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Introduction to Business Law 1
Notes
Unit 1: Introduction to Business Law
Structure:
1.1 Introduction
1.2 Nature of Law
1.3 Legal Environment of Business
1.4 Mercantile Law
1.5 Essentials of Law
1.6 Summary
1.7 Check Your Progress
1.8 Questions and Exercises
1.9 Key Terms
1.10 Check Your Progress: Answers
1.11 Case Study
1.12 Further Readings
1.13 Bibliography
Objectives
After studying this unit, you should be able to understand:

z Meaning of Law
z Nature of Law
z Objectives of Law
z Need for Law
z Scope of Business Law
z Sources of Business Law
z Legal Environment of Business
z Mercantile Law
z Essentials of Law
Amity Directorate of Distance and Online Education

2 Legal Aspects of Business
Notes 1.1 Introduction

Law is a main contributory factor for man’s welfare and wellbeing. The study of law
is of enormous practical value and vital and ever-present force in modern life. Every
individual and even more a business man needs even more thorough knowledge of the
law than the person not so engaged. As he carried his business, he is confronted with
problems arising out of contract, sale of goods, bailment, agency, negotiable instruments,
cyber-crimes environmental issues, International dealing and so on. At present situation
business are facing a lot of formidable problems as every activity of the business is
vigilantly watched by the public and law. In economics is started developing in the positive
direction and exposed to global competition and followed the path of economic
liberalization to the greater extent. This made compulsory to study ‘Business Law’ or to
the knowledge of various legal aspects as a part of commerce, management and business
study curriculum with different titles.
With the growth of people’s social and economic behaviour has assumed a multi-
dimensional character. Most civilized societies, therefore, provide and enforce different set
of rules, regulations and principles for different kind of social behaviour. In this connection
there are different branches of law both for social, individual and business such as
constitutional law, civil procedure codes, criminal procedure codes, International law,
Mercantile law / Business law and so on. The mercantile law is referred to the branch
of law which comprises laws concerning trade, industry, business or commerce with the
increasing complexities of modern business world, the scope of mercantile law has
enormously widened. Since the business is related to society, any activity related society
and main’s welfare are directly related; hence it is now termed as business law or legal
aspects of business or business regulations.
Prior to the enactment of the various acts like the contract acts, sales of goods acts,
companies act, the negotiable instrument act, Insurance act, etc., business transactions
were regulated by the personal laws of the parties to the suit. The rights of Hindus and
Muslims were governed by their respective laws and usages. Where both parties were
Hindus, they were regulated by the Hindu Law and where both parties were Muslims, the
Mohammedan Law was applied. In cases where one party was a Hindu and the other
was of Muslims, the personal law of the defendant was applied. In case of persons other
than Hindus and Muslims, and also where laws and usages of Hindus and Muslims were
silent on any point, the courts generally applied their principles of English law. In the
present era the General law applicable to all sort of persons in the society irrespective
of any religious differences. The applications are based on nature and type of situation
faced every man in the society. Hence the study on different activity and the practices
of an individual man is essential.Man is a rational and social being who comes into contact
with various types and varieties of people with different capabilities and dimensions.
The law of contracts forms the oldest branch of the law relating to business and
general transactions, as it affects every person in one way or the other, as all of us enter
into some kind of agreement or contract every day. Law of contract is very essential to
all merchants, when they are involved with huge money and dealings. At the same time
it is also for the general public like a person buys a movable property, hires some goods
or services, booking for a marriage hall, putting up of a show and so on. Such contracts
create legal relations giving rise to certain rights and obligations.
Meaning of Law
Law is a rule of action evolved to regulate social life and to avoid conflict of interests.
Law is enacted or customary in a community and recognised as commanding or avoiding
certain action.
Definitions of Law Notes

According to Woodrow Wilson, “Law is that portion of the established habit and
thought of mankind which has gained distinct and formal recognition in the shape of uniform
rules backed by the authority and power of the government”.
According to Austin, “A law is a rule of conduct imposed and enforced by the
sovereign”.
According to Scotland, “Law as rules of external human action enforced by the
sovereign political authority i.e., the state”.
According to Oxford Dictionary, “Law is rule made by authority for the proper
regulation of a community or society or for correct conduct of life”.
From the above discussions and definitions, it is clear that the law can be applicable
as the following:
(i) Body of rules which includes Statute Law like;
(a) The Indian contract Act 1872,
(b) The Indian partnership Act 1932
(c) The Companies Act 1956
(d) Case Laws
(e) Customs and Usages.
(ii) Guide to human conduct.
(iii) Imposed by some authority in which special power is vested, like;
(a) Municipal bodies.
(b) State legislative assemblies.
(c) Parliament
(d) All statute law lay down by the state.
(e) Case law lay down by the superior courts.
(f) Customs and usages practiced by the people over period of time.
(iv) Enforcementwhich is main characteristic of law, carried by the state. The law
which is not enforced ceases to be law.
Branches of Law
With the growth of civilisation, human being’s social and economic behaviour has
assumed manyfacets. It is therefore essential that multi-dimensional human activities
should be controlled throughdifferent set of rules and principles. Almost all civilised
societies, therefore, provide and enforcedifferent set of rules and guiding principles for
different kinds of social, economical and politicalobjectives. Hence, there are several
branches of law, such as:
i) International Law
International law is the set of rules generally regarded and accepted as binding in
relations between states and nations. It serves as a framework for the practice of stable
and organized international relations. International law differs from national legal systems
in that it primarily concerns nations rather than private citizens. National law may become
international law when treaties delegate national jurisdiction to supranational tribunals such
as the European Court of Human Rights or the International Criminal Court. Treaties such
as the Geneva Conventions may require national law to conform.

Notes International law is consent-based governance. This means that a state member of
the international community is not obliged to abide by international law unless it has
expressly consented to a particular course of conduct. This is an issue of state
sovereignty.The term "international law" can refer to three distinct legal disciplines:
a) Public international law, which governs the relationship between provinces and
international entities. It includes these legal fields: treaty law, law of sea,
international criminal law, the laws of war or international humanitarian law and
international human rights law.
b) Private international law or conflict of laws, which addresses the questions of
(1) which jurisdiction may hear a case, and (2) the law concerning which
jurisdiction applies to the issues in the case.
c) Supranational law or the law of supranational organizations, which concerns
regional agreements where the laws of nation states may be held inapplicable
when conflicting with a supranational legal system when that nation has a treaty
obligation to a supranational collective.
ii) Constitutional Law
Constitutional law is the body of law which defines the relationship of different entities
within a state, namely, the executive, the legislature, and the judiciary.Not all nation states
have codified constitutions, though all such states have a jus commune, or law of the
land, that may consist of a variety of imperative and consensual rules. These may include
customary law, conventions, statutory law, judge-made law or international rules and
norms.The Constitution of India is the Supreme Law of India. It lays down the framework
defining fundamental political principles, establishes the structure, procedures, powers,
and duties of government institutions, and sets out fundamental rights, directive principles,
and the duties of citizens. It is the longest written constitution of any sovereign country
in the world, containing 448 articles in 22 parts, 12 schedules and 118 amendments.
Besides the Hindi version, there is an official English translation. Dr B.R. Ambedkar is
widely regarded as the father of the Indian Constitution.
iii) Criminal Law
Criminal law is the body of law that relates to crime. It regulates social conduct and
proscribes threatening, harming, or otherwise endangering the health, safety, and moral
welfare of people. It includes the punishment of people who violate these laws. Criminal
law differs from civil law, whose emphasis is more on dispute resolution and victim
compensation than on punishment.
iv) Civil Law
Civil law is a legal system originating in Western Europe, intellectualized within the
framework of late Roman law, and whose most prevalent feature is that its core principles
are codified into a referable system which serves as the primary source of law. This can
be contrasted with common law systems whose intellectual framework comes from judge-
made decisional law which gives precedential authority to prior court decisions on the
principle that it is unfair to treat similar facts differently on different occasions.
Historically, civil law is the group of legal ideas and systems ultimately derived from
the Code of Justinian, but heavily overlaid by Germanic, canon-law, feudal, and local
practices, as well as doctrinal strains such as natural law, codification, and legislative
positivism.
Conceptually, civil law proceeds from abstractions, formulates general principles, and
distinguishes substantive rules from procedural rules. It holds case law to be secondary

and subordinate to statutory law, and the court system is usually inquisitorial, unbound Notes
by precedent, and composed of specially-trained, functionary judicial officers with limited
authority to interpret law. Jury trials are not used, although in some cases, benches may
be sat by a mixed panel of lay magistrates and career judges.
v) Business or Mercantile Law
The terms ‘Business’, ‘Commercial’, and ‘Mercantile’, in relation to law, are used
in the samesense. ‘Business Law’ is that branch of law, which comprises laws concerning
trade, industry andcommerce. Business law refers to those rules and regulations, which
govern the formation andexecution of business transactions made by various persons in
the society. These provisions comprisethe legal environment of business. Business law
is intended to infuse the much needed ‘certainty’in commercial dealings. Business law
includes laws relating to contract, sale of goods, negotiableinstruments, partnership,
company and many other economic laws having a bearing on trade,industry, and
commerce.
Illustrations:
i) International Law
On June 24, 1993, Jose Medellin – a Mexican national who had lived most of his
life in the U.S. – took part in a gang initiation with five other men at a park in Houston,
Texas. Two additional men were present at the initiation but did not take part in the
ritualistic beating of their newest member. Once the initiation was complete, the men
stayed in the park, drinking alcohol.
Two teenage girls who had attended a nearby party encountered the group after
cutting through the park in order to make it home before curfew. The gang approached
the girls and held them down against their will. Two of the men decided to leave at this
point. The remaining members of the gang then brutally raped and beat the girls, then
decided to kill them so they could not identify their attackers.
The gang then reconvened at the home of Peter Cantu, one of the gang members,
where he lived with his brother, Joe, and sister-in-law, Christina. Christina asked why the
men were covered in blood, and Medellin proudly recounted the details of what the gang
had done, saying that what they did would soon be on the news. He then informed her
that he had raped the girls and had killed one of them.
After the gang had left, Christina convinced Joe to report the gang’s crimes to the
authorities. Four days later, the girls’ bodies were found. Everyone who was believed to
be responsible was arrested, and Medellin gave both written and taped confessions of
his crimes. He was sentenced to the death penalty upon the conclusion of his trial.
The case became an example of international law at work when, in the International
Court of Justice, Mexico sued the U.S. on behalf of over 50 Mexican citizens who had
been given the death penalty without their national consulates being notified. The court
ruled that the U.S. had indeed acted in error, and that the defendants’ cases should be
reopened.
Initially, the U.S. government felt Mexico’s suit was “unjustified,” “unwise,” and an
“ultimately unacceptable intrusion in the United States criminal justice system.” However,
after the court’s decision was handed down in 2005, the government reversed its position
and announced that it would abide by the decision.
The government then instructed states to reconsider those convictions and sentences
pertaining to Mexican nationals who were on death row here in the U.S. Medellin’s death-

Notes penalty appeal was one of those cases pending before the Supreme Court, and it was
dismissed by the Court in order to enable Texas courts to comply with the government’s
directive.
The Texas Court of Criminal Appeals, however, refused to comply, with one of the
court’s judges accusing the White House of an “unprecedented, unnecessary and intrusive
exercise of power over the Texas court system.” The Bush administration responded by
entering the case on Medellin’s behalf and urging the Supreme Court to overturn the Texas
court’s decision.
The government’s brief informed the justices that if the Texas court’s decision was
not reversed, then it would “place the United States in breach of its international law
obligation” to comply with the International Court of Justice’s decision. Further, it would
also “frustrate the president’s judgment that foreign policy interests are best served by
giving effect to that decision.”
Four of the Supreme Court Justices (Chief Justice Roberts and Justices Scalia,
Kennedy, Thomas, and Alito) rejected the arguments made by the Bush administration.
Justice Stevens wrote a concurring opinion, and Justices Breyer, Souter, and Ginsburg
dissented.
On July 16, 2008, the International Court of Justice asked for stays of the executions
of Medellin and four additional Mexican nationals who were in similar situations (their
consulates not being notified). The following day, Robert Black – a spokesman for Texas
Governor Rick Perry – said the state would proceed with Medellin’s August 5, 2008
execution, despite the International Court of Justice’s order for a stay. Said Black, “The
world court has no standing in Texas and Texas is not bound by a ruling or edict from
a foreign court. It is easy to get caught up in discussions of international law and justice
and treaties. It’s very important to remember that these individuals are on death row for
killing our citizens.”
Medellin was indeed executed at 9:57 p.m. on August 5, 2008, after a three-hour
delay while the Supreme Court heard a late appeal, which was ultimately denied anyway.
ii) Constitutional Law
The U.S. Constitution establishes three branches of the federal government: the
executive branch, the judiciary branch, and the legislative branch. Through the Constitution,
each branch is created and its powers are 'enumerated.'
Article I establishes our legislative branch, which is Congress. The U.S. Congress
is made up of the House of Representatives and the Senate. The Constitution gives
congressional powers to each. This power means that Congress makes our federal laws.
Article II establishes our executive branch, which is the U.S. President. Generally
speaking, the President may suggest legislation and may also veto laws.
The United States Supreme Court is established through Article III of the Constitution.
The Supreme Court uses its power of judicial review to interpret the Constitution and
determine which laws are in keeping with the Constitution. The Supreme Court therefore
'checks and balances' the laws of Congress.
iii) Criminal Law
To find someone guilty of a criminal act, the prosecution must generally prove two
different elements of the particular situation: (1) that the act occurred, and (2) that the
act was purposeful, or that the accused had a conscious intent to act.

An “overt act” is something a person does on purpose, knowingly, or recklessly that Notes
is against the law. An act is “purposeful” when the person has a conscious intent to engage
in the act, or to bring about a certain result. A purposeful act is deliberate and voluntary,
not the result of a mistake, or an act coerced by another person. An action is “reckless”
when the perpetrator knows it carries an uncalled-for risk for harm to another, yet
consciously disregards that risk.
The “intent” to commit a criminal act must take place before the act itself, though
the two may occur as instantly as simultaneous thoughts. The courts may assume
criminal intent from certain facts of the case which would lead any reasonable person
to make the same assumption. For example, the intent to commit armed robbery may
be assumed by the defendant’s possession of a mask and gun, as long as the items
coincide in some way with the robbery or attempted robbery.
Additionally, criminal intent may be assumed by the fact that the person committed
the crime. In other words, it may be assumed a person intended that the “natural and
probable consequences” of his voluntary or purposeful act would lead to the actual result.
For example, it may be assumed that the person intended to commit murder by the fact
that he purposefully pointed a gun at the victim and pulled the trigger.
iv) Civil Law
While the lawsuit against McDonald’s made national headlines, the facts of the case
regarding negligence, defective product, and breach of implied warranty make a fascinating
civil case.
Liebeck v. McDonald’s Restaurants CV-93-02419, 1995 (N.M. Dist., Aug. 18, 1994)
This case began when 79-year-old Stella Liebeck, who was a passenger in her
grandson’s car, purchased a cup of coffee at McDonald’s drive-through. While the car was
still parked, Liebeck removed the lid from the cup to add some creamer to her coffee,
inadvertently dropping the cup and spilling the scalding hot coffee on her lap. Liebeck
suffered third-degree, deep tissue burns on her legs that required multiple surgeries and
skin grafts.
Liebeck filed a civil lawsuit against McDonald’s for her injuries under the torts of strict
liability and negligence. This case was controversial in that the media portrayed Liebeck’s
civil lawsuit as frivolous because she was suing over coffee being too hot. However, the
damages to her body, her pain and suffering, loss of income, and loss of enjoyment in
life due to pain were real and she did prevail in court. The jury found that the defendant’s
product (the coffee) was defective (too hot to drink) and this constituted a breach of implied
warranty (the assumption that the coffee was safe to drink). The jury also found that
Liebeck was twenty percent at fault for her injuries.
v) Business or Mercantile Law
Indian mercantile law is based largely upon the English mercantile law. Prior to the
enactment of the various Acts constituting mercantile law, the personal laws of the parties
to suit regulated mercantile transactions. The rights of Hindus were governed by the Hindu
Law and that of Muslims by the Mohammedan Law.
In case of persons other than Hindus and Muslims, the Courts applied the principles
of English Law. Further, where laws and usage of Hindus or Muslims were silent on any
point, the principles of English Law were applied.
The first efforts to pass an Act constituting mercantile law in India were made in
1872 by the passing of the Indian Contract Act. From that time a large number of statutes
have been enacted concerning matters coming within the purview of mercantile law. For
Notes example, the Sale of Goods Act, 1930, the Partnership Act, 1932, the Companies Act,
1955, etc.
Objectives of Law
The various objectives of law are as follows:

i) To incorporate uniformity and social security among all category of people of
the society.
ii) To establish socio-economic justice and remove the existing imbalances in the
socio-economic structure.
iii) To impose social justice on the basis of social change by considering all round
welfare and improvement of the community, through welfare and well-being of
the citizens individually and collectively from material, moral and spiritual stand
points.
iv) To create awareness of law among the citizen, its contents, purpose,
requirements, regulations and manner involves which its serves them. It is able
to make them follow the law and respect it.
v) To make a strong government or state to implement the law positively for the
benefit of human-being and for the welfare and wellbeing of the society.
Need for Law
As law is a body of rules passed, and it is guidance which is imposed to certain

level to the general public, it is obvious that the law must be known and practiced by
each and every person in the society.
“Ignorantiajuris non–excusat” is a familiar and well accepted maxim and the meaning
of the same is ignorance of law is no excuse. Though it is not possible for any common
man to learn every branch of law, yet it is to the advantage of each member of the
community to know something of rules and regulations by which he is governed and as
such he must acquaint himself with the general principles of the law of the country.
It is understood that, some knowledge of law is necessary for every member of the
society in general and particular with the business class. As such no sound businessman
would attempt to solve important legal problems affecting his business interest without
expert legal advice. A general knowledge of some of the more important legal principles
and how they apply to certain problems will definitely help a business man in avoiding
conflict with the persons with whom he comes into business contacts. Mercantile Law,
Commercial Law or Business Law are in particular importance to business people or
general public to certain extent engaged in economic and social activities.
Business Law
Business law refers to that branch of law which comprises laws concerning trade
industry and commerce.Business Law is also known as a body of legal rules which relates
to the conduct of business.
Scope of Business Law
Most civilized societies provide and enforce different sets of rules and guiding
principles for different kinds or social behaviour. Hence there are several branches of law
such as Constitutional Law, Criminal Law, Civil Law, Industrial Law, Labour Law,
Commercial Law or Business Law and so on.
The scope of business law is fairly large. It includes the law relating to contracts, Notes
sale of goods, partnership, negotiable instruments, insurance, insolvency, carriage of
goods, company’s activities and so on. In respect of Business Law in particular which
is also dealing with the activities pertaining with the any class of people who are directly
or indirectly connected with the business activities. Hence the scope of business law can
be broadly classified as:
(a) Law of contract: Law of contract deals with any agreement which may be in
particular or general with the individuals belonging to the society and also of
various commercial activities.
(b) Law of sale of goods: Deals with the agreement between one traders’ to
another trader with only commercial transactions.
(c) Economic and other Legislation: Are termed as ‘General Law’, deals with
both the business and society which sets the rules towards rights, duties and
obligations for any category of people in the society. Some of the law of this
nature which are termed as ‘Act’ are:
i) The Monopolies and Restrictive Trade Practices Act 1969.
ii) The Environment (Protection) Act 1986.
iii) The Patents Act 1970.
iv) The Sick Industrial Companies (Special Provision) Act 1985.
v) The Consumer Protection Act of 1986.
vi) The Securities Contracts (Regulation) Act 1956.
vii) The Foreign Exchange Management Act and so on.
Sources of Business Law

Major part of Indian Mercantile Law or Commercial Law is based on English Law.
Any Practices, customs and usages are also used in formulating Business Law. The
courts in India are however, selective in the application of English Law.
1. English Mercantile Law
Constitutes the foundation on which the super structure of the Indian Business Law
has been built.
2. Statutes of Indian Legislation
The Law of Merchant or LexMercatoria was English Law relating to mercantile
transactions like Negotiable Instruments, Contracts of Partnership, Carriage and
Insurance. In India, the same Law are embodied in the Acts passed by the State
Legislatures or Parliament. The bulk of the Indian Mercantile Law is Statute Law. The laws
of such category are:
i) The Indian Contract Act, 1872
ii) The Negotiable Instrument Act 1881
iii) The Sale of goods Act 1930
iv) The Indian partnership Act 1932
v) The companies Act 1956
3. Judicial decisions
It referred to something done or said that may serve as an example or rule to authorize
or justify an act. Judicial decisions are usually referred to as precedents and are binding

Notes on all courts having jurisdiction power to that of court which gives the judgement which
is popularly known as Case Laws.
4. Customs and Usages
‘Custom’, refers to usage or practice common to many or to a particular place. It
is long-established practice considered as unwritten law. A particular act, usage or conduct
practiced by a group of people for a long period becomes a custom.
1.2 Nature of Law

Law is an instrument which regulates human conduct/behavior. Law means Justice,
Morality, Reason, Order and Righteous from the view point of the society. Law means
Statutes, Acts, Rules, Regulations, Orders, and Ordinances from point of view of
legislature. Law means Rules of court, Decrees, Judgment, Orders of courts, and
Injunctions from the point of view of Judges. Therefore, Law is a broader term which includes
Acts, Statutes, Rules, Regulations, Orders, Ordinances, Justice, Morality, Reason,
Righteous, Rules of court, Decrees, Judgment, Orders of courts, Injunctions, Tort,
Jurisprudence, Legal theory, etc.
Law at its most fundamental level is a means by which individuals and groups with
wildly different agendas, goals, and aspirations can function in a tolerant, cooperative, and/
orcompetitive environment. Just as there is no reason to dismiss law merely because
of its grotesque misuse by those with the power to use it as a manipulative and enslaving
tool there is also any reason to assume that the latter is the only viable form of law. The
law of control is not the law which at a fundamental level is what one desires.
The general question about the nature of law presupposes that law is a unique social-
political phenomenon, with more or less universal characteristics that can be discerned
through philosophical analysis. General jurisprudence, as this philosophical inquiry about
the nature of law is called, is meant to be universal. It assumes that law possesses certain
features, and it possesses them by its very nature, or essence, as law, whenever and
wherever it happens to exist. However, even if there are such universal characteristics
of law which is controversial.
First, there is the sheer intellectual interest in understanding such a complex social
phenomenon which is, after all, one of the most intricate aspects of human culture. Law,
however, is also a normative social practice: it purports to guide human behavior, giving
rise to reasons for action. An attempt to explain this normative, reason-giving aspect of
law is one of the main challenges of general jurisprudence. These two sources of interest
in the nature of law are closely linked. Law is not the only normative domain in our culture;
morality, religion, social conventions, etiquette, and so on, also guide human conduct in
many ways which are similar to law. Therefore, part of what is involved in the understanding
of the nature of law consists in an explanation of how law differs from these similar
normative domains, how it interacts with them, and whether its intelligibility depends on
other normative orders, like morality or social conventions.
Contemporary legal theories define these two main interests in the nature of law in
the following terms. First, we need to understand the general conditions that would render
any putative norm legally valid. Second, there is the interest in the normative aspect of
law. This philosophical interest is twofold. A complete philosophical account of the
normativity of law comprises both an explanatory and a justificatory task. The explanatory
task consists of an attempt to explain how legal norms can give rise to reasons for action,
and what kinds of reasons are involved. The task of justification concerns the question
of whether people ought to comply morally speaking or all things considered with law’s
demands. In other words, it is the attempt to explain the moral legitimacy of law and the Notes
subjects’ reasons for complying with it.
1.3 Legal Environment of Business

Legal Environment of Business in India primarily covers the legal policy, framework
and law in which business has to operate. The primary objective of the business is to
produce and sell the products/services for profit for the needs/wants of the consumers.
These products and services are offered in the marketplace where consumers and buyers
can purchase the products/services they are looking for. The entrepreneurs wanted to
operate in an environment which is business friendly and consumer friendly. It has to be
business friendly so that any entrepreneur who is bringing together the resources for the
purpose of producing goods and services. To govern a business transaction there are
certain laws which are setup by the Government by which a transaction can be termed
as legal and to safeguard the interest of both producer and buyer.
Indian Government has framed a number of policies, rules and regulations to benefit
and control both the business firms as well as consumers. Here are some of the acts
and policies which form the basic legal environment of India:
1. Indian Contract Act
Indian Contract Act was introduced in 1872. The act is applicable all over India, except
Jammu and Kashmir. This is one of most important laws for the business firms because
each and every business enters into some contract. In the words of Pollock, “Every
agreement and promise, enforceable by law, is a contract.”
2. Indian Contract Act 1872
Indian Contract act is of “Jus in personam” nature, which means a right against or
in respect of a thing. Follow the link given below to get detailed provisions of Indian Contract
Act 1872. Indian Contract Act provides security to both the parties who enter into a
contract. The party, who breaches the contract, is liable to face the penalty. The Act also
provides protection to the business. The act is like a foundation on which the structure
of the business is built. It would be difficult to run a business smoothly without doing
contracts. Every person, consciously or unconsciously, enters into one or more contracts
in his/her life. The Act provides remedies against the person who fails to complete the
terms and conditions of the contract.
3. Industries (Development and Regulation) Act
Development of industrial sector is synonym of the overall development of an
economy. Governments formulate various industrial policies to foster the growth of
industrial sector and IDRA was introduced with the same objective.Industries (Development
and Regulation) Act was enacted in 1951 by the Central Government, in pursuance of
Industrial Policy Resolution 1948. IDRA came into force with effect from 6th May, 1952.
4. Competition Act
Competition Act was introduced in 2002. It extends to the entire India, except Jammu
and Kashmir. Competition Act was need of the hour to promote efficiency and maximize
welfare.Competition Act was introduced to create an environment of free trade, ensure
healthy competition in the market, and protect the interests of consumers. The Act
prohibits anti-competitive agreements, abuse of dominant position by the enterprises, and
regulates mergers and acquisitions which can have adverse effects on competition within
India. It was necessary to establish a Commission to curb the adverse effects of
competition and economic development.
Notes 1.4 Mercantile Law

Mercantile law or commercial law is the law that regulates commercial activities of
the economy. It is a very wide term and all the laws that regulate commercial transaction
in India are covered under its ambit. The pre-requisite of such transaction is a valid
agreement between the parties to the contract. It can either be express or implied.
It is concerned with the rights and obligations of traders arising out of the commercial
transaction. The trader can be an individual, partnership firm or a company. All the Acts
in India that govern trade or commerce are part of Mercantile Law of India. For example,
Indian Contract Act, 1872; Sale of Goods Act, 1930; Companies Act, 2013 etc.
Origin of Mercantile Law
The Mercantile Law in India developed with the enactment of the Indian Contract Act,
1872. Before this, all the commercials transactions were governed by the personal laws
of the party to contract. For example Hindu Law, Mohammedan Law, etc. The first attempt
to codify Mercantile Law in India was made by the Britishers in 1872 by the enactment
of Indian Contract Act. Since then, numerous laws have been enacted in India to regulate
commercial transactions, such as Partnership Act, Negotiable Instruments Act, etc.
Sources of Indian Mercantile Law

The Indian Mercantile Law has developed from many sources. The following are the
main sources of Indian Mercantile Law:
1. English Mercantile Law
The Indian Mercantile Law owes its origin to the English Mercantile Law. For a very
long time, India was under the control of Britishers. Therefore, it has a direct influence
on Indian law, and Indian Mercantile Law is no exception to it. The dependence of Indian
Law on English Law is so high that, in the absence of any provision related to the issue
in question, the direct recourse is to refer to the English Mercantile Law. The sources
of English Mercantile Law are Common Law, Equity, Law Merchant, and Statute Law.
The Common law of England or the judge made law is the preliminary source of Indian
Law. It is the unwritten law of England that consists of judicial decisions and customs.
With the passage of time, this law became rigid. This rigidity led to the development of
Equity in England.
The remedy under Common Law was available by obtaining writs, but the writs were
very specific and less than required. This led to dissatisfaction among people. And in many
cases, the remedy under Common Law was not adequate. So, the people would appeal
to the King. The King transferred the cases to the Chancellor, who would decide those
cases by his common sense, natural justice, and conscience. This led to the development
of Equity Courts. Law Merchant is the law that consists of the principles developed out
of the principles of customs and usages. This ultimately became a part of Common Law
of England.
Statute law is the written law of England enacted by the Parliament of England. This
written law always overrides the unwritten law i.e. Common Law and Equity. It is one of
the very vital sources of Mercantile Law of England. For example English Partnership Act,
1890, Sale of Goods Act, 2015, etc.
2. Acts enacted by Indian Legislature
The greater part of Indian Mercantile law is Legislature enacted. The Acts enacted
by the Indian Parliament are that source of law which makes it possible to bring uniformity
in Indian Law. Changes can be brought in Indian Law effectively by legislative enactments.
3. Judicial Decisions Notes

Judges interpret the law and put life into the black and white letters of law for its
effective implementation. The decision of judges is binding on all subsequent decisions
unless overruled by a higher court or a larger bench. For example, the decision of a High
Court is binding on all the lower courts under its jurisdiction, and the decision of a Supreme
Court is binding on all the courts of India except for the Supreme Court itself. The decision
of the Supreme Court has persuasive value for the same bench, but it has binding value
in the case, a larger bench gave the earlier ruling.
4. Law-Judgement
The doctrine of the binding value of earlier judicial decisions i.e. the precedent is
followed to maintain uniformity in delivering justice. Whenever the law is silent on a certain
issue, then the judges interpret the law in such a way that the yawning gaps in the law
are filled to ensure justice. The precedents have binding value to ensure that no two alike
cases are decided on two different principles as this will result in injustice to some. This
principle ensures justice for each and every individual along with a measure of certainty
for the law itself.
Before independence, the decisions of Privy Council were binding on all the lower
courts as it was the highest court of Appeal for Indians. At present, the Supreme Court
of India is the highest court of Appeal, and its decisions are binding on all the courts
of India. But even today, the decisions of Privy Council and House of Lords are referred
to as precedents in deciding certain cases and in interpreting certain statutes in India.
5. Customs and Trade Usages
Customs and Usages had played a very vital role in regulating the commercial
transactions in India when there was no codified law. In fact, the codified law of India has
given superseding powers to the customs and usages. For example, Section 1 of Indian
Contract Act states, “Nothing herein contained shall affect any usage or custom of trade
not inconsistent with the Act.” A custom becomes binding when certain pre-requisites
are fulfilled. For example, antique, reasonable, consistent with law, not against public
policy. Then, the custom is recognized by courts, and it becomes a legal obligation. Hundi
is the best example of this, and it has been recognized by the Negotiable Instruments
Act as well.
The need for mercantile law is felt when a dispute arises between the two parties
to the contract. Awareness about the law of the land is essential as ignorance of law
is no excuse. Therefore, each and every individual should have knowledge of the mercantile
law of their country. In the absence of knowledge, no rights can be enjoyed, and no
obligations can be met.
1.5 Essentials of Law

Various Essentials of Law are:
1. Law of property
The law of property is concerned with the rights which may arise in relation to anything
that can be owned. Thus, property covers land, goods and intangible rights such as debts,
patents or the goodwill of a business.

Notes 2. Civil liability

The civil law is concerned with the rights and duties which arise between private
individuals. The aim of taking legal action is to put right a wrong which has occurred,
often by means of an award of compensation. The areas of civil liability which have the
greatest impact on businesses are liability in contract and tort.
3. Equity
Over a period of time the common law became a very rigid system of law and in
many cases it was impossible to obtain justice from the courts.
4. Public utility
Custom is the embodiment of those principles which have commended themselves
to the national conscience as principle of justice and public utility. The natural conscience
may well be accepted by the courts as an authority to guide. Such of the customs should
also obtain the sanctions of law. The customs must be acknowledged and approved not
by the power of the state but by the public opinion of the society at large.
5. Rational expectation
Rational expectation of the customs and usages and its continuance is another stage
to be accepted as source of law. Generally the rational expectation is been fulfilled unless
there is a contrary, rather than frustration. Even if customs are not ideally just and
reasonable, even if it can be shown that the rational conscience has astray in establishing
them, it is accepted as they are.
6. Interest of society
Custom rests on the popular convictions that it is in the interest of society. This
conviction is so strong that it is not found desirable to go against it.Custom is useful both
to the law-giver and the people. Further it must not be opposed by a statute law. To the
people, a custom is already known. Its observance over a long period makes its
acceptance easier by the people. It is easier to secure reference for a code or law if it
claims to be based on customs immemorially observed and no new legislation can
completely ignore it.
1.6 Summary
Law is a main contributory factor for man’s welfare and wellbeing. The study of law
is of enormous practical value and vital and ever-present force in modern life. Every
individual and even more a business man needs even more thorough knowledge of the
law than the person not so engaged. As he carried his business, he is confronted with
problems arising out of contract, sale of goods, bailment, agency, negotiable instruments,
cyber-crimes environmental issues, International dealing and so on. At present situation
business are facing a lot of formidable problems as every activity of the business is
vigilantly watched by the public and law. In economics is started developing in the positive
direction and exposed to global competition and followed the path of economic
liberalization to the greater extent. This made compulsory to study ‘Business Law’ or to
the knowledge of various legal aspects as a part of commerce, management and business
study curriculum with different titles.
With the growth of people’s social and economic behaviour has assumed a multi-
dimensional character. Most civilized societies, therefore, provide and enforce different set
of rules, regulations and principles for different kind of social behaviour. In this connection
there are different branches of law both for social, individual and business such as
constitutional law, civil procedure codes, criminal procedure codes, International law,
Mercantile law / Business law and so on. The mercantile law is referred to the branch Notes
of law which comprises laws concerning trade, industry, business or commerce with the
increasing complexities of modern business world, the scope of mercantile law has
enormously widened. Since the business is related to society, any activity related society
and main’s welfare are directly related; hence it is now termed as business law or legal
aspects of business or business regulations.
The law of contracts forms the oldest branch of the law relating to business and
general transactions, as it affects every person in one way or the other, as all of us enter
into some kind of agreement or contract every day. Law of contract is very essential to
all merchants, when they are involved with huge money and dealings. At the same time
it is also for the general public like a person buys a movable property, hires some goods
or services, booking for a marriage hall, putting up of a show and so on. Such contracts
create legal relations giving rise to certain rights and obligations.
Prior to the enactment of the Indian contract act 1872, English common law was
applied indiscriminately to Indian natives which led to many inconveniences statues were,
therefore enacted to supersede English law and to regulate the contracts where parties
were Mohammedans and Hindus. The rights of Hindus and Mohammedans were regulated
by their own laws and usages. Laws and usages of Hindus and Mohammedans were silent
on any point English law applied.
The law of contract is embodied in the Indian contract act 1872. The Indian contract
act incorporates many features of English law. It is not an extensive code because besides
of sales of gods act and the Indian partnership Act. The Act does not incorporate the
negotiable instrument Act. A particular usage of custom is allowed to prevail and remain
unoffered. It should be reasonable certain and should be well know.
Legal Environment of Business in India primarily covers the legal policy, framework
and law in which business has to operate. The primary objective of the business is to
produce and sell the products/services for profit for the needs/wants of the consumers.
These products and services are offered in the marketplace where consumers and buyers
can purchase the products/services they are looking for.
I. Fill in the Blanks
1. _______________ in simple term means rules.

2. Prior to the enactment of the Indian Contract Act _______________.
3. _______________ common law was applied indiscriminately to Indian natives.
4. English law and to regulate the contracts where parties were _______________
and _______________.
5. The rights of Hindus and Mohammedas were regulated by their own
_______________ and _______________.
6. The parties to the contract were realized and this gave birth to the Indian Contract
Act.
II. True or False
1. The law contract is embodied in the Indian Contract Act 1873.

2. The Indian Contract Act incorporates many features of Spain law.

Notes 3. English law is not extensive code because besides the sales of goods Act and
the partnership act.
4. The contract law is silent on any matter Hindu or Mohammedans law relating
to contracts shell apply.
5. The law of contract is the most important branch of business law.
6. Business law affects everybody like trade commercial and industry.
III. Multiple Choice Questions
1. When the Indian contract act introduced?

[a] 1772
[b] 1871
[c] 1873
[d] 1872
2. Who regulated by their own laws and usages?
[a] Mohammedans and Cristanse
[b] Mohammedans and Hindus
[c] Hindus and cristanse
[d] None of these
3. Which was not incorporating the negotiable insurance act?
[a] Sales of goods act
[b] Partnership act
[c] Transfer of property act
[d] Sales of goods act and Indian partnership act
4. Which is the most important branch of business law?
[a] Law and practice
[b] Law and tradition
[c] Law of business
[d] Law of contract
5. Under which section promises are not covered by the Indian contract act
expected?
[a] Section 24
[b] Section 25
[c] Section 22
[d] None of these
6. Which one is not deals particular law of contract?
[a] Indemnity
[b] Guaranties
[c] Bailment and agency
[d] None of these
7. Which one is essential element of the valid contract?
[a] Proposal and acceptance
[b] Free consent

[c] Certainty Notes

[d] All of these
8. “When one person signifies to another his willingness to do or obtain from doing
anything with a view to obtaining the assent of that other to such act” is called
[a] Consideration
[b] Enforceable law
[c] Proposal
[d] Certainty
9. A proposal when accepted it becomes what?
[a] Legal relationship
[b] Possibility of performance
[c] Promise
[d] Free consent
10. When at the desire of the promisor the promise of any other person has done
or at stained from doing of abstain from doing something such act is called?
[a] Consideration
[b] Certainty
[c] Legal relationship
[d] Free consent

I. Short Answer Questions
1. Define the term Law.
2. Define Business Law.
3. What is law of merchant?
4. What is common law?
5. What is case law?
6. What is statue law?
II. Extended Answer Questions
1. Give an introduction to Law.
2. Discuss in details about nature of Law.
3. Explain about Legal Environment of Business.
4. Discuss in details about Mercantile Law.
5. Explain in details about essentials of Law.
1.9 Key Terms

z Law: Law is a rule of action evolved to regulate social life and to avoid conflict
of interests. Law is enacted or customary in a community and recognized as
commanding or avoiding certain action.
z International Law: International law is the set of rules generally regarded and
accepted as binding in relations between states and nations. It serves as a
framework for the practice of stable and organized international relations.

