Approval, licencing and registration of factories

The factories Act mandates the registration of factories and other establishments with the concerned
State Government. Section 6 of the Act governs the registration of factories and empowers the State
Government to frame rules.

For the registration of factories, the plans of any class or description of factories to be submitted to
the Chief Inspector or State Government. The plans of any class or description of factories to be
obtained in advance for the site on which the factory is to be situated and for the construction or
extension of any factory or class or description of factories. The plans and specifications need to be
submitted for acquiring these permissions (Permit applications). It prescribes the nature and specifications
of such plans, and from whom it shall be certified. It also prescribes the fees payable for registration/
licensing/ renewal of licenses.

No license will be granted if the application is not accompanied with a notice under section 7 of the
Act. The notice shall be served at least fifteen days prior to the commencement of the factory. The
notice should be in writing and must include:

a. the name and situation of the factory;

 b. the name and address of the occupier and owner;
c. communication address;
d. nature of manufacturing process;
e. total horsepower installed in the factory;
f. name of the manager of the factory;
g. number of workers employed, and average number of number of employees employed per
day during the last twelve months in-case of existing factories; and
h. such other particulars as may be prescribed.
If no communication is received from the authorities for application submitted through registered
post with in three months, such applications are deemed to be approved and is called automatic
approval. The applicant can appeal with in 30 days to the State Government if the Chief inspector
refuses to issue permission and cn appeal Central Government if the application is rejected by the
State Government.

Occupier and his duties

The occupier of a factory is the designated person who is having control over the entire affairs of the
factory. For firms any one of the individual partner, for company any one of the director, and if the
factory is owned by Central or State Government or any other local authority the person appointed to
manage the entire affairs of the factory shall be the occupier.

The occupier of the factory shall ensure that proper working conditions and measures to protect the
health, safety and welfare of all workers are taken. He is obliged to ensure:

a) the provision and maintenance of plant and systems of work in the factory that are safe and
without risks to health;
b) the arrangement in the factory for ensuring safety and absence of risks to health in connection
with the use, handling, storage and transport of articles and substances;
c) the provision of such information, instruction, training and supervisions as are necessary to
ensure the health and safety of all workers at work;
d) the maintenance of all places of work in the factory in a condition that is safe and without
risks to health and the provision and maintenance of such means of access to, and egress
from, such place as are safe and without such risks;
e) the provision, maintenance or monitoring of such working environment in the factory for the
workers that is safe, without risks to health and adequate as regards facilities and
arrangements for their welfare at work.
In addition to the above responsibilities he shall prepare and revise a written statement of the general
policy with respect to the health, safety and welfare of workers at work and the arrangements taken
to implement the policy for the time being.

Authorities under the Act

In order to perform the various functions of the Act, the Act constitutes various authorities such as
Inspectors, Certifying uurgeons, Welfare officers and safety officers.

Inspectors

The State Government in official Gazette notification appoints persons with required qualification as
Inspectors for the purpose of the Act. The State Government in official Gazette notification appoints
Chief Inspectors who shall, in addition to powers conferred on Chief Inspector under this Act, exercise
the powers of an Inspector throughout the State. The State Government in official Gazette notification
appoints Additional Chief Inspectors, Joint Chief Inspectors and Deputy Chief Inspectors and as many
other officers as it thinks fit to assist the Chief Inspector and to exercise such of the powers of the
Chief Inspector

No persons shall be appointed as Inspectors, Chief Inspectors, Additional Chief Inspectors, Joint Chief
Inspectors and Deputy Chief Inspectors who is directly or indirectly interested in a factory or in any
process or business.