Notes z Constitutional Law: Constitutional law is the body of law which defines the
relationship of different entities within a state, namely, the executive, the
legislature, and the judiciary.Not all nation states have codified constitutions,
though all such states have a jus commune, or law of the land, that may consist
of a variety of imperative and consensual rules.
z Criminal Law: Criminal law is the body of law that relates to crime. It regulates
social conduct and proscribes threatening, harming, or otherwise endangering
the health, safety, and moral welfare of people. It includes the punishment of
people who violate these laws.
z Civil Law: Civil law is a legal system originating in Western Europe,
intellectualized within the framework of late Roman law, and whose most
prevalent feature is that its core principles are codified into a referable system
which serves as the primary source of law. This can be contrasted with common
law systems whose intellectual framework comes from judge-made decisional
law which gives precedential authority to prior court decisions on the principle
that it is unfair to treat similar facts differently on different occasions.
z Business Law: Business law refers to that branch of law which comprises laws
concerning trade industry and commerce. Business Law is also known as a
body of legal rules which relates to the conduct of business.
z Judicial decisions: It referred to something done or said that may serve as
an example or rule to authorize or justify an act. Judicial decisions are usually
referred to as precedents and are binding on all courts having jurisdiction power
to that of court which gives the judgement which is popularly known as Case
Laws.
z Customs and Usages: ‘Custom’, refers to usage or practice common to many
or to a particular place. It is long-established practice considered as unwritten
law. A particular act, usage or conduct practiced by a group of people for a
long period becomes a custom.
z Competition Act: Competition Act was introduced in 2002. It extends to the
entire India, except Jammu and Kashmir. Competition Act was need of the hour
to promote efficiency and maximize welfare. Competition Act was introduced
to create an environment of free trade, ensure healthy competition in the market,
and protect the interests of consumers.
z Mercantile Law: Mercantile law or commercial law is the law that regulates
commercial activities of the economy. It is a very wide term and all the laws
that regulate commercial transaction in India are covered under its ambit. The
pre-requisite of such transaction is a valid agreement between the parties to
the contract. It can either be express or implied.
z Law of property: The law of property is concerned with the rights which may
arise in relation to anything that can be owned. Thus, property covers land,
goods and intangible rights such as debts, patents or the goodwill of a business.

1. Law 2. 1875
3. English 4. Mohammedan, Hindus
5. Laws, usages 6. 1872

II. True or False Notes

1. True 2. False
3. True 4. True
5. True 6. True

1. [d] 2. [b]
3. [d] 4. [d]
5. [b] 6. [d]
7. [d] 8. [c]
9. [c] 10. [a]
1.11 Case Study

Mr. A Developed a shopping mall at Mumbai at the request of Mr. B who is a municipal
corporater. Mr. C makes agreement to pay Rs. 2,50,000. Mr. A accept the proposal of
Mr. C. Is this an agreement or a contract justify your answer.
Ans : The given case is under the chapter of consideration, which means the promises
executes the work at the desire or under the direction of the promisor In this set case
Mr. A developed a shopping mall at Mumbai with the prior request of Mr. B who is a
municipal corporater. Mr. C makes agreement to pay Rs. 2,50,000 and Mr. A accepted
the proposal of Mr. C.
Case
Durgaprasad V/S Baldeo In this case Mr. Durgaprasad constructed the market under
the direction of municipal corporater. market allotted to various person, Mr. baldeo was
one of them. He made an agreement that he will pay commission to Mr. Durgaprasad
for the land allotment in the market. But after this agreement Mr. Baldeo failed to pay
money to Mr. Durgaprasad hence Durgaprasad filed a case against baldeo.
Judgement
As mentioned above A developed a shopping mall at Mumbai at the request of B
who is a municipal corporater C agree to pay Rs.2,50,000 to A as mentioned in the above
case C is the stranger between A and B so there is no valid consideration between A
and C because U/S 2 (D) anything is done voluntarily, there is no lawful consideration.

1. A.K. Majumdar Company Law & Practice (Taxmann’s) 13th Ed. 2008
2. Anson Law of Contract 22nd Edition 1964
3. Ashok K. Bagrial on Company Law 11th Ed. 2007
4. Asia Pages, Towards a Philosophy of Modern corporation 1967
5. Avtar Singh Company law 16th Ed.2009
6. Avtar Singh, Company Law 15th Ed. 2007
7. B.C. Sarma on The Law of Ultra vires 2004
8. Carden, T. Percy- Limitation on Power of Common Law Corporation (1910)
9. Charles De Hoghton on The Company, Ed.1970

Notes 10. Charlesworth’s Company Law 8th Edition 1965

12. D.J. Hewit Control of Delegated legislation Being a Study of Ultra Vires 1953
13. D.L.Majumdar,Towards Philosophy of the Modern Corporation (1967)
14. D.S.R. Krishnamurti, TAXMANN’S Company Law 2006
1.13 Bibliography
1. Allen, Devin E., “Asian Contract Law”, (1972), published by Cambridge University
Press.
2. Anson, W.R., “Principles of the English Law of Contract and of Agency in its
relation to contract”, ed. 21st (1959), Oxford at the Clarendon Press, London.
3. Anand, R.L. &Iyer, Commentary on the Specific Relief Act, 1963 (Act No. 47
of 1963), ed.12th, (2011), Delhi Law House.
4. Awasthi, S.K., “Digest on Indian Contract Act, 1872: with allied legislations”,
ed.1st, (1999), Dwivedi& Co., Allahabad.
5. Bangia, R.K. (Dr.), “Law of Contract & Specific Relief with Special emphasis
on Law of Tender”, 1994(1), reprint 2015.
6. Beatson, J., “Anson’s Law of Contract”, ed.27th, (1998), and ed.28th, (2002),
published by Nairobi: Oxford University Press.
7. Bhadbhade, Neelima, “Contract Law in India”, ed.2nd, (2012), published by
Kluwer Law Intl
8. Berle, A. A. and Means, G. C. (1968) ‘The New Concept of the Corporation’,
in The modern corporation and private property. Rev. ed. New York: Harcourt,
Brace & World, pp. 309–313.
9. Davies, P. L., Worthington, S. and Gower, L. C. B. (2012a) ‘Chapter 3 - sources
of company law and the company’s constitution’, in Gower and Davies’ principles
of modern company law. 9th ed. London: Sweet & Maxwell, pp. 64–79.
10. Dignam, A. J., Goo, S. H. and Hicks, A. (2011) Hicks & Goo’s cases and
materials on company law. 7th ed. Oxford: Oxford University Press.
11. Dignam, A. J. and Lowry, J. P. (2014) Company law.Eighth edition. Oxford:
Oxford University Press.
12. Hannigan, B. (2012d) ‘Corporate personality’, in Company Law. 3rd ed. Oxford:
Oxford University Press, pp. 40–62.
13. Hannigan, B. (2012e) ‘Formation, classification and registration of companies’,
in Company Law. 3rd ed. Oxford: Oxford University Press.
14. Hannigan, B. (2016) Company law.Fourth edition. Oxford: Oxford University
Press.
15. Ireland, P. (1984) ‘The Rise of the Limited Liability Company’, International
Journal of the Sociology of Law, 12, pp. 239–260.
16. Kershaw, D. (2012) Company law in context: text and materials. 2nd ed. Oxford:
17. Lowry, J. P., Reisberg, A. and Pettet, B. G. (2012a) ‘Chapter 4 - entrenchment
of rights’, in Pettet’s Company Law. 4th ed. Harlow: Pearson.
18. Lowry, J. P., Reisberg, A. and Pettet, B. G. (2012e) Pettet’s company law:
company law and corporate finance. 4th ed. Harlow: Pearson.
±±±±

Law of Contract 21
Notes
Unit 2: Law of Contract
Structure:
2.1 Introduction and Relevance of Law of Contract
2.2 Definition of a Valid Contract
2.3 Offer and Acceptance
2.4 Free Consent
2.5 Consideration
2.6 Performance of Contracts
2.7 Discharge of Contracts
2.8 Breach of Contract
2.9 Void Agreements
2.10 Quasi Contracts
2.11 Freedom to Contract
2.12 Summary
2.15 Key Terms
2.17 Case Study
2.19 Bibliography
Objectives

 Definition of a Valid Contract
 Offer and Acceptance
 Consent
 Consideration
 Performance of Contracts
 Discharge of Contracts
 Breach of Contract
 Void Agreements
 Quasi Contracts
 Freedom to Contract

Notes 2.1 Introduction and Relevance of Law of Contract

The law of contract is that branch of law which determines the circumstances in
which a promise or an agreement shall be legally binding on the person making it. The
law relating to contracts in India is confined to the Indian Contact Act, 1872. The Act
came into force on the first day of September 1872. Originally this Act was included with
general principles of law of contract, contracts relating to sale of goods, special kinds
of contracts like indemnity, guarantee and so on. Later the Indian Contract Act has been
divided into two, Part I as general principles of Law of Contract and Sale of goods Act,
where as in Part II it is Partnership Act and so an.
Unlike other branches of law, law of contract does not apply, but it determines the
circumstance in which a Promise has been made. The parties to an agreement may lay
down their own terms and conditions. The Indian Contract Act does not declare to be
a complete and exhaustive code, it deals with the general principles of the law of contract
and with special contracts only.
The law of contract differs from other branches of law. The Act does not lay down
a number of rights and duties which the law will enforce. In this Act the party themselves
creates rights and duties which will be supported with a limited principles.
The law of contract states that the first step required to form a valid contract is that
an offer must be formally made by one of the parties to another. A common example
to elucidate upon this principle is found in the sale of property; the purchaser, in this
example, must make an offer to purchase the underlying property. This offer may include
simplistic or complex terms, but it must be concrete and affirmed through written
documentation.
Following the offer, the contract, as stated by the law of contract, must be accepted
by the offered party. Using the sale of property as an example, the seller must affirmatively
accept the offer; the original offer may be accepted in a written or spoken form.
If the offered party proposes a counteroffer, an acceptance is not realized. When
a court determines whether or not an offer and acceptance was realized, the judicial body
using the law of contract will look for a formal meeting or a concurrence of wills to decide
if the requirements latent in the offer and acceptance statutes of the law of contract had
been satisfied.
Lastly, the basic principles of the law of contract will require consideration to be given
for the contract to maintain a legal or valid status. Consideration simply means that
something of value was exchanged between the agreeing parties. In most instances, the
consideration takes the form of money or an asset that holds considerable value.
2.2 Definition of a Valid Contract
Definition of Contract
Sir John Salmond defines a contract as, “An agreement creating and defining
obligations between two parties.”
According to Sir William Anson, “A contract as a legally binding agreement made
between two or more persons, by which rights are acquired by one or more to acts or
forbearance on the part of the other or others.”
In simple words, a contract is an agreement between two or more parties which is
intended to have legal consequences.
Law of Contract 23
According to Halsburey, “A contract is an agreement between two or more persons Notes

which is intended to be enforceable at law and is constituted by the acceptance by one
party of an offer made to him by the other party to do or abstain from doing some act.”
Sir Fredirck Pollock defines, “Every agreement and promise enforceable at law is
a Contract.”
According to the Indian Contact Act, Section 2 (h) “An agreement enforceable by
law is a Contract.”
Essential Elements of a Valid Contract
All agreements are contracts whereas all contracts are not agreement. Hence the
word agreement is wider than the contract. To make the agreement to be contract there
need to is a the legal obligations.
1. Plurality of Parties
An agreement is constituted by means of an offer by one party and an acceptance
to that offer by the other party, which is known as plurality of parties for a valid contract.
Here, one party may be an offeror and the other party may be the acceptor.
2. Offer and Acceptance
An agreement is the result of an offer and its acceptance. In order to create a valid
contract both ‘lawful offer’ and ‘Lawful acceptance’ are essential. Thus, in agreement there
should be two parties i.e. offeror, one who is making the offer and another person acceptor
who is accepting or giving his assent for the offer. There are certain rules laid down by
the Contract Act to make both offer and acceptance to be valid.
3. Legal obligation
An agreement to become a contract must given rise to a legal obligation.Section.
10 of the Act, which lays down the essentials of a valid contract does not specify ‘intention
to create legal relations,’ as one of the ingredients. This is also considered as one of
the necessary contractual ingredient in English Law. Under Indian Contract Act, an
obligation is the legal duty to do or abstain from doing a definite act or acts.
If the parties do not intend to create legal obligations, there is no contract between
them, whereas an agreement for social obligations cannot be a contract.
As previously referred to Balfour Vs Balfour (1919) In this case, there is an agreement
between husband and wife and agreement without the intention of creating legal obligations
(refer page 17) same is hold good for the agreement to have lunch at a friend’s house.
In case of commercial transactions, an intention to create legal obligation is
presumed. If the parties expressly declare and resolved that their agreement is not intended
to create legal relationships, then even a business transaction will not amount to contract.
4. Lawful consideration
The legal meaning of consideration is ‘quid-pro-quo’ or something in return.
Consideration is one of the essential elements of contract. Contradiction is defined as,
“Consideration is the price for which the promise of another is brought.” (Black stone).
Promises made without consideration is not enforceable contract. According to Sec 25
of the Act, that an agreement without consideration is void. An agreement which is not
supported by consideration is considered as ‘nudumpactum’ (a nude or bare agreement).
So it should be supported by the parties. Each party to the agreement must give or promise
something and receive something or a promise in return.

Notes 5. Capacity of parties

When an agreement is formed to make it to be a valid contract, there arises, question
of contractual capacity of parties who make the agreement. The parties to an agreement
must be competent to a contract, otherwise it cannot be enforced by Court of Law. If
either of the parties does not have the capacity to contract, the contract is not valid. Section
11 of the Contract Act also says that, “every person is competent to contract, who is
in the age group of majority, according to the law to which he is subject, and who is sound
mind, and not disqualified from contracting by any law to which he is subject.” (For more
detail refers the topic ‘capacity of parties)’.
6. Free consent
The word consent means the parties must have agreed upon the same thing in the
same sense. So, the consent should come from both the parties, that is the offeror and
the accepter. The consent must be free and genuine. When the agreement is made
between the parties, both the parties should agree upon same-thing with the same sense.
This is known as “Consensus-ad-idem” in English Law. The consent of the parties should
not be obtained by mis-representation, fraud, undue-influence, coercion or mistake,
otherwise such of the agreement is invalid under law. Hence an agreement must be made
with free consent.
7. Lawful object
Object is nothing to do with consideration but it should be lawful. The object for which
the agreement has been entered must not be illegal or immoral or opposed to public policy.
The purpose or design of the contract is lawful, but, when a party hires a house and use
it as a gambling house, then the object of the contract is to run a gambling house, then
it is unlawful and it not accepted under law. Hence the object which is not agreeable under
law or for defeat of any law, intention of creating fraud, any injury to person and property,
any act against the public policy are not lawful objects.
8. Certainty of meaning
Agreements to form valid contracts must be certain. As per section 29 of the Act,
“Agreements, the meaning of which is not certain, or capable of being made certain, are
void. The terms of the contract must be precise and certain. It cannot be left vague. A
contract may be void on the ground of uncertainty.
Example: If A agrees to sell to B, a white horse for rupees five thousand or rupees
ten thousand, there is nothing to show which of the two prices was to be given. This sort
of agreement will become invalid.
9. Possibility of performance
If the act is impossible to act by itself, both physically or legally, it cannot be enforced
at law. Example: If A agrees with B to discover treasure by magic, such agreement is
unenforceable.
10. Agreement not declared void or illegal
The agreements must have been expressly declared to be void by any law in force
in country, when such agreements if entered into, shall not be enforceable by courts of
Law. According to the Law, agreement in restraint of marriage, trade, legal proceedings,
uncertainty of meaning and wagering agreement are void, unlawful or illegal.
11. Legal formalities
There is no specification for the agreement or contract which should be made in oral
or written. An oral contract is a perfectly valid contract, except in those cases where

Law of Contract 25
writing, registration etc., are required for some statutes. In India agreement in writing is Notes
required in cases of sale, mortgage, lease or gift of immoveable property and so on. If
the legal formalities are not followed then there cannot be a valid agreement to form a
contract.
2.3 Offer and Acceptance
Meaning and Definition of Offer
Offer is basis and one of the major element of essentials of valid contract.
According to the Indian Contract Act, Section 2(a) “When one person signifies to
another his willingness to do or to abstain from doing anything with a view to obtain the
assent of that other to such act or abstinence, he is set to make a proposal.”
Essentials of a Valid Offer
1. Capable of creating legal relationship

Offer must be such that it should create legal relationship. An offeror must intend
to create legal bindings and legal relationships. Not all offers will create legal binding like
a social invitation, even if it is accepted, and does not create legal relationship, as it is
not intended.
Example: A accepts an invitation to dine at B’s place on a certain date, but fails
to turn up on the appointed date. Here A cannot be sued for a breach of contract because
in contracts regulating social invitation or domestic arrangements cannot create legal
binding or legal relationships and it do not intend legal consequences to follow from the
breach of a contract. The essential elements is that, an offer therefore must be such as
would result in a valid contract when it is accepted.
2. Offer may be express or implied
There is no legal rule that how it must be made. It can be express, which means
mere by a word of mouth or implied through understanding. The Contract Act is not giving
any specification regarding the mode of making contract. Hence it may be express or
implied.
3. Offer must be certain, definite and not vague
Terms of offer must be definite, certain, unambiguous and clear or not loose and
vague. Both offeror and offeree should be clear about the legal consequences arising out
of contract. Any vague offers does not convey or communicate what it exactly means.
According to the famous case, Taylor VsPortington (1855); A offered to take a house on
lease for three years at £ 284 per annum if the house was put into through repair and
drawing rooms handsomely decorated according to the present style. It was held that,
the offer was too vague to result in a contractual relationship because the term ‘Present
style’ may mean one thing to A and another to B. Hence here the agreement is void.
4. Offer must be communicated to the offeree
Offer cannot be made by a person to himself. It must be always be communicated
to the offeree. “No communication, no offer”, i.e. if there is no communication of an offer,
there is no acceptance resulting in the contract. e. g: A writes a letter to B offering to
sell his bike for Rs. 40,000 but not posting the letter he keeps it in his bag, here it is
not an offer and B can never accept it.

Notes 5. To obtaining the acceptance

Offer must be made with a view to obtaining the acceptance or assent of the other
party. The offer to do or not to do something should have the focus of getting assent from
the other party and it is not an offer when it is made merely with a view to disclosing
the intention of making an offer.
6. An offer may be positive or negative
A positive offer is an offer to do something. A negative offer is, on the other hand,
is an offer not to do something or abstain from doing something and both are accepted.
7. An offer may be conditional
An valid offer can also be conditional. Such offers are offer that can be accepted
only subject to that conditions. A conditional offer lapses when the condition is not
accepted. In this, a conditional offer by the management of a company to the trade union
to pay a certain amount lapses when condition is not accepted. In connection to his there
is a case, Thomson Vs LMS Railway Company (1930), according to this case, Mr. A
a traveler takes a ticket for a railway journey. On the front of the ticket, it was printed
as “for conditions see back”. One of the conditions was that the Railway Company would
not be liable for the personal injuries to the passengers. A the traveler was injured by
a railway accident and sued for the injury. It was held that the travelers were bound by
the conditions and could not recover any damages. In this case, the LMS Railway
Company is not bound to pay any of the compensation due to the accidents.
8. An offer should not contain a term, the non-compliance of which would amount to
acceptance
While making the offer should not presumed to be accepted, one cannot say while
making the offer that if the offer is not accepted before a certain date, it will be presumed
to have been accepted. Thus, an offeror cannot say that if acceptance is not communicated
upto a certain date, the offer would be presumed to have been accepted. If the offeree
does not reply, there is no contract, as no obligation to reply can be imposed on to him
on the ground of justice.
9. Offer is not a mere statement
A mere statement without any intention is not an offer. An invitation or an answer
to a question and a statement of price list does not constitute a valid offer. i.e. a price
lists, window displays, tenders, invitation by a company to public to subscribe to its
shares, railway displays, sign boards, hoarding and so an are not an offer.
10. Offer must be intentional to do an act
An offer without intention of the offeror to commit something is not an offer. That
is offeror may not be serious in his expression and the offer is made just like that, but
it does not constitute a valid offer.
11. Offer should not be a cross offer
Cross offer does not constitute a valid offer as here two persons make identical offer.
The court does not approve one person is offer an offer and another persons offer is not
an offer.
12. Offer through printed contracts
An offer through printed matters for the special purpose formulate a valid offer/contract
Example: Life Insurance Corporation of India, Indian Railways, Nationalised banks,
Credit Co-operative societies and so on. These are some of the examples of organisation

Law of Contract 27
where in thousands of people enter into agreement for their own benefits. It is difficult Notes
to make organisations to stand with the different types of offer to different people. This
type of offer or contracts are also known as Standard Forms of Contracts.
Acceptance
Acceptance is the manifestation by the offeree of his assent to the term. The acceptor
should do something to signify his intention to accept. A common example of an act
amounting to acceptance is the fall of the hammer in the case of an auction sale. No
mental acceptance will form an acceptance, except where a proposal prescribes a
particular mode of acceptance. The acceptance may be made in several different ways.
Example:A offers to sell his vehicle for Rs. 5 lakhs, B accepts the offers to purchase
the vehicle for the same amount. This is acceptance.
Who can accept the offer?
The acceptance must be from the person to whom the offer is made. The offer cannot
be accepted by the another without the consent of the person making it. Thus, where
an offer is made by X to Y, the acceptance by Z would be inoperative.
Essentials of Valid Acceptance
Offer and acceptance are the back-bone of the contract. The acceptance of an offer
is the very essence of a contract. For the validity and legal effectiveness the following
are the essential conditions of an acceptance:
1. Acceptance for an offer must be absolute and unconditional: Section 7(1)
of the Act says, “The acceptance must be absolute and unqualified” that is
absolute or in full and unqualified or unconditional. A qualified and conditional
acceptance amounts to a counter offer and rejection of the original offer. Any
alteration or variation, however, small of the offer will make the acceptance
invalid. In the case of; Jordan Vs Norton (1838)
2. Acceptance may be express or implied: When an acceptance is express
in words, spoken or written i.e. by word of mouth, by post, by telephone,
telegram or through messenger or through any means, it is express acceptance.
When the acceptance is given by conduct, it is implied acceptance. When an
acceptance is to be inferred from the circumstances of the case or from the
conduct of the parties it is referred to implied acceptance.
In case of V. RaoVs A. Rao (1916), A widow promised to settle some immovable
property to her niece if the niece stayed with her in her residence. Thus, niece
stayed with her in her residence till her death. It was held that the niece was
entitled to the property.
3. Acceptance must be communicated to the offeror: The acceptance must
be communicated to the offeror through some means. Instead if the offeree
remains silent and does nothing to show that he has accepted the offer, then
no contract is formed. The acceptor should signify his intention to accept.
4. Acceptance must be in response to offer: There can be no acceptance
without offer. Acceptance cannot be made before the offer. For example, no
allotment of shares in a company can be made unless the allotee has applied
for them before hand. As such, acceptance should follow the offer.
5. Acceptance must be made with in a reasonable time: A valid acceptance
will be made within the reasonable time allowed by the offeror. When there is
Notes no mention of time by the offeror then it can be made within a reasonable time.
What is reasonable time is a question of fact depending on a particular
circumstance. Acceptance may be made at any time till the offer is alive
otherwise such of the acceptance are invalid.
6. Acceptance must be in the prescribed manner or a reasonable mode:
Where the offerorprecribes mode of acceptance then the acceptor should adopt
the same mode. Section 7(2) states that if the acceptance is not made in the
manner prescribed, the proposer may within a reasonable time after the
acceptance is communicated to him, insist that the acceptance must be made
in a manner prescribed. Otherwise the acceptance can be made through other
reasonable manner in which it is communicated to the offeror.
7. The acceptance must be by the offeree: An offer can be accepted only by
the person or persons to whom it is made. A valid contract arises only if its
acceptance is communicated by a person who has the authority to accept. If
it is communicated by the unauthorised person, it is not valid acceptance.
8. The acceptor must be aware of the proposal at the time of the offer:
(a) Acceptance is made when the offer is created. When an acceptor is not aware
of existence of the offer and conveys his acceptance, then there is no valid
contract. There must be knowledge of the offer before anyone could consent
to it. An act done out of ignorance of the offer for a reward cannot be called
an acceptance. Another examples is, case, “LalmanShuklaVsGauriDatt”. (1913)
(b) A sold his business to his manager B without disclosing the fact to his
customers. C a customer, who had running an account with A, sent an order
for the supply of goods to A by name. B received the order and executed the
same. C refused to pay the price. It was held that there was no contract between
B and C because C never made any offer to B and as such C was not liable
to pay the price to B. The same kind of example is also taken from the case
BoultonVs Jones (1857).
2.4 Free Consent
Meaning and Definition of Free Consent
Free consent is very important and essential element of the valid contract. It is
essential to the creation of a contract that the parties are “ad-idem”, i.e. they agree upon
the same thing in the same sense at the same time and their consent is free and real.
Under Sec 10 of the Contract Act provides that all the contracts are made with free consent.
There is no misunderstanding between parties regarding the subject matter or any other
essentials of the contract. It is not necessary only the consent of the parties to the
contract, but there should be ‘free consent’. Both these terms are provided in the Contract
Act.
According to Section. 13, consent is defined as, “Two or more persons are said to
consent when they agree upon the same thing in the same sense.”
Coercion
Coercion refers making a person to do an act forcibly or compelling him to do so.

A per section 15 of the Act coercion is defined as; “Coercion is the committing or
threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful

Law of Contract 29
detaining or threatening to detain, any property, to the prejudice of any person whatever, Notes
with the intention of causing any person to enter into an agreement.
From the above section the following are the analysis or elements for coercion:
(a) The committing of any act forbidden by the IPC (Indian Penal Code) or
(b) The threatening to commit any act forbidden by IPC, or
(c) The unlawful detaining of any property, or
(d) Threatening to detain a property wrongfully.
Thus, for an act to be forbidden by the IPC, there must not be merely a threat but
the act should be such as to be punishable under the IPC. The agreement under coercion
is voidable agreement
Undue-influence
Undue influence is another vitality element renders a contract voidable at the option
of the party whose consent was procured by undue influence. The term ‘under influence’
means the unfair use of one’s authority or superior power in order to obtain the consent
of a persons who is subordinates or in weaker position. According to Section 16 of the
contract Act, undue influence is defined as,
“A contract is said to be induced by “undue influence” where the relation subsisting
between the parties are such that one of the party is in a position to dominate the will
of the other and uses that position to obtain an unfair advantage over the other.”
Fraud
Fraud refers to deceive or to cheat. The term fraud includes all acts committed by
a person with an intention to device another person. Fraud is the willful representation
made by a party to a contract with the intent to deceive other party or induce such party
to enter into a contract.
According to the Indian Contract Act under Section 17, Fraud is defined as, “Fraud
means and includes any of the following acts committed by a party to a contract or with
his connivance (dis-regard), or by his agent, with intent to deceive another party there
to or his agent, or to induce him to enter into a contract.”
2.5 Consideration
Consideration is another important elements of contract. Many a times it is
considered as the foundation of the contract. The contract Act enforces only those
promises which are made for consideration. Where one party promises to do something
it must get something in exchange. This “Something in return” is known as consideration.
Subject to certain exception, an agreement made without consideration is “nudumpactum”
i.e. is a nude or bare contract, and hence it is void.
Definition of Consideration
Apart from the Contract Act, consideration is defined in many ways and by many
persons including juries which are as follows.
In the English case, Currie VsMisa (1875) the word consideration was defined by
Lush J as, “A valuable consideration in the sense of the law may consist either in some
right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss
or responsibility given, suffered or undertaken by the other”.
Notes Justice Patterson defines as, “Consideration means something which is of some
value in the eye of law. It may be some benefit to the plaintiff or some detriment to the
defendant”
According to Calcutta High Court, “Consideration is a price of a promise or a return
or quid-proquo (something in return), something of value received by the promisee as
inducement of promise”.
Black Stone defines consideration as, the recompense (reward) given by the party
contracting to the other. In other words, it is a price of the promise”.
Essentials and Legal Rules for Valid Consideration
From the definitions, the case laws, judgment and also the Act, the following are
considered as essentials of a valid considerations:
1. Consider must move at the desire of the promisor: The Indian Contract Act
says that an act or abstinence, which forms consideration for the promise, must
be done according to the desire of the promisor. It can also be done at the
request of the promisor. Any Act performed at the desire or request of the third
party cannot form a consideration. Thus an act done or services rendered
voluntarily, or may also be at the desire of the third person will not amount to
valid consideration so as to support a contract.
Example: A saves B’s goods from fire without being asked to do so. Here A
cannot demand payment for his services.
2. Consideration may move from the promisee or any other person: As per
Section 2(d) of the Act, the consideration may be done either by the promisee
or any other person. Here promisee is the person to whom the promise is made.
It means a person can sue on contract, even if the consideration for the promise
moved from a third party. While under the English Law consideration must be
moved from the promisee only.
3. Consideration may be past, present and future Under 2(d) states that
consideration may be past, present and future, has done or abstained from doing
(Past) or does or abstains from doing (Present) or promises to do or abstain
from doing (Future) something”. Hence, consideration may be:
(a) Past consideration: A past consideration is something wholly done or suffered
before making the agreement. Here the present promise is based on the
consideration already taken place.
Example:A found B’s purse and gave it to him. B promised to give Rs. 100
as a reward. Here for B’s promise, the act of A in finding B’s purse is the past
consideration.
(b) Present consideration: Consideration which are executed in nature should
move simultaneously with the promisee is called present consideration.
Example: A receives Rs. 20,000 in cash from B, in return of an article, which
he promises to deliver to B. It is present consideration for the promise to deliver
the article.
(c) Future consideration: It is also referred to executory in nature and here when
the consideration from one party to the other is to pass subsequently in making
of the contract, then it is known as future agreement.
Example: A promises to sell and deliver a bag of rice of 50 kgs to B at Rs.
1,000 after a week, upon B’s promise to pay the amount to A at the time of

Law of Contract 31
delivery. The promise of A is supported by promise of B and the consideration Notes

is executory on both the sides.
Thus, in case of future consideration, it is outstanding on both the sides where
as in case of present consideration it is outstanding on one side only.
4. Consideration need not be adequate to the promise: The real meaning of
consideration is something in return. This ‘something in return’, need not
necessarily be equal in value to “something given”. There is no mentioning of
adequacy of consideration by Law. It is no where laid down that the consideration
should be adequate to the promise. Adequacy is for the parties to decide at
the time of making the agreement. No contract can be refused on the ground
of inadequacy of the consideration. All that the laws says, it has some value
or something in return. Even a smallest consideration is sufficient provided it
has some value. Under Explanation 2 to Section 25 of the Contract Act mentions
that, “An agreement to which the consent of the promisor is freely given is not
void merely because the consideration is inadequate, but the in-adequacy of
the consideration may be taken into account by the court in determining the
question whether the consent of the promisor was freely given or not.
Example: A agrees to sell his house worth Rs. 10 lakhs to B for Rs. 10 thousand.
As consent to the agreement was freely given, the agreement is contract, not
withstanding the inadequacy of the consideration.
5. Consideration must be real and not illusory: Although the consideration can
be past, present and future and also need not be adequate but it should be
competent, real and valuable in the eyes of law. It should not be unreal or illusory.
Consideration is illusory when a person promises to do something which he
is already bound to do by law or by contract. Consideration must be something
more than what a promise is already bound to do. Performance of a legal or
public duty is no consideration for a promise. Similarly, performing or promising
to perform a legal obligation imposed by a contract with the promisor cannot
form consideration. But doing or agreeing to do more than a persons official
duty will serve as consideration.
Example: If A promises to put life in the dead body of B’s son for Rs. 1,00,000,
the agreement is void, because of the physical impossibility of the performance.
6. Consideration must be lawful: Consideration must not be illegal, immoral or
opposed to public policy. As per Section 23 of the Act, which is giving the
consideration, which are unlawful and which are not unlawful. “The consideration
or object of an agreement is lawful, unless:
“It is forbidden by law or is of such a nature that, is permitted, it would defeat
the provisions of any law; or is fraudulent or involves or implies injury to the
person or property of another; or the court regards it as immoral or opposed
to public policy”
In each of the above cases, the consideration of an agreement is said to be
unlawful. Every agreement of which consideration is unlawful is void.
Example: A promise to obtain B an employment in the Government services
and B promises to pay Rs. 50,000 to A. The agreement is void as the
consideration for it is unlawful.

Notes 2.6 Performance of Contracts

Performance of contract means that both, the promisor and the promisee have fulfilled
their respective obligations, which the contract placed upon them. For instance, A visits
a stationery shop to buy a calculator. The shopkeeper delivers the calculator and A pays
the price. The contract is said to have been discharged by mutual performance.
Example: A promises to deliver goods to B on a certain day on payment of Rs 1,000.
A expires before the contracted date. A‘s representatives are bound to deliver the goods
to B, and B is bound to pay Rs 1,000 to A‘s representatives.
Types of Performance
Performance, as an action of the performing may be actual or attempted

1. Actual Performance
When a promisor to a contract has fulfilled his obligation in accordance with the terms
of the contract, the promise is said to have been actually performed. Actual performance
gives a discharge to the contract and the liability of the promisor ceases to exist. For
example, A agrees to deliver10 bags of cement at B’s factory and B promises to pay
the price on delivery. A delivers the cement on the due date and B makes the payment.
This is actual performance. Actual performance can further be subdivided into substantial
performance and partial Performance.
2. Substantial Performance
This is where the work agreed upon is almost finished. The court then orders that
the money must be paid, but deducts the amount needed to correct minor existing defect.
Substantial performance is applicable only if the contract is not an entire contract and
is severable. The rationale behind creating the doctrine of substantial performance is to
avoid the possibility of one party evading his liabilities by claiming that the contract has
not been completely performed. However, what is deemed to be substantial performance
is a question of fact to be decided in both the case. It will largely depend on what remains
undone and its value in comparison to the contract as a whole.
3. Partial Performance
This is where one of the parties has performed the contract, but not completely, and
the other side has shown willingness to accept the part performed. Partial performance
may occur where there is shortfall on delivery of goods or where a service is not fully
carried out. There is a thin line of difference between substantial and partial performance.
The two following points would help in distinguishing the two types of performance. Partial
performance must be accepted by the other party. In other words, the party who is at
the receiving end of the partial performance has a genuine choice whether to accept or
reject. Substantial performance, on the other hand, is legally enforceable against the other
party.
Payment is made on a different basis from that for substantial performance. It is
made on quantum merit, which literally means as much as is deserved. So, for example,
if half of the work has been completed, half of the negotiated money would be payable.
In case of substantial performance, the party that has performed can recover the amount
appropriate to what has been done under the contract, provided that the contract is not
an entire contract. The price is thus, often payable in such circumstances, and the sum
deducted represents the cost of repairing defective workmanship.

Law of Contract 33
4. Attempted Performance Notes

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

The Contract Act provides various rights and obligations between the parties to form
a contract. When the contractual relationship subsisting between the parties come to an
end the contract is said to be discharged. In other words, a contract is said to be
discharged or terminated when the rights and obligations created by it are extinguished.
Here the parties are no more liable under the contract, when once the discharge of the
contract exist. Thus, discharge is an end of the contract and termination of the contractual
relationship. The Act provides under different section the various modes of discharging
of a contract, which are follow as under:-
I. Discharge by agreement
Since a contract is formed on the basis of an agreement, it follows that the contract
can be discharged by mutual agreement. The rights and obligations created by an
agreement can be discharged without their performance by means of another agreement
between the parties which provides for the extinguishments of the earlier rights and
obligations.
Section 62 provides: “If the parties to a contract agrees to substitute a new contract
for it, or rescind or alter it, the original contract need not be performed.” From this section,
it contemplates three distinct modes of discharge of contract by agreement. Novation,
Alterations, and Rescission are three different ways in which parties agree to terminate
the existence of the contract.
As per section 63 of the Act, “Every person who accepts a proposal may dispense
with or remit, wholly or in part, the performance of the promise made to him, or may extend
the time for such performance, or may accept instead of it any satisfaction which he thinks
fit. This section also provides the modes of discharging the contract through Remission
and Waiver.
II. Discharge by Performance
Performance of a contract is the usual mode of discharging a contract. The

performance of a contact takes place, when the parties to the contract undertake the rights
and obligation to do as per the terms of the agreement. When both the parties have
performed their obligation, the contract is said to be discharged by performance.
According to Sec. 37 of the Contract Act, “The parties to a contract must either
perform or offer to perform their respective promises, unless such performance is dispensed
with or excused under the provisions of the Act, or of any other law. Promises bind the

Notes representatives of the promisors in case of the death of such provisions before performance
unless a contrary intention appears from the contract.
III. Discharge by Breach
It is also another mode of discharging the contract. Here, when a party to contract
fails to perform his obligations, he is said to have committed breach of contract. A breach
of a contract discharges the aggrieved party from performing his obligations. The breach
of contract may either be
(i) Actual Breach of contract
(ii) Anticipatory Breach of contract Again,
(i) Actual Breach of Contract may take place in two different situations i.e.
(a) At a time, when performance is actually due: In this situation, if a party to a
contract fails to perform his obligation at the specified time, he is liable for its
breach.
Example:A agrees to deliver a furniture worth Rs. 10,000 to B on 31st March
2005, but fails to do so on that date, he is said to have committed a breach
of the contract. Similarly, if A delivers furniture worth Rs. 10,000, on 31st March
2005, but B, for no valid reason, refuses to accept them, B becomes guilty of
breach.
(b) Breach during the performance:It occurs when one party fails or refuses to
perform the obligation under the contract during the performance of the contract.
Such a situation is likely to happen in case of contracts on installment of delivery
of goods or constructions of a building and payments by installment and so
on. Refusal of performance may be express or implied. Here the aggrieved party
to repudiate the contract and sue the other party for damages due to breach
of contract.
(ii) Anticipating Breach of contract
When a party to a contract has refused or repudiate, or renounces to perform his
obligation, before the time fixed for performance is known as Anticipatory Breach of
contract. Anticipatory breach is premature destruction of the contract rather than a failure
to perform it.
Under Section 39 of the Indian contract Act lays down as “when a party to the
contract,
(i) has refused to perform or
(ii) disabled himself from performing the contract,
(iii) in its entirety, the promises may put an end to the contract,
(iv) unless he had signified by words or conduct, his acquiescence in its continuance.
When it put in a simple word, when the promisor, prior to the due date of performance,
altogether refuses to perform his obligations under the contract or disables himself from
doing so, then there occurs a breach of contract.
Example: A singer enters into a contract with B, the manager of a theatre, to sing
at his theatre two nights, every week during the next two months, and B engages to pay
her Rs. 1000 per night. On the sixth night A, willfully absent herself. With the assent
of B, A sings on the seventh night. B has signified his acquiescence in the continuance

Law of Contract 35
of the contract and cannot now put an end to it but he is entitled for compensation for Notes
the damages sustained by him though A’s failure to sing on the sixth night.
IV. Discharge by operation of law
Discharge by operation of law is another mode of discharge of the obligation of the

contract: The following are the circumstances:
(a) Unauthorized Material alteration
If a party to a contract effects any material alterations in a written document or
contract without the consent of the other party, then the contract has been done with
unauthorized material alterations, which is void. In this case both the parties will be
discharged from their respective obligations. A material alteration is one which changes,
in a significant manner, the legal identity or character of the contract or the rights and
liabilities of the parties to the contract. The effect of making such an alteration is exactly
the same as that of canceling the contract. Both the parties will be discharged from their
respective obligation.
(b) Insolvency
Under insolvency, the contract is discharged by the insolvency of one of the parties
to it and when court passes an ‘order of discharge’.
(c) Merger
It takes place when there is acceptance of a higher security in the place the lower.
In other words when a contract with an inferior right give place to another contract with
a superior right, the original contract gets discharged by its merger in the latter.
Example: A was tenant of B’s house. A purchases the house from B. The rights
of A as the lessee of the house merge into his rights as the owner of the house. The
tendency is discharged by merger.
(d) Death
Death of the promisor results in termination of the contract in case involving of
personal skill and ability. Excepting the skills and ability of the contracting party’s death,
the other cases, the rights and liabilities of the deceased person pass on to the legal
representatives.
V. Discharge by impossibility (Sec. 56)
Impossibility is another situation for the discharging of the contract. A contract is

discharged if its performance become impossible. Impossibility may arise on the face of
two contract or may exist unknown to the parties at the time of making contract, or it
may also arise subsequently after the contract is made.
VI. Discharge by lapse of time
The another mode of discharging the contract is by lapse of time

The Indian Limitations Act has prescribed period with in which the existing rights
can be enforced in courts of law. The main object of this act is to guide and assist the
vigilant on onesown act but not those who sleep over their rights. The Law fixes a specific
period of performance and if no action is taken by the promisee in the court of Law with
in the specific time, he is debarred from enforcing the contract. Many a times and in the
case of simple contracts, the period of limitation is three years. If an aggrieved party does

Notes not enforce his rights with in the time prescribed by the Act, his remedy by way of a
suit is barred, which in effect means, that the other party is discharged from his obligation.
For example, the price of goods sold should be paid with in three years of the delivery
of goods. In case of goods on credit, payment should be made after the expiry of a fixed
period of credit, the price should be paid with in three years of the expiry of the period
of credit. If the price is paid and the creditor does not file a suit against the buyer for
the recovery of price within three years, the debt recovery of price within three years, the
debt becomes time–barred and hence irrecoverable. Thus, lapse of time terminates a
contract.
2.8 Breach of Contract

Breach of contract means one party to the contract fails to fulfill her contractual
obligations. A breach can occur if a party fails to perform within the time frame specified
in the contract, does not perform in accordance with the terms of the agreement, or fails
to perform whatsoever. If one party fails to perform while the other party fulfills her duties
under the contract, the performing party is entitled to legal remedies for breach of contract.
Types of Breaches
There are four different types of breaches of contract:

1. Actual Breach v. Anticipatory Breach
Most breaches of contracts are one of two types: actual or anticipatory. Actual
breaches occur when a party fails to fulfill her obligations on the date performance is due,
or when a party performs her obligations and the other party refuses to perform.
Anticipatory breach occurs when a party refuses to perform her obligations under
the contract before the due date of performance. For example, if a party agrees to sell
her car to a buyer in five days, but then reneges on day three, she is anticipatorily breaching
the contract.
2. Minor Breach v. Material Breach
A contract breach can either be minor or material. A minor breach, also known as
a partial breach, is a failure to complete a minor, non-essential part of a contract. Although
it is technically a breach, the contract can still be completed.
A material breach, on the other hand, is a substantial breach in contract terms usually
excusing the non-breaching party from performing and giving her the right to sue for
damages. For example, in a home purchase contract, a seller refusing to give the buyer
the keys to the home after the buyer has completed all contract terms is a material breach.
2.9 Void Agreements

Section 2 (g) of the Indian Contract Act, states “that a void agreement is one which
is not enforceable by law. A void agreement does not create rights, obligations or duties.
It does not give rise to any legal consequences. Such agreements are void ab initio”. The
courts can only enforce those agreements that according to Section 10 fulfill the conditions
of the Indian Contract Act. It should not be declared void by any law in the country. There
is a difference between void agreements and void contracts.
• A void agreement is not valid.
• The agreement is not enforceable by law.

Law of Contract 37
• It is void from the very beginning of the making of the agreement. Notes
• The following agreements are expressly declared as void by the Indian Contract
Act:
• Agreement by a minor or a person of unsound mind.[Sec(11)]
• Agreement of which the consideration or object is unlawful[Sec(23)]
• Agreement made under a bilateral mistake of fact material to the agreement[Sec(20)]
• Agreement of which the consideration or object is unlawful in part and the illegal
part cannot be separated from the legal part [Sec(24)]
• Agreement made. without consideration.[Sec(25)]
• Agreement in restraint of marriage [Sec(26)]
• Agreement in restraint of trade [Sec(27)]
• Agreement in restraint of legal proceedings[Sec(28)]
• Agreement the meaning of which is uncertain [Sec(29)]
• Agreement by way of wager [Sec(30)]
• Agreement contingent on impossible events [Sec(36)]
• Agreement to do impossible acts [Sec(56)]
• A Void contract is valid when it is entered into but after it is formed due to some
limitation it becomes non enforceable.
• A Void contract is enforceable by law but due to impossibility or illegality it
becomes unenforceable at a later date.
• A void contract remains valid until its validity stops functioning.
Essentials of Valid Agreements
(a) An agreement to trade with alien enemies: Here enemy refers to a person
who belongs to a foreign country with which the home country is at war.
(b) An agreement for the interference with the course of justice: Here when
an offence has been committed, the guilty party must be prosecuted and any
agreement which seeks to prevent the prosecution of such a person is opposed
to public policy and is void. Again an agreement, the object of which is to
interfere with the course of justice is also unlawful.
Example: An agreement to influence a judge to induce him to decide the case
in a party’s favour, is obviously opposed to public policy and is void.
(c) Agreement for stifling prosecution: Stifling refers to suppressing and any
agreement for suppressing the prosecution is unlawful. As per the public
interest, all criminals should be prosecuted and punished. Contracts for stifling
prosecution are a common type of contracts opposed to public policy.
Example: A promises B to drop a prosecution which he has instituted against
B for robbery, and B promises to restore the value of the things taken. Here
the agreement is void as its object is unlawful.
(d) Agreements of maintenance and champerty: When a person agrees to help
another by money or otherwise in litigation in which he is not himself interested
it is called maintenance. When a person helps another in litigation in exchange

Notes of a promise to handover a portion of the fruits of the litigation, if any, it is called
champerty.
The principle of English Law provides that an agreement on maintenance and
champerty is void and same is not applicable in India. But an agreement by
a chartered accountant with his client to change fees on the basis of percentage
of the benefit received by the client in Income tax proceedings is void.
Under the Indian Law, agreements of maintenance and champerty are not
absolutely void. They are valid if they are reasonable and made with the bona-
fide object of helping a claim believed to be just.
(e) Agreements for the sale of public offices, titles and honours: Agreements
for the sale or transfer of public offices and titles or for the procurement of public
recognition like BharathRatna, Padma Vibushan and so on, for monetary
consideration are opposed to public policy. It tends to the prejudice of the public
service by interfering with the selection of the best qualified persons. Such
agreements, if enforced, would lead to inefficiency and corruption in public life.
(f) Marriage brokerage agreements: An agreement to procure the marriage of
a person in consideration of a sum of money is called brokerage agreement.
It is the interest of society that reckless or unsuitable marriage should be
prevented and third parties are not allowed to make money by bringing about
matrimonial unions. An agreement for marriage must be free and it should be
voluntary decision of the concerned parties. Excepting of such agreements,
others are void.
Example: Under the case of AmirchandVs Ram Rattan chand (1903). “A
proposed the marriage of his widow niece to B and offered to given her gold,
jewels and land. The marriage took place, but A refused to fulfill the rest of his
promise. It was held that the agreement was not enforceable.
In India, however, marriage are in most cases negotiated by the parents of the
parties and the custom of appointing agents or brokers for finding out a suitable
match is well established. Therefore there is some difference of opinion on the
question whether the English rule regarding marriage brokerage contracts should
be applied here.
Again, an agreement of dowry i.e. to pay money to the parents of the bride
or the bridegroom in consideration of their agreeing to the contract of marriage
is also illegal and cannot be offered. But such an agreement is illegal in respect
of payment only, the validity of the marriage is not affected.
(g) Agreement interfacing with parental duties: The parents are the natural
guardians to their children. Both father and mother have full authority over their
children. Any agreement which is inconsistent with the duties arising out of such
guardianship is void as being opposed to public policy.
In the case of Atma Ram VsBanku Mal (1930): For monetary consideration,
A agrees to place his daughter at the disposal of B to be married as B likes.
The agreement is illegal and void as it would interfere, with A’s parental duty
to select a husband in the best interest of the girl.
(h) Agreement in Restrain of trade: As per Section 27 of the Act, “Every
agreement by which anyone is restrained from excising a lawful profession, trade
or business of any kind, is to that extent void”. Again an agreement which
prevents a person from carrying an any lawful business is void.
(i) Agreement restraining personal liberty: An agreement which unduly
restricts the liberty of the individual is illegal and thus void.

Law of Contract 39
(j) Agreement tending to create monopolies: An agreement to create monopoly Notes

is void and opposed to the public policy. There can be monopoly rights given
to one person to the exclusion of others.
Example: A promises B, the owner of a newspaper Rs. 500 in consideration
of the publication by B, in his newspaper of false statements in regard to a
candidate for election. B published them. The agreement in void as opposed
to public policy.
2.10 Quasi Contracts

A quasi-contract is a fictional contract created by courts for equitable, not
contractual, purposes. A quasi-contract is not an actual contract, but is a legal substitute
for formed to impose equity between two parties. The concept of a quasi-contract is that
of a contract that should have been formed, even though in actuality it was not. It is used
when a court finds it appropriate to create an obligation upon a non-contracting party to
avoid injustice and to ensure fairness. It is invoked in circumstances and is connected
with the concept of restitution.
In contracts, it is the consent of the contracting parties which produces the obligation;
in quasi-contracts no consent is required, and the obligation arises from the law or natural
equity, on the facts of the case. These acts are called quasi-contracts, because, without
being contracts, they bind the parties as contracts do. "A quasi-contract is not really a
contract at all in the normal meaning of a contract," according to one scholar, but rather
is "an obligation imposed on a party to make things fair."
Meaning of Quasi Contract
A quasi contract is an obligation invoked by law in the absence of an agreement.

Its purpose is to create a legal duty where, in fact, no agreement was entered into by
the parties. Quasi contracts are based on the principle of equity and justice. It simply
states that nobody shall enrich himself unjustly at the expense of another.
Example: A is knocked down by a vehicle. B, a stranger, who found A on the road
in unconscious state, takes A to doctor. The doctor provides treatment to A, who is an
unconscious state. In such a situation, there is no contract between A and doctor and
A claims that he is not liable to pay for the services offered by the doctor, as he was
unconscious at the time of treatment and there is no agreement between the two.
Application: In such a situation, the theory of quasi contract applies. In this case
the doctor has spent his valuable time for the treatment of accident victim (A) and so,
A is liable to pay for the services of the doctor. If A fails to do so, the court can apply
the doctrine of quasi contract and order A to pay. This is to prevent the unjust enrichment
of A at the expense of doctor.
Liability: The main question that arises in such situations is the liability of the
defendant. As the aim of this doctrine is to prevent unjust enrichment of one party, at
the expense of the other,
The damages are usually restricted to the value of services rendered or the cost of
the goods delivered. If the damages exceed that value, the whole concept of quasi contract
will be defeated, as it will be unfair for the defendant.
A quasi contract is a fictitious contract created under legal obligations, similar to
a valid contract. These contracts are also known as implied-in-law contracts. What makes
this different is that the parties involved do not intend to create a contract. A quasi contract

Notes is created by the Court. For the same reason, there is no actual offer or acceptance or
an agreement between the parties. Also, a quasi-contract is based on the principle of
unjust enrichment. According to this principle, a person is not allowed to draw benefit
at the cost of someone else.
Types of Quasi-Contracts
The following are of Quasi-contracts are discussed below:

1. Supply of necessaries (Sec. 68)
According to section 68, if a person incapable of entering into a contract or any one
whom he as legally bound to support is supplied by another with necessaries suited to
his condition in life the person who has furnished such supplies I entitled to be reimbursed
from the property of such incapable person.
Example: ‘A’, supplies “B” a lunatic with necessaries suitable to his condition in
life. ”A” is entitled to reimburse from B’s property.
2. Payment by an interested person (Sec. 69)
A person, who is interested in payment of money which another is bound by law
to pay and who therefore pays it, is entitled to be reimbursed by other.
The essential requirements of Section.69 as follows:
a) The payment mode should be bonafide for the protection of one’s interest.
b) The payment should not be a voluntary one.
c) The payment must be such as the other party was bound by law to pay.
Example: “B” holds land Bengal on a lease granted by the Zamindar. The revenue
payable by “A” to the Government being in arrears his land is advertised for sale by the
Government under the Revenue Law.
The sale will be annulment of “B’s lease. ’B’ to prevent the sale and the consequent
of annulment of his own lease pays to the Government the sum due from A. A is bound
to make good to B the amount so paid.
3. Obligation to pay for non-gratuitous acts (Section.70)
When a person lawfully does anything for another person or delivers anything to him
not intending to do so, gratuitously, and such other person enjoys the benefit thereof,
the latter is bound to make the compensation to the former in respect of or restore, the
things do done or delivered.
Example: “A”, a tradesman lease goods at “B” house by mistake. B treats the goods
as his own. He is bound to pay for them to A.
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 Bailee. He is bound to take as much care o the
goods as a man of ordinary prudence would under similar circumstances take of his own
goods of the same bulk, quality and value. He must also take all necessary measures
to trace its owner. If he does not, he will be guilty of wrongful conservation of the property
till the owner is found out, the property in goods will vest in the finder and he can retain
the goods as his own against the whole world (except the owner).
Example: “F” picks up a diamond on the floor of ‘S’s shop. He hands it over to ‘S’
to keep it till the real owner is found out. No one appears to claim it for quite some week’s
Law of Contract 41
inspite of wide advertisement in the news papers. ‘F’ claims the diamond from ‘S’ who Notes
refuses to return. ‘S’ is bound to return the Diamond to ‘F’ who is entitled to retain the
diamond against the whole world except the true owner.
5. Mistake or coercion (Section.72)
A person to whom money has been paid, or anything delivered by mistake or under
coercion, must repay or return it to the person who paid it by mistake or under coercion.
Example: “A” & “B” jointly owe Rs.100/- to “C”. A alone pays the amount to C and
B not knowing this fact pays Rs.100/- over again to “C”. C is bound to pay the amount
to B.
2.11 Freedom to Contract

Freedom of contract is the freedom of private or public individuals and groups (of
any legal entity) to form contracts without government restrictions. This is opposed to
government restrictions such as minimum wage, competition law, or price fixing.
The doctrine of freedom of contract has always been respected by the Law, which
allows parties to provide for the terms and conditions that will govern the relationship. The
Principles of Contract Law, however, state that this freedom is subject to the requirements
of good faith, fair dealing and the mandatory rules established under the Principles.
Accordingly, the law has intervened to guide parties as to which terms they can contract
on to effectively balance the inequality in their bargaining power, and ensure optimum
protection for the consumer who, most times, has limited expertise in the field.
Freedom of contract embraces two closely connected, but two different concepts.
Firstly, it indicates that contracts were based on mutual agreement. Secondly, it
emphasizes that the creation of a contract was the result of a free choice unhampered
by external control including the government or the legislature.
Freedom to Contract Promotes Progress
Only by treating individuals in this manner can over-arching rules allow people to
use their own knowledge, express their individuality, and take advantage of their own ideas
by joining them and their property in various unanticipated ways. When people cannot
make binding, enforceable commitments, dynamic progress is severely hampered. The
idea of contract fosters progress by encouraging specialization and allowing an extended
order to develop. Postrel points out the especial importance of well-functioning legal
systems when strangers interact in commercial and other situations. In addition, she notes
that the goal of contract law is not to inspire legal suits but to settle or avoid them. Well-
known rules that eliminate ambiguity make it more likely that promises will be kept.
In order to be invaluable to businessmen and other members of a free society, the
contract must be a tool of virtually unlimited adaptability. To achieve this, the legal system
must minimize the formality necessary for contractual transactions. It can do this by
permitting freedom as to the form and content of contractual arrangements. Contracts have
been rewritten through prior restraints (e.g., rent control, minimum wage laws, and interest
rate ceilings) and subsequent nullification of contract terms. Legislators and judges should
refrain from substituting their own judgments in cases where they believe there is unequal
bargaining power or where they think that certain contracts are not in the “public interest.”
Contract sanctity is paramount. Such a free contract system encourages dynamic
processes and technological achievements by permitting entrepreneurs to quickly and
flexibly experiment with new ways of satisfying wants.

Notes 2.12 Summary

The law of contract is that branch of law which determines the circumstances in
which a promise or an agreement shall be legally binding on the person making it. The
law relating to contracts in India is confined to the Indian Contact Act, 1872. The Act
came into force on the first day of September 1872. The law of contract differs from other
branches of law. The Act does not lay down a number of rights and duties which the law
will enforce. In this Act the party themselves creates rights and duties which will be
supported with a limited principles.
The law of contract states that the first step required to form a valid contract is that
an offer must be formally made by one of the parties to another. A common example
to elucidate upon this principle is found in the sale of property; the purchaser, in this
example, must make an offer to purchase the underlying property. This offer may include
simplistic or complex terms, but it must be concrete and affirmed through written
documentation.
Agreement refers to a negotiated and usually legally enforceable understanding
between two or more legally competent parties.
A seller of the goodwill of a business may agree with the buyer to refrain from carrying
on a similar business, with in the specified local limits, so long as the buyer carries on
a like business, provided that such limits are reasonable. In such a case an Agreement
in restraint of trade is valid.
An agreement in the nature of a business combination between traders (or)
manufactures does not amount to a restraint of trade and is perfectly valid. But if an
agreements attempts to create a monopoly it would be void.
An agreement of service by which an employee binds himself, during the term of
his agreement, not to compete with his employer is valid and does not amount to restraint
of trade.
According to section 2(f) of the Indian contract Act, 1872, ‘Promises which form the
consideration for each other are called reciprocal promises.
The word immoral includes sexual immorality. Hence its object (or) consideration
is unlawful.
An agreement, whose consideration and object is immoral, is deemed to be illegal
and void.
A wager is an agreement between two parties by which one party promises to pay
money (or) money’s worth an the happening of soma uncertain event, in consideration
of the other parties promises to pay if the event does not happen.
The wagering agreement must be certain and there must be promise to pay money
(or) money’s worth between the parties.
The promise made between the partied must be conditional and uncertain event (i.e..,
happening (or) non happening). Generally a wager relates to a future event, but it may
also relate to a past event provided the parties are not aware of its result (or) the time
of its happening.
Each party should stand to win (or) lose upon the determination of the uncertain
event. An agreement is not a wager if either of the parties may win but cannot lose (or)
may lose but cannot win.

Law of Contract 43
The wagering agreement is a game of chance. Therefore, no party should have control Notes
over the happening (or) non happening of an event. If on the other hand one of the parties
has control over the event, then the transaction lacks an essential ingredient of a wager.
The parties should have no other interest in the subject matter of the agreement
except winning (or) losing of the amount of the wager.
A crossword competition is involving a good measure of skill for its successful
solution. But if prizes of a crossword competition depend upon the correspondence of the
competitors solution with a previously prepared solution kept with the editor of a
newspaper, there it is treated as lottery and wagering transaction. According to prize
competition act, 1955, prize competition is game of skill are not wagers provided the
amount of prize not exceed rs.1000/-.
Contract of insurance is not wagering agreements even though the payment of money
by the insurer may depend up on a future uncertain event.
An agreement to contribute a prize of the value of above Rs.500/- to be awarded
to the winner of a horse race is also one of the exceptions to the wagering agreement.
Every promise and every set of promises forming the consideration for each other
is an agreement. When the person to whom the proposal is made signifies his assent
there to the proposal said to accepted. A proposal when accepted becomes a promise.
It should be noted that a mere promise by two parties would not constitute an agreement
offer and acceptance together constitute an agreement. Agreement is promise as a set
of reciprocal promises. The promisor makes a proposal and a promise accepts the
proposal. Both promisor and promise promise to perform their part of reciprocal promises.
A valid agreement is one which is enforceable by law. An agreement not enforceable by
law is said to void. It has no legal existence at all and is devoid of any legal effect. A
void agreement is not enforceable by law. Unlawful agreements are not enforceable on
account of them being opposed to public policy like agreements in restraint of trade or
in restraint a marriage of in restraint of legal proceedings.
A void agreement is one which is enforceable by law all the option of one of more
of the parties there to but not at the option of the other of others. An unforceable agreement
is valid in law out is incapable of proof because of some technical defect. For example
promissory note which is not all stamped of is insufficiently stamped. An illegal agreement
is something against the law itself. It is void-ab-initio.
An agreement enforceable by law is a contract [Sec 2(h)]. An agreement the object
of which is to create an obligation is a contract. When an agreement compels another
to do something, or not to do something, it is a contract. Contract is a combination of
agreement and enforceability. The test to distinguish between an agreement and a contract
is whether it is enforceable by law of not creation of obligation on the part of the parties
to an agreement to perform their liabilities gives the causes of enforceability of an
agreement.
A contract is an agreement enforceable by law made between two or more persons
by which fights are accredited by one of more to the acts done. All agreements are
therefore not contract but all contracts are agreement in other words. A contract must
have all the above elements when any elements are missing. It ceases to be a contract
through it mail be valid agreement. An agreement is a wider term than a contract. All
contracts are therefore agreement but all agreements are not contracts.

Notes 2.13 Check Your Progress

1. The proposal is said to be _______________.
2. A proposal when accepted becomes a _______________.
3. _______________ and _______________ together constitute an agreement.
4. Agreement is a promise or set of _______________ promises.
5. Promises which form the consideration or part of the consideration for each
other are called _______________ promises.
6. A _______________ agreement is one which is enforceable by law.
II. True or False
1. Section 2(g) of the Indian contract act defines a contract.

2. An agreement enforceable by law is a contract under section 2(e).
3. Every promise and every set of promise, forming the consideration for each is
an agreement.
4. Promise is define in sections 2(a) of the act.
5. The proposal is said to be accepted.
1. Which section was defines the Indian contract act agreement?

[a] Section 2(e)
[b] Section 4(e)
[c] Section 5(e)
[d] Section 2(A)
2. Which section was defines the Indian contract of promise?
[a] Section 2(e)
[b] Section 2(b)
[c] Section 2(d)
[d] Section 2(a)
3. Which of the together constitute an agreement?
[a] Offer and acceptance
[b] Roles and regulation
[c] Writing and registration
[d] None of these
4. Which agreements are not enforceable by law?
[a] Valid agreements
[b] Void agreement
[c] Enforceable agreement
[d] Voidable agreement
5. Which section was the enforceable agreement?
[a] Sec 2(g)
[b] Sec 2(h)
Law of Contract 45
[c] Sec 2(i) Notes

[d] None of these
6. An agreement enforceable by law is called what?
[a] Free consent
[b] Contract
[c] Writing and registration
[d] None of these
1. What is Contract?
2. What is Valid Contract?
3. Define the term Offer.
4. What is term Acceptance?
5. What is Consent?
6. What is Consideration?
7. What is Performance of Contract?
8. What is Discharge of Contract?
9. Give the meaning of Breach of Contract.
10. What is Void Agreement?
11. What is Quasi Contract?
12. What is Freedom to Contract?

1. Give introduction and relevance to Contract.
2. Discuss in details about Valid Contract.
3. Explain essentials of Offer and Acceptance.
4. Discuss in details about Consent and Consideration.
5. Explain in details about Performance of Contracts.
6. Discuss in details about Discharge of Contracts.
7. Write note on: Breach of Contract.
8. Discuss essentials about Void Agreements.
9. Explain in details about Quasi Contracts.
10. Discuss in details about Freedom to Contract.
2.15 Key Terms

z Law of Contract: The law of contract is that branch of law which determines
the circumstances in which a promise or an agreement shall be legally binding
on the person making it. The law relating to contracts in India is confined to
the Indian Contact Act, 1872. The Act came into force on the first day of
September 1872.

Notes z Consideration: Consideration means that something of value was exchanged

between the agreeing parties. In most instances, the consideration takes the
form of money or an asset that holds considerable value.
z Valid Contract: Valid contract is a written or expressed agreement between
two parties to provide a product or service. There are essentially six elements
of a contract that make it a legal and binding document.
z Offer and Acceptance: An offer is an open call to anyone wishing to accept
the promise of the offer or and generally, is used for products and services.
Acceptance occurs when an offeree agrees to be mutually bound to the terms
of the contract by giving consideration, or something of value like money, to
seal the deal.
z Free Consent: Free Consent is one of the essential elements of a valid contract.
The essence of this requirement is that a person should enter into an agreement
with a free as well as an open mind and without any fear. If anyone has not
allowed the other party the freedom of expression, the agreement will not be
fair.
z Performance of Contract: Performance of contract means that both, the
promisor and the promisee have fulfilled their respective obligations, which the
contract placed upon them. For instance, A visits a stationery shop to buy a
calculator. The shopkeeper delivers the calculator and A pays the price. The
contract is said to have been discharged by mutual performance.
z Breach of Contract: Breach of contract means one party to the contract fails
to fulfill her contractual obligations. A breach can occur if a party fails to perform
within the time frame specified in the contract, does not perform in accordance
with the terms of the agreement, or fails to perform whatsoever.
z Void Agreements: Section 2 (g) of the Indian Contract Act, states “that a void
agreement is one which is not enforceable by law. A void agreement does not
create rights, obligations or duties. It does not give rise to any legal
consequences. Such agreements are void ab initio”. The courts can only enforce
those agreements that according to Section 10 fulfill the conditions of the Indian
Contract Act.
z Quasi Contract: A quasi-contract is a fictional contract created by courts for
equitable, not contractual, purposes. A quasi-contract is not an actual contract,
but is a legal substitute for formed to impose equity between two parties. The
concept of a quasi-contract is that of a contract that should have been formed,
even though in actuality it was not. It is used when a court finds it appropriate
to create an obligation upon a non-contracting party to avoid injustice and to
ensure fairness. It is invoked in circumstances and is connected with the
concept of restitution.

1. Accepted
2. Promise
3. Offer, acceptance
4. Reciprocal
5. Reciprocal
6. Valid
Law of Contract 47
Notes
II. True or False
1. False
2. False
3. True
4. False
5. True

1. [a] 2. [b]
3. [a] 4. [b]
5. [b] 6. [b]
2.17 Case Study

Balfour vs Balfour
Where parties to contract do not intend to create binding agreement, the agreement
cannot be enforced. The case of balfourvsbalfour is a well-known illustration of a domestic
agreement. In this case a husband (Mr. Balfour) was working in ceylone. During the
holidays, he and his wife (Mrs. Balfour) went to England to enjoy the leave. When Mr.
Balfour was to return to ceylone, his wife was advised to remain in England, due to ill
health. Mr. Balfour agreed to send a sum of $930 per month for probable expense of
maintenance. For some time he sent the amount but afterwards differences arose between
them which resulted in their separation and the allowance fell into arrears. Mrs. Balfour
suit for recovery was dismissed by Lord Atkin on the ground that parties did not intend
that it will be attended by legal consequences.
Questions:
1. Why the agreement made by Balfour vs Balfour cannot be enforced?
2. Do you think the claim of Mrs. Balfour suit for recovery was legal?

10. Charlesworth’s Company Law 8th Edition 1965

Notes 2.19 Bibliography

Press.
Kluwer Law Intl
10. Davies, P. L., Worthington, S. and Gower, L. C. B. (2012b) ‘Chapter 7 - corporate
actions’, in Gower and Davies’ principles of modern company law. 9th ed.
London: Sweet & Maxwell, pp. 163–190.
Press.
19. Lowry, J. P., Reisberg, A. and Pettet, B. G. (2012b) ‘Chapter 5 - organisation
of functions and corporate powers’, in Pettet’s Company Law. 4th ed. Harlow:
Pearson.
±±±±
Contracts of Guarantee and Indemnity 49
Notes
Unit 3: Contracts of Guarantee and Indemnity
Structure:
3.1 Introduction
3.2 Contract of Indemnity
3.3 Contract of Guarantee
3.4 Kinds of Guarantee
3.5 Creditor
3.6 Surety
3.7 Summary
3.10 Key Terms
3.12 Case Study
3.14 Bibliography
Objectives

z Contract of Indemnity
z Contract of Guarantee
z Kinds of Guarantee
z Creditor
z Surety


Contract of Indemnity is a contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself or by the conduct of any
other person. It is made in order to protect the promisee against anticipated loss. There
are only two parties involved i.e. the person who promises to make good the loss generally
known as the indemnifier (promisor) and the person whose loss is to be made good called
as the indemnified (promisee). The liability of the indemnifier to the indemnified is primary
and independent. This contract is for the reimbursement of loss.
Contract of Guarantee is a contract to perform the promise or discharge the liability
of a third person in case of his default. It is made to enable a person to get a loan or
goods on credit or an employment. There are three parties involved i.e. the person who
gives the guarantee known as the surety , the person in respect of whose default the
guarantee is given known as the principal debtor and the person to whom the guarantee
is given known as the creditor. There are three contracts first between creditor & principal
debtor, second b/w surety & creditor, third b/w surety & principal debtor. The primary
liability is of principal debtor and the surety has a secondary liability.
3.2 Contract of Indemnity

The Contracts of Indemnity refers to the contract whereby one party promises to
save the other from loss caused to him by the conduct of the promisor himself or by the
conduct of any other person, is called a contract of indemnity.
Definition of Contracts of Indemnity
According to Section 124 of the Indian Contract Act, “Contract of indemnity means
a contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself or by conduct of any other person.”
Example: The person who promises to save the other is called the Indemnitor or
Indemnifier and the person who is compensated is the Indemnitee, Indemnified or the
indemnity-holder. An indemnity can be defined as a sum paid by A to B by way of
compensation for a particular loss suffered by B. A, the indemnitor may or may not be
responsible for the loss suffered by the B, the indemnitee. Forms of indemnity include
cash payments, repairs, replacement, and reinstatement.
Rights of the Indemnity Holder
The rights of the indemnity holder are dependent on the terms of the contract of
indemnity as a general rule. Section 125 of the Indian Contract Act, 1872 comes into
play when the indemnity holder is sued i.e., under specific situation.
The indemnity holder is entitled to recover the:
a) All the damages that he may have been compelled to pay in any suit in respect
of any matter to which the promise of the indemnifier applies. For example, if
A contracts to indemnify B against the consequences of any proceedings which
C may take against B in respect of a particular transaction. If C does institute
legal proceeding against B in that matter and B pays damages to C, A will
be liable to make good all the damages B had to pay in the case.
b) All the costs of suits that he may have had to pay to the third party provided
he acted as a man of ordinary prudence and he did not act in contravention

of the directions of the indemnifier or if he had acted under the authority of the Notes
indemnifier to contest such a suit. In the case of ADAMSON vs. JARVIS [1827]
4 BING 66, Adamson was entitled to recover the money he had to pay to the
true owner of the cattle as well as any expenses incurred by him to get a legal
counsel etc.
c) All the sums that he may have paid under the terms of any compromise of any
such suit provided such compromise is not contrary to the indemnifier’s orders
and was a prudent one or if he acted under authority of the indemnifier to
compromise the suit. The indemnity holder is also entitled to losses due to
change of law not foreseen by the parties when they entered into such contract
of indemnity.
Rights of the Indemnifier
The rights of the indemnifier have not been mentioned expressly anywhere in the
Act. In JASWANT SINGH vs. SECTION OF STATE 14 BOM 299, it was decided that
the rights of the indemnifier are similar to the rights of a surety under Section 141 where
he becomes entitled to the benefit of all securities that the creditor has against the principal
debtor whether he was aware of them or not. Where a person agrees to indemnify, he
will, upon such indemnification, be entitled to succeed to all the ways and means by which
the person originally indemnified might have protected him against loss or set up his
compensation for the loss.
The principle of subrogation i.e., substitution is founded in equitable principles. Once
the indemnifier pays for the loss or damage caused, he will step into the shoes of the
indemnified. Thus, he will have all the rights with which the original indemnifier protected
himself against loss or damage. The principle of subrogation is applicable due to the ICA
and principles of equity.
Insurance - Under Section 126, of the ICA, a contract of guarantee is defined as,
“a contract to perform the promise, or discharge the liability of a third person in case of
his default.” This type of contract is formed mainly to facilitate borrowing and lending
money.
Characteristics of a Contract of Indemnity
Characteristics of a Contract of indemnity are as follows:

1. A contract of guarantee must satisfy all the essential elements of a contract.
For example, the object must be lawful, there must be free consent etc.
2. The Contract may be express or implied. An express contract is by word or
by writing. An implied contract of indemnity comes from the circumstances of
the` case or the relationship between the parties.
3. Section 69 implies a promise to indemnify.
3.3 Contract of Guarantee

Under Section 126 of the Contract Act states that a contract of guarantee is an oral
or written contract to perform the promise, or discharge the liability of a third person in
case of the third person’s default. The person who gives the guarantee is called the surety;
the person in respect of whose default the guarantee is given is called the principal-debtor,
and the person to whom the guarantee is given is called the creditor.

Notes As in any other contract, a contract of guarantee not supported by consideration

would be void. Section 127 of the Contract Act provides that anything done or any promise
made for the benefit of the principal-debtor may be sufficient consideration for giving the
guarantee.
Illustration: Amala agrees to sell a television to Bimala and delivers it. Bimala does
not pay Amala but Sithala, without consideration, agrees to pay instead of Bimala. This
agreement is void as there is no consideration. On the other hand, if Sithala requests
Amala to provide the television to Bimala on credit for one month and agrees to pay if
Bimala defaults, that would be a valid contract of guarantee as Amala providing the
television on credit to Bimala is the consideration for Sithala’s promise to guarantee
payment by Bimala.
Meaning of Contract of Guarantee
A contract of guarantee is a contract to perform the promise or discharge the liability,

of a third person in case of his default.
Example: P lends Rs. 5,000 to Q and R promises to P that if Q does not pay the
money R will do so. This is contract of guarantee. Q is called the Principal Debtor, P
the Creditor, and R the Guarantor or the Surety.
Essentials of a Valid Guarantee
1. A contract of guarantee must satisfy all the essential elements of a contract.