Powers of Inspectors

The Inspectors appointed by the Act has the power to:

a. enter with such assistants, being persons in the service of the Government, or any local or
other public authority or with an expert, as he thinks fit, any place which is used, or which he
has reason to believe, is used as a factory;
b. make examination of the premises, plant, machinery, article or substance;
c. inquire into any accident or dangerous occurrence, whether resulting in bodily injury,
disability or not, and take on the spot or otherwise statements of any person which he may
consider necessary for such inquiry;
d. require the production of any prescribed register or any other document relating to the
factory;
e. seize, or take copies of, any register, record or other document or any portion thereof, as he
may consider necessary in respect of any offence under this Act, which he has reason to
believe, has been committed;
 f. direct the occupier that any premises or any part thereof, or anything lying therein, shall be
left undisturbed (whether generally or in partticular respects) for so long as is necessary for
the purpose of any examination under clause (b);
g. take measurements and photographs and make such recordings as he considers necessary for
the purpose of any examination under clause (b), taking with him any necessary instrument
or equipment;
h. in case of any article of substance found in any premises, being an article or substance which
appears to him as having caused or is likely to cause danger to the health or safety of the
workers, direct it to be dismantled or subject it to any process or test (but not so as to damage
or destroy it unless the same is, in the circumstances necessary, for carrying out the purposes
of this Act), and take possession of any such article or substance or a part thereof, and detain
it for so long as is necessary for such examination;
i. exercise such other powers as may be prescribed.

Certifying surgeon

Qualified medical practitioners are appointed by the State Government to be Certifying surgeons for
the purpose of the Act within certain local limits. With approval from the State Government Certifying
surgeons can authorise qualified medical practitioners to exercise his powers as Certifying surgeon for
a period of time. No person shall be appointed, authorised to continue as Certifying surgeon, who has
become the occupier of a factory or directly or indirectly interested in the factory or its affairs.

The duties of a certifying surgeon under the Act were:

1. the examination and certification of young persons

2. the examination of persons engaged in factories in such dangerous occupation or process as
may be prescribed
3. the exercising of such medical supervisions as may be prescribed for any factory or class or
description of factories where-

o cases of illness have occurred, which it is reasonable to believe are due to the nature
of the manufacturing process carried on, or other conditions of work prevailing,
therein;
o by reason of any change in the manufacturing process carried on or in the substances
used therein or by reason of the adoption of any new manufacturing process, or of
 any new substance for use in a manufacturing process, there is a likelihood of injury
to the health of workers employed in that manufacturing process;
o young persons are, or are about to be, employed in any work which is likely to cause
injury to their health.

Welfare Officer

The occupier is statutory obliged to appoint welfare officer under section 49 of the Act to
establishments employing five hundred or more workers.

Safety Officer

The occupier of a factory employing one thousand or more workers are obliged to appoint such
number of safety officers as per section 40-B of the Act. The employers liability is extend to factories
employing thousand or more workers or where manufacturing process involves risk of bodily injury,
poisoning or disease or any other hazard to health of the persons employed therein.

Health, Safety and Welfare Measures

The Act stress the occupier of the factory to provide various health, safety and welfare measures to
the workers for their protection, prosperity and wellbeing. The various legal aspects pertaining to
health, safety and welfare are effective in creating a better work climate by eliminating the threats of
accidents, hazards, diseases and other associated issues.

Health measures

Health measures are those measures taken by the occupier of the factory to protect the health of the
workers employed. The aim of providing such measures is to protect the physical and mental health
of the workers employed. The various measures the occupier undertakes as per the Act were:

1. Cleanliness (Sec 11) - the factory should be kept clean and free from effluvia arising from any
drain, privy or other nuisance. The dirt and trash must be removed and properly disposed to
keep the factory clean. The floors must be cleaned and washed with disinfectant periodically
and all walls, ceilings and partitions must be properly painted periodically and kept well
2. Disposal of waste and effluents (Sec 12) – proper and effective arrangements and facilities
shall be made in factory for the proper treatment and disposal of waste and effluent due to
the manufacturing process.
 3. Ventilation and temperature (Sec 13) – provisions and arrangements has to be done for the
adequate ventilation by circulating fresh air and temperature control measures to protect the
workers’ health must be made within the factory.
4. Dust and fumes (Sec 14) – proper measures to handle dusts, fumes and impurities arises as a
result of manufacturing process need to be arranged in factories. Exhaust appliances shall be
installed in appropriate location near to the origin of such dusts and fumes to prevent
inhalation of the same by the workers.
5. Artificial humidification (Sec 15) – the humidity of air shall be varied in factories in accordance
with the manufacturing process. Necessary ventilation and cooling systems need to be
installed to regulate and artificially increase the humidity of the air.
6. Overcrowding (Sec 16) – overcrowding of workers in the work rooms and other work space is
another serious concern in factories. No room in factory shall be overcrowded with workers
which shall be injurious to the health and life of the workmen.
7. Lighting (Sec 17) – sufficient and suitable lighting arrangements shall be arranged in the
working space and other passages in the factory. Artificial or natural lighting arrangements
need to be provided to avoid occupational diseases, injury and accidents.
8. Drinking water (Sec 18) – effective arrangements shall be made at suitable points convenient
to the workers to supply sufficient wholesome drinking water.
9. Latrines and urinals (Sec 19) – separate latrines and urinals of prescribed types of male and
female shall be provided at suitable points accessible to the workers. The latrines and urinals
shall be properly lighted and ventilated and maintain in clean and hygienic conditions.
10. Spittoons (Sec 10) – there shall be sufficient number of spittoons of clean and hygienic
conditions at convenient locations to the workers.