(For example, the object must be lawful; there must be free consent etc.) But
the following points are to be noted.
2. A contract of guarantee may be either oral or written.
3. In a contract of guarantee there are three parties i.e., the creditor, the principal,
debtor and the surety. All the parties must join the contract.
4. In a contract of guarantee, the primary liability is that of principal debtor. The
liability of surety arises only when there is a default of the principal debtor.
Therefore, the liability of the surety is secondary.
5. In a contract of guarantee the principal debtor may be a minor. In this case
the surety is liable to pay even though the minor may not be. The contract will
be enforced as between the surety and the creditor.
6. Consideration: In a contract of guarantee, the consi-deration received by the
principal debtor is taken to be sufficient consideration for the surety. “Anything
done, or any promise made, for the benefit of the principal debtor may be
sufficient consideration to the surety for giving guarantee.”-Sec.127.
Examples:
(i) B requests P to sell and deliver to him goods on credit. P agrees to do so,
provided C will guarantee the payment of the price of goods. C promises to
guarantee the payment in consideration of P’s promise to deliver the goods.
This is a sufficient consideration for C’s promise.
(ii) P sells and delivers goods to B. C afterwards requests P to forbear to sue B
for the debt for a year and promises that if he does so, C will pay for them
in default of payment by B, P agrees to forbear as requested. This is a sufficient
consideration for C’s promise.
(iii) P sells and delivers goods to B. C afterwards, without consideration agrees to
pay for them in default of B. The agreement is void.

Contracts of Guarantee which are invalid Notes

A contract of guarantee is invalid in the following cases:
1. Misrepresentation: Any guarantee which has been obtained by means of
misrepresentation mode by the creditor, or with his knowledge and assent,
concerning a material part of the transaction, is invalid.
2. Concealment: Any guarantee which, the creditor has obtained by means of
keeping silence as to material circums-tances is invalid.
Examples:
(a) D engages B as clerk to collect money for him. B fails to account for
some of his receipts, and D in consequence calls upon him to furnish
security for his duly accounting. C gives his guarantee for B’s duly
accounting. D does not acquaint C with B’s previous conduct. B
afterwards makes default. The guarantee is invalid.
(b) G guarantees to C payment for iron to be supplied by him to B to the
amount of 2000 tons. B and C have privately agreed that B should pay
five rupees per ton beyond the market price, such excess to be applied
in liquidation of an old debt. This agreement is concealed from G. G is
not liable as a surety.
3. When Co-surely does not join: Where a person gives a guarantee upon a
contract that the creditor shall not act upon it until another person has joined
in it as co-surety, the guarantee is not valid if that other person does not join.
4. Lack of essential elements: A contract of guarantee is invalid if it lacks one
or more of the essential elements of a contract (e.g., if there is want of free
consent or if the object is illegal).
Indemnity and Guarantee
While there are only two parties in a contract of indemnity (the indemnifier and the
indemnified), there are three parties in a contract of guarantee (the surety, the principal-
debtor, and the creditor). A contract of indemnity reimburses loss to the indemnified, while
a guarantee provides security to the creditor.
In a contract of indemnity, the indemnifier’s liability is primary and arises when the
contingent event occurs. In a contract of guarantee, surety’s liability is secondary and
arises when the principal-debtor defaults. The indemnifier, after performing their part of
the promise, have no rights against the third party, and can sue the third party only if
there is an assignment in their favour. In a contract of guarantee, the surety may sue
the principal-debtor to recover the amount paid to the creditor.
Differences between Contract of Indemnity and Guarantee
A few important distinctions between a contract of indemnity and contract of

guarantee are as follows:
Contract of Indemnity Contract of Guarantee
1. Contract of indemnity is a contract with 1. Contract of guarantee is a contract
the intention to make good financial loss where one person makes a legally
as nearly as possible. binding promise to take on the legal
responsibilities of another person, if that
person defaults in their obligations.

Notes 2. In contract of indemnity there are only 2. In contract of guarantee there are three
two parties viz the indemnifier or parties viz the creditor, principal debtor
promisor and the indemnity holder or and surety.
promisee.
3. A contract of indemnity is formed to 3. A contract of guarantee is formed to give
provide compensation of loss. assurance to the creditor in lieu for his
money.
4. In a contract of indemnity, the 4. In a contract of guarantee, the liability is
indemnifier is the sole person who is shared by the surety and principal
held liable. debtor. The principal debtor owes the
primary liability and the surety owes the
secondary liability.
5. There are two contracts in a contract 5. There are three contracts in the case of
of indemnity. guarantee.
6. In Indemnity the promisor is discharged 6. In guarantee the surety is discharged by
by payment. payment made by principal debtor.
Consideration for Guarantee
Anything done or any promise made, for the benefit of the principal debtor, may be
a sufficient consideration to the surety for giving the guarantee.
Illustration:
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises
to guarantee the payment in consideration of A's promise to deliver the goods.
This is a sufficient consideration for C's promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B
for the debt for a year, and promises that, if he does so, C will pay for them
in default of payment by B. A agrees to forbear as requested. This is a sufficient
consideration for C's promise.
(c) A sells and delivers goods to B.A afterwards, without consideration, agrees to
pay for them in default of B. The agreement is void.
Surety's liability
The liability of the surety is co-extensive with that of the principal debtor, unless it
is otherwise provided by the contract.
Illustration:
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill
is dishonored by C. A is liable not only for the amount of the bills but also for any interest
and charges which may have become due on it.
Continuing Guarantee
A guarantee which extends to a series of transaction, is called, a "continuing
guarantee".
Illustrations:
(a) A, in consideration that B will employ C in collecting the rents of B's zamindari,
promises B to be responsible, to the amount of 5,000 rupees, for the due
collection and payment by C of those rent. This is a continuing guarantee.
(b) A guarantees payment to B, a tea-dealer, to the amount of £ 100, for any tea Notes
he may from time to time supply to C. B supplies C with tea to above the value
of £ 100, and C pays B for it. Afterwards, B supplies C with tea to the value
of £ 200. C fails to pay. The guarantee given by A was a continuing guarantee,
and he is accordingly liable to B to the extent of £ 100.
(c) A guarantees payment to B of the price of five sacks of flour to be delivered
by B to C and to be paid for in a month. B delivers five sacks to C. C pays
for them. Afterwards B delivers four sacks to C, which C does not pay for. The
guarantee given by A was not a continuing guarantee, and accordingly he is
not liable for the price of the four sacks.
Revocation of continuing guarantee
A continuing guarantee may at any time be revoked by the surety, as to future

transactions, by notice to the creditor.
Illustrations:
(a) A, in consideration of B's discounting, at, A's request, bills of exchange for C,
guarantees to B, for twelve months, the due payment of all such bills to the
extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees.
Afterwards, at the end of three months, A revokes the guarantee. This revocation
discharges A from all liability to B for any subsequent discount. But A is liable
to B for the 2, 000 rupees, on default of C.
(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills
that B shall draw upon him. B draws upon C, C accepts the bill. A gives notice
of revocation. C dishonours the bill at maturity; A is liable upon his guarantee.
Revocation of continuing guarantee by surety's death
The death of the surety operates, in the absence of any contract to the contrary,
as a revocation of a continuing guarantee, so far as regards future transactions.
Liability of two persons, primarily liable, not affected by arrangement between them
that one shall be surety on other's default
Where two persons contract with a third person to undertake a certain liability, and
also contract with each other that one of them shall be liable only on the default of the
other, the third person not being a party to such contract the liability of each of such
two persons to the third person under the first contract is not affected by the existence
of the second contract, although such third person may have been aware of its existence.
Illustration:
A and B make a joint and several promissory note to C. A makes it, in fact, as
surety for B, and C knows this at the time when the note is made. The fact that A, to
the knowledge of C, made the note as surety for B, is no answer, to a suit by C against
A upon the note.
3.4 Kinds of Guarantee

Various kinds of guarantee are given bellow:
1. Specific Guarantee
A specific guarantee pertains to a single debt or a single transaction. It is a simple
guarantee or a specific guarantee when the debt is discharged, then the duty is performed
Notes and the contract of guarantee comes to an end. In a specific guarantee if a new transaction
has to be made between two parties a fresh guarantee will have to be taken as the
guarantee on the single debt is completed. Guarantee can be for an existing debt or for
a prospective debt or a future transaction.
Illustration:
Purva guarantees the payment for 5 computers to Ali. The computers are to be
delivered to Khan in March. Ali delivers the computers to Khan and payment is made
to him. Purva’s contract of guarantee ends on the payment. He is not liable for any further
contracts because it is a specific contract pertaining to only five computers. If Khan paid
for the computers then Purva would have been liable to make the payment to Ali.
2. Continuing Guarantee
According to Section 129 a continuing guarantee extends to a series of transactions.
The surety is liable for all the transactions as his guarantee extends to all of them until
the guarantee is removed.
Illustration:
Raju was employed as a driver by Mr. Tiwari on the recommendation of Shiv for
collection of credit payments from Delhi. Shiv guaranteed Raju’s honesty and promised
to pay in case of any default in payments collected by him (Raju). This is a contract of
continuing guarantee.
3.5 Creditor
Creditor is an individual to whom an obligation is owed because he or she has given
something of value in exchange. One who may legally demand and receive money, either
through the fulfillment of a contract or due to injury sustained as a result of another's
Negligence or intentionally wrongful act. The term creditor is also used to describe an
individual who is engaged in the business of lending money or selling items for which
immediate payment is not demanded but an obligation of repayment exists as of a future
date.
An attachment creditor is an individual who has obtained an order of attachment from
a court to command a sheriff to seize the property of a debtor who has defaulted in the
repayment of an outstanding obligation so that the property may be used to satisfy the
creditor's claim.
A Judgment Creditor is a party who has gone to court and obtained a judgment
against the person who owes him or her money. If that judgment creditor obtains an order
of attachment, he or she becomes an attachment creditor.
A general creditor or creditor at large is an individual who has neither a lien nor a
security interest in the property of the debtor.
A junior creditor is one whose right to collect money from a debtor is subordinate
to that of another individual who also has a right to collect payment of a different debt
from the same debtor. The person with the primary right to payment is known as a senior
creditor.
A principal creditor is the party who has a claim against the debtor that is far greater
than the debt owed to any other creditor, and in some instances, to all other creditors
combined.

A secured creditor holds a special legal right in particular property of the debtor to Notes
assure him or her of repayment of the debt. A creditor who has the protection of a lien
or mortgage is secured.
A single creditor has a lien on only one of the debtor's funds or accounts.
Petitioning creditors are those parties to whom one debtor owes money and who
apply to the court of Bankruptcy in order to secure the debtor's property and distribute
it equitably among them.
Creditors' Rights
Creditors' rights are the procedural provisions designed to protect the ability of
creditors persons who are owed money to collect the money that they are owed. These
provisions vary from one jurisdiction to another, and may include the ability of a creditor
to put a lien on a debtor's property, to effect a seizure and forced sale of the debtor's
property, to effect a garnishment of the debtor's wages, and to have certain purchases
or gifts made by the debtor set aside as fraudulent conveyances. The rights of a particular
creditor usually depend in part on the reason for which the debt is owed, and the terms
of any writing memorializing the debt.
Priority of Creditors
Creditors' rights deal not only with the rights of creditors against the debtor, but also
with the rights of creditors against one another. Where multiple creditors claim a right
to levy against a particular piece of property or against the debtor's accounts in general,
the rules governing creditor's rights determine which creditor has the strongest right to
any particular relief.
Generally, creditors can be divided between those who "perfected" their interest by
establishing an appropriate public record of the debt and any property claimed as collateral
for it, and those who have not. Creditors may also be classed according to whether they
are "in possession" of the collateral, and by whether the debt was created as a purchase
money security interest. A creditor may generally ask a court to set aside a fraudulent
conveyance designed to move the debtor's property or funds out of their reach.
Specialized Legal Practices
Some lawyers have a specialized practice area focused on the collection of such
debts. Such attorneys are frequently referred to as collection attorneys or collection
lawyers. Attorneys who practice in the area of "creditor's rights" perform one or all of the
following:
i) File lawsuits and using other legal collection techniques to collect consumer
debts (i.e., debts owed by individuals).
ii) File lawsuits and using other legal collection techniques to collect commercial
debts (i.e. debts owed by businesses).
iii) Represent creditor's interests in a bankruptcy proceeding.
iv) Foreclose homes or commercial real estate if the purchaser defaults on
payment.
v) Recover (or replevin) secured goods (e.g., automobiles) if the purchaser defaults
on payment.

Notes 3.6 Surety

A surety contract is a legally binding agreement that the signee will accept
responsibility for another individual's contractual obligations, usually the payment of a loan
if the principal borrower falls behind or defaults. The person who signs this type of contract
is more commonly referred to as a cosigner. Someone may sign a surety contract to
help their child obtain a car loan, to start a business, or some other transaction considered
by the lender to be relatively high-risk. In many lending situations, it is a requirement for
getting the loan or, alternatively, can help the borrower get a better rate.
A "surety" is a contract or agreement where one person guarantees the debts of
another. Often they are called surety bonds or surety agreements. Surety bonds commonly
are used to protect the government from the misconduct or failure of a company to fulfill
its obligations. For example, a contractor building something for the government might
be required to purchase a surety bond to reimburse the government if the project isn't
completed on time or up to the required standards.
Parties
There are three parties to a surety agreement. The first party is called the "principal"
who the person (or company) is purchasing the surety agreement. The principal has some
sort of obligation and is basically purchasing a guarantee that the obligation to the second
party (called the "obligee") will be met. The third party is the "guarantor," and this is
generally a surety bond company that is assuming the risk of collecting from the principal,
should the principal fail to meet his obligation to the obligee.
Legalities
For a surety obligation to exist legally the guarantor must have received some form
of payment or "consideration." All people in the contract must be legally able to enter
into binding contracts. The obligation of the guarantor cannot be greater than the original
obligation of the principal, although it can be less than the original obligation. The obligation
of the guarantor ends when the terms of the contract are fulfilled by the principal or some
other terms of the contract are met.
If the principal fails to meet his obligations and the surety bond company has to
reimburse the obligee, the surety company will seek reimbursement from the principal.
Surety agreements are not insurance. The payment made to the surety company is
payment for the bond, but the principal is still liable for the debt. The primary purpose
of the surety company is to relieve the obligee of the time and inconvenience of collecting
from the principal. The obligee instead collects immediately from the guarantor, and then
the guarantor must collect the obligation from the principal either through collateral posted
by the principal or through other means.
Discharge of surety by variance in terms of contract
Any variance made without the surety's consent, in the terms of the contract between
the principal and the creditor, discharges the surety as to transactions subsequent to
the variance.
Illustrations:
(a) A becomes surety to C for B's conduct as manager in C's bank. Afterwards,
B and C contract, without A’s consent, that B' s salary shall be raised, and
that he shall become liable for one-fourth of the losses on overdrafts. B allows
a customer to over-draw and the bank loses a sum of money.

A is discharged from his surety ship by the variance made without his consent, Notes
and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which B is appointed
by C and of which the duties are defined by an Act of the Legislature. By a
subsequent Act, the nature of the office is materially altered. Afterwards, B
misconducts himself. A is discharged by the change from future liability under
his guarantee, though the misconduct of B is in respect of a duty not affected
by the later Act.
(c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A's
becoming surety to C for B's duly accounting for moneys received by him as
such clerk. Afterwards, without A's knowledge or consent, C and B agree that
B should be paid by a commission on the goods sold by him and not by a
fixed salary. A is not liable for subsequent misconduct of B.
(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil
supplied by C to B on credit. Afterwards B becomes embarrassed, and, without
the knowledge of A, B and C contract that C shall continue to supply B with
oil for ready money, and that the payments shall be applied to the then, existing
debts between B and C. A is not liable on his guarantee for any goods supplied
after this new arrangement.
(e) C contracts to lend B 5,000 rupees on the lst March. A guarantees repayment.
C pays the 5,000 rupees to B on the lst January, A is discharged from his
liability, as the contract has been varied, inasmuch as C might sue B for the
money before the first of March.
Discharge of surety by release or discharge of principal debtor
The surety is discharged by any contract between the creditor and the principal
debtor, by which the principal debtor is released, or by any act or omission of the creditor,
the legal consequence of which is the discharge of the principal debtor.
Illustrations:
(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods
to B, and afterwards B becomes embarrassed and contracts with his creditors
(including C) to assign to them his property in consideration of their releasing
him from their demands. Here B is released from his debt by the contracts with
C, and A is discharged from his surety ship.
(b) A contracts with B to grow a crop of indigo on A's land and to deliver to B at
a fixed rate, and C guarantees A's performance of this contract. B diverts a
stream of water which is necessary for the irrigation of A's land and thereby
prevents him from raising the indigo. C is no longer liable on his guarantee.
(c) A contracts with B for a fixed price to build a house for B within a stipulated
time. B supplying the necessary timber. C guarantees A's performance of the
contracts. B omits to supply the timber. C is discharged from his' surety ship.
Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor
A contract between the creditor and the principal debtor, by which the creditor makes
a composition with, or promises to give time to, or not to sue, the principal debtor,
discharges the surety, unless the surety assents to such contract.

Notes Surety not discharged when agreement made with third person to give time to
principal debtor
Where a contract to give time to the principal debtor is made by the creditor with
a third person, and not with the principal debtor, the surety is not discharged.
Illustration:
C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted
by B, contracts with M to give to B. A is not discharged.
Creditor's forbearance to sue does not discharge surety
Mere forbearance on the part of the creditor to sue the principal debtor or to enforce
any other remedy against him, does not, in the absence of any provision in the guarantee
to the contrary, discharge the surety.
Illustration:
B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue
B for a year after the debt has become payable. A is not discharged from his surety ship.
Rights of surety on payment or performance
Where a guaranteed debt has become due, or default of the principal debtor to perform
a guaranteed duty has taken place, the surety upon payment or performance of all that
he is liable for, is invested with all the rights which the creditor had against the principal
debtor.
Surety's right to benefit of creditor's securities
A surety is entitled to the benefit of every security which the creditor has against
the principal debtor at the time when the contract of surety ship entered into, whether
the surety knows of the existence of such security or not; and if the creditor loses, or
without the consent of the existence of such security or not; and if the creditor loses,
or without the consent of the surety, parts with such security, the surety is discharged
to the extent of the value of the security.
Illustrations:
(a) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also
further security for the 2,000 rupees by a mortgage of B's furniture. C cancels
the mortgaged. B becomes insolvent and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture.
(b) C, a creditor, whose advance to B's is secured by a decree, receives also a
guarantee for that advance from A. C afterwards takes B's goods in execution
under the decree, and then, without the knowledge of A, withdraws the
execution. A is discharged.
(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from
C to B. Afterwards, C obtains from B a further security for the same debt.
Subsequently, C gives up the further security. A is not discharged.
Guarantee obtained by misrepresentation, invalid
Any guarantee which has been obtained by means of misrepresentation made by
the creditor, or with his knowledge and assent, concerning a material part of the
transaction, is invalid.

Guarantee obtained by concealment, invalid Notes

Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances is invalid.
Illustrations:
(a) A engages B as clerk to collect money for him. B fails to account for some
of his receipts and A in consequence call upon him to furnish security for his
duly accounting. C gives his guarantee for B's duly accounting. A does not
acquaint C with B's previous conduct. B afterwards makes default. The
guarantee is invalid.
(b) A guarantees to C payment for iron to be supplied by him to B to the amount
of 2,000 tons. B and C have privately agreed that B should pay five rupees per
tonne beyond the market price, such excess to be applied in liquidation of an
old debt. This agreement is concealed from A. A is not liable as a surety.
Guarantee on contract that creditor shall not act on it until co-surety joins
Where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has joined in it as co-surety, the guarantee is not valid that
other person does not join.
Implied promise to indemnify surety
In every contract of guarantee there is an implied promise by the principal debtor

to indemnify the surety, and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but no sums which he has paid
wrongfully.
Illustrations:
(a) B is indebted to C, and A is surety for the debt. C demands payment from
A, and on his refusal sues him for the amount. A defends the suit, having
reasonable grounds for doing so, but he is compelled to pay the amount of the
debt with costs. He can recover from B the amount paid by him for costs, as
well as the principal debt.
(b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange
drawn by B upon A to secure the amount. C, the holder of the bill, demands
payment of it from A, and on A's refusal to pay, sues him upon the bill. A,
not having reasonable grounds for so doing, defends the suit, and has to pay
the amount of the bill and costs. He can recover from B the amount of the bill,
but not the sum paid for costs, as there was no real ground for defending the
action.
(c) A guarantees to C, to the extent of 2,000 rupees, payment for rice to be supplied
by C to B. C supplies to B rice to a less amount than 2,000 rupees, but obtains
from A payment of the sum of 2,000 rupees in respect of the rice supplied.
A cannot recover from B more than the price of the rice actually supplied.
Co-sureties liable to contribute equally
Where two or more persons are co-sureties for the same debt or duty, either jointly
or severally, and whether under the same or different contracts, and whether with or without
the knowledge of each other, the co-sureties, in the absence of any contract to the
contrary, are liable, as between themselves, to pay each an equal share of the whole
debt, or of that part of it which remains unpaid by the principal debtor.

Notes Illustrations:
(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes
default in payment. A, B and C are liable, as between themselves, to pay 1,000
rupees each.
(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there
is a contract between A, B and C that A is to be responsible to the extent
of one-quarter, B to the extent of one-quarter, and C to the extent of one-half.
E makes default in payment. As between the sureties, A is liable to pay 250
rupees, B 250 rupees and C 500 rupees.
Liability of co-sureties bound in different sums
Co-sureties who are bound in different sums are liable to pay equally as far as the
limits of their respective obligations permit.
Example:
(a) A, B and C, as sureties for D, enter into three several bonds each in a different
penalties namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees,
C in that of 40,000 rupees, conditioned for D's duly accounting to E.D makes
default to the extent of 30,000 rupees. A, B and C are each liable to pay 10,000
rupees.
(b) A, B and C, as sureties for D, enter into three several bonds each in different
penalty namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees,
C in that of 40,000 rupees, conditioned for D's duly accounting to E. D makes
default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and
B and C 15,000 rupees each.
(c) A, B, A and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 10,000 rupees, B in that of 20, 000 rupees,
C in that of 40, 000 rupees, conditioned of D's duly accounting to E. D makes
default to the exeunt 70,000 rupees. A, B and C have to pay each the full penalty
of his bond.
3.7 Summary
A contract of indemnity is a contract by which one party promised to save the other
from loss caused to him by the conduct of the promisor himself by the conduct of any
other person. A person who promises to make good the loss i.e., the promisor is called
the indemnifier and the person whose loss Rupees to be made good. By at contract of
indemnity a security is provided to the promise against any anticipated loss. The promise
is protected and assured of being compensated for the loss if any arising out of the
contract. English law means a promise to save a person harmless from the consequences
of an act. It includes indemnity against loss arising from any cause what so ever.
A contract of guarantee is a contract to perform the promise or discharge the liability
of a third person in case of his default. The person who gives the guarantee is called
the surely. The person in respect or whose default the guarantee is given is called the
principal debtor and the person to who the guarantee is given is called the creditor contract
between the surety and the principal debtor is that of indemnity. Principal debtor
indemnifies the surety that if he pays the amount in case of default committed by him
he wills indemnity him in case of loss. This contract if it is not express anything done
or any promise made for the benefit of principal may be a sufficient consideration to the
surety for giving the guarantee. The consideration recovered by the principal debtor is taken

to be sufficient consideration for the surety. A contract of guarantee without consideration Notes
is void. Anything done for the benefit of the principal debtor before the guarantee was given
is a good communication. The cardinal rule is that guarantor must not be made liable
beyond the terms of his engagement. A bank guarantee is an independent and distinct
contract between the bank and the beneficiary and is not qualified by underlying transaction
and is the primary contract between the person at whose instances he bank guarantee
for due performance of words contract or towards security deposit. In a contract of
guarantee these must always be three parties in contemplation. A principal debtor a
creditor and a third party who in consideration of the same act. A continuing grantee is
different from an ordinary guarantee there is also a difference between a guarantee which
stipulates that the guararantum is liable to pay only on a demand by the creditor and
a guarantee which does not contain such a condition. The liability to pay may arise on
the principal debtor and guarantor at the same time of at different points of time.
1. Providing for the common defenses is considered to be one of the main

_____________ of government.
2. The English political philosopher _____________ greed that a higher natural law
guaranteed liberty to every person.
3. A _____________ is a good or service that cannot be read readily provided by
the market and so is provided by government.
4. Politics arises out of _____________ in society.
5. Only _____________ decisions can extend to all of society.
II. True or False

1. A contract of Indemnity is not a contingent contract.
2. A contract of insurance is a contract of indemnity.
3. Indemnity given by repayment after payment by the indemnity holder.
4. An indemnifier can sue the third party in his own name.
5. A contract of guarantee cannot be oral.

1. Which section defines that contract of indemnity?
[a] Sec 121
[b] Sec 122
[c] Sec 123
[d] Sec 124
2. ‘A’ contracts to indemnity ‘B’ against the consequences of any proceedings
which ‘C’ may take against ‘B’ in respect of a certain sum of Rs 200. It is
called……….
[a] Contract of agreement
[b] Quasi contract
[c] Contract of indemnity
[d] None of these
Notes 3. What are the essentials of contract of indemnity?

[a] Contract of indemnity must certain all the essentials of a valid contract
[b] The promise or the indemnity holder must have suffered a lose
[c] Both a and b
[d] None of these
4. Which section lays down rights of indemnity holder?
[a] Sec 122
[b] Sec 123
[c] Sec 124
[d] Sec 125
5. What are the rights of indemnity holder?
[a] Damages
[b] All sums
[c] Suit for specific performance
[d] All of the above
6. The person who gives the guarantee is called…………..
[a] Promise
[b] Both a and b
[c] Surety
[d] None of these

1. What is Contract of Indemnity?
2. What is Contract of Guarantee?
3. What is Guarantee?
4. Who is a Creditor?
5. What is Surety?

1. Give an introduction to Contract of Indemnity.
2. Write note on: Contract of Guarantee.
3. Explain various Kinds of Guarantee.
4. Discuss roles of Creditor.
5. Explain the discharge of surety by variance in terms of contract.
6. Discuss discharge of surety by release or discharge of principal debtor.
7. Explain the rights of surety on payment or performance.
8. Discuss about surety's right to benefit of creditor's securities.
9. Explain implied promise to indemnify surety.

3.10 Key Terms Notes

z Contract of Indemnity: The Contracts of Indemnity refers to the contract
whereby one party promises to save the other from loss caused to him by the
conduct of the promisor himself or by the conduct of any other person, is called
a contract of indemnity.
z Rights of the Indemnity Holder: The rights of the indemnity holder are
dependent on the terms of the contract of indemnity as a general rule. Section
125 of the Indian Contract Act, 1872 comes into play when the indemnity holder
is sued i.e., under specific situation.
z Contract of Guarantee: Under Section 126 of the Contract Act states that a
contract of guarantee is an oral or written contract to perform the promise, or
discharge the liability of a third person in case of the third person’s default. The
person who gives the guarantee is called the surety; the person in respect of
whose default the guarantee is given is called the principal-debtor, and the
person to whom the guarantee is given is called the creditor.A contract of
guarantee is a contract to perform the promise or discharge the liability, of a
third person in case of his default.
z Misrepresentation: Any guarantee which has been obtained by means of
misrepresentation mode by the creditor, or with his knowledge and assent,
concerning a material part of the transaction, is invalid.
z Concealment: Any guarantee which, the creditor has obtained by means of
keeping silence as to material circums-tances is invalid.
z Indemnity and Guarantee: In a contract of indemnity, the indemnifier’s liability
is primary and arises when the contingent event occurs. In a contract of
guarantee, surety’s liability is secondary and arises when the principal-debtor
defaults. The indemnifier, after performing their part of the promise, have no rights
against the third party, and can sue the third party only if there is an assignment
in their favour. In a contract of guarantee, the surety may sue the principal-debtor
to recover the amount paid to the creditor.
z Surety's liability: The liability of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided by the contract.
z Continuing Guarantee: A guarantee which extends to a series of transaction,
is called, a "continuing guarantee".
z Revocation of continuing guarantee: A continuing guarantee may at any time
be revoked by the surety, as to future transactions, by notice to the creditor.
z Specific Guarantee: A specific guarantee pertains to a single debt or a single
transaction. It is a simple guarantee or a specific guarantee when the debt is
discharged, then the duty is performed and the contract of guarantee comes
to an end. In a specific guarantee if a new transaction has to be made between
two parties a fresh guarantee will have to be taken as the guarantee on the
single debt is completed. Guarantee can be for an existing debt or for a
prospective debt or a future transaction.
z Creditor: Creditor is an individual to whom an obligation is owed because he
or she has given something of value in exchange. One who may legally demand
and receive money, either through the fulfillment of a contract or due to injury
sustained as a result of another's Negligence or intentionally wrongful act. The
term creditor is also used to describe an individual who is engaged in the
business of lending money or selling items for which immediate payment is not
demanded but an obligation of repayment exists as of a future date.
Notes z Creditors' Rights: Creditors' rights are the procedural provisions designed to
protect the ability of creditors persons who are owed money to collect the money
that they are owed. These provisions vary from one jurisdiction to another, and
may include the ability of a creditor to put a lien on a debtor's property, to effect
a seizure and forced sale of the debtor's property, to effect a garnishment of
the debtor's wages, and to have certain purchases or gifts made by the debtor
set aside as fraudulent conveyances. The rights of a particular creditor usually
depend in part on the reason for which the debt is owed, and the terms of any
writing memorializing the debt.
z Surety: Surety contract is a legally binding agreement that the signee will
accept responsibility for another individual's contractual obligations, usually the
payment of a loan if the principal borrower falls behind or defaults. The person
who signs this type of contract is more commonly referred to as a cosigner.

1. Purpose
2. John Lodie
3. Public good
4. Conflict
5. Government
II. True or False

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

1. [d] 2. [c]
3. [c] 4. [d]
5. [d] 6. [b]
3.12 Case Study

Mohori Bibee vs. Dharmodas Ghose
The law relating to contracts in India is contained in Indian Contract Act, 1872. The
Act was passed by British India and is based on the principles of English Common Law.
It is applicable to all the states of India except the state of Jammu and Kashmir. It
determines the circumstances in which promises made by the parties to a contract shall
be legally binding on them. All of us enter into a number of contracts everyday knowingly
or unknowingly. Each contract creates some rights and duties on the contracting parties.
Hence this legislation, Indian Contract Act of 1872, being of skeletal nature, deals with
the enforcement of these rights and duties on the parties in India.

Before the enactment of the Indian Contract Act, 1872, there was no codified law Notes
governing contracts in India. In the Presidency Towns of Madras, Bombay and Calcutta
law relating to contract was dealt with the Charter granted in 1726 by King George I to
the East India Company. Thereafter in 1781, in the Presidency Towns, Act of Settlement
passed by the British Government came into force. Act of Settlement required the Supreme
Court of India that questions of inheritance and succession and all matters of contract
and dealing between party and party should be determined in case of Hindu as per Hindu
law and in case of Muslim as per Muslim law and when parties to a suit belonged to
different persuasions, then the law of the defendant was to apply. In outside Presidency
Towns matters with regard to contract was mainly dealt with through English Contract
Laws; the principle of justice, equity and good conscience was followed.
MohoriBibee vs. DharmodasGhose In this case, a minor (dharmodas) mortgaged his
house for Rs. 20,000 and received Rs. 10,500 from the mortgage. Subsequently, the
mortgagor sued for setting aside the mortgage on the ground of his minority at the time
of execution of mortgage deed. The Privy Council held that according to Section 11, a
minor is incompetent to contract and therefore, minor’s agreement was absolutely void,
not merely voidable. Hence, mortgage was cancelled. Moreover, the morgagee’s request
for refund of Rs. 10,500 was also turned down on the ground that minor’s agreement was
void from the beginning and therefore, mortgagee has not right of restitution.
Questions:
1. How do you justify the minor is incompetent to contract and therefore, minor’s
agreement was absolutely void, not merely voidable?
2. Why the mortgage was cancelled? Explain.

3.14 Bibliography
Press.

Notes 3. Anand, R.L. &Iyer, Commentary on the Specific Relief Act, 1963 (Act No. 47
Kluwer Law Intl
Press.
Pearson.
±±±±

Contracts of Bailment and Pledge 69
Notes
Unit 4: Contracts of Bailment and Pledge
Structure:
4.1 Introduction
4.2 Bailment and Kinds of Bailment
4.3 Bailor and Bailee
4.4 Termination of Bailment
4.5 Finder of Lost Goods
4.6 Pledge or Pawn
4.7 Pledge by Non-owners
4.8 Pledgor and Pledgee
4.9 Summary
4.12 Key Terms
4.14 Case Study
4.16 Bibliography
Objectives

 Concepts of Bailment
 Kinds of Bailment
 Bailor and Bailee
 Termination of Bailment
 Finder of Lost Goods
 Pledge or Pawn
 Pledge by Non-owners
 Pledgor and Pledgee


A Contract where one party delivers goods to the other upon return basis to fulfil
a specific purpose is called bailment contract. It includes two parties namely; bailer and
bailee. The person who is delivering the goods is called bailer and the person to whom
goods are delivered, is called bailee.
Example: A has handed over his fan to B for the purpose of repairs. It is bailment
contract. A is bailer and B is bailee. Similarly X has handed over his dress Y for the purpose
of washing. It is also bailment Contract where X is bailer and Y is bailee.
The bailement contracts are classified into Gratuitous bailments and Non – Gratuitous
bailments.
Gratuitous Bailments: If there is only one directional consideration, it is called
Gratuitous bailment. In here, the bailment contract is for the benefit of either the bailer
or the bailee only.
Example 1: Mr. A, while going to abroad, has handed over his gold to this friend
namely B for Safe custody. Here bailer only is getting benefited.
Example 2: Y has taken Scooter for X who is his friend for 1 day. Here only bailee
is being benefited.
Non-Gratuitous bailments: If there is two directional consideration it is called Non-
Gratuitous bailment. In here, the bailment contract is for the benefit of both parties.
Example: X has handed over his dress to B who is owner of a laundry for washing.
At a charge of Rs. 10/-. Here both parties are being benefited.
Features of Bailment
a) In case of bailment, as there is delivery of goods, there will be change in
procession.
b) Though there is change in possession, there will be no change in title.
c) Bailment includes return of goods after fulfillment of purpose.
d) In delivering the goods, there must be specific purpose.
4.2 Bailment and Kinds of Bailment

According to Section 148 of the Contract Act, “A bailment is the delivery of goods
by one person to another for some purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed of according to the directions
of the person delivering them”. Some of the examples of bailment are- Cloth given to a
tailor for stitching, a watch given to a shop for repairing, a friend lending his bicycle to
another friend for riding it and jewelry taken on rent for wearing it to party.
Types of Bailments
Bailment may broadly be classified into two categories, namely,

1. Gratuitous bailment, and
2. Non-gratuitous bailment

1. Gratuitous Bailment Notes

A bailment with no considerations is called a gratuitous bailment. In this kind of
bailment neither the bailor, nor the bailee is entitled to any remuneration or reward. Such
a bailment may be for the exclusive benefit of either party, i.e., the bailor or the bailee,
discussed as below.
Bailment for the exclusive benefit of the bailor
In this case the bailor delivers the goods for the exclusive benefits and the bailee
does not derive any benefit out of it.
For example, “A” leaves his pets with “B”, his neighbour to be looked after during
A’s physical absence. In this case, A alone is being benefited by the bailment. Or, if
you park your car in your neighbour’s premises to be taken care in your absence, you
as a bailor derive the exclusive benefit from the bailment.
Bailment for the exclusive benefit of the bailee
This is the case where a bailor delivers the goods to the bailee for the exclusive
benefits of the bailee and does not gain anything from the contract himself.
For example, you lend your book to a friend of yours for a week without any charge
or favour. In this case the recipient of the book as a bailee, is the sole beneficiary of
this transaction of bailment.
2. Non-Gratuitous Bailment
Contrary to gratuitous bailment, a non-gratuitous bailment or bailment for reward is
one that involves some consideration passing between the bailor and the bailee. Obviously
in this case the delivery of goods takes place for the mutual benefit of both the parties.
For example, “A” hires “B’s” car. Here B is the bailor and receives the hire charges
and A is the bailee and enjoys the use of the car. Similarly, when you give your PC or
laptop for repair to some techie, both you and the computer techie are going to be benefited
by this contract – while you get your computer repaired, he gets his fees or charges.
4.3 Bailor and Bailee

A "bailment" is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.
The person delivering the goods is called the "bailor". The person to whom they are
delivered is called the "bailee".
Explanation: If a person already in possession of the goods of another contract to
hold them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor
of such goods, although they may not have been delivered by way of bailment.
An individual who temporarily relinquishes possession but not ownership of a good
or other property under a bailment. The bailor entrusts the possession of the good or
property to another individual, known as the bailee. A bailment is usually a contractual
agreement between the bailor and the bailee that specifies the terms and purpose of the
change in possession.
A bailor transfers possession, but not ownership, of a good to another party, known
as the bailee, in the event of a bailment. While the good is in the bailee's possession,
the bailor is still the rightful owner. A bailor/bailee relationship can be illustrated in the

Notes management of investment portfolios. A bailor can designate a bailee to supervise an

investment portfolio for a particular time period. While the bailee does not own the portfolio,
the bailor entrusts the chosen individual to ensure that the portfolio is in good hands until
such time that the bailor can or wishes to resume the duties of managing the portfolio.
An individual who temporarily gains possession, but not ownership, of a good or other
property under a bailment. The bailee is entrusted with the possession of the good or
property by another individual known as the bailor.
Contracts of Bailment
Section 148 of the Contract Act defines bailment as the delivery of goods by one
person to another person for some purpose, upon a contract that they will either return
those goods or dispose of the goods according to the instructions of the person who
delivered the goods when the purpose is accomplished. The person who hands over the
goods is the bailor and the person who receives the goods is the bailee.
Illustration: Ali stays at Hotel Babylon and leaves some luggage with the Hotel for
safekeeping. The Hotel Babylon is a bailee in respect of the luggage and Ali is a bailor.
Duties of the Bailee
Section 151 of the Contract Act mandates that a bailee is bound to take as much
care of the goods bailed as a person of ordinary prudence would, under similar
circumstances, take of that person’s own goods of the same bulk, quality, and value as
the goods bailed.
Illustration: A gave B some bales of jute to be transported by ship to another port.
A shipped the jute to the other port, but failed to unload the bales of jute from the boat,
which was also leaky, for thirty hours when a cyclone hit the area. B has not performed
the duty expected of a bailee, and would be liable to compensate A for the damage caused.
According to Section 160 of the Contract Act, the bailee must return, or deliver
according to the bailor’s instructions, the goods bailed, without demand, as soon as the
time for which they were bailed has expired, or the purpose for which they were bailed
has been accomplished. Section 161 of the Contract Act adds that, if, because of the
bailee’s fault, the goods are not returned or the delivery is not made at the proper time,
the bailee is responsible to the bailor for any loss, destruction, or damage.
Rights of the Bailee
According to Section 158 of the Contract Act, where the contract of bailment does
not provide for any remuneration to be paid to the bailee for the purpose for which the
goods are to be kept or carried, the bailor must repay to the bailee the necessary expenses
incurred by the bailee for the purposes of the bailment.
Where a bailee, in accordance with the purpose of the bailment, renders any service
involving the exercise of skill or labour in respect of the bailed goods, Section 170 of the
Contract Act stipulates that the bailee has, in the absence of a contract to the contrary,
a right to retain the bailed goods until the bailee receives due remuneration for the services
rendered in respect of the goods.
Illustration: A gives some goods to B and asks him to store them in a warehouse
for six months under the condition that A will pay B a fee for the storage and use of the
warehouse. Should A fail to pay storage fees at the end of six months, B will not have

the right to retain the goods as merely making arrangements for the storage of goods Notes
in a warehouse does not involve any labour or skill exercised in respect of the goods.
Bailor's duty to disclose faults in goods bailed
The bailor is bound to disclose to the bailee faults in the goods bailed, of which the
bailor is aware, and which materially interfere with the use of them, or expose the bailee
to extraordinary risk; and if he does not make such disclosure, he is responsible for
damage arising to the bailee directly from such faults.
If such goods are bailed for hire, the bailor is responsible for such damage, whether
he was or was not aware of the existence of such faults in the goods bailed.
Illustrations:
(a) A lends a horse, which he knows to be vicious, to B. He does not disclose
the fact that the horse is vicious. The horse runs away. B is thrown and injured;
A is responsible to B for damage sustained.
(b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it,
and A is injured. B is responsible to A for the injury.
Termination of bailment by bailee's act inconsistent with conditions
A contract of bailment is voidable at the option of the bailor, if the bailee does any
act with regard to the foods bailed, inconsistent with the conditions of the bailment.
Illustration:
A lets to B, for hire, a horse of his own riding B drives the horse in his carriage.
This is, at the option of A, a termination of the bailment.
Liability of bailee making unauthorized use of goods bailed
If the bailee makes any use of the goods bailed which is not according to the
conditions of the bailment, he is liable to make compensation to the bailor for any damage
arising to the goods from or during such use of them.
Illustrations:
(a) A lends a horse to B for his own riding only. B allows C, a member of his family,
to ride the horse. C rides with care, but the horse accidentally falls and is injured.
B is liable to make compensation to A for the injury done to the horse.
(b) A hires a horse in Calcutta from B expressly to march to Banaras. A rides with
due care but marches to Cuttack instead. The horse accidentally falls and is
injured. A is liable to make compensation to B for the injury to the horse.
Effect of mixture, without bailor's consent, when the goods can be separated
If the bailee, without the consent of the bailor, mixes the goods of the bailor with
his own goods and the goods can be separated or divided, the property in the goods
remains in the parties respectively; but the bailee is bound to be bearing the expense
of separation or division, and any damage arising from the mixture.
Illustration:
A bails 100 bales of cotton marked with a particular mark to B. B, without A's consent,
mixes the 100 bales with other bales of his own, bearing a different mark; A is entitled
to have his 100 bales returned and B is bound to bear all the expenses incurred in the
separation of the bales and any other incidental damages.
Notes Repayment, by bailor, of necessary expenses

Where, by the conditions of the bailment, the goods are to be kept or to be carried,
or to have work done upon them by the bailee for the bailor, and the bailee is to receive
no remuneration, the bailors shall repay to the bailee the necessary expenses incurred
by him for the purpose of the bailment.
Restoration of goods lent gratuitously
The lender of a thing for use may at any time require its return, if the loan was
gratuitous, even though he lent it for a specified time or purpose. But if, on the face of
such loan made for a specified time or purpose, the borrower has acted in such a manner
that the return of the thing lent before the time agreed upon would cause him losses
exceeding the benefit actually derived by him from the loan, the lender must, if he compels
the return, indemnify the borrower for the amount in which the loss so occasioned exceeds
the benefits so derived.
Return of goods bailed, on expiration of time or accomplishment of purpose
It is the duty of the bailee to return, or deliver according to the bailor's directions,
the goods bailed, without demand, as soon as the time for which they were bailed has
expired, or the purpose for which they were bailed has been accomplished.
Bailor's responsibility to bailee
The bailor is responsible to the bailee for any loss which the bailee may sustain
by reason that the bailor was not entitled to make the bailment, or to receive back the
goods, or to give directions, respecting them.
Bailee's particular lien
Where the bailee has, in accordance with the purpose of the bailment, rendered any
service involving the exercise of labour or skill in respect of the goods bailed he has in
the absence of a contract to the contrary, a right to retain such goods until he receives
due remuneration for the services he has rendered in respect of them.
Illustrations:
(a) A delivers a rough diamond to B, a jeweller, to be cut and polished, which is
accordingly done. B is entitled to retain the stone till he is paid for the service
he has rendered.
(b) A gives cloth to B, a tailor, to make into a coat, B promises A to deliver the
coat as soon as it is finished, and to give a three months' credit for the price,
B is not entitled to retain the coat until he is paid.
4.4 Termination of Bailment

Termination means the end of a contract or a discharge of a contract. The contract
of bailment can be discharged in the following ways:
(1) On the expiry of the period: When the bailment of good is made for a specific
period and that period expires then the bailment also comes to an end.
Illustration:
MrGujral took a bike from his neighbor Shrinath for two days as his bike had gone
for repair. He used the bike for two days and then returned the bike to Shrinath. Thus
the contract of bailment came to an end.

(2) On the completion of the task or the achievement of the objective: When Notes
bailment of goods is made for a particular purpose and that purpose gets accomplished
then the bailment comes to an end.
Illustration:
Jaggu takes Manoj’s mobile to make a call. Once the call has been made the
bailment comes to an end and Jaggu has to return the mobile to Manoj.
(3) Inconsistent uses of goods by the bailee: When bailment is made and the
bailee does an act which is inconsistent with the terms of contract then the bailor can
terminate the contract.
Illustration:
Rustam borrowed Kavi’s Car to go to Dehradun but instead he took the car to Kanpur.
Hence Kavi terminates the contract because of inconsistent usage of the good borrowed.
(4) Destruction of the subject matter: When the subject matter of the contract
gets destroyed or becomes incapable of being used for the purpose of bailment then the
bailment ends.
Illustration:
Mr Arora gave his shirts and trousers for dry-cleaning at the dry cleaning shop. The
same night there was fire in the shop and the shirt and trousers of Mr Arora. Hence the
contract of bailment came to an end.
(5) Gratuitous Bailment: It can be terminated anytime subject to conditions laid
down in section 159 (please see page 8 for more on Gratuitous Bailment in this lesson
above).
(6) Death of the bailor/bailee: In case any of the parties to the contract of bailment
expires the contract terminates.
Illustration:
Geeta had given her saree to Sangita for doing some embroidery work on the border
of the saree. Sangita met with an accident and died the next day. Hence the contract
of bailment came to an end.
4.5 Finder of Lost Goods

According to section 71, a person who find goods belonging to another and takes
them into his custody, is subject to the same responsibility as a bailee. Since the position
of the finder of the goods is that of a bailee he is supposed to take the same amount
of care with regard to the goods as is expected of a bailee under section 151. He is also
subject to all the duties of a bailee, including a duty to return the goods after the true
owner is found. If he refuses to return, he could be made liable for conversion.
Rights of Finder of Goods
Section 168 and 169 confer certain rights on the finder of goods.
Section 168 – May Sue For Specific Reward Offered
The finder of goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred by him to preserve the goods and to find out the owner but
he may retain the goods against the owner until he receives such compensation and where

Notes the owner has offered a specific reward for the return of goods lost, the finder may sue
for such reward and may retain the goods until he receives it.
Right of Lien
According to section 168, a finder of goods has no right to sue the owner for trouble
and expenses voluntarily incurred by him to preserve the goods and to find the owner.
He has, however, the right of particular lien in respect of those goods. He may retain the
goods against the owner until he receives compensation for trouble and expense voluntarily
incurred by him to preserve the goods and to find the owner
Right of Claiming the Reward, If Announced By the Owner
It has been noted above that the finder has the right to retain the goods until he
Is paid compensation for trouble and expense voluntarily incurred by him to preserve the
goods and find the owner. In addition to that, where the owner has offered a specific reward
for the return of goods lost the finder may sue for such reward and also may retain the
goods until he receives it.
If the goods have already been found voluntarily and then the owner of the goods
promises to compensate the finder for his past voluntary services, the contract is binding
and the owner is bound to pay the promised amount.
Section 169 – when finder of thing commonly on sale may sell it:
When a thing which is commonly the subject of sale is lost, if the owner cannot
with reasonable diligence be found, or if he refuses upon demand, to pay the lawful charge
of the finder, finder may sell it –
When the thing is in danger of perishing or losing the greater part of its value,
When the lawful charge of the finder, in respect of the thing found amount to two-
third of its value.
Right to Sell the Goods Found (Sec.169)
The finder of the goods has also been given the right to sell the goods found by
him under certain circumstances mentioned in section 169. Such a right is available to
the finder of the lost goods when the following conditions are satisfied:
If the owner of the goods cannot be found; or if he refuses to pay the lawful charges
of the finder, and
When the good is in danger of perishing its value; or when the lawful charges of
the founder in respect of the thing found amount to two-third of its value.
Duties of Finder of Any Lost Goods
If a person finds any lost goods he does not become the actual of those goods.
He, in fact, becomes a special kind of bailee in the sense that he has to take care of
the goods until the actual owner of the goods is found. Thus he possesses same duties
towards the lost goods as of a bailee, and therefore finder’s position has been considered
along with bailment. A finder of the lost goods has to observe following duties towards
the goods he possesses:
Duty to take reasonable care of goods (section 151 & 152)
According to Section 151, the finder of goods should take such care of the goods
as a man of ordinary prudence would take of his own goods. If he fails to act like an
ordinary prudent man, he cannot be excused by pleading that he had taken similar care

of his own goods also, and his goods have also been lost and damaged along with those Notes
of the ordinary prudent man.
According to section 152, the finder of goods in the absence of any special contract,
is not responsible for the loss, destruction or deterioration of the goods, if he has taken
the amount of care of it described on section 151.
Duty not to make unauthorized use of goods (section 153 & 154)
According to section 153, termination of bailment by finder of good’s act inconsistent
with conditions: a contract of bailment is voidable at the option of the actual owner, if
the finder of goods make any unauthorized use of the goods found inconsistent with the
condition of the bailment.
According to section 154, liability of finder of goods making unauthorized use of goods
bailed: if the finder of goods makes any use of the goods found, which is not according
to the conditions of the bailment, he is liable to make compensation to the owner of goods
for any damage arising to the goods from or during such use of them.
Duty not to mix goods (section 155 – 157)
According to Section 155, effect of mixture with owner’s consent, of this goods with
finder of good’s: if the finder of goods, with consent of the owner, mixes the goods of
the owner with his own goods, the owner and the finder of goods must shall have an interest
in proportion to their respective shares, in the mixture thus produced.
According to section 156, effect of mixture without owner’s consent when the goods
can be separated: when the goods mixed can be separated, the finder and the owner
will remain the possessor of their respective shares. But the finder of goods is bound to
bear the expense of separation, and any damage arising from the mixture.
According to section 157, effect of mixture, without owner’s consent when the goods
cannot be separated: in case, the nature of the goods is such that the owner’s cannot
be separated from those of the finder’s good, it is deemed to be loss of goods and the
owner cannot recover compensation for the same from the finder of goods.
Duty to return goods (section 160 & 161)
According to section 160, return of goods found on expiration of time period: it is
the duty of the finder of the goods to return or deliver the goods found to the true owner
as per his directions before the expiration of the time period specified by him.
According to section 161, finder of goods responsibility when the goods are not duly
returned: if by the default of the finder of goods, the goods are not returned or delivered
at the proper time, he is responsible to the loss or destruction of goods from that time.
4.6 Pledge or Pawn
Pledge
According to Section 172 of the Contract Act, when goods are bailed as security
for the payment of a debt, or performance of a promise, the bailment is a pledge. If the
pawnor (the bailor in a pledge) defaults payment or performance of their promise, the
Pawnee (the bailee in a pledge) may either sue the pawnor or sell the goods pledged
after giving reasonable notice to the pawnor. If the proceeds from the sale are less than
the amount due to the Pawnee, the pawnor will still be liable to pay the remaining amount,
but where the proceeds exceed the amount due; the Pawnee must return the surplus to
the pawnor.
Notes Illustration:
A, a Pawnee has only the special property in the goods pledged, that is, the right
of retainer of the goods as security; in case of default, A must either bring a suit against
B, the pawnor or sell the goods after giving reasonable notice.
Pawn or Pledge is a bailment of goods by a debtor to his creditor, to be kept till
the debt is discharged. A mortgage of goods is in the Common Law distinguishable from
a mere pledge or pawn. By a mortgage the whole legal title passes conditionally to the
mortgagee; and if the goods be not redeemed at the stipulated time, the title becomes
absolute at law although equity allows a redemption. But in a pledge, a special property
only passes to the pledgee, the general property remaining in the pledgor. Also, in the
case of a pledge, the right of a pledgee is not consummated, except by possession; and,
ordinarily, when that possession is relinquished, the right of the pledgee is extinguished
or waived. But, in the case of a mortgage of personal property the right of property passes
by the conveyance to the mortgagee, and the possession is not or may not be essential
to create or support the title. As to things which may be the subject of pawn: These are,
ordinarily, goods and chattels; but money, debts, negotiable instruments, choses in action,
and indeed any other valuable things of a personal nature, such as patent-rights and
manuscripts, may by the Common Law be delivered in pledge. It is not indispensable that
the pledge should belong to the pledgor; it is sufficient if it is pledged with the consent
of them owner. By the pledge of a thing, not only the thing itself is pledged, but also,
as accessory, the natural increase thereof. If the pledgor have only a limited title to the
thing, as for life or for years, he may still pawn it to the extent of his title; but when that
expires, the pledgee must surrender it to the person who succeeds to the ownership.
It is of the essence of the contract that there should be an actual delivery of the
thing to the pledgee; for until delivery, the whole contract is executory, however strong
may be the engagement to deliver it; and the pledgee acquires no right of property in it.
But there need not be an actual manual delivery, as it is sufficient if there are any of
those acts or circumstances which, in construction of law, are deemed sufficient to pass
the possession of property, as the key of a warehouse. As possession is necessary to
complete the title, so by the Common Law the title determines if the pledgee lose the
thing pledged, or deliver it back to the pledgor unless for a temporary or special purpose.
It is also of the essence of the contract that the thing should be delivered as a security
for some debt or engagement. It may be delivered as security for a future debt or
engagement, as well as for a past debt; for one or for many debts and engagements;
upon condition or absolutely; for a limited time or for an indefinite period. It may also be
implied from circumstances, as well as arise by express agreement, and it matters not
what is the nature of the debt or the engagement. The pledge is understood to be a security
for the whole and for every part of the debt or engagement.
As to the pledgee or pawnee's rights and duties: The pawnee acquires, in virtue of
the pawn, a special property in the thing, and is entitled to the exclusive possession of
it during the time and for the objects for which it is pledged. The pledgee has a right to
sell the pledge, when the pledgor fails to perform his engagement. He might have filed
a bill in equity against the pledgor for a sale, or he may proceed to sell ex mero motu,
upon giving due notice of his intention to the pledgor. If several things be pledged, each
is deemed liable for the whole debt or engagement; and the pledgee may proceed to sell
them from time to time, until the debt or other claim be completely discharged. The
possession of the pawn does not suspend the right to sue for the whole debt or other
engagement without selling the pawn, for it is only a collateral security.
A pawnee cannot become the purchaser at the sale. A pledgee cannot alienate the
property absolutely, nor beyond the title actually possessed by him, unless in special
cases. He may deliver the pawn into the hands of a stranger for safe custody, without Notes
consideration; for he may sell or assign all his interest in the pawn, or he may convey
the same interest conditionally, by way of pawn, to another person, without destroying
or invalidating his security.
The following rules elucidate the principles as to the pawnee's title to use the pawn:
(1) If the pawn is of such a nature that the due preservation of it requires some
use, there such use is not only justifiable, but it is indispensable to the faithful
discharge of the duty of the pawnee.
(2) If the pawn is of such a nature that it will be worse for the use, such, for instance,
as clothes, the use is prohibited to the pawnee.
(3) If the pawn is of such a nature that the keeping is a charge to the pawnee,
as a cow or horse, there the pawnee may milk the cow and use the milk, and
ride the horse by way of recompense for the keeping.
(4) If the use will be beneficial to the pawn, or it is indifferent there it seems that
the pawnee may use it.
(5) If the use will be without any injury, and yet the pawn will thereby be exposed
to extraordinary perils, there the use is impliedly interdicted.
The pawnee is liable for ordinary neglect in keeping the pawn. He must return the
pledge and its increments, if any, after the debt or other duty has been discharged. He
must render a due account of all the income, profits, and advantages derived by him from
the pledge, in all cases where such an account is within the scope of the bailment. As
to the pledgor's rights and duties:- If the pledge is conveyed by way of mortgage, so that
the legal title passes unless the pledge is redeemed at the stipulated time, the title of
the pledgee becomes absolute at law; and the pledgor has only an equitable right to
redeem. If, however, it be a mere pledge, as the pledgor has never parted with the general
title, he may, at law, redeem, notwithstanding he has not strictly complied with the
condition of his contract. If, when the pledgor applies to redeem, the pledge has been
sold by the pledgee without any proper notice to the former, no tender of the debt due
need be made before bringing an action therefor: for the party has incapacitated himself
to comply with his contract to return the pawn. Subject to the pledgee's right, the owner
has a right to sell or assign his property in the pawn. As the general property of goods
pawned remains in the pawnor, and the pawnee has a special property only, either may
maintain an action against a stranger for any injury done to it, or for any conversion of
it. Goods pawned are not liable to be taken in execution in an action against the pawnor,
at least, not unless the bailment is terminated by payment of the debt, or by some other
extinguishment of the pawnee a title, except in case of the Crown, and then subject to
the pawnee's right. By the act of pawning, the pawnor enters into an implied engagement
of warranty that he is the owner of the property pawned. The pawnor is responsible for
all frauds, not only in the title but in the concoction of the contract. The pawnor must
reimburseto the pawnee all expenses and charges which have been necessarily incurred
by the latter in the preservation of the pawn, even though by some subsequent accident
these expenses and charges may not have secured any permanent benefit to the pawnor.
The contract of pledge is put an end to or extinguished:-
(1) By the full payment of the debt, or the discharge of the other engagements for
which the pledge was given;
(2) By the satisfaction of the debt in any other mode, either in fact or by operation
of law; as, for instance, by receiving other goods in payment or discharge of
the debt;

Notes (3) By taking a higher or different security for the debt, without any agreement that
the pledge shall be retained therefor (this is called a novation in the Roman
Law);
(4) By extinguishing the debt, which also extinguishes the right to pledge;
(5) By the things perishing.
Pledge by Mercantile Agent
Where a mercantile agent is, with the consent of the owner, in possession of goods
or the documents of title to goods, any pledge made by him, when acting in the ordinary
course of business of a mercantile agent, shall be as valid as if he were expressly
authorized by the owner of the goods to make the same; provided that the pawnee acts
in good faith and has not at the time of the pledge notice that the pawnor has no authority
to pledge.
Explanation: In this section, the expression "mercantile agent " and "documents of
title" shall have the meanings assigned to them in the Indian Sale of Goods Act, 1930
(3 of 1930).
Pledge by person in possession under voidable contract
When the pawnor has obtained possession of other goods pledged by him under
a contract voidable under section 19 or section 19A, but the contract has not been
rescinded at the time of the pledge, the Pawnee acquires a goods title to the goods,
provided he acts in good faith and without notice of the pawnor's defect of title.
Where person pledges goods in which he has only a limited interest, the pledge
is valid to the extent of that interest.
4.7 Pledge by Non-owners

It is only the owner of goods who has the power and authority to pledge the goods,
but in some cases even the non-owners can pledge the goods. The cases where the non-
owners can pledge the goods are the following:
1. Mercantile Agent
In this case the agent has a right to pledge the goods in the ordinary course of
business with the consent of the owner.
Illustration:
Sudhir was an agent of Yogendra who was a manufacturer of readymade garments.
Yogendra had a shortage of working capital due to bad debts therefore Sudhir took a loan
of rupees fifty thousand from Devendra and kept as security a hundred suits worth rupees
thousand each with Devendra for a period of six months.
2. Pledge by seller or buyer in possession after sale
There are two situations in this. In the first situation the seller is left with possession
of goods after sale has been made. In the second situation the buyer obtains possession
of goods with the consent of the seller before the sale has been made. According to section
30 of the Sale of Goods Act 1930, in both the situations the respective possessors of
goods have the right to pledge the goods provided the Pawnee or the Pledgee acts in

good faith and has no notice of the previous sale of goods to the buyer or of the lien Notes
of the seller over the goods.
Illustration:
Simran bought (paid full money) a television set from a shop but did not take it with
her as she was shifting to a new house and so wanted the seller to send the set after
two days into her new house. Later that day the seller took money on loan from his friend
and pledged the sold television set to him.
Simran wanted to buy a television set on easy installments. She took the televison
set home and promised the seller to pay the balance in twenty monthly installments. The
very next day Simran took money on loan and pledged the television set to the creditor.
3. Pledge where Pawnor has limited interest
According to section 179 of the Indian Contract Act, “where a person pledges goods
in which he / she have limited interest, the pledge is valid to the extent of that interest.
A person having a lien over the goods or a finder of goods may pledge them to the extent
of his /her interest”.
Illustration:
Margaret found a wristwatch lying on the road and could not find the owner of the
watch. She took the watch home and because it was not working, she got it repaired
for rupees two hundred. After a couple of days she took some money from a friend on
loan and pledged the watch with her. The pledge was valid to the extent of Margaret’s
interest in the watch, namely rupees two hundred.
A delivers a suit length to B, the tailor, for making a suit and agrees to pay Rs.
1500 as sewing charges. After stitching the suit, B pledges it to C for Rs. 3000. The pledge
is valid to the extent of B’s interest in the suit, namely Rs. 1500. A can recover the suit
only by paying Rs. 1500 to C, the pledgee.
4 Pledge by co-owner in possession
Where the goods belong to more than one owner, one of the several co-owners of
goods who is in possession of the goods with the consent of the other owners has a
right to create a valid pledge of the goods.
Two sisters Reena and Susmita were gifted a car by their father. Reena was in need
of money so she went to a moneylender and took a loan of five lakh and pledged the
car to the creditor with the consent of her sister.
5. Pledge by person in possession under voidable contract
According to section 178-A, “if a person obtains possession of goods under a voidable
contract, the pledge created by him / her is valid provided:
(1) The contract has not been rescinded before the contract of pledge
(2) The Pawnee acts in good faith and has no knowledge about the defective title
of the Pawnor”.
Illustration:
Sita purchased a necklace worth rupees one lakh from a jeweler and paid cash. Later
the jeweler found that the cash consisted of fake notes. Meanwhile Sita went to a
moneylender and took a loan of rupees two lakh and pledged the necklace to him. As
the jeweler had not rescinded the contract before the contract of pledge was entered into
Notes and also as the moneylender was unaware of the fraud and took the necklace as a security
in good faith, the contract of pledge was a valid contract.
4.8 Pledgor and Pledgee

The relationship between banker and customer can be that of Pledgee and Pledger
as well. This happens when a customer pledges (promises) certain assets or security
with the banker in order to get a loan. In this case, the customer becomes the Pledger
and the banker becomes the Pledgee. Under this agreement, the assets or security will
remain with the banker until the customer repays the loan.
Rights and duties of the pawner
Right to receive goods till sole (Sec. 177). If a time is tipulated for the payment of
the debt or performance of the promise, for which the pledge is made, and the pawnor
makes default in the payment of the debt or the performance of the promise at the
stipulated time he may redeem the goods pledged at any subsequent time, before their
actual sale of them, but he must in that case pay, in addition, any expenses which might
have arisen from his default.
Rights and duties of the pawnee
1. Right to receive payment of the debt or to obtain the performance of promise
with interest and expense(Sec. 173). Pawnee has a right to retain possession
on the goods pledged till he obtains payment of his debt interest on that debt
and all other necessary expenses which he might have incurred for the
preservation of the goods pledged or in respect, of his possession.
2. Right of Particular lien (Sec. 174). Pawnee has no right to retain his possession
over the goods pledged for any debt or promise other than the debt or promise
for which they were pledged unless otherwise provided for, by a contract.
3. Right to receive extraordinary expenses (Sec. 175). Pawnee is also entitled to
receive from the pawnor any extraordinary expenses which he might have
incurred for the preservation of the goods pledged.
4. Pawnee’s right in case of default of the pawnor (Sec. 176). In the case of default
by the pawnor in the payment of debt or the performance of promise at the
stipulated time or on demand or within reasonable time, the pawnee can
exercise the following two rights:
(a) He has a right to bring a suit on the debt or promise and can retain the
goods pledged as a collateral security.
(b) He has also a right to sell the goods pledged after giving reasonable notice
of sale to the pawnor.
He has a right to claim any deficit arising from the sale of the goods
pledged from the pawnor. He will have to return to the pawnor any excess
obtained by the sale of goods pledged beyond the amount necessary
to pay the debt and other expenses due.
5. Pawnee must not use the goods pledged. He must not use goods pledge unless
they are such as will not deteriorate by wear.
Besides the above rights and duties, all other rights and duties of the bailor and bailee
apply equally to pawnor and the pawnee.

4.9 Summary Notes

A bailment is the delivery of the goods by one person to another for some purpose
upon a contract that they shall when the purpose is accomplished be returned or otherwise
disposed of according to the direction of the person delivering them. Bailment means to
deliver or to hand over change of possession of goods for some specific purpose is the
essence of delivery. Bailment constitutes delivery of possession of goods for some specific
purpose. Delivery of goods is upon a contract between the bailor and bailee. However a
person already in possession of the goods may become a bailee by a subsequent
agreement express or implied. A finder of goods has been held to be a bailee irrespective
an any contract therefore an obligation of bailee also arises without a contract change
of possession of goods by delivery by person to another must be for a temporary period.
Mere custody of goods without parting with its possession does not constitute bailment.
Bailment involves change of possession, constructive and symbolic delivery may be made
by doing anything which has the effect of putting the goods in the possession of the
intended bailee or of any person authorized to hold them on his behalf (sec 144) delivers
of documents delivery of bill of exchange delivers of railway receipt.
Goods given to a friend or anyone else to be used by he without any reward or
remuneration or consideration is called a gratuitous bailment.
The bailment of goods as security for payment of debt or performance of promises
is called pledge. The bailor in this case is called the promisor. Pledge is therefore a kind
of bailment. Any kind of movable property can be pledged by actual or constructive delivery.
Where a person pledges the goods in which he has only a limited interest the pledge
is valid to the extent of that interest. Delivery of document of title to the goods which
would enable the pawnee to obtain possession thereof. A bailment relates to specific
moveable property of which delivery has been given by one person to another for a specific
purpose. A pledge is much more valuables fight than a mere lien the difference lies in
that in a lien they is no power of sale or deposition of the goods. A pledge is something
between a simple lien and a mortgage. In the case of a lien there is no transfer of any
interest. In the case of a mortgage has an absolute interest in the property subject to
a right of redemption ordinary goods may be pledged by the owner of the goods. The seller
left in possession of the goods after sale and the buyer to whom possession of the goods
after sale and the buyer to whom possession of the goods has been delivered before sale.

1. A ______ is the delivery of the goods by one person to another for some purpose.
2. The person delivering the goods is called the ______________.
3. The person to whom they are delivered is called the ______________.
4. The transaction is called ______________.
5. The transaction is called bailment under section ______________.
6. Bailment means to ______________ or to ______________ over.
II. True or False

1. The bailment of goods as security for payment of a debt or performance of a
promise is called bailment.
2. The bailor in pledge case is called pawnor.
Notes 3. The bailee is called the pawnee under section 172.

4. Any kind of movable property can be pledge by actual or constructive delivery.
5. Where a person pledges the goods in which he has only a limited interest the
pledge is valid to the extent of that interest.

1. The delivery of the goods by one person to another for some purpose upon a
contract is called…………………..
[a] Transformation
[b] Courier services
[c] Bailment
[d] None of these
2. The person delivering the goods is called…………………
[a] Transformer
[b] Bailor
[c] Service provider
[d] Both b and c
3. The person to whom they are delivered is called…………….
[a] Seller
[b] Buyer
[c] Both a and b
[d] Bailee
4. Bailment means…………………
[a] To deliver
[b] Handover
[c] Both a and b
[d] None of these
5. Which section defines bailment?
[a] Sec 146
[b] Sec 148
[c] Sec 150
[d] None of these
6. ‘A’ delivers cloth piece to ‘B’, a tailor, to be switched into a suit it’s called……….
[a] Agreement
[b] Relationship
[c] Contract
[d] Bailment
1. What is Bailment?
2. Who is Bailor?
3. Who is Bailee? Notes

4. What is Termination of Bailment?
5. What is Pledge?
6. What is Pawn?
7. Who is Pledgor?

1. Discuss in details about Bailment.
2. Explain the kinds of bailment.
3. Discuss relationship between Bailor and Bailee.
4. Explain about Termination of Bailment.
5. Discuss about Finder of Lost Goods.
6. Explain about Pledge or Pawn.
7. Discuss about Pledge by Non-owners.
8. Explain relationship between Pledgor and Pledge.
4.12 Key Terms

z Bailment: According to Section 148 of the Contract Act, “A bailment is the
delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person delivering them”.
z Gratuitous Bailment: A bailment with no considerations is called a gratuitous
bailment. In this kind of bailment neither the bailor, nor the bailee is entitled
to any remuneration or reward. Such a bailment may be for the exclusive benefit
of either party, i.e., the bailor or the bailee, discussed as below.
z Non-Gratuitous Bailment: Contrary to gratuitous bailment, a non-gratuitous
bailment or bailment for reward is one that involves some consideration passing
between the bailor and the bailee. Obviously in this case the delivery of goods
takes place for the mutual benefit of both the parties.
z Bailment: A "bailment" is the delivery of goods by one person to another for
some purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions
of the person delivering them.
z Bailor and Bailee: The person delivering the goods is called the "bailor". The
person to whom they are delivered is called the "bailee".
z Contracts of Bailment: Section 148 of the Contract Act defines bailment as
the delivery of goods by one person to another person for some purpose, upon
a contract that they will either return those goods or dispose of the goods
according to the instructions of the person who delivered the goods when the
purpose is accomplished. The person who hands over the goods is the bailor
and the person who receives the goods is the bailee.
z Bailee's particular lien: Where the bailee has, in accordance with the purpose
of the bailment, rendered any service involving the exercise of labour or skill
in respect of the goods bailed he has in the absence of a contract to the contrary,
a right to retain such goods until he receives due remuneration for the services
he has rendered in respect of them.

Notes z Termination of Bailment: Termination means the end of a contract or a

discharge of a contract. The contract of bailment can be discharged in the ways
on the expiry of the period: When the bailment of good is made for a specific
period and that period expires then the bailment also comes to an end.
z Finder of Lost Goods: According to section 71, a person who find goods
belonging to another and takes them into his custody, is subject to the same
responsibility as a bailee.
z Right of Lien: According to section 168, a finder of goods has no right to sue
the owner for trouble and expenses voluntarily incurred by him to preserve the
goods and to find the owner. He has, however, the right of particular lien in
respect of those goods. He may retain the goods against the owner until he
receives compensation for trouble and expense voluntarily incurred by him to
preserve the goods and to find the owner
z Pledge: According to Section 172 of the Contract Act, when goods are bailed
as security for the payment of a debt, or performance of a promise, the bailment
is a pledge. If the pawnor (the bailor in a pledge) defaults payment or performance
of their promise, the Pawnee (the bailee in a pledge) may either sue the pawnor
or sell the goods pledged after giving reasonable notice to the pawnor.
z Pledgor and Pledgee: The relationship between banker and customer can be
that of Pledgee and Pledger as well. This happens when a customer pledges
(promises) certain assets or security with the banker in order to get a loan.
In this case, the customer becomes the Pledger and the banker becomes the
Pledgee. Under this agreement, the assets or security will remain with the
banker until the customer repays the loan.

1. Bailment
2. Bailer
3. Bailee
4. Bailment
5. 148
6. Deliver, Hand
II. True or False

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

1. [c] 2. [b]
3. [d] 4. [c]
5. [b] 6. [d]

4.14 Case Study Notes

Dunlop Pneumatic Tyre Co Ltd vs. Selfridge & Co
Dunlop made tyres. It did not want them sold cheaply but to maintain a standard
resale price. It agreed with its dealersnot to sell them below its recommended retail price.
It also bargained for dealers to get the same undertaking from their retailers (in this case,
Selfridge). If retailers did sell below the list price, they would have to pay £5 per tyre in
liquidated damages to Dunlop. Dunlop thus was a third party to a contract between
Selfridge and Dew. When Selfridge sold the tyres at below the agreed price, Dunlop sued
to enforce the contract by injunction and claimed damages. Selfridge argued that Dunlop
could not enforce the burden of a contract between Dunlop and Dew, which Selfridge had
not agreed to.
The doctrine of privity of contract can be best illustrated by English case Dunlop
Pneumatic Tyre Co Ltd vs Selfridge & Co. As per the facts of the case, Dunlop & Co
sold some tyre to one dew & co with an agreement that these tyres will not be sold below
the list price. Dew & Co in turn sold some of the tyres to selfridge& co with an agreement
that they will observe conditions as to the Price and They also promised that they will
pay to the Dunlop & Co a sum of Rs. 500 for every tyre sold below the list price. Selfridge
sold some tyres below the list price and the Dunlop & Co brought an action to recover
the damages for the same. Held that Dunlop & Co cannot bring an action against Selfridge
because there was not contract between the two.
Questions:
1. Do you think the the doctrine of privity of contract by English case Dunlop
Pneumatic Tyre Co Ltd vs Selfridge & Co. are valid as per the facts of the case?
2. How do you justify the facts of this case?