Safety Measures

Safety measures are those statutory measures related to the safety of workers employed. These
measure ensures the safety of the workers working on or around machines and other hazards areas.
Safety measures strengthens the work morale and productivity. Various safety measures includes
safety trainings, installation of safety guards and devices, fencing and covering dangerous parts of
machines and safety directions and warnings. The various statutory safety measures that an occupier
obliged to adhere were:
1. Fencing of machinery (Sec 21) – machines in motion and involves danger and high risk should
be properly fenced to avoid accidents and proper care should be provided for the
maintenance of such machinery.
2. Work on or near machinery in motion (Sec 22) – employing workers on or around machineries
in motion has to be restricted to safe guard the life of the workers. When it became necessary
to examine the motion of the machinery, such examination shall be made by trained adult
worker wearing safety devices supplied by the employer. Woman and young persons are
restricted in such areas on or near machinery in motion.
3. Employment of young persons on dangerous machines (Sec 23) – the employment of young
person on dangerous machines is restricted by the Act. He can be employed only if he has
been fully instructed with the risk and hazard involved and the precautions to be observed.
He should trained properly under the supervision of a skilled person who is knowledgeable in
such machines and jobs.
4. Striking gears and devices for cutting off power (Sec 24) – installation and maintenance of
striking gears and devices for cutting power in case of emergency is mandatory for every
factory. Suitable striking gears and mechanical appliances shall be provided and maintained
to move driving belts in machineries in motion.
5. Self-acting machines (Sec 25) – no traversing part of a self-acting machine in any factory and
no material carried thereon shall be allowed to run on its outward or inward traverse with in a
distance of 45 centimeters from any fixed structure which is not part of the machine. This
provision shall apply only if the space over which the traversing part of the self-acting machine
runs is a space over which any person liable to pass, whether in the course of his employment
or otherwise.
6. Casing of new machinery (Sec 26) – all machineries installed in the factory shall be properly
safeguarded with cases to prevent accidents. Every screw set, bolt or any revolving shaft,
spindle, wheel or pinion shall be so sunk and encased and other friction gears not requiring
frequent adjustments while in motion shall be completely encased unless it is safety situated.
7. Prohibition of employment of women and children near cotton-openers (Sec 27) – the
employment of women and children is restricted for pressing cotton in which a cotton-opener
is at work. Employment of women and children is permitted if the cotton opener is a separate
room with specification from the delivery point.
8. Hoists and lifts (Sec 28) – the hoist and lifts installed shall be of good construction and quality
with adequate strength. It shall be properly maintained and examined by a competent person
at least once in every six month. Hoists and lifts ways shall be protected by enclosures fitted
with gates.
9. Lifting machines, chains, ropes and lifting tackles (Sec 29) – the lifting devices including cranes,
chain, ropes and lifting tackle for the purpose of raising or lowering persons, goods or
materials shall be of good construction, quality and strength. It shall be properly maintained
and examined by a competent person at least once in every six month.
10. Revolving machinery (Sec 30) – the factories engaged in grinding process shall permanently
affix a notice indicating the maximum safe working peripheral of grindstone, the speed of the
shaft or spindle upon which the wheel is moulded and the diameter of the pully upon such
shaft or spindle necessary to secure such safe working peripheral speed.
11. Pressure plate (Sec 31) – effective measures shall be taken to control the pressure if the
factory or plant or machinery or any part thereof is operated above the atmospheric pressure.
12. Floors, stairs and means of access (Sec 32) – all floors, steps, stairs and passages shall be of
good construction and maintained properly. They shall be free from obstructions and
substances likely to cause persons to slip and handrails shall be provided. Proper fencing and
other measures shall be provided to ensure safety of the workers working at a height likely to
fall.
13. Pits, sumps, openings in floor, etc (Sec 33) – the fixed vessels, sumps, tanks, pits or any
opening on the ground or in the floor likely to cause danger shall be securely covered or fenced
properly.
14. Excessive weights (Sec 34) – no worker employed in a factory shall be allowed to lift, carry or
move any heavy load likely to cause him injury.
15. Protection of eyes (Sec 35) – safety devices for eyes such as goggles, transparent screens shall
be provided to the workers for the protection of their eyes from risk of injury to the eyes from
particles or exposure of excessive lights.
16. Precaution against dangerous fumes, gases etc. (Sec 36) – the entry to any chamber, tank, vat,
pit, pipe, flue or other confined space in any factory in which any gas, fume, vapour or dust is
likely to be present to such an extent as to involve risk to persons is restricted unless it is
provided with adequate manhole or other effective means of egress.
17. Precautions regarding the use of portable electric light (Sec 36-A) – the usage of any electric
light or any other electric appliances exceeding twenty four volts is restricted in side any
chamber, tank, vat, pit; flue or other confined space in a factory, unless adequate safety devices
are provided. The presence of any inflammable gas, fume or dust is likely to be present in such
chamber, tank, vat, pit, flue or other confined space, flame-proof construction shall only be
permitted.
18. Precautions Against Explosive or Inflammable Dust, Gas, and Fume etc. (Sec.37) – if
the manufacturing process in the factory produces dust, gas and fume of exploding
 nature , all practicable measures shall be taken to prevent any explosion by effective
enclosure of the plant or machinery used in the process, or removal or prevention of the
accumulation of such dust, gas and fumes, or exclusive or effective enclosure of all
possible source of ignition.
19. Precautions in Case of Fire (Sec.38) – all practicable measure shall be taken to prevent
the outbreak of fire and its spread by maintaining safe means of fire escape for all
person in the event of fire and necessary equipment’s and facilities for extinguishing
fire.
20. Power to Require Specifications of Defective Parts or Tests of Stability (Sec.39) – the
inspector may ask the occupier or the manager of the factory to furnish drawings,
specifications and other particulars regarding safety, or to carry out any tests in the
specified manner and inform the inspector of the results thereof, if the building or part
of a building machinery or plant in a factory may be dangerous to human life of safety
21. Safety of Building and machinery (Sec. 40) - the inspector may serve on the occupier or the
manager or both of the factory on order in writing specifying the measures which in his
opinion shall be adopted and requiring them to be carried out before a specified date if the
building or part of a building or machinery or plant in a factory is in a such condition that it is
dangerous to human life or safety.
22. Maintenance of Building (Sec. 40A) – the inspector may serve on the occupier or
manager or both of the factory an order in writing specifying the measures which should
be taken, if any building or any part of a building in a factory is in such a state of
disrepair as is likely to be lead to condition detrimental to the health and welfare of the
workers
23. Safety Officers (Sec. 40B) - In every factory where 1,000 or more workers are
ordinarily employed, or wherein, in the opinion of the State Government, any
manufacturing process or operation is carried on, which process or operation involves
any risk of bodily injury, poisoning or disease, or any other hazard to health, to the
process employed in the factory, the occupier shall, employ such number of Safety
Officers as may be specified in the official notification of the State Government.