4.16 Bibliography
Press.

Notes 2. Anson, W.R., “Principles of the English Law of Contract and of Agency in its
Kluwer Law Intl
Press.
Pearson.
±±±±

Contract of Agency 89
Notes
Unit 5: Contract of Agency
Structure:
5.1 Introduction
5.2 Agent and Agency
5.3 Kinds of Agencies
5.4 Classification of Agents
5.5 Duties and Rights of Agents
5.6 Principal’s Duties to the Agent and his Liability to Third Parties
5.7 Personal Liability of Agent
5.8 Termination of Agency
5.9 Power of Attorney
5.10 Summary
5.13 Key Terms
5.15 Case Study
5.17 Bibliography
Objectives

z Concept of Agent and Agency
z Agent and Agency
z Concept of Agency
z Kinds of Agencies
z Classification of Agents
z Duties and Rights of Agents
z Principal’s Duties to the Agent and his Liability to Third Parties
z Personal Liability of Agent
z Termination of Agency
z Power of Attorney


An agent is a person employed to do any act on behalf of or torepresent another
in dealings with third persons. The personemploying the agent is referred to as the
principal, and the contractbetween the agent and the principal is one of agency.
Theunderlying doctrine of agency is that persons who do an act throughanother are deemed
to do it themselves.
The distinction between an agent and a servant or employee is that,in the case of
an agent the principal merely directs what must bedone whereas in the case of employees,
the employer also directs how it is to be done.
Section 226 of the Contract Act clearly states that contracts enteredinto through
an agent, and obligations arising from acts done by anagent, may be enforced in the same
manner, and will have thesame legal effects as if the contracts had been entered into,
and theacts done, by the principal in person.
Illustration: P appoints Q as an agent. Q borrows some money fromR on P’s behalf.
P is bound to repay the loan to R.
Duties of an Agent
Section 211 of the Contract Act mandates that an agent mustconduct the principal’s
business according to the principal’sinstructions, or, if there are no such instructions,
according to theprevailing custom in doing business of the same kind at the placewhere
the agent conducts business. If the agent acts otherwise, theagent must make good to
the principal any loss that is sustained,and if there is profit, the agent must account for
it.
Illustration: A, the principal, instructs B, the agent, to buy somewheat and despatch
it by rail. B buys the wheat, but despatches it inan open truck, which is not the customary
practice for transportingwheat. The wheat is destroyed in a fire. B must make good the
loss that A suffered.
An agent must also conduct the business of the agency with suchskill as is generally
possessed by a person engaged in a similarbusiness, unless the principal had notice of
the agent’s lack of skill.
An agent must act with reasonable diligence using all the skill thatthe agent
possesses, and must compensate the principal for directconsequences of the agent’s
neglect, want of skill, or misconduct.
Illustration: A bank was asked to collect money on behalf of acustomer, and remit
it to the customer. The bank sent the money,about Rupees Thirty-four thousand, by draft,
by ordinary post. Thedraft was lost. As an agent, the bank was held to be negligent
insending such a large amount through ordinary post.
Section 213 of the Contract Act stipulates that an agent must renderproper accounts
to the principal on demand.
According to Sections 215 and 216 of the Contract Act, if agentsdeal, on their own
account, in the business of the agency withoutinforming the principal of all material
circumstances and withoutobtaining the principal’s consent, the principal can repudiate
thetransaction and recover any benefit the agent may have receivedfrom the transaction.
Illustration: P, an agent, sells some goods belonging to Q, theprincipal, to R. P
receives a commission from Q for this, but alsogets a return commission from R. P must
pay to Q the amount ofthe return commission, because it is a profit P made as an agent.
Rights of an Agent Notes

Section 217 of the Contract Act provides that an agent may retainany amount due
to the agent, be it for expenses incurred for theprincipal or as remuneration, from any
money received on behalf ofthe principal. In fact, Section 221 of the Contract Act goes
furtherand holds that where there is no contract to the contrary, an agentis entitled to
retain the principal’s goods, papers, and other property- both movable and immovable -
received by the agent, until theamounts due to the agent for commission, disbursements,
andservices rendered in course of the agency have been paid to theagent.
Illustration: A engages B as his agent to collect the rent due on A’sproperties. B
can retain the money collected as rent until B’sremuneration is paid.
Further, Section 222 of the Contract Act specifies that a principal isbound to
indemnify the agent against the consequences of all lawfulacts done by the agent in
exercise of the authority conferred uponthe agent.
Illustration: Parvez, at Singapore, under instructions from Obama ofCalcutta,
contracts with Manmohan to deliver certain goods to him.Obama does not send the goods
to Parvez, and Manmohan suesParvez for breach of contract. Parvez informs Obama of
the suit,who authorises him to defend the suit. Parvez defends the suit, andis compelled
to pay damages and costs, and incurs expenses.Obama is liable to Parvez for such
damages, costs and expenses.
Extent of agent's authority
An agent, having an authority to do an act, has authority to do every lawful thing

which is necessary in order to do such act.
An agent having an authority to carry on a business has authority to do every lawful
thing necessary for the purpose, or usually done in the course, of conducting such
business.
Illustrations:
(a) A is employed by B, residing in London, to recover at Bombay a debt due to
B. A may adopt any legal process necessary for the purpose of recovering the
debt and may give a valid discharge for the same.
(b) A constitutes B his agent to carry on his business of a shipbuilder. B may
purchase timber and other materials, and hire workmen, for the purpose of
carrying on the business.
When agent cannot delegate
An agent cannot lawfully employ another to perform acts which he has expressly
or impliedly undertaken to perform personally, unless by the ordinary custom of trade a
sub-agent may, or, from the nature of agency, a sub-agent must, be employed.
Agent's responsibility for sub-agent appointed without authority
Where an agent, without having authority to do so, has appointed a person to act
as a sub-agent, the agent stands towards such person in the relation of a principal to
an agent, and is responsible for his acts both to the principal and to third person; the
principal is not represented, by or responsible for the acts of the person so employed,
nor is that person responsible to the principal.

Notes Agent's duty in naming such person
In selecting such agent for his principal, an agent is bound to exercise the same
amount of discretion as a man of ordinary prudence would exercise in his own case; and,
if he does this, he is not responsible to the principal for the acts of negligence of the
agent so selected.
Illustrations:
(a) A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor
of good reputation to choose a ship for A. The surveyor makes the choice
negligently and the ship turns out to be unseaworthy and is lost. B is not, but
the surveyor is, responsible to A.
(b) A consigns goods to B, a merchant, for sale. B, in due course, employees an
auctioneer in good credit to sell the goods of A, and allows the auctioneer to
receive the proceeds of the sale. The auctioneer afterwards becomes insolvent
without having accounted for the proceeds. B is not responsible to A for the
proceeds.
Characteristics of Agency
Characteristics of Agency can be summarized as follows:

1. Agreement between Principal and Agent
It is important that there be an agreement as agency depends on agreement and
not necessarily on contract. A contract cannot be formed with a minor because an
agreement with a minor is void, but an agreement of agency with a minor is possible
because between the principal and the third person any person may be appointed as an
agent whether it be a minor or a person of unsound mind.
Illustration:
Rustam a shoe manufacturer appointed Kapil as his agent to sell shoes. Kapil was
just fifteen years old. Therefore the agreement between Kapil and Rustam is a void
agreement and cannot become a contract. However the agreement between them can
be treated as a contract of agency because in an agency the agent can be a minor.
2. Intention of the Agent to Act on Behalf of The Principal: For an agency to arise,
it is important that the person (agent) intends to act on behalf of another (principal).
Illustration:
Prabhu a builder appointed Sooga as his agent to sell houses. The agreement
between them can become a contract of agency only when Sooga gives his consent to
Prabhu to become his agent.It was held by the Court that it is only when one acts as
a representative of the other in business dealings so as to create contractual relations
between those other and third persons that one is an agent and there is an agency.
3. Whatever the Principal can do Personally he/she can do through his/her Agent
The agent can perform all those activities which the principal is liable to perform.
However the agent cannot perform acts which are personal in character or are annexed
to public office such as marriage and the duty of a magistrate.
Illustration:
Ramlal was going to get married, so he appointed Shambhu, his cousin as his agent
to look after his business and all other personal and business affairs. Shambhu had the

right to run the business on behalf of Ramlal but he did not have the right to marry on Notes
behalf of Ramlal.
4. He who does an act through another does it by himself/herself
The acts of an agent are the acts of the principal. The principal is liable to the third
party for the acts done by the agent.
Illustration:
Radheylal a creditor appointed Ramu as his agent to recover payments from his
debtors. Ramu was sent by Radheylal to recover rupees fifty thousand from, Sangeeta
a debtor. Ramu took rupees fifty thousand from Sangeeta and ran away with it. Hence
Radheylal cannot ask Sangeeta to pay the money again. However if Ramu is a major,
then Radheylal can take legal action against him.
5. No Consideration Required for Agency
According to section 185 of the Indian Contract Act no consideration is necessary
to create an agency. The fact that the principal has agreed to be represented by the agent
is a sufficient detriment to the principal to support the contract of agency.
Illustration:
Sangeeta had a headache so she asked her son to go to the market and get a tablet
of disprin. In this case the relation between the mother and son is that of a principal and
agent and for the service of getting a tablet of disprinSangeeta gave nothing in cash or
kind to her son. Thus there is a contract of agency without any consideration.
5.2 Agent and Agency
Agent
Agent is party that has express (oral or written) or implied authority to act for another
(the principal) so as to bring the principal into contractual relationships with other parties.
An agent is under the control (is obligated to) the principal, and (when acting within the
scope of authority delegated by the principal) binds the principal with his or her acts.
Additional powers are assigned to agent under the legal concept of 'apparent authority.'
The agent, however, does not have title to the principal's goods in his or her possession,
except where agent's lien is applicable. In general, advertising agencies do not fall under
this definition of an agent, because they act as principals for the services they buy on
behalf of their clients.
Types of Agents
(a) General agent: This is an agent who has the principal’s unlimited authority
to carry out contracts on behalf of the principal without recourse to the principal
on each and every point in a transaction.
(b) Agent of necessity: Here, the agency comes into being as a result of
circumstances. There is no formal appointment, express or otherwise. The agent
steps into the agency with a view to minimise damages or loss to the goods
of principal.
(c) Del Credere agent: This agent undertakes to guarantee the goods or indemnify
the principal for any losses arising from the agency transaction. In return for
this assurance, the agent receives an extra remuneration from the principal.

Notes (d) Factor: The basic feature of the agent is that the agent has possession of the
goods before sale. In this case, such an agent can sell in his/her own name
and may even pledge the goods as security to raise money in the name of the
principal.
(e) Special Agent: This is an agent who has been appointed to carry out only
a designated task. On completion of the task, the agency terminates. Example,
a polling agent.
(f) Broker: This is an agent who does not have possession of the goods at the
time of sale. The transaction concluded by such an agent on behalf of the
principal, nevertheless binds the principal.
Agency
Agency is the capacity of an actor to act in a given environment. The capacity to

act does not at first imply a specific moral dimension to the ability to make the choice
to act, and moral agency is therefore a distinct concept. In sociology, an agent is an
individual engaging with the social structure. Notably, though, the primacy of social
structure vs. individual capacity with regard to persons' actions is debated within sociology.
This debate concerns, at least partly, the level of reflexivity an agent may possess.
5.3 Kinds of Agencies

Various Kinds of Agencies are:
1. Seller's Broker
The seller's broker is also known as the seller's representative or listing agent. This
person works exclusively on behalf of the seller to find a buyer for the listed property.
The relationship is formed by an express written contract which provides that the seller's
broker is the only person authorized to sell the property. Once a sale is made, the broker
receives a percentage of the sale price as payment. If the broker knows information about
the property that would sway a potential buyer, he must disclose this information under
most state laws. The broker owes fiduciary duties to the seller, such as duty of loyalty
and full disclosure.
2. Sub-agent
A sub-agency involves a situation where a potential buyer would like to look at a
property and his regular agent is unavailable. A sub-agent will walk the buyer through the
property and provide him customer service as if he were his own client. The difference
is that a sub-agent is not permitted to provide the buyer with any information or disclosures
that could negatively impact the seller.
3. Buyer's Broker
A buyer's broker is in an agency relationship similar to that of the seller's broker,
only he is working directly with interested buyers looking for property. The buyer's broker
must disclose material information about a property that would likely interfere with the
buyer's use and enjoyment of the property. In Arizona, this refers to information about
the seller's likelihood not to sell, defects, liens or judgments on the property. The buyer's
broker communicates directly with a seller's broker if the buyer makes an offer and, in
most cases, is granted authority to negotiate on behalf of the buyers. Small business
owners looking to acquire property should contract with a buyer's broker with commercial
real estate experience as well as an understanding of the buyer's industry and needs.

4. Dual Agency Notes

Dual agency refers to a situation in which a broker represents both a seller and buyer
at the same time. This does not constitute a conflict of interest as long as both parties
are aware of and consent to the arrangement. The dual agent is required to keep information
about price, motivation or terms confidential unless expressly instructed to inform the other
party about this information.
5.4 Classification of Agents

There are different classifications of agents in an agency relationship. They are:
A. Classification on basis of extent of authority
1. Special Agents
A special agent is one who is appointed to perform a special act or represent his
principal in some particular transaction. He has limited authority. He has no authority to
bind the principal in respect of any other act than that for which he is employed.
For instance, if a person is employed to purchase a car, the authority of such a
person comes to an end as soon as he purchases a car. If he exceeds his authority,
the principal is not liable for such unauthorized acts.
For example, the principle may be travelling or living overseas or maybe in hospital
or have limited mobility. The power of attorney may be general or it may be limited to
a particular area, a particular purpose such as the sale of a particular property or a period
of time such as one year or until someone returns from overseas. Appointing an attorney
can give peace of mind for spouses or family members as they give each other power
of attorney in case of accident or absence. The power of attorney can be stopped like
any other agency appointment.
2. General Agents
A general agent is one who has authority to do all acts connected with a particular
trade, business or employment. For instance, if a person is placed as a manager, he
has authority to bind the principal for all his acts falling within the scope of the business
of managing the store. Such an authority of the agent is implied provided his acts are
within the limits of his apparent authority. It is immaterial if they are outside the scope
of his actual authority.
A manager of a branch shop of a firm or a commission agent is instances of general
agents. General agents have an implied authority to bind his principal by doing various
acts necessary for carrying on the business of his principal. Sufficiently wide powers are
vested in him to affect the business deals, enter into trade bargains, to make purchases
and also payments of the purchases, to receive money on behalf of his principal.
3. Universal Agents
A universal agent is one who enjoys unlimited authority to do all such acts as could
be delegated, and which the principal himself could lawfully perform. An agent of this type
is usually appointed by a businessman who is still legally competent to appoint an agent,
but owing to his physical condition, wants to retire by giving a blanket power of attorney
to the agent to do anything that has to be done while he is in the service.
When a person leaves his country for a long time, he may appoint his son, wife
or friend as his universal agent to act on his behalf in his absence.

Notes B. Classification According to Functions Performed by the Agent

1. Broker: This is an agent that is engaged to negotiate for the sale or purchase
of a property for a commission known as brokerage. However, a broker doesn’t
have possession of the goods.
2. Factor: This is an agent that has been engaged to sell or deal with goods that
have been consigned to him by his principal. He is usually entrusted with the
possession of the goods.
3. Estate Agent: These are agents used by real estate owners or land speculators
in order to buy and sell landed property. They do this in exchange for an estate
commission.
4. Bankers: Banks serve as the agent of account holders in a limited sense. In
the instance of a cheque, the account holder is the principal; the bank is the
agent while the payee is the third party.
5. Auctioneers: An auctioneer is also an agent of the owner of the goods. An
auctioneer is the person that conducts the auction on behalf of the owner. He
may or may not have possession of the goods being sold.
5.5 Duties and Rights of Agents

Duties of Agents
a) Agent should follow the instructions given by the principal.
b) If agent comes across any complicated situation, he has to communicate that
situation to principal and his advice is to be obtained.
c) Agent should behave in his capacity as agent, he should not run the transaction
in his own name.
d) Agent should not make secret profits by utilizing reputation of the principal.
e) Agent should safe guard property of principal particularly upon happening of
events like death of principal, insolvency of principal, etc.
f) Agent should maintain proper accounting records to enrol the transactions run
by him. Agent has to remit amounts to principal properly.
g) Agent has to remit amounts to principal properly.
h) Agent should not carry on delegation.
Rights of Agents
a) Right of Retainer: Agent has right to deduct the amount which is due to him
by principal, from amount payable to principal.
b) Right of stoppage in transit: In case where agent is personally liable, he has
right to stop the goods in transit. The good may be moving towards customer
or principal.
c) Right to claim Remuneration: As per the terms of agency contract, agent
has rights to claim remuneration.
d) Right of Indemnity: Principle of indemnity gets operated between principal and
agent where principal is implied indemnifier and agent is implied indemnity
holder. So agent can make principal answerable for all types of sufferings.
e) Right of lien: Agent can exercise right of lien but contract act has not specified
whether it is general lien or particular lien. Therefore the nature of agent’s lien
depends upon mutual understanding.

5.6 Principal’s Duties to the Agent and his Liability to Third Parties Notes
Similar to the above duties, there are also certain duties that the principal owes to
his agent. While these duties are not as concrete nor so distinctly spelled out by state
statutes, the duties are important in determining the rights of the agent when the principal
fails to live up to obligations created by the agency relationship. These duties are:
1. Performance
Performance is normally considered to be an agent’s obligation; however, the
principal is expected to do whatever can be done reasonably to accomplish the purpose
of the agency.
2. Compensation
Compensation is normally specified in the listing agreement or employment contract.
Although the receipt of compensation is usually contingent on the closing of the sale or
lease, in most real estate transactions the agent has earned his or her fee when he or
she has produced a ready, willing and able buyer (usually evidenced by the signing of
the purchase contract or lease). The earned fee is usually payable only upon the closing
of the transaction. Nonetheless, compensation arrangements are negotiable and can take
several forms.
3. Reimbursement
Reimbursement implies that the principal must reimburse the agent for expenses
made on the principal’s behalf. This does not mean that the principal has to reimburse
the agent for the costs of advertising, entertainment and other costs of doing business.
An example of reimbursable expenses may include the situation involving an absentee
landlord or seller if the agent is required to perform minor repairs and incur other small
expenses in order to keep the property in good condition. When these expenses are made
in good faith and within the scope of the agent’s authority, the agent is entitled to
reimbursement from the principal for funds expended on the principal’s behalf.
4. Indemnification
Indemnification is becoming more important for the agent. This duty arises when the
agent suffers a loss through no fault of his or her own while performing duties on behalf
of the principal. An example is a broker making an innocent misrepresentation in
performing acts on behalf of the principal. As previously discussed, the agent is almost
always liable if the agent makes a misrepresentation to a third party. However, if the broker
relied on a representation made by the principal, the agent may be reimbursed for losses
because of the principal’s misrepresentation. This often includes concealed defects and
representation regarding the quality and condition of the property.
5.7 Personal Liability of Agent

An agent is not personally liable for the contracts entered into by him on behalf of
his principal unless there is a contract to the contrary. Such a contract is presumed in
the following circumstances:
1. Where the Agent Acts for a Foreign Principal: When an agent contracts
for the sale or purchase of goods for the principal residing abroad, the agent
is personally liable for such contracts. However, the agent can exclude his
personal liability by expressly providing in the contract not to incur personal
liability.

Notes 2. Where the Agent Acts for an Undisclosed Principal: Where the agent acts
for an undisclosed principal, he is personally liable on the contracts. But where
the agent discloses that he is only an agent or the third party knows that he
is acting as an agent of another, then the agent is not personally liable.
3. Where the Agent Acts for an Incompetent Principal: When the agent
contracts for a principal who is not competent to contract such as minors,
persons of unsound mind etc., the agent is personally liable on the contracts.
4. Where the Agent Acts for a Non-existing Principal: Where the agent acts
for a principal who is non-existent, the agent is personally liable on the contracts.
For instance, the promoters, contracting on behalf of the company, which is
yet to be incorporated, are personally liable.
5. Where the Agent’s Authority is coupled with Interest: Where an agent has
an interest in the subject-matter of the contract, his agency is said to be coupled
with interest. In such a case, the agent is personally liable to the extent of his
interest in the contract. He can also enforce the contract to the extent of his
own interest.
6. Where an Agent Receives or Pays Money by Mistake or Fraud: Where
an agent receives some money from a third party by mistake or fraud, he is
personally liable to the third person for the refund of such money. Likewise,
if he pays some money to a third party by mistake or fraud, he can recover
it back from the person to whom it has been paid.
5.8 Termination of Agency

An agency is terminated by the principal revoking his authority, or by the agent
renouncing the business of the agency; or by the business of the agency being completed;
or by either the principal or agent dying or becoming of unsound mind; or by the principal
being adjudicated an insolvent under the provisions of any Act for the time being in force
for the relief of insolvent debtors.
Section 201 Termination of agency
An agency is terminated by the principal revoking his authority, or by the agent
renouncing the business of the agency; or by the business of the agency being completed;
or by either the principal or agent dying or becoming of unsound mind; or by the principal
being adjudicated an insolvent under the provisions of any Act for the time being in force
for the relief of insolvent debtors.
Different ways by which an agency can be terminated:
1. An agency created for a specific purpose as well as an agency created by a
power of attorney is terminated once the particular purpose for which it was
created was accomplished. After the termination of the agency, the agent is
free of any fiduciary duty to the principal arising from the agency relationship.
2. The parties can terminate the agency by mutual agreement. An agency
relationship requires the mutual assent of the parties and both the parties have
power to withdraw their assent. An agency may not be terminated by the act
of one of the parties and should be done mutually. The mutual abandonment
of an agency is a question of fact, since it is a matter of intention of both the
parties. The court will ascertain such intent from the surrounding facts and
circumstances of the transaction as well as implied from the conduct of the
parties.

3. An agency contract may be cancelled on the basis of an express stipulation Notes

in the contract. In such a case, the parties will have a right of cancellation at
the will of either party or upon the happening of a contingency or the non-
performance of some expressed condition. The principal cannot cancel such
an agreement at will so long as the agent fulfils his/her part of the agreement.
However, the principal can cancel the agency contract for any justifiable cause.
4. An agency may be revoked at the will of the principal when an agency is not
coupled with an interest, and no third party’s rights are involved. The party
terminating the agency must show good cause. Thus, when A enters into a
contract whereby B is to provide A for a stated period of time with goods or
services, which both parties realize are for use in a particular enterprise owned
by A, in the absence of a specific clause so providing, A cannot escape his
obligations under that contract by voluntarily selling his interest in the enterprise
before the expiration of the expressed contract term. Therefore, if the right to
cancel an agency contract is dependent upon some contingency, the
cancellation must be justified by establishing the happening of such
contingency.
5. A principal may unilaterally cancel an agency without incurring liability for breach
of contract under the following instances: misconduct or habitual intoxication
of the agent which interferes with his/her employment, the refusal of the agent
to obey reasonable instructions or to permit the principal to make a proper audit
of his/her accounts, serious neglect or breach of duty by the agent, dishonesty
or untrustworthiness of the agent, the agent’s failure to pay an indebtedness
owing to the principal, disloyalty of the agent like using the agency to make
secret profits.
6. Ordinarily, an agent may renounce the agency relationship by expressly
notifying the principal, either orally or in writing. An agent’s cessation of all
relations with the principal, and abandonment by the agent may be treated as
a renunciation. However, mere violation of instructions by the agent will not
amount to renunciation. Although agency can be terminated at will, law
stipulates that notice must be given to the party affected by termination.
Termination of agency, where agent has an interest in subject-matter
Where the agent has himself an interest in the property which forms the subject-
matter of the agency, the agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest.
Illustrations:
(a) A, gives authority to B to sell A's land, and to pay himself, out of the proceeds,
the debts due to him from A.A cannot revoke this authority, nor can it be
terminated by his insanity or death.
(b) A consigns 1,000 bales of cotton to be, who has made advances to him on
such cotton, and desires B to sell the cotton, and to repay himself out of the
price the amount of his own advances. A cannot revoke this authority, not is
it terminated by his insanity or death.
Agency can be terminated by following ways:
1. By Agreement
On the basis that agency relationship is created by agreement between the principal
and the agent, such a relationship can also be brought to an end by mutual agreement
Notes between the parties, either in writing or orally.Termination by agreement may also occur
if the agency relationship is terminated pursuant to the provisions of the agreement itself.
The following situations may arise in this context:
i) If the agreement provides for the appointment of the agent for a specified period
of time, the agency will come to an end automatically when that period of time
expires.
ii) If the agreement provides for the agency to terminate upon the occurrence of
a specified event, the agency will come to an end upon the happening of the
specified event.
2. By the Act of Parties
An agency may be terminated by the acts of the either principal or the agent as
illustrated below:
i) Performance by the agent
ii) If an agent is appointed to accomplish a particular task or for a specific purpose,
when the task is accomplished by the agent or the specific purpose is attained,
the agency will terminate.
Revocation by the principal
The authority of an agent may be revoked at any time by the principal. Unilateral
revocation in accordance with the provisions of the agency agreement may render the
principal liable to the agent for the breach of agency agreement.Any word or conduct of
the principal inconsistent with the continued exercise of the authority by the agent may
operate as revocation of the agency.Revocation’s of the agent’s power by the principal
may not automatically discharge the principal from liability to a third party who is entitled
to rely from liability to a third party who is entitled to rely from liability to a third party
who is entitled to rely from liability to a third party who is entitled to rely on the apparent
authority of the agent on grounds of representation by the principal of previous course
of dealing with the agent’s before notice of revocation is given to the third party .Therefore
notice of revocation of an agent’s power should be given to the third party as soon as
possible.
Renunciation by agent
An agent is entitled to renounce his power by refusing to act or by notifying the
principal that he will not act for the principal.Unilateral termination of the agency by the
agent before he has fulfilled the obligations to the principal under the agency agreement
will render the agent liable to the principal for the breach of the agency agreement such
as payment of damages for the loss suffered by the principal.
3. By Notice
If the agency agreement provides that the agency may be terminated upon either
party serving on the other written notice of a specified duration.However, if the agency
agreement does not contain any termination provision, the general rule is that reasonable
notice has to be given to the other party to terminate the agency.
4. By Operation of Law
An agency may terminate by the operation of law upon the occurrence of particular
events:
Where the party concerned is an individual: By death, By insanity, By bankruptcy.

Agent's duty in conducting principal's business Notes

An agent is bound to conduct the business of his principal according to the directions
given by the principal, or in the absence of any such directions according to the customs
which prevails in doing business of the same kind at the place where the agent conducts
such business. When the agent acts otherwise, if any loss be sustained, he must make
it good to his principal and if any profit accrues, he must account for it.
Illustrations:
(a) A, an agent engaged in carrying on for B a business, in which it is the custom
to invest from time to time, at interest, the moneys which may be in hand, on
its to make such investment. A must make good to B the interest usually
obtained by such investments.
(b) B, a broker in whose business it is not the custom to sell on credit sells goods
of A on credit to C, whose credit at the time was very high. C, before payment,
becomes insolvent. B must make good the loss to A.
Skill and diligence required from agent
An agent is bound to conduct the business of the agency with as much skill as
is generally possessed by person engaged in similar business unless the principal has
notice of his want of skill. The agent is always bound to act with reasonable diligence,
and to use such skill as he possesses; and to make compensation to his principal in
respect of the direct consequences of his own neglect, want of skill, or misconduct, but
not in respect of loss or damage which are indirectly or remotely caused by such neglect,
want of skill or misconduct.
Illustration:
(a) A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money
is paid on A's account, with order to remit. B retains the money for considerable
time. A, in consequence of not receiving the money, becomes insolvent. B is
liable for the money and interest, from the day on which it ought to have been
paid, according to the usual rate, and for any further direct loss as, e.g., by
variation of rate of exchange-but not further.
(b) A, an agent for the sale of goods, having authority to sell on credit, sells to
B in credit, without making the proper and usual enquiries as to the solvency
of B. B at the time of such sale, is insolvent. A must make compensation to
his principal in respect of any loss thereby sustained.
(c) A, an insurance-broker employed by B to effect an insurance on a ship, omits
to see that the usual clauses are inserted in the policy. The ship is afterwards
lost. In consequence of the omission of the clauses nothing can be recovered
from the underwriters. A is bound to make good the loss to B.
(d) A, merchant in England, directs B, his agent at Bombay, who accepts the
agency, to send him 100 bales of cotton by a certain ship. B, having it in his
power to send the cotton, omits to do so. The ship arrives safely in England.
Soon after her arrival the price of cotton rises. B is bound to make good to
A the profit which he might have made by the 100 bales of cotton at the time
the ship arrived, but not any profit he might have made by the subsequent rise.
Agent to be indemnified against consequences of lawful acts
The employer of an agent is bound to indemnify him against the consequences of

all lawful acts done by such agent in exercise of the authority conferred upon him.

Notes Illustrations:
(a) B, at Singapore under instructions from A of Calcutta, contracts with C to deliver
certain goods to him. A does not send the goods to B, and C sues B for breach
of contract. B informs A of the suit, and A authorizes him to defend the suit.
B defends the suit, and is compelled to pay damages and costs, and incurs
expenses. A is liable to B for such damages, costs and expenses.
(b) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with
C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive
the oil, and C sues B. B informs A, who repudiates the contract altogether.
B defends, but unsuccessfully, and has to pay damages and costs and incurs
expenses. A is liable to B for such damages, costs and expenses.
Agent to be indemnified against consequences of acts done in good faith
Where one person employs another to do an act, and the agent does the act in
good faith, the employer is liable to indemnify the agent against the consequences of that
act, though it may cause an injury to the rights of third persons.
Illustrations:
(a) A, a decree-holder and entitled to execution of B's goods requires the officer
of the court to seize certain goods, representing them to be the goods of B.
The officer seizes the goods, and is sued by C, the true owner of the goods.
A is liable to indemnify the officer for the sum which he is compelled to pay
to C, in consequence of obeying A's directions.
(b) B, at the request of A, sells goods in the possession of A, but which A had
no right to dispose of. B does not know this, and hands over the proceeds of
the sale to A. Afterwards C, the true owner of the goods, sues B and recovers
the value of the goods and costs. A is liable to indemnify B for what he has
been compelled to pay to C, and for B's own expenses.
Non-liability of employer of agent to do a criminal act
Where one person employees another to do an act which is criminal the employer
is not liable to the agent, either upon an express or an implied promise to indemnify him
against the consequences of that Act.
Illustrations:
(a) A employs B to beat C, and agrees to indemnify him against all consequences
of the act. B thereupon beats C, and has to pay damages to C for so doing.
A is not liable to indemnify B for those damages.
(b) B, the proprietor of a newspaper, publishes, at A's request, a libel upon C in
the paper, and A agrees to indemnify B against the consequences of the
publication, and all costs and damages of any action in respect thereof. B is
sued by C and has to pay damages, and also incurs expenses. A is not liable
to B upon the indemnity.
Compensation to agent for injury caused by principal's neglect
The principal must make compensation to his agent in respect of injury caused to
such agent by the principal's neglect or want of skill.
Illustration:
A employs B as a bricklayer in building a house, and put up the scaffolding himself.
The scaffolding is unskilfully put up, and B is in consequence hurt. A must make
compensation to B.

Enforcement and consequences of agent's contract Notes

Contracts entered into through an agent, and obligations arising from acts done by
an agent, may be enforced in the same manner, and will have the same legal
consequences as if the contracts had been entered into the acts done by the principal
in person.
Illustrations:
(a) A buys goods from B, knowing that he is an agent for their sale, but not knowing
who the principal is B's principal is the person entitled to claim from A the price
of the goods, and A cannot, in a suit by the principal, set-off against that claim
a debt due to himself from B.
(b) A, being B's agent; with authority to receive money on his behalf, receives from
C a sum of money due to B. C is discharged of his obligation to pay the sum
in question to B.
Consequences of notice given to agent
Any notice given to or information obtained by the agent, provided it be given or
obtained in the course of the business transacted by him for the principal, shall, as between
the principal and third parties, have the same legal consequences as if it had been given
to or obtained by the principal.
Illustrations:
(a) A is employed by B to buy from C certain goods, of which C is the apparent
owner and buys them accordingly. In the course of the treaty for the sale, A
learns that the goods really belonged to D, but B is ignorant of that fact B is
not entitled to set-off a debt owing to him from C against the price of goods.
(b) A is employed by B to buy from C goods of which C is the apparent owner.
A was, before he was so employed a servant of C, and then learnt that the
goods really belonged to D, but B is ignorant of that fact. In spite of the
knowledge of his agent, B may set-off against the price of the goods a debt
owing to him from C.
5.9 Power of Attorney

Power of Attorney (POA) is a legal document giving one person (the agent or attorney-
in-fact) the power to act for another person (the principal). The agent can have broad legal
authority or limited authority to make legal decisions about the principal's property,
finances or medical care. The power of attorney is frequently used in the event of a
principal's illness or disability, or when the principal can't be present to sign necessary
legal documents for financial transactions.
A general power of attorney acts on behalf of the principal in any and all matters,
as allowed by the state. The agent under a general POA agreement may be authorized
to take care of issues such as handling bank accounts, signing checks, selling property
and assets like stocks, filing taxes, etc. A limited power of attorney gives the agent the
power to act on behalf of the principal in specific matters or events. For example, the
limited POA may explicitly state that the agent is only allowed to manage the principal's
retirement accounts. A limited POA may also be limited to a specific period of time, e.g.,
if the principal will be out of the country for, say, two years.
Most power of attorney documents allow an agent to represent the principal in all
property and financial matters as long as the principal’s mental state of mind is good.
If a situation occurs where the principal becomes incapable of making decisions for him
Notes or herself, the POA agreement would automatically end. However, someone who wants
the POA to remain in effect after the person’s health deteriorates would need to sign a
Durable Power Of Attorney (DPOA).
The durable power of attorney remains in control of certain legal, property or financial
matters specifically spelled out in the agreement, even after the principal becomes
mentally incapacitated. While a DPOA can pay medical bills on behalf of the principal,
the durable agent cannot make decisions related to the principal's health, e.g., taking
the principal off life support is not up to a DPOA.
The principal can sign a durable power of attorney for health care, or healthcare power
of attorney (HCPA), if he wants an agent to have the power to make health-related
decisions. This document, also called a healthcare proxy, outlines the principal’s consent
to give the agent POA privileges in the event of an unfortunate medical condition. The
durable POA for healthcare is legally bound to oversee medical care decisions on behalf
of the principal.
Illustration:
In real estate transactions, Power of Attorney plays a very vital role. In many
situations PoA facilitates real estate transactions. Example: If the seller of the property
is expected to be out of station at the probable time of registration, a PoA can be granted
to a third person who can duly sign the registration documents on behalf of the seller.
But this convenience, going forward, paved the way for avoiding stamp duty which resulted
in great loss to the government exchequer.
The under mentioned illustration will make the point clear:
Suppose A is the seller and B is the buyer. If B wants to buy the property only
for making some business, ie; not for acquiring the property for his own use, he may
request the seller to grant him an irrevocable power of attorney instead of making
registration of the sale. Stamp duty for power of attorney is nominal when compared to
that of sale transaction. When the price gets escalated, B can sell it to C and will make
the sale transaction on behalf of A on the strength of the PoA as if the property was sold
by A directly to C. Here, B has saved the stamp duty which should have been paid by
him if he had got the sale registered in his favour instead of getting the PoA.
Having understood the volume of loss to the government exchequer, several state
governments have introduced some amendments in registration rules relating to real estate
transactions. Kerala government have introduced an amendment in such a way that PoA
for real estate transactions can be made on Rs.300.00 stamp paper only if it is granted
in favour of spouse and blood relatives viz; parents, children, brothers and sisters. In other
cases, of course, power of attorney can be granted but with the same stamp duty required
for registration of sale transaction of the property concerned. It may however be noted
that transfer of properties is not permitted now on the strength of General Power of
Attorney.
Types of Power of Attorney

Various types of Power of Attorney are:
1. Non-Durable Power of Attorney
The non-durable power of attorney is used only for a set period of time and usually
for a particular transaction in which you grant your agent authority to act on your behalf.
Once the transaction is completed, or should the principal become incapacitated during
this time, the non-durable power of attorney ceases.
2. Durable Power of Attorney Notes

The durable power of attorney is much more encompassing than the non-durable
power of attorney and it can be used to allow an agent to manage all the affairs of the
principal should they become unable to do so. It does not have a set time period and
it becomes effective immediately upon the incapacitation of the principal. It does expire
upon the principal’s death.
A power of attorney template or POA form can be used to nominate a power of
attorney to represent an individual and their affairs in several different areas should they
become incapacitated.
3. Special or Limited Power of Attorney
A special or limited power of attorney is used on a limited basis for one-time financial
or banking transactions, or for the sale of a particular property. This is most often used
when the principal is unable to complete the transaction due to prior commitments or
illness and wants to appoint an agent to act on their behalf. The agent has no other
authority to act on behalf of the principal other than what is assigned to them in the limited
power of attorney.
4. Medical Power of Attorney
The medical power of attorney grants authority to the agent to take specific control
over the healthcare decisions of the principal should they become incapacitated or unable
to do so. This usually takes effect upon the consent of the presiding physician and it
allows the agent to authorize all medical decisions related to the principal.
5. Springing Power of Attorney
A springing power of attorney becomes effective at a future time and only when a
specific event occurs, such as the incapacitation of the principal or a triggering event that
occurs while the principal is out of the country and unable to act upon it. This type of
power of attorney can be durable or non-durable and can encompass any number of affairs
the principal wants to assign to the agent.
5.10 Summary
An agent is a person employed to do an act for another or to represent another in
dealings with third person. The person for whom such act is done or who is so represented
is called the principal. Any major person and of sound mind may become an agent to
be responsible to the principal. A person with limited or no capacity to contract can also
be appointed as an agent such person like a minor can bind their principals but they
themselves are not responsible to principals. The difference between the relation of master
and servant and of principal and agent is that a principal and agent is that a principal
has the fight to different that works the agent has to do but a master has the further right
to direct how the work is to be done. An agent though bound to exercise his authority
in accordance with all lawful instruction which may be given to him by his principal is
not subject to the direct what work the agent has to do be a master has the further fight
to direct how the work is to be done. An agent act for and on behalf of the principal becomes
liable to third party on such contract entered into by the agent the test of agency is whether
a person has the capacity to bind the principal by acts done. On his behalf when the
agent can establishes privacy of contract between third party and his principal an agency
exists. The authority is said to be express when it is given by words spoken or written.
The authority of an agent may be implied. An authority is said to be implied when it is
inferred from the conduct situation or relationship of the parties circumstances of the case

Notes and things spoken or written or by the ordinary courts of dealings. The agent must act
bonafide in the interests of the parties concerned. The best example of agents powers
in emergency is in case or marine adventures when an agent has without authority done
acts or incurred obligation to third persons on behalf of his principals is bound by such
acts or obligations if he has by his words. Holding but means falsely leading another to
believe something which is not true representation must be specific. The agent has no
real authority. It is created by estoppels. Ratification is adopting or accepting subsequently
a past act of an agent done on behalf of another without authority. The first essential to
the doctrine of ratification specific or particular agent is a person who is appointed to do
a single act for the principal he appointed by a special or particular agent is a person
who is appointed to do a single act for the principal. He appointed by a special power
of attorney. The termination of the authority of an agent does not so far as regards as
the agent. Faudepart before it becomes known to him beat of the principal also terminals
the agency when agent receives knowledge of the death of the principal.

1. An _____________ is a person employed to do an act for another or to represent
another in dealings with third person.
2. Can a _____________ be appointed an agent under section 148.
3. A person with limited or on capacity to contract can also be appointed as an
_____________.
4. No _____________ is necessary to create an agency section 185.
5. An agent acts for and on behalf of the principal with the _____________ party.
6. The authority of an agent may be _____________.
II. True or False

1. A person who represents another is known as a principal.
2. Anyone who is legally competent to act for himself can act as an agent of himself
or herself but cannot serve as an agent for another.
3. Agents are usually classified according to the nature of their relationship with
their principal.
4. An agency by ratification results when a principals approves an unauthorized
act performed by an agent.
5. An agency by invention is created when circumstances make such an agency
necessary.
1. Which section defines agent and a principal?

[a] Sec 181
[b] Sec 182
[c] Sec 183
[d] None of these
2. A person employed to do an act for another to represent another in dealings
with third persons is called…………….

[a] Broker Notes

[b] Agent
[c] Intermediate
[d] None of these
3. ‘A’ appoints ‘B’ to purchase a house for him A is the principal ‘B’ an agent
and the relationship between the two is that is called…………….
[a] Trade broker
[b] Service provider
[c] Agency
[d] Both a and b
4. Who will become an agent?
[a] Major person
[b] Sound mind person
[c] Minor person
[d] Both a and b
5. Which section defines employee an agent?
[a] Sec 182
[b] Sec 183
[c] Sec 184
[d] Sec 185
6. How is agency constituted?
[a] Agent by necessity
[b] Agency by estoppels
[c] Agency by ratification
[d] All of these

1. Who is an Agent?
2. What is Agency?
3. What is Rights of Agent?
4. What is Personal Liability of Agent?
5. What is Termination of Agency?
6. What is Power of Attorney?

1. Give an introduction to Contract of Agency.
2. Discuss about Agent and Agency.
3. Explain various kinds of Agencies.
4. Discuss the classification of Agents.
5. Explain various Duties and Rights of Agents.
6. Discuss duties to the Agent and his Liability to Third Parties.
Notes 7. Explain about Personal Liability of Agent.

8. Write note on: Termination of Agency.
9. Discuss in details about Power of Attorney.
5.13 Key Terms

z Agent: An agent is a person employed to do any act on behalf of or torepresent
another in dealings with third persons. The personemploying the agent is referred
to as the principal, and the contractbetween the agent and the principal is one
of agency. Theunderlying doctrine of agency is that persons who do an act
throughanother are deemed to do it themselves.
z Rights of an Agent: Section 217 of the Contract Act provides that an agent
may retainany amount due to the agent, be it for expenses incurred for
theprincipal or as remuneration, from any money received on behalf ofthe
principal. In fact, Section 221 of the Contract Act goes furtherand holds that
where there is no contract to the contrary, an agentis entitled to retain the
principal’s goods, papers, and other property- both movable and immovable -
received by the agent, until theamounts due to the agent for commission,
disbursements, andservices rendered in course of the agency have been paid
to theagent.
z General agent: This is an agent who has the principal’s unlimited authority
to carry out contracts on behalf of the principal without recourse to the principal
on each and every point in a transaction.
z Agent of necessity: Here, the agency comes into being as a result of
circumstances. There is no formal appointment, express or otherwise. The agent
steps into the agency with a view to minimise damages or loss to the goods
of principal.
z Del Credere agent: This agent undertakes to guarantee the goods or indemnify
the principal for any losses arising from the agency transaction. In return for
this assurance, the agent receives an extra remuneration from the principal.
z Special Agent: This is an agent who has been appointed to carry out only
a designated task. On completion of the task, the agency terminates. Example,
a polling agent.
z Broker: This is an agent who does not have possession of the goods at the
time of sale. The transaction concluded by such an agent on behalf of the
principal, nevertheless binds the principal.
z Agency: Agency is the capacity of an actor to act in a given environment. The
capacity to act does not at first imply a specific moral dimension to the ability
to make the choice to act, and moral agency is therefore a distinct concept.
In sociology, an agent is an individual engaging with the social structure.
z Seller's Broker: The seller's broker is also known as the seller's representative
or listing agent. This person works exclusively on behalf of the seller to find
a buyer for the listed property. The relationship is formed by an express written
contract which provides that the seller's broker is the only person authorized
to sell the property.
z Sub-agent: A sub-agency involves a situation where a potential buyer would
like to look at a property and his regular agent is unavailable. A sub-agent will
walk the buyer through the property and provide him customer service as if he
were his own client. The difference is that a sub-agent is not permitted to provide

the buyer with any information or disclosures that could negatively impact the Notes
seller.
z Buyer's Broker: A buyer's broker is in an agency relationship similar to that
of the seller's broker, only he is working directly with interested buyers looking
for property. The buyer's broker must disclose material information about a
property that would likely interfere with the buyer's use and enjoyment of the
property.
z Dual Agency: Dual agency refers to a situation in which a broker represents
both a seller and buyer at the same time. This does not constitute a conflict
of interest as long as both parties are aware of and consent to the arrangement.
The dual agent is required to keep information about price, motivation or terms
confidential unless expressly instructed to inform the other party about this
information.
z Special Agents: A special agent is one who is appointed to perform a special
act or represent his principal in some particular transaction. He has limited
authority. He has no authority to bind the principal in respect of any other act
than that for which he is employed.
z General Agents: A general agent is one who has authority to do all acts
connected with a particular trade, business or employment. For instance, if a
person is placed as a manager, he has authority to bind the principal for all
his acts falling within the scope of the business of managing the store. Such
an authority of the agent is implied provided his acts are within the limits of
his apparent authority. It is immaterial if they are outside the scope of his actual
authority.
z Universal Agents: A universal agent is one who enjoys unlimited authority to
do all such acts as could be delegated, and which the principal himself could
lawfully perform. An agent of this type is usually appointed by a businessman
who is still legally competent to appoint an agent, but owing to his physical
condition, wants to retire by giving a blanket power of attorney to the agent to
do anything that has to be done while he is in the service.
z Performance: Performance is normally considered to be an agent’s obligation;
however, the principal is expected to do whatever can be done reasonably to
accomplish the purpose of the agency.
z Compensation: Compensation is normally specified in the listing agreement
or employment contract. Although the receipt of compensation is usually
contingent on the closing of the sale or lease, in most real estate transactions
the agent has earned his or her fee when he or she has produced a ready,
willing and able buyer (usually evidenced by the signing of the purchase contract
or lease). The earned fee is usually payable only upon the closing of the
transaction. Nonetheless, compensation arrangements are negotiable and can
take several forms.
z Reimbursement: Reimbursement implies that the principal must reimburse the
agent for expenses made on the principal’s behalf. This does not mean that
the principal has to reimburse the agent for the costs of advertising,
entertainment, and other costs of doing business. An example of reimbursable
expenses may include the situation involving an absentee landlord or seller if
the agent is required to perform minor repairs and incur other small expenses
in order to keep the property in good condition.
z Indemnification: Indemnification is becoming more important for the agent.
This duty arises when the agent suffers a loss through no fault of his or her
Notes own while performing duties on behalf of the principal. An example is a broker
making an innocent misrepresentation in performing acts on behalf of the
principal. As previously discussed, the agent is almost always liable if the agent
makes a misrepresentation to a third party.
z Personal Liability of Agent: An agent is not personally liable for the contracts
entered into by him on behalf of his principal unless there is a contract to the
contrary.
z Termination of Agency: An agency is terminated by the principal revoking his
authority, or by the agent renouncing the business of the agency; or by the
business of the agency being completed; or by either the principal or agent dying
or becoming of unsound mind; or by the principal being adjudicated an insolvent
under the provisions of any Act for the time being in force for the relief of insolvent
debtors.
z Agent's duty in conducting principal's business: An agent is bound to
conduct the business of his principal according to the directions given by the
principal, or in the absence of any such directions according to the customs
which prevails in doing business of the same kind at the place where the agent
conducts such business. When the agent acts otherwise, if any loss be
sustained, he must make it good to his principal and if any profit accrues, he
must account for it.
z Power of Attorney: Power of Attorney (POA) is a legal document giving one
person (the agent or attorney-in-fact) the power to act for another person (the
principal). The agent can have broad legal authority or limited authority to make
legal decisions about the principal's property, finances or medical care. The
power of attorney is frequently used in the event of a principal's illness or
disability or when the principal can't be present to sign necessary legal
documents for financial transactions.

1. Agent
2. Minor
3. Agent
4. Consideration
5. Third
6. Implied
II. True or False

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

1. [a] 2. [b]
3. [d] 4. [d]
5. [b] 6. [d]


Kedar Nath vs. Gorie Mohamed
In order to construct a town hall at howrah, the commissioner of Howrah Municipality
started to obtain necessary fund by public subscription. A also promised to subscribed
Rs. 1000 to fund by signing his name in the subscription book for the purpose. On the
faith of the promised subscriptions, the secretary of the town hall construction committee
engaged a contractor for construction of town hall and thus, incurred liability. A refused
to pay his subscription. Held, engaging a contractor and starting the construction work
on the faith of the promise to subscribe was sufficient consideration. Hence, A was liable
to pay the amount to the extent of the liability incurred by the promise.
The plaintiff is a Municipal Commissioner of Howrah and one of the trustees of the
Howrah Town Hall Fund. Some time ago, it was in contemplation to build a Town Hall
in Howrah, provided the necessary funds could be raised, and upon that state of things
being existent, the persons interested set to work to see what subscriptions they could
get. When the subscription list had reached a certain point, the Commissioners, including
the plaintiff, entered into a contract with a contractor for the purpose of building the Town
Hall, and plans of the building were submitted and passed, but as the subscription list
increased, the plans increased too, and the original cost, which was intended to be Rs.
26,000, has swelled up to Rs. 40,000; but for the whole Rs. 40,000 the Commissioners,
including the plaintiff, have remained liable to the contractor as much as for the original
contract, because the additions to the building were made by the authority of the
Commissioners and with their sanction. The defendant, on being applied to, subscribed
his name in the book for Rs. 100, and the question is, whether the plaintiff, as one of
the persons who made himself liable under the contract to the contractor for the cost of
the building, can sue, on behalf of himself, and all those in the same interest with him,
to recover the amount of the subscription from the defendant.
Questions:
1. Whether this is a suit which could be maintained by the whole of the persons
who made themselves liable to the contractor if they were all joined?
2. Whether the suit as laid by the plaintiff is legally maintainable?



Press.
Kluwer Law Intl
Press.
Pearson.
±±±±
Law of Partnership 113
Notes
Unit 6: Law of Partnership
Structure:
6.1 Introduction
6.2 Meaning and Nature of Partnerships
6.3 Registration of Firms
6.4 Partnership Deed
6.5 Changes in a Firm
6.6 Dissolution
6.7 Summary
6.10 Key Terms
6.12 Case Study
6.14 Bibliography
Objectives

z Cpncepts of Partnerships
z Nature of Partnerships
z Registration of Firms
z Partnership Deed
z Changes in a Firm
z Dissolution


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.” "Section 464 of the Companies Act, 2013 empowers the Centre Government to
prescribe maximum number of partners in a firm but the number of partners so prescribed
cannot be more than 100.The Central Government has prescribed maximum number of
partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules,2014.
Thus, in effect, a partnership firm cannot have more than 50 members".
Partnerships present the involved parties with complex negotiation and special
challenges that must be navigated unto agreement. Overarching goals, levels of give-and-
take, areas of responsibility, lines of authority and succession, how success is evaluated
and distributed, and often a variety of other factors must all be negotiated. Once agreement
is reached, the partnership is typically enforceable by civil law, especially if well
documented. Partners who wish to make their agreement affirmatively explicit and
enforceable typically draw up Articles of Partnership. Trust and pragmatism are also
essential as it cannot be expected that everything can be written in the initial partnership
agreement, therefore quality governance and clear communication are critical success
factors in the long run. It is common for information about formally partnered entities to
be made public, such as through a press release, a newspaper ad, or public records laws.
While industrial partnerships stand to amplify mutual interests and accelerate
success, some forms of collaboration may be considered ethically problematic. When a
politician, for example, partners with a corporation to advance the latter's interest in
exchange for some benefit, a conflict of interest results; consequentially, the public good
may suffer. While technically lawful in some jurisdictions, such practice is broadly viewed
negatively or as corruption.
6.2 Meaning and Nature of Partnerships

A partnership is an association of two or more persons to carry on, as co-owners,
a business and to share its profits and losses. The partnership may come into existence
either as a result of the expansion of the sole-trading concern or by means of an agreement
between two or more persons desirous of forming a partnership.
Nature of Partnership
A partnership is an arrangement where parties agree to cooperate to advance their

mutual interests.The need for partnership form of organization arose from the limitation
of sole-proprietorship. In sole-proprietorship, the financial resources and managerial skills
were limited; one man could not supervise all the business activities personally. Moreover
risk, bearing capacity of an individual was also limited. When business activities started
expanding, the need for more funds arose. More persons were required for supervising
different functions. It was at this stage that a need for associating more persons arose.
So, more persons were associated to form groups to carry on business. These persons
brought into the business their financial resources and are also helpful in business
administration.
When the business expands in size, the proprietor finds it difficult to manage the
business and is forced to take more outsiders who will not only provide additional capital
but also assist him in managing the business on sound lines. Sometimes, the nature

of business demands large amount of capital, effective supervision and greater Notes
specialization. It is ideal form of organization for the enterprise requiring moderate amount
of capital and diversified managerial talent. This form is not suitable for a business resuming
big capital an expert managerial personnel.
Definition
Under Section 4 of the Partnership Act 1952, “The relation between persons who
have agreed to share profits of a business carried on by all or any one of them acting
for all”.
According to the act, there must be two or more persons having contractual
relationship. It is not necessary that the business should be managed by all the partners
but any one or more partners can run the business on behalf by all the persons. Any
partner acting on behalf of other partner can bind the firm to third parties. So there is
an implied authority on behalf of other partners.
Characteristics/ Features of Partnership Firm

1. Association of Two or More Persons: In partnership firm as discussed earlier
there must be at least two persons. Partnership is the outcome of a contract,
so there must be two or more persons. The persons becoming partners must
be competent to enter into a contract. Minors cannot form a partnership firms
they are incompetent to enter into a contract.
2. Contractual Relation: The persons joining the partnership enter into a contract
for running a business. According to Partnership Act, the relation of partnership
arises from the contract and not from status. The contract may be oral or written
but in practice written agreement is made because it helps to settle disputes
if they arise later on.
3. Earning of Profits: The purpose of the business should be to make profits and
distribute them among partners. If a work is done for charity purposes or to
serve the society it will not be called partnership. So, the motive of the business
should be to earn profits. It doesn’t mean that there will not be loses but the
emotive should be the earning of profits.
4. Existence of Business: Partnership can only be for some kind of business.
The term “Business” includes any trade, profession or occupation. By business
we mean all activities concerning production, distribution and rendering of
services for the purpose of earning profits. If the work is related to social service,
we do not call it a business and hence, no partnership.
5. Implied Authority: There is implied authority that any partner can act on behalf
of the firm. The business will be bound by the acts of partners.
6. Unlimited Liability: As the case of sole-trade business liability of the partners
of a firm is unlimited. In case some obligation arises then not only the partnership
assets but also the private property of the partners can be taken for the payment
of liabilities of the firm to the third parties.
7. Principal and Agent Relationship: In partnership the relationship of principal
and agent exists. It is not necessary that all partners should work in the
business. Any one or more partners can act on behalf or other partners. Each
partner is thereby an agent and can hence bind the firm through his activities
and thereby bind other partners too.
8. Utmost Good Faith: The very basis of the partnership business is good faith
and mutual trust. Every partner should act honestly and give proper accounts
Notes to other partner. The partnership cannot run if there is suspicion among other
partners. It is very important that the partners should act as trustees and for
the common good of all. Distrust and suspicion among partners may lead to
the failure of many firms.
9. Restriction to Transfer of Shares: No partner can sell or transfer his shares
to anybody else without the consent of the other partners. In case any partner
does not want to continue in the partnership, he can give a notice for dissolution
of firm.
10. Common Management: Every partner has right to take part in the running of
the business. It is not necessary for all partners to participate in the day-to-
day activities of the business but they are entitled to participate. Even if
partnership business is run by some partners, the consent of all other partners
is necessary for taking important decisions.
11. Partners and Partnership are one: A partnership firm has no separate entity
from the partners. A firm is only a name to the collective name of partners.
No firm can exist without partners. The rights and liabilities of partners are the
rights and liabilities of the firm. Partners have implied authority to bind the firm
for their acts.
12. Capital Contribution: The partners contribute to the capital of the firm. It is
not necessary to have capital in profit sharing ratio. A partner can be admitted
to the firm even without contribution of capital. It is not essential that the partners
should contribute to the firm’s capital.
13. Protection of Minority Interest: All important decisions are generally taken
by consensus. It ensures protection of those who may not agree to the majority
view point. A partner may even ask for the dissolution of partnership if he feels
aggrieved.
14. Continuity: There is no true limit for the continuity of a partnership firm. It goes
on up to the time the partners want it to go. Any misunderstanding among
partners, death or insolvency of a partner may dissolve the partnership.
Dissolution of partnership does not necessarily mean dissolution of the firm.
The remaining partners may continue the firm after meeting the claims of the
outgoing partner.
Who is a partner?
Partner is a person who takes part in an undertaking with another or others, especially
in a business or company with shared risks and profits.
Rights of partner
Rights of a Partner are given bellow:

1. Right to take part in management: Every partner has the right to take part
in the management and conduct of day to day affairs of the business of the
partnership enterprise.
2. Right to express opinion: Every partner has right to express his opinion on
the matters relating to business of the partnership enterprise. Ordinary matters
during the course of business are decided by majority votes, but major business
decision of the business are taken unanimously by all the partners.
3. Right to take out copies and inspect the books of account: Every partner
has a right to inspect the books of accounts of the partnership enterprise and
further take out the copies of the same.

4. Right to share profits: In the absence of any contract to the contrary, every Notes
partner has an equal share in the profits of the partnership enterprise. Otherwise,
they have to share the profit and loss as per the agreed ratio stated in the
partnership deed.
5. Right to have interest on capital: In the absence of any agreement, express
or implied, a partner is not entitled to get any interest on capital contributed
by him.It may be further pointed out here that a partner is entitled to interest
(subject to the agreement to the contrary) only out of profits earned by a firm.
If a firm incurs losses, on interest on capital can be claimed by a partner.
6. Right to have interest on advances: Every partner in the partnership
enterprise is entitled to get interest on any advances made by him over and
above his capital @ 6% per annum.A partner is not entitled to receive interest
on advances made by him after the dissolution of the partnership enterprise,
unless there is an express or implied agreement to that effect.
7. Right to be indemnified: Every partner has the right to be indemnified by the
firm in respect of any losses suffered and expenses incurred by him in the
conduct of the business of the firm.
8. Right to have joint share in the partnership property: The property of the
firm belongs to all the partners and can be used for the common benefit of all
the partners. Partnership property may be used by a partner for his personal
benefit only subject to express contract between the partners.
9. Right in emergency: A partner has the right to protect the firm loss in any
emergency by undertaking any act as would be deemed fit and have done by
a person of ordinary produce in his own case under similar circumstances. Such
acts of the partner shall be binding on the firm.
10. Right of preventing the entry of new partner: Every partner has the right
to prevent the induction of a new partner in the firm without the consent of all
the partners. It may be pointed out here that the partnership deed or Agreement
may contain a provision allowing one of the partners to introduce a new partner.
Duties of partner
The duties of a partner are as follows:

i. To carry on the business to the greatest common advantage: Every partner
is bound to carry on the business of the firm to the greatest common advantage.
In other words, the partner must use his knowledge and skill in the conduct
of business to secure maximum benefits for the firm.
ii. To be just and faithful to each other: Every partner must be just and faithful
to other partners of the firm. Every partner must observe utmost good faith and
fairness towards other partners in business activity.
iii. To render true accounts: Every partner must render true and proper accounts
I his co-partners. Each and every entry in the books must be supported by
vouchers and di explanations if demanded by other partners.
iv. To provide full information: Every partner must provide full information of £
activities affecting the firm to the other co-partners. No information should be
concealed, kept secret.
v. To attend diligently to his duties: Every partner is bound to attend diligently
to duties in the conduct of the business of the firm.
vi. To work without remuneration: A partner is not entitled to receive any kind

Notes remuneration for taking part in the conduct of the business. But in practice,
the working partners are generally paid remuneration as per agreement, so also
commission in some case.
vii. To indemnify for loss caused by fraud or willful neglect: If any loss is
caused to the firm because of a partner's willful neglect in the conduct of the
business or fraud commit by him against a third party then such partner must
indemnify the firm for the loss.
viii. To hold and use partnership property exclusively for the firm: The partners
must hold and use the partnership property exclusively for the purpose of
business of the firm not for their personal benefit.
ix. To account for personal profits: If a partner derives any personal profit from
partnership transactions or from the use of the property of the firm or business
connection the firm or the firm's name, he must account for such profit and pay
it to the firm.
x. Not to carry on any competing business: A partner must not carry on
competing business to that of the firm. If he carries on and earns any profit
then he must account for the profit made and pay it to the firm.
Liabilities of a Partner
The following are the liabilities of a partner to third parties:

i. Liability of a partner for acts of the firm: Every partner is jointly and severally
liable for all acts of the firm done while he is a partner. Because of this liability,
the creditor of the firm can sue all the partners jointly or individually.
ii. Liability of the firm for wrongful act of a partner: If any loss or injury is
caused to any third party or any penalty is imposed because of wrongful act
or omission of a partner, the firm is liable to the same extent as the partner.
However, the partner must act in the ordinary course of business of the firm
or with authority of his partners.
iii. Liability of the firm for mis-utilisation by partners: Where a partner acting
within his apparent authority receives money or property from a third party and
misutilises it or a firm receives money or property from a third party in the course
of its business and any of the partners misutilises such money or property,
then the firm is liable to make good the loss.
iv. Liability of an incoming partner: An incoming partner is liable for the debts
and acts of the firm from the date of his admission into the firm. However, the
incoming partner may agree to be liable for debts prior to his admission. Such
agreeing will not empower the prior creditor to sue the incoming partner. He
will be liable only to the other co-partners.
v. Liability of a retiring partner: A retiring partner is liable for the acts of the
firm done before his retirement. But a retiring partner may not be liable for the
debts incurred before his retirement if an agreement is reached between the
third parties and the remaining partners of the firm discharging the retiring partner
from all liabilities. After retirement the retiring partner shall be liable unless a
public notice of his retirement is given. No such notice is required in case of
retirement of a sleeping or dormant partner.

Kinds of Partner Notes

There are different kinds of partners and they may be classified as under:
1. Active Partner
An active partner is one who takes active part in the day-to-day working of the
business. He may act in different capacities such as manager, organizer, adviser and
controller of all the affairs of the firm. He may also be called as ‘Working Partner’.
2. Sleeping or Dormant Partner
A sleeping partner is one who contributes the capital, shares profits and bears the
loss of the business but doesn’t take part in the working of the concern. A person may
have money to invest but may not be able to devote time for the business; such a person
may become a sleeping partner. However a sleeping partner is equally liable towards the
firm’s liabilities just like other partners. He cannot bind the firm or its members through
his acts. He would also be never known to public; hence he could also be termed as
‘A Secret Partner’.
3. Nominal Partner
A nominal partner is one who lends his name to the firm. He does not contribute
any capital nor does he share profits of the business. He is known as a partner to the
third parties. On the strength of his name, the business gets more credit in the market
or may promote its sales. A nominal partner is liable to the third parties who give credit
to the firm on the assumption of that person being a partner in the firm.
4. Partner of Profits
A person may become a partner for sharing the profits only. He contributes capital
and is also liable to third parties like other partners. He is not allowed to take part in
the management of the business. Such partners are associated for money and goodwill.
5. Partner by Estoppels or Holding Out
When a person is not a partner but poses himself as a partner, either by words or
in writing or by his acts, he is called a partner by estoppels or by holding out. A partner
by estoppels or by holding out shall be liable to the outsiders who deal with the firm on
the presumption of that person being a partner even though he is not a partner and does
not contribute anything to the business.
6. Secret Partner
The position of a secret partner lies between active and sleeping partner. His
membership of the firm is kept secret from outsiders. His liability is unlimited and he is
liable for the losses of the business. He can take part in the working of the business.
7. Sub-Partner
A partner may associate anybody else in his share in the firm. He gives a part of
his share to the stranger. The relationship is not between the sub-partner and the firm
but between him and the partner. The sub-partner is not the entity of the firm. He is not
liable to the debts of the firm.
8. Minor as a Partner
A minor is a person who has not yet attained the age of majority. A minor cannot
enter into a contract according to the Indian Contract Act because a contract by a minor
is void ab initio. However, a minor may be admitted to the benefits of an existing partnership
with the consent of all partners. The minor is not personally liable towards the liabilities

Notes of the firm, but this share in the firms profit and property of the partnership concern will
be liable for the debts of the firm.
Kinds of Partnership
1. General Partnership
In this type of partnership the liability of members is unlimited. All the partners
personally and collectively are liable for the obligations of the firm. All the partners can
take part in the working of the business. In India, this kind of partnership exists.
Registration of such firms is not compulsory however certain privileges are available to
the firm which is registered.
(a) Particular Partnership: When a partnership is started for certain work it is
called particular partnership. When the work is completed the partnership comes
to an end. The partnership may also be for a limited period. It will be dissolved
at the expiry of that period.
(b) Partnership-at-will: This type of partnership is neither for a fixed period nor
for a particular purpose. The partnership-at-will continuous up to the time the
partners have faith in each other. The life of partnership is not limited by time
and work. It can be dissolved when all the partners want dissolution or any one
of the partner gives notice for the dissolution of the firm.
2. Limited Partnership
In general partnership, the liability of partners is unlimited. This discourages those
persons who wants to invest money in business but do not want to risk their private
property. These persons can risk their investments in the firm but not beyond. The limited
partnership provides them an opportunity for investment. In limited partnership the liability
of the partners is limited while liability of some partners is unlimited. The partners with
limited liability are called special partners while those with unlimited liability are called
general or active partners.
6.3 Registration of Partnership Firms

(i) Filing an Application
The first thing to be done is to file an application with the Registrar of Firms on a
prescribed form. A small amount of registration fees is also deposited along-with the
application.
The application should contain the following information:
(a) The name of the firm.
(b) The principal place of business of the firm.
(c) The names and addresses of partners and the dates on which they joined the
firm.
(d) If the firm is started for a particular period then that period should be mentioned.
(e) If the firm is started to achieve a specific object then it should also be given.
The application form should be signed and verified by each partner or by his duly
authorized agent.
(ii) Certificate
The particulars submitted to the Registrar are examined. It is also seen whether all
legal formalities required have been observed or not. If everything is in order, then the

Registrar shall record an entry in the register of firms. The firm is considered registered Notes
thereon.
6.4 Partnership Deed

A partnership deedis a document that outlines in details the rights and responsibilities
of all parties to a business operation. It has the force of law and is designed to guide
the partners in the conduct of the business.
Specimen of Partnership Deed
THIS DEED OF PARTNERSHIP IS MADE on this 12th day of January, 2011 by and
between
Mr. A S/o C R/o XYZ hereinafter referred to as Party of the FIRST PART (which
expression shall deem and include his heirs, executors, administrators, representatives,
assigns and agents), AND
Ms. B D/o D R/o XYZ, Party of the SECOND PART (which expression shall deem
and include his heirs, executors, administrators, representatives, assigns), AND
WHEREAS the above named partners have decided to start the partnership business
of Recruitment Services in the name and style of M/s SSS with effect from …th day of
January, 20..on the terms and conditions hereinafter mentioned and have desired to reduce
the terms and conditions into writing.
Now this Indenture is witnessed as Follows:
1. THAT the PARTIES referred above shall carry on the business of Recruitment
Services in the PARTNERSHIP FIRM under the name and style of M/s SSS
hereinafter referred to as the FIRM) XYZ, But by their mutual consent may start
and carry on any other business or businesses under any other name or names
at any other place or places.
2. THAT the business of the PARTNERSHIP pursuant to this DEED of
PARTNERSHIP shall be deemed to have commenced with effect from …th day
of January, 20...
3. That the capital required for the business of Partnership shall be contributed
time to time by the PARTIES in such manner in all respect as may be agreed
to between them and such capital may be paid interest as may be mutually
agreed from time to time at the rate of rates not exceeding 12% (Twelve Percent)
per annum.
4. That all the PARTIES referred above shall be Working Partners and shall attend
diligently to the business of the Partnership and carry on the same for the
greatest advantage of the Firm.
5. That all the WORKING PARTNERS may be paid Salary w.e.f. … day of Feb.,
2008, for the work of the FIRM as may be agreed mutually from time to time
between the PARTIES in accordance with the provisions of the Income Tax Laws
as well as business necessities and other factors, subject however, that the
monthly Salary to each such Partner shall not exceed as under:
NAME OF WORKING PARTNER MAXIMUM BASIC SALARY NOT TO EXCEED
a. Mr. A Rs. 12,000/- per month
b. Ms. B Rs. 12,000/- per month
6. That all business expenses shall be borne by the FIRM.

Notes 7. That the Profits or Losses, as the case may be, of the Partnership business
shall be divided among the Partners as under:
NAME OF WORKING PARTNER SHARE OF PROFIT SHARE OF LOSS
a. Mr. A 50% 50%
b. Ms. B 50% 50%
8. That the duration of the PARTNERSHIP shall be at WILL subject to Clause ‘9’
9. That any Partner may retire from Partnership after giving a notice to the other
Partner (s) of not less than one month in writing and at the expiry of such notice
period he shall be deemed to have retired.
10. Upon mutual understanding, each Partner or his duly authorized agent shall have
free access to the account books of the Partnership and shall be entitled to
take copies or extracts from any or all such books and records of the Partnership
Business.
11. That no Partner shall have the right to sell, mortgage or transfer his share of
interest in the FIRM to anyone else except to his heir or heirs or any one of
the existing Partners or to their heir (s). In the event of heir (s) selling his/
her shares to anyone else, the existing Partners shall have a right or pre-emotion
in respect of such share (s) sold.
12. That the Partners shall keep or cause to be kept the books of account of the
FIRM at the principal places of its business and make all entries therein, and
that all such books of account kept shall be closed on 31st March every year
or in the case of any necessity on any other date as the Partners may mutually
decide.
13. That no Partner shall do any act or thing whereby FIRM or the FIRM property
may be prejudicially effected.
14. That the terms of the Partnership Deed may be altered, added to or cancelled
by the written consent of the Parties to this DEED.
15. That the partners can open the bank account of the firm, in any bank and bank
account shall be operated by the partners jointly or individually, as the case
may be.
16. That the partners shall not take any loan from any person/Financing Company,
bank or any other Govt./Pvt. Department in any case, without the written consent
of each other.
17. That in the case of any dispute arising out of this DEED between the Parties
of this DEED, it shall be decided by Arbitration as provided for under the Indian
Arbitration Act.
IN WITNESS WHEREOF the Parties hereto have set and subscribed their respective
hands to these presents the day, month and year first written above.
WITNESSES:
1. MR. A
(Party of the First Part)
2. MS. B
(Party of the Second Part)

Advantages of Registration Notes

The registration of a firm is not only advantageous for the firm but also for those
who deal with it. The following advantages are derived from the registration of a firm:
(i) Advantages to the Firm
The firm gets a right to the third parties in civil suits for getting its rights enforced.
In the absence of registration, the firm cannot sue outside partners in courts.
(ii) Advantages to Creditors
A creditor can use any partner for recovering his money due from the firm. All partners
whose names are given in the registration are personally responsible to the outsiders.
So, creditors can recover their money from any partner of the firm.
(iii) Advantages to Partners
The partners can approach a court of law against each other in case of dispute among
partners. The partners can sue outside parties also for recovering their amounts, etc.
(iv) Advantages to Incoming Partners
A new partner can fight for his rights in the firm if the firm is registered. If the firm
is not registered then he will have to depend upon the honesty of other partners.
(v) Advantages of Outgoing Partners
The registration of a firm benefits the outgoing partners in a number of ways.
The outgoing partners may be divided into two categories:
(i) On the death of a partner,
(ii) On the retirement of a partner.
On the death of a partner his successors are not responsible for the liabilities incurred
by the firm after the date of his death. In case of a retiring partner, he continues to be
responsible up to the time he does not give public notice. The public notice is not registered
with the Registrar and he ceases his liabilities from the date of this notice. So, it is
essential to get a firm registered for getting this advantage.
6.5 Changes in a Partnership Firm

Whenever a change or alteration is made in any of the following particulars then it
should be communicated to the Registrar of firms and a suitable change is made in the
register. The change to be made is sent in a prescribed form and with the prescribed
fees.
Following changes or alterations are to be sent to the Registrar:
(i) Any change in the name of the firm.
(ii) Any change in the principal place of business. The change in name or principal
place of business almost requires a new registration. These changes should
be sent in a prescribed form and should be signed by all the partners.
(iii) When constitution of the firm is changed i.e., an old partner may retire or a
new partner may be added.
(iv) Any change in the name of a partner or his address.

Notes (v) When a minor partner attains the age of majority and he elects to become or
not to become a partner.
(vi) When the firm is dissolved.
Exceptions:
The non-registration does not affect the following rights of a firm:
(i) The partners of an unregistered firm can bring a suit for the dissolution of the
firm or for the settlement of its accounts. They can also use the property of
a dissolved firm.
(ii) The right of an official receiver or official assignee is not affected for realizing
the share of the insolvent partner, whether the firm is registered or not.
(iii) The unregistered firm or its partners may use or claim a set-off where the subject
matter of the suit does not exceed Rs. 100 in value.
(iv) The third parties can always use a firm whether it is registered or not.
6.6 Dissolution of Partnership Firm

The dissolution of partnership among all the partners of a firm is called the Dissolution
of the Firm (Sec. 39 of the Partnership Act, 1932). Dissolution of Partnership involves
a change in the relation of partnership business, if the remaining partners resolve to
continue the concern. In such cases there will be a new partnership but the firm will
continue in a reconstituted form.
Dissolution of firm means complete breakdown of the relation of partnership among
all the partners. When all the partners resolve to dissolve the partnership, the dissolution
of firm occurs, i.e. the firm is wound up.
If the business comes to an end, it is said that the firm has been dissolved.
Dissolution of firm means the closing down of the business. Firm’s dissolution implies
partnership dissolution but not vice versa.
That is dissolution of partnership does not mean dissolution of firm, but the dissolution
of firm will be dissolved on any one of the following ways:
(A) Dissolution by Agreement (Sec. 40)
A firm may be dissolved at any time with the consent of all partners. For instance,
when a firm does not expect good prospects in the future, a firm can be dissolved by
mutual consent of all partners.
(B) Compulsory Dissolution (Sec. 41)
A firm is compulsorily dissolved by operation of law when all the partners except
one become insolvent or when all the partners become insolvent or when business
becomes illegal or when the number of partners exceeds twenty in case of ordinary
business or ten in case of banking.
(C) Dissolution on the Happening of Certain Contingencies (Sec. 42)
A firm is dissolved, in the absence of contrary, in the event of any of the following
circumstances:
(i) The expiry of the term for which it was formed.
(ii) The completion of the venture for which the partnership was constituted.

(iii) The death of a partner. Notes

(iv) The adjudication of a partner as an insolvent.
(D) Dissolution by Notice of Partnership at Will (Sec. 43)
Where a partnership is at will, the firm may be dissolved by any partner giving notice
in writing to all the other partners of his intention to dissolve the firm.
(E) Dissolution by the Court (Sec. 44)
The court is empowered to order the dissolution of a firm consequent on a suit by
a partner in the following cases:
(i) When a partner becomes insane or unsound of mind.
(ii) When a partner becomes permanently incapable of performing his duties, be
it mental or physical.
(iii) When a partner is proved guilty of misconduct which is likely to affect adversely
the busi-ness of the firm.
(iv) When a partner conduct himself in such a way that it is not possible for the
other partners to carry on partnership with him.
(v) When a partner transfers his interest or share to third party.
(vi) When the business cannot be carried out except at a loss. (It must be
remembered that the object of partnership is to earn profits and if that object
is not fulfilled, the firm can be dissolved).
(vii) When it appears to be just and equitable. For instance, continued quarrelling,
deadlock in the management, refusal to attend matters of business, absence
of cooperation etc. among the partners. (The court has wide discretionary
powers).
Liability for Acts Done After Dissolution (Sec. 45)
When a firm is dissolved a public notice must be given of the dissolution. If it is
not done, the partners continue to be liable as such to third parties for any act done by
any of them after the disso-lution, and in such a case, the act of a partner done after
dissolution is deemed to be an act done before the dissolution.
6.7 Summary
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.” "Section 464 of the Companies Act, 2013 empowers the Centre Government to
prescribe maximum number of partners in a firm but the number of partners so prescribed
cannot be more than 100. The Central Government has prescribed maximum number of
partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules,2014.
Thus, in effect, a partnership firm cannot have more than 50 members".
Partnerships present the involved parties with complex negotiation and special
challenges that must be navigated unto agreement. Overarching goals, levels of give-and-
take, areas of responsibility, lines of authority and succession, how success is evaluated
and distributed, and often a variety of other factors must all be negotiated. Once agreement
is reached, the partnership is typically enforceable by civil law, especially if well
documented. Partners who wish to make their agreement affirmatively explicit and
enforceable typically draw up Articles of Partnership. Trust and pragmatism are also
essential as it cannot be expected that everything can be written in the initial partnership
Notes agreement, therefore quality governance and clear communication are critical success
factors in the long run. It is common for information about formally partnered entities to
be made public, such as through a press release, a newspaper ad or public records laws.
A partnership is an association of two or more persons to carry on, as co-owners,
a business and to share its profits and losses. The partnership may come into existence
either as a result of the expansion of the sole-trading concern or by means of an agreement
between two or more persons desirous of forming a partnership.
A partnership is an arrangement where parties agree to cooperate to advance their
mutual interests. The need for partnership form of organization arose from the limitation
of sole-proprietorship. In sole-proprietorship, the financial resources and managerial skills
were limited; one man could not supervise all the business activities personally.
Partner is a person who takes part in an undertaking with another or others, especially
in a business or company with shared risks and profits.
An active partner is one who takes active part in the day-to-day working of the
business. He may act in different capacities such as manager, organizer, adviser and
controller of all the affairs of the firm. He may also be called as ‘Working Partner’.
A sleeping partner is one who contributes the capital, shares profits and bears the
loss of the business but doesn’t take part in the working of the concern. A person may
have money to invest but may not be able to devote time for the business; such a person
may become a sleeping partner. However a sleeping partner is equally liable towards the
firm’s liabilities just like other partners. He cannot bind the firm or its members through
his acts. He would also be never known to public; hence he could also be termed as
‘A Secret Partner’.
A nominal partner is one who lends his name to the firm. He does not contribute
any capital nor does he share profits of the business. He is known as a partner to the
third parties. On the strength of his name, the business gets more credit in the market
or may promote its sales. A nominal partner is liable to the third parties who give credit
to the firm on the assumption of that person being a partner in the firm.
A person may become a partner for sharing the profits only. He contributes capital
and is also liable to third parties like other partners. He is not allowed to take part in
the management of the business. Such partners are associated for money and goodwill.
The position of a secret partner lies between active and sleeping partner. His
membership of the firm is kept secret from outsiders. His liability is unlimited and he is
liable for the losses of the business. He can take part in the working of the business.
A partner may associate anybody else in his share in the firm. He gives a part of
his share to the stranger. The relationship is not between the sub-partner and the firm
but between him and the partner. The sub-partner is not the entity of the firm. He is not
liable to the debts of the firm.
A minor is a person who has not yet attained the age of majority. A minor cannot
enter into a contract according to the Indian Contract Act because a contract by a minor
is void ab initio. However, a minor may be admitted to the benefits of an existing partnership
with the consent of all partners. The minor is not personally liable towards the liabilities
of the firm, but this share in the firms profit and property of the partnership concern will
be liable for the debts of the firm.
In this type of partnership the liability of members is unlimited. All the partners
personally and collectively are liable for the obligations of the firm. All the partners can
take part in the working of the business. In India, this kind of partnership exists.
Registration of such firms is not compulsory however certain privileges are available to Notes
the firm which is registered.
A partnership deed is a document that outlines in details the rights and
responsibilities of all parties to a business operation. It has the force of law and is designed
to guide the partners in the conduct of the business.
The dissolution of partnership among all the partners of a firm is called the Dissolution
of the Firm (Sec. 39 of the Partnership Act, 1932). Dissolution of Partnership involves
a change in the relation of partnership business, if the remaining partners resolve to
continue the concern. In such cases there will be a new partnership but the firm will
continue in a reconstituted form.

1. …………….is an association of two or more persons to carry on, as co-owners,
a business and to share its profits and losses.
2. ……………….is a very popular form of business in India.
3. Partner is a person who takes part in an undertaking with another or others,
especially in a business or company with shared……………..
4. An active partner is one who takes active part in the day-to-day working of
the……………..
5. …………..is one who contributes the capital, shares profits and bears the loss
of the business but doesn’t take part in the working of the concern.
II. True or False

1. Partnership is an association of two or more persons to carry on, as co-owners,
a business and to share its profits and losses.
2. Partnership firm is a very popular form of business in India.
3. Partner is a person who takes part in an undertaking with another or others,
especially in a business or company with shared risks and profits.
4. An active partner is one who takes active part in the day-to-day working of the
business.
5. Partnership deed is a document that outlines in details the rights and
responsibilities of all parties to a business operation.
1. What is an association of two or more persons to carry on, as co-owners, a

business and to share its profits and losses?
a) Partnership
b) Partnership firm
c) Dissolution of firm
d) Partnership deed
2. What is a very popular form of business in India?
a) Partnership
b) Partnership firm

Notes c) Dissolution of firm

d) Partnership deed
3. Who is a person who takes part in an undertaking with another or others,
especially in a business or company with shared risks and profit?
a) Partnership
b) Partnership firm
d) Partner
4. What is a document that outlines in details the rights and responsibilities of
all parties to a business operation?
a) Partnership
b) Partnership firm
d) Partner
5. When all the partners resolve to dissolve the partnership, the dissolution of firm
occurs, i.e. the firm is ………….
a) Wound up
b) Partnership firm
d) Partner

1. Who is a Partner?
2. What is Partnership?
3. What is Partnership Firm?
4. Who is Sleeping partner?
5. Who is Active Partner?
6. What is Registration of Firm?
7. What is Partnership Deed?
8. What is Dissolution of Partnership Firm?
1. State the characteristics of partnership.

2. Discuss the essentials of ideal partnership.
3. State the advantages and disadvantages of Partnership.
4. Distinguish between general partnership and limited partnership.
5. State the duties and rights of partner.
6. Discuss various types of Partnership.
7. Explain the process of Registration of Firms.
8. Discuss about Partnership Deed.

6.10 Key Terms Notes

z Partnership: Partnership is an association of two or more persons to carry on,
as co-owners, a business and to share its profits and losses. The partnership
may come into existence either as a result of the expansion of the sole-trading
concern or by means of an agreement between two or more persons desirous
of forming a partnership.
z Partnership Firm: Partnership firm is a very popular form of business in India.
It is when two or more persons come together with a common objective to earn
a profit. It cannot be formed by a single person. To form a partnership two or
more persons are required to come together.
z Nature of Partnership: A partnership is an arrangement where parties agree
to cooperate to advance their mutual interests. The need for partnership form
of organization arose from the limitation of sole-proprietorship. In sole-
proprietorship, the financial resources and managerial skills were limited; one
man could not supervise all the business activities personally.
z Partner: Partner is a person who takes part in an undertaking with another or
others, especially in a business or company with shared risks and profits.
z Active Partner: An active partner is one who takes active part in the day-to-
day working of the business. He may act in different capacities such as
manager, organizer, adviser and controller of all the affairs of the firm. He may
also be called as ‘Working Partner’.
z Sleeping or Dormant Partner: A sleeping partner is one who contributes the
capital, shares profits and bears the loss of the business but doesn’t take part
in the working of the concern. A person may have money to invest but may
not be able to devote time for the business; such a person may become a
sleeping partner.
z Partner of Profits: A person may become a partner for sharing the profits only.
He contributes capital and is also liable to third parties like other partners. He
is not allowed to take part in the management of the business. Such partners
are associated for money and goodwill.
z General Partnership: In this type of partnership the liability of members is
unlimited. All the partners personally and collectively are liable for the obligations
of the firm. All the partners can take part in the working of the business.
z Particular Partnership: When a partnership is started for certain work it is
called particular partnership. When the work is completed the partnership comes
to an end. The partnership may also be for a limited period. It will be dissolved
at the expiry of that period.
z Partnership-at-will: This type of partnership is neither for a fixed period nor
for a particular purpose. The partnership-at-will continuous up to the time the
partners have faith in each other. The life of partnership is not limited by time
and work. It can be dissolved when all the partners want dissolution or any one
of the partner gives notice for the dissolution of the firm.
z Limited Partnership: In general partnership, the liability of partners is
unlimited. This discourages those persons who wants to invest money in
business but do not want to risk their private property. These persons can risk
their investments in the firm but not beyond. The limited partnership provides
them an opportunity for investment.

Notes z Partnership Deed: A partnership deed is a document that outlines in details

the rights and responsibilities of all parties to a business operation. It has the
force of law and is designed to guide the partners in the conduct of the business.
z Dissolution of Partnership Firm: Dissolution of firm means complete
breakdown of the relation of partnership among all the partners. When all the
partners resolve to dissolve the partnership, the dissolution of firm occurs, i.e.
the firm is wound up.

1. Partnership
2. Partnership firm
3. Risks and profits
4. Business
5. Sleeping partner
II. True or False

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

1. [a] 2. [b]
3. [c] 4. [c]
5. [a]
6.12 Case Study

Friends since law school, Ben and Jonathan achieved individual success before
founding their own firm. Ben had been an associate in one of the large, downtown law
offices where he developed an expertise in bankruptcy law, while Jonathan worked at
another large firm focusing on patent law. It was six years ago when, each married and
with growing families, Ben and Jonathan brought their expertise together and launched
their company.
After an enthusiastic beginning, their partnership, now seven years old, is threatened
by simmering bitterness.
Ben’s Story
Jonathan isn’t devoting enough time to make this business work. He typically strolls
in the office at 9:30 and most summer nights he’s running out the door at 5:00. We used
to meet at least twice a week over lunch when we first began the company. We’d talk
over our dreams for the firm and would hash out business development strategies. Now
he’s off on lunch meetings nearly every day, which means even more time out of the office.
It makes my blood boil that he’s slacking off and I’m carrying this business myself.

Jonathan’s Story Notes

The whole reason we launched this partnership is so that we’d be our own bosses.
Right now, I feel like I’m working for Ben. He’s only happy if I’m at my desk every second
of every day, always poised for his next demand. He’s always got a pile of grunt work
for me to do. I’ve got a life outside of work and I’m not going to be bullied by him.
Investigation
In a joint meeting with Ben and Jonathan we uncovered each of their perspectives
in better detail. Ben shared how he feels overwhelmed with the day-to-day tasks of running
the business. He misses the spirit of collaboration that marked the first years of their
business partnership. As the sole income earner for his family Ben’s focused on
maximizing profits for the business. For his part, Jonathan explained that time spent with
his children is important. His wife works so Jonathan drops off their children at school
and daycare before coming to the office. In the summer, he coaches his son’s Little League
team. One aspect of leading the firm that Jonathan particularly likes is forging new client
relationships. His frequent lunch meetings have been his way of networking and this
outreach has been a primary source for new clients.
Resolution
It quickly became clear that care for their families was the key motivator for both
Ben and Jonathan in starting their business. For Ben, it’s through financial security and
sustainability that he primarily contributes to his family. For Jonathan, a flexible schedule
is essential. Uncovering that common value of care for family helped the two partners to
better understand each other’s decisions.
Hearing the complementary contributions each make to the business helped them
to better appreciate the partnership. Once Ben understood the purpose behind Jonathan’s
frequent lunchtime meetings he supported the strategy.
Instead of expecting Jonathan to take on office tasks, it would be a better use of
both Jonathan and Ben’s time if they hired an office manager to handle their administrative
needs. With these demands no longer a drain on Ben’s time and energy, Ben would be
available to mentor and supervise the team of paralegals in their firm. Developing their
talents and skills is a fulfilling role for Ben and advances his goal of sustainability of the
firm.
Jonathan, reminded of the pleasure and value of the conversations he and Ben used
to share, saw again the purpose of regular partner meetings as an essential element for
the health of their company. The two partners now have a standing lunch meeting twice
a week where they alternate discussions on day-to-day management and long-term
strategy for their business.

Notes 10. Charlesworth’s Company Law 8th Edition 1965

6.14 Bibliography
Press.
Kluwer Law Intl
Press.
16. Kershaw, D. (2012) Company law in context: text and materials. 2nd ed.
Oxford:Oxford University Press.
±±±±

Law of Sales of Goods 133
Notes
Unit 7: Law of Sales of Goods
Structure:
7.1 Contract of Sale
7.2 Goods and their Classification
7.3 Meaning of Price
7.4 Conditions and Warranties
7.5 Performance of a Contract of Sale
7.6 Unpaid Seller and his Rights
7.7 Remedies for Breach of Contract
7.8 Summary
7.11 Key Terms
7.13 Case Study
7.15 Bibliography
Objectives

z Contract of Sale
z Goods and their Classification
z Meaning of Price
z Conditions and Warranties
z Performance of a Contract of Sale
z Unpaid Seller and his Rights
z Remedies for Breach of Contract

Notes 7.1 Contract of Sale

A contract of sale is a legal contract. It is a contract for the exchange of goods,
services or property that are the subject of exchange from seller (or vendor) to buyer (or
purchaser) for an agreed upon value in money (or money equivalent) paid or the promise
to pay same. It is a specific type of legal contract. An obvious ancient practice of exchange,
in many common-law jurisdictions it is now governed by statutory law. A contract of sale
lays out the terms of a transaction of goods or services, identifying the goods sold, listing
delivery instructions, inspection period, any warranties and details of payment.
Indian Sale of Goods Act 1930 is a Mercantile Law. The Sale of Goods Act is a
kind of Indian Contract Act. It came into existence on 1 July 1930. It is a contract whereby
the seller transfers or agrees to transfer the property in the goods to the buyer for price.
It is applicable all over India, except Jammu and Kashmir. The goods are sold from owner
to buyer for a certain price and at a given period of time.The name Indian is removed from
the act with effect from 23 September 1963 hence the act name is now Sale of Goods
acts 1930.
In trade and commerce, sales and purchase of goods are very common transactions.
These transactions may appear to be very simple but the possibilities of complications
is always there. Therefore knowledge of basic principles of sale and purchase is very much
essential for all the concerned parties as well as for the entire community.
The Sale of Goods Act contains the basic principles as well as the legal framework
of transactions of sale and purchase.
Earlier the Sale of Goods Act was a part of the Indian Contract Act. A separate
Act was framed in the year 1930.
Essential of a Contract of Sale

(1) There must be at least two parties as a person cannot sale goods to himself.
However there may be a contract of sale between one part-owner and another.
(2) There must be a transfer or agreement to transfer the ownership of goods from
one person to another. Mere transfer of possession is not sale.
(3) The subject matter of sale must be ‘goods’ and movable. The transfer of
immovable property is not governed by Sale of Goods Act, 1930.
(4) The consideration for sale is called price which should be stated in terms of
‘money’. Exchange of ‘goods’ for ‘goods’ is barter and not sale. However price
may be paid partly in terms of money and partly in kind.
(5) All essential elements of a valid contract must be present in a contract of sale.
(6) A contract of sale may be absolute or conditional.
7.2 Goods and their Classification

Goods are material things wanted by human beings. They can be seen or touched.
When we are hungry, we take food. When we fall sick, we take medicines. When we
study, we use book, notebook, pen, paper etc. All these are examples of goods which
satisfy some of our wants. All the things which satisfy human wants are good.
Classification of Goods
The goods which form the subject of a contract of sale may be either existing goods,
owned or possessed by the seller or future goods Sec 6(1) or contingent goods [Sec 6(2)].

1. Existing goods are owned by the seller at the time of sale. They are of the Notes
following types:
(i) Specific goods - These are identified and agreed upon at the time of
sale.
(ii) Ascertained goods - These become ascertained after the contract is
made.
(iii) Generic goods - These are not ascertained at the time of contract and
are defined only by description.
2. Future goods are not owned by the seller at the time of contract but
manufactured or acquired by him subsequent to formation of contract. Where
by a contract of sale the seller purports to effect a present sale of future goods
, the contract operates as an agreement to sale.
3. Contingent goods: These are goods the acquisition of which by seller depends
upon a contingency which may or may not happen.
Difference between Sale and Agreement to Sell
1. Nature of contract: Sale is an executed contract while an agreement to sell
is an executor contract. In an agreement to sell something remains to be done.
It shall become sale only when the conditions ofcontract are fulfilled.
2. Transfer of property: In a sale the transfer of property takes place immediately
but in an agreement tosell, it does not pass to the buyer immediately. As the
buyer, in a sale immediately becomes the owner ofgoods, so the risk also
passes to him. But in an agreement to sell seller still remains the owner so
the riskdoes not pass to the buyer and if the goods are destroyed, the loss
will fall on the seller even though theyare in the possession of the buyer.
3. Creation of right: An agreement to sell creates a ‘Jus in personam’, i.e., a
personal right only against the buyer while a sale creates i.e, right in the goods
against the whole world.
4. Remedies in case of breach: In an agreement to sell, the seller can sue only
for damages for non-performance of contract by the buyer. But in a sale, the
seller can sue for the price of the goods. Inaddition to that he has the right
of lien, stoppage in transit and re-sale.In case of breach of contract of saleby
the seller, the buyer can sue for the delivery of goods or for damages but in
an agreement to sell the buyer has onlya personal remedy against the seller.
5. Consequences of Insolvency: In a sale if the buyer is adjudged insolvent; the
seller must deliver thegoods to the official receiver and can claim rateable
dividend like other unsecured creditors for the priceunpaid on his goods. In an
agreement to sell the seller can refuse to deliver the goods unless paid for
thegoods.
In a sale, if the seller is adjudged insolvent, the buyer is entitled to receive the goods
from the official receiver. But inan agreement to sell, if the buyer has made the payment
in advance to the seller, he can only ask for rateable dividendand not the delivery of goods.
7.3 Meaning of Price

Price is a value that will purchase a definite quantity, weight, or other measure of
a good or service. The considerations in exchange for transfer of ownership, price forms
the essential basis of commercial transactions. It may be fixed by a contract, left to be
determined by an agreed upon formula at a future date or discovered or negotiated during
the course of dealings between the parties involved.
Notes Illustration:
Price
“Price” sometimes refers to the quantity of payment requested by a seller of goods
or services, rather than the eventual payment amount. This requested amount is often
called the asking price or selling price, while the actual payment may be called the
transaction price or traded price. Likewise, the bid price or buying price is the quantity
of payment offered by a buyer of goods or services, although this meaning is more common
in asset or financial markets than in consumer markets.
Economic price theory asserts that in a free market economy the market price
reflects interaction between supply and demand: the price is set so as to equate the
quantity being supplied and that being demanded. In turn these quantities are determined
by the marginal utility of the asset to different buyers and to different sellers. Supply and
demand, and hence price, may be influenced by other factors, such as government subsidy
or manipulation through industry collusion.
Meaning of Pricing
Pricing is the process of determining what a company will receive in exchange for
its product. It is the method adopted by a firm to set its selling price. It depends on the
firm's average costs, and on the customer's perceived value of the product in comparison
to his or her perceived value of the competing products.
Typical pricing objectives
The various objectives of Pricing are as follows:

1. Market penetration objective
In the initial stages of entering the market, the entrepreneurs may set a relatively
low price. This is mainly to secure a large share of the market. In a highly price sensitive
market, the businessman may continue to sell his products even without profit. He is
interested in growth rather than in making a profit. In the market penetration objective,
the unit cost of production and distribution will decrease when the volume of sales attain
a particular target. In brief, market penetration objective is an attempt to secure a large
share of the market by deliberately setting the low prices.
2. Market skimming objective
Market skimming means utilizing the opportunities in the market to reap the benefits
of high sales increased profits and low unit costs. Some of the entrepreneur’s study the
buyer’s needs and try to provide the suitable goods but charge them high prices. This
objective is realized in those markets where the magnitude of competition is very low.
The entrepreneurs, in this situation, make profits over a short period. The market-skimming
objective would not be meaningful, when the consumer refuses to purchase the goods
at the prices fixed by the producers. This pricing objective would be suitable in the markets
where the consumers feel that costly goods are of the superior quality.
3. Target rate of return objective
Rate of return is normally measured in relation to investment and sales. The
producers enjoying some protection may prefer to earn a target rate on investment. This
would be possible where the entrepreneur enjoys a franchise or a monopolistic situation.
But in the long run, every businessman attempts to secure an adequate return on
investment through price setting. Mostly, middleman like wholesalers, retailers will price
their merchandise to earn a particular rate of return on sales.
4. Price stabilization objective Notes

Frequent changes in the prices of product will harm the long-term interests of the
companies. Hence, they aim at stabilization of prices. They do not exploit a short supply
position to earn the maximum. During the periods of good business, they try to keep prices
from rising and during the periods of depression, they keep prices from falling too low.
Thus, they take a long-term view in achieving price stability.
Illustration:
Pricing
Competition Based: Competition-based pricing strategies focus solely on what the
competition is charging, and strive to meet or beat those prices. Sometimes this strategy
is referred to as a rock-bottom pricing strategy, or a low price leader strategy. The goal
is to best your biggest competitors based on pricing alone. As Web Marketing Today
exhibits, the competition-based pricing strategy is used by many large retailers on the
Internet. Because the same products are available from multiple sources, the consumer
buying decision is simply to select the retailer with the lowest price. This pricing strategy
is a difficult one for small businesses to maintain, because it provides very narrow profit
margins that make it challenging for the business to achieve enough momentum to grow.
Penetration Strategy: A penetration pricing strategy is used as a loyalty-building
or market-entry tool. The penetration pricing strategy offers a high-quality product at a
much lower than expected price. This combination helps the business enter a new market
even when strong competitors exist, and it builds loyalty with new customers from the
beginning. The penetration strategy can dramatically increase the lifetime value of
customers, because they're "hooked" with the outstanding first product offering and--
assuming future products are just as high quality--they are more willing to buy additional
products from the company long into the future.
Loss Leader: Also known as a promotional pricing strategy, the goal of the loss
leader pricing strategy is to get new customers even if you do not make a profit from
the initial sale. By taking a loss on the first sale, businesses can offer related products
or upsells at normal prices. Despite losing profits on the promotional product or loss leader,
enough profits are normally made from the additional regular-priced products and services
to sustain the strategy for the long term.
Grocery store sales utilize the loss leader pricing strategy on a regular basis. They
discount one or more items on their shelves to the point of taking a loss of profit, with
the intention of getting customers into their stores. Once there, the customers are likely
to buy more than just those products that are on sale.
High End: Premium pricing takes advantage of a segment of consumers who believe
high quality comes at a premium price. Instead of trying to have the lowest price amongst
competitors, businesses who use the premium pricing strategy attempt to price their
products and services at the highest in their market. This strategy limits the customer
base available to market products and services to, but also provides much higher profit
margins for each sale.
Importance of Pricing
The importance of price is self-evident. The process of setting an adequate price is

not an exact science. The importance of pricing can be summarized as follows:
i) Pricing leads to maximize short term and long-run profit.
ii) It helps to increase sales volume.

Notes iii) It helps to increase monetary sales.

iv) It supports to an organization for increasing market share.
v) It helps to obtain a target rate of return on investment.
vi) It assists to obtain a target rate of return on sales.
vii) It helps to stabilize market or stabilize market price.
viii) It desensitizes customers to product price.
Determination of Pricing
The several issues should be taken into consideration prior to a business determining
a price for its products and services:
i) Costs
Cost is an important element in price determination. Cost data serve as the base.
Price has to be along cost. If price is below the cost of production it would mean
losses. Thus, cost analysis is important. Along the total costs, average and marginal costs
are to be determined.For business decisions in the short run, direct or variable costs have
greater relevance. The firms seek to cover full allocated costs. Economy in cost is also
important for setting a lower price for the product. A high cost of production obviously
calls for a higher price.
ii) Profit Margin
In determining price policy, profit consideration is also significant. In practice,
however, rarely is there a goal of profit maximization. Usually, pricing policy is based on
the goal of obtaining a reasonable profit. Further, most of the businessmen would prefer
to hold constant price for their products rather than going for a price rise on a price cut,
as far as possible.
iii) Market
How much are similar products or services selling for? Can certain demographic
details, such as age, gender and income level, be linked to customers who are most willing
to purchase particular products or services? The answers to these questions and more
are found by researching the market that a business' products or services are a part of.
Likewise, such answers will be influential in setting a price deemed acceptable by
customers; the proof of such should be evident in their purchasing decisions.
iv) Supply and Demand
Supply and demand are like a seesaw in that, as one factor goes up, the other
correspondingly lowers. This is even more evident with items that are always in demand,
such as food and gas. The basis for this stems from the fact that consumers are willing
to pay more for needed items when they are not easily available as opposed to simply
going without them. Constant review of the supply and demand of the products or services
offered by a business will allow it to adjust prices accordingly.
v) Position
Simply put, a business' position is how its target market views its offerings in
comparison to companies that offer similar products or services. Certain companies are
viewed as being high-quality and thus are able to charge more for their products or services.
On the other hand, other companies are viewed as the economical and affordable option
in which case consumers are generally not willing to pay as much for their offerings.

vi) Competition Notes

The nature of pricing policy largely depends on the degree of competition prevailing
in the market. Under perfect competition, there is a uniquely determined ruling price in
the market also the firm has no scope to design its own price policy. Under monopoly,
oligopoly or monopolistic competition, the firm can determine its own price policy.
vii) Government Policy
Pricing policy of a firm is also affected by the government policy. If the government
resorts to price control, the firm has to adopt the price as per the formula and ceiling
prescribed by the Government and then there is little scope to pursue its own pricing.
For instance, in India we have drug price control, etc.
7.4 Conditions and Warranties

A condition is a stipulation essential to the main purpose of the contract and forms
the very basis of thecontract. Its breach gives rise to a right to treat the contract as
repudiated. Thus, if the condition is notfulfilled the buyer has a right to repudiate the
contract, and refuse the goods. If he has already paid theprice, he can recover it from
the seller.
A warranty is a stipulation collateral to the main purpose of the contract, that is to
say, it is a subsidiarypromise. Its breach does not entitle the aggrieved party to repudiate
the contract. He can only claimdamages. Where there is a breach of warranty on the
part of the seller, the buyer must accept the goodsand claim damages.Where A purchases
100 bags of wheat from B. Wheat must be fit for human consumption. This is anessential
stipulation.
Definitions
(1) A stipulation in a contract of sale with reference to goods which are the subject
thereof may be a condition or a warranty.
(2) As per Sec 12(2) of the sale of Goods Act, a condition is a stipulation essential
to the main purpose of the contract, the breach of which gives rise to right to
treat the contract as repudiated.
(3) As per Sec 12(3) of the sale of Goods Act, a warranty is a stipulation collateral
to the main purpose of the contract, the breach of which gives rise to a claim
for damages but not to a right to reject the goods and treat the contract as
repudiated.
(4) Whether a stipulation in a contract of sale is condition or a warranty depends
in each case on the construction of the contract, a stipulation may be a condition
though called warranty in a contract. [Sec 12(4)]
Implied Conditions and Warranties
Even where, in a contract of sale, no definite representations are made, the law
implies certain representations ashaving been made. Such implied representations may
amount to conditions or warranties. Section 14 to 17 of the saleof Goods Act give a list
of conditions and warranties which are implied unless the circumstances of the contract
aresuch as to show a different intention.
Implied Warranties
Subject to a contract to the contrary the following warranties are implied in every
contract of sale.

Notes 1. That the buyer shall have and enjoy quiet possession of the goods. If his
possession is disturbed either bythe seller or some other person claiming
superior title, buyer can recover damages from the seller for the breach of
animplied warranty of quiet possession. A bought a typewriter from B for Rs.200.
A spent Rs.11 O on overhauling it.Unknown to A and B the typewriter was stolen
property and A had to return it to the real owner. A was held entitled to claim
from B the sum of Rs.200+110=310 as damages for breach of warranty of quiet
possession.
2. That the goods are free from any charge or encumbrance in favor of a third party
not declared orknown to the buyer before or at the time when the contract is
made. If the buyer has to discharge theamount of the charge or encumbrance
on the goods, there is a breach of implied warranty and he canclaim the amount
as damages from the seller.
A sells to B a used motor-car which was previously mortgaged to C, but B has no
knowledge of the mortgage and Adoes not inform B of its existence. A is liable to B for
breach of the implied warranty against encumbrances.
Implied Conditions
1. Conditions as to title
There is an implied condition on the part of the seller that, in the case of sale, he
has the right to sell the goods, and in the case of an agreement to sell, he will have
the right to sell the goods when theproperty is to pass. Thus if the seller has no title
to the good, the buyer can reject the goods, or if he has takenpossession of the goods
and is deprived of it by the real owner, the buyer can recover the full price of the goods
evenif he has made use of them.A bought a motor-car from and used it for 4 months.
B had no title to the car because hehas obtained the possession by theft and consequently
A had to surrender it to the real owner. A was entitled torecover from B the full price even
though he used the car for 4 months.
2. Sale by Description
Where there is a sale of goods by description, there is an implied condition that
the goods shall correspond with the description. Goods are sold by description when they
are described by the contract by meansof words, symbols, number of grade, and the buyer
relies on them when buying. The rule that the goods shallcorrespond with the description
applies both to specific and unascertained goods.A bought a truck loads of corn fromB
on the basis of a letter from the seller which referred to the corn as “No.3 Yellow 21 per
cent moisture”. When thecorn was received, it was 49 per cent moisture, moldy and unfit
for use. A could reject the goods or accept them andsue for damages.
3. Sale by Sample
When the goods are to be supplied according to sample agreed upon the following
conditions are implied
(a) The bulk shall correspond with sample in quality.
(b) The buyer shall have a reasonable opportunity of comparing the goods with
sample.
(c) The goods shall be free from any latent defects rendering them merchantablewhich
would not beapparent on reasonable examination of the sample.
Example:
(i) A sold to B by sample some apples put up in cans. The sample can appeared
to be satisfactory, but the remainder of the goods were found to be spoiled.
A was liable to pay damage to B for a breach ofimplied condition. B could reject Notes
the goods, if he liked.
(ii) A sold two parcels of wheat by sample to B. B went to inspect the goods. One
parcel was shown, notboth. On finding the other parcel defective B was entitled
to rescind the contract.
Passing of the Property from the Seller to the Buyer

A Sale is defined as transfer of ownership of the goods from the seller to the buyer
for a price. Therefore what is important in a transaction of sale is the transfer of the
ownership. It is essential to determine the exact point of time at which the ownership
of the goods is transferred in favour of the buyer. Sections 18 to 25 of the Sale of Goods
Act, determine when the property passes from the seller to the buyer.
Specific goods
(i) Specific goods in a deliverable state

Where there is an unconditional contract for the sale of specific goods in a deliverable
state, the property in the goods passes to the buyer when the contract is made, and
it is immaterial whether the time of payment of the price or the time of delivery of the
goods, or both, is postponed.
(ii) Specific goods to be put into a deliverable state
Where there is a contract for the sale of specific goods and the seller is bound to
do something to the goods for the purpose of putting them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice thereof.
(iii) Specific goods in a deliverable state
When the seller has to do anything thereto in order to ascertain price Where there
is a contract for the sale of specific goods in a deliverable state, but the seller is bound
to weigh, measure, test or do some other act or thing with reference to the goods for
the purpose of ascertaining the price, the property does not pass until such act or thing
is done and the buyer has notice thereof.
Unascertained Goods
(1) Where there is a contract for the sale of unascertained or future goods by de
scription and goods of that description and in a deliverable state are uncondition
ally appropriated to the contract, either by the seller with the assent of the buyer
or by the buyer with the assent of the seller, the property in the goods thereupon
passes to the buyer. Such assent may be expressed or implied, and may be
given either before or after the appropriation is made.
(2) Delivery to carrier-Where, in pursuance of the contract, the seller delivers the
goods.
Goods on approval or ‘on sale or return’
When goods are delivered to the buyer on approval or on sale or return or other similar
terms, the property therein passes to the buyer:
(a) When he signifies his approval or acceptance to the seller to does not other
actadopting the transaction.
(b) If he does not signify his approval or acceptance to the seller but retains the
gods without giving notice of rejection, then, if a time has been fixed for the
Notes return of the goods, on the expiration of such time, and, if not time has been
fixed, on the expiration of a reasonable time.
7.5 Performance of a Contract of Sale

The term 'performance of the contract of sale' may be defined as the performance
of the respective duties of the seller and the buyer as per the terms of the contract. Thus,
the performance of the contract of sale comprises two parts, namely:
i) Seller's duty to deliver the goods.
ii) Buyer's duty to accept the goods and pay the price.
It is important to note that the delivery of the goods and the payment of their price
are concurrent conditions, i.e., both these conditions should be performed at the same
time. This provision is included in Section 32 of the Sale of Goods Act, which provides
that the seller should be ready and willing to deliver the goods to the buyer, in exchange
for the actual possession of the goods. However, the parties may also agree otherwise,
i.e., they may enter into an agreement as to when the goods are to be delivered, and
as to when the price is to be paid.
Illustration: Amita agreed to deliver certain goods to Bunty. The price was to be
paid by Bunty on the delivery of the goods. In this case, Amita need not deliver the goods,
unless Bunty is ready and willing to pay the price of the goods on delivery. In fact Bunty
need not pay for goods, unless Amita is ready and willing to deliver them on the payment
of the price. This is because each of the parties in the transaction must be willing to
perform their respective part of the sale .
Thus, each party should be ready and willing to perform his or her part of the promise
before one can call upon the other to act on his or her promise.
Mode of Delivery
1. Actual delivery
Actual delivery means physical transfer of goods by the seller to the buyer. The
delivery may be made by the agent of the seller to the agent of the buyer.
2. Symbolic delivery
Where the goods are bulky, it is usual for the seller to give symbolic delivery. For
example, where the timber is lying in a warehouse, the delivery of key is regarded as
symbolic delivery which has the effect of putting the buyer in possession or actual control
of the goods.
It should be noted that the key must give complete access to the goods. If for
example, the key of a room in which the goods are kept is given but the key of the main
gate or door is not given, it is not regarded as a valid delivery.
3. Constructive delivery
In place of actual or symbolic delivery, the goods may be delivered without any
change in their actual or visible custody. For example, where the goods at the time of
sale are in possession of a third person and such third person acknowledges to the buyer
that he holds the goods on his (buyer's) behalf, the delivery is called constructive delivery.
Example: A sells to B 100 bags of rice lying in C's warehouse. C acknowledges
to B that he is holding these 100 bags on behalf of B. It is constructive delivery by A
to B.
Rules Regarding Delivery Notes

1. Delivery by whom and to whom (Sec. 31)
It is the duty of the seller to deliver the goods and of the buyer to accept and pay
for the goods delivered.
2. Delivery and payment are concurrent conditions (Sec. 32)
Unless otherwise agreed, delivery of goods and payment of price are concurrent
conditions, i.e., at the same time or reciprocally. The seller shall be ready and willing
to deliver the goods and the buyer shall be ready and willing to pay the price in exchange
for delivery of the goods.
3. Mode of delivery (Sec. 33)
This has been discussed in detail in earlier paragraphs. The delivery may be actual,
symbolic or constructive. The parties may agree to any mode of delivery expressly or
impliedly.
4. Effect of part delivery (Sec. 34)
A delivery of part of the goods, in the process of the delivery of the whole, has the
same effect, for the purpose of passing the property in such goods, as a delivery of the
whole. However, delivery of part of the goods, with an intention of severing it from the whole,
does not operate as a delivery of the remainder.
Example: A ship arrived at the port laden with a cargo of wheat. The owner endorsed
the bill of lading to A. The master of the ship reported to the customs that the cargo
was for A. Next day, A made entry of the wheat in his name at the customs house.
Thereupon, part of the cargo was delivered to A. Held, this constituted a delivery of the
whole [Slubey v. Hey ward].
5. Delivery to be made on request of the buyer (Sec. 35)
Apart from any express contract, a seller is not bound to deliver the goods unless
and until requested by the buyer. If the seller fails to deliver the goods on the application
of the buyer, the seller is guilty of breach of contract.
6. Place of delivery [Sec. 36(1)]
In the absence of an agreement, express or implied, the goods sold are to be delivered
at the place at which they are at the time of sale. The goods agreed to be sold are to
be delivered at the place at which they are at the time of the agreement to sell, or if not
then in existence, at the place at which they are manufactured or produced.
7. Time of delivery
If any time is specified by the parties, the goods must be delivered by that time.
(i) If the seller is bound to send the goods to the buyer and no time has been
fixed by the parties, the goods must be delivered within a reasonable time [Sec.
36(2)]. What is reasonable time is a question of fact in each case?
(ii) The demand for delivery should be made at a reasonable hour. What is a
reasonable hour is a question of fact?
8. Delivery of goods in possession of third persons [Sec