Welfare measures

Welfare measures aimed to provide a better working environment to the workers to enhance their
standard of living. Welfare measures includes all facilities and amenities provided by the employer
other than all economic considerations. The statutory welfare measures provided by the employer for
the well-being of the employees were;

1. Washing facilities (Sec.42) – suitable washing facility separate for male and female shall be
provided in the factory conveniently accessible to the workers. The washing area shall be
properly maintained and kept clean.
2. Facilities for storing and drying clothing (Sec. 43) – suitable provisions shall be provided to
keep cloths not worn during working hours and for drying wet cloths.
3. Facilities for sitting (Sec. 44) – suitable sitting arrangements shall be provided to workers work
in standing position to take rest which may occur in the course of work. The Chief inspector
may direct the occupier of the factory to provide seating arrangements, if the workers can
effectively do their work in sitting position.
4. First-aid-appliances (Sec. 45) – first-aid box or cupboard with prescribed contents shall be kept
in every factory accessible during all working hours. At least on such box for every one
hundred and fifty workers shall be kept in the charge of a separate responsible person,
certified in first-aid treatment recognized by the State Government and who shall always be
readily available during the working hours of the factory. Ambulance room with prescribed
specification and equipment’s is mandatory for factories employing more than five hundred
workers. The ambulance shall be in charge of a medical and nursing staff and made readily
available during the working hours of the factory.
5. Canteens (Sec. 46) – the employer shall provide canteen facilities to the workers wherein
more than two hundred and fifty workers are employed. A managing committee for the
canteen need to be constituted with representation of workers and the food items served and
there charges shall be fixed in advance.
6. Shelters, rest-rooms and lunch-rooms (Sec. 47) – the occupier shall provide adequate
shelters or rest rooms and suitable lunch rooms if more than one hundred and fifty
workers are ordinarily employed, where the workers can take their meals brought by
them. The rest room and lunch room shall be maintained clean and well with proper
lighting and ventilation
7. Creches (Sec. 48) – it is mandatory to have a room for the use of children under the age of six
years wherein more than thirty women workers are employed. Such room shall be properly
maintained in a clean and sanitary condition with adequate light and ventilation under the
charge of a women trained in the care of children and infants.
8. Welfare Officers (Sec. 49) – the occupier of the factory shall employ such number of
welfare officers as prescribed wherein five hundred or more workers are employed.
Obligations of workers

The Act impose certain obligation on the part of the employer or occupier of the factory for the
welfare and well-being of the workers employed. The Act also impose certain obligations on
the part of workers for securing the measures taken by the employer and for the smooth conduct
of the factory. The workers in a factory shall not indulge in any of the activities such as:

1. wilfully interfere with or misuse any appliance, convenience or other thing provided in a
factory for the purposes of securing the health, safety or welfare of the workers therein;
2. wilfully and without reasonable cause do anything likely to endanger himself or others; and
3. wilfully neglect to make use of any appliance or other thing provided in the factory for the
purposes of securing the health or safety of the workers therein.

If any worker violates any of the provisions or any rule shall be punished with imprisonment for a term
which may extend to three months, or with fine which may extend to one hundred rupees, or with
both.

Rights of workers

To have a better workplace and to ensure health, safety and welfare of the workers employed the Act
guarantees certain rights to every worker. The rights of workers employed in a factory were:

1. obtain from the occupier, information relating to workers’ health and safety at work,
2. get trained within the factory wherever possible, or, to get himself sponsored by the occupier
for getting trained at a training centre or institute, duly approved by the Chief Inspector,
where training is imparted for workers’ health and safety at work,

represent to the Inspector directly or through his representative in the matter of inadequate
provision for protection of his health or safety in the factory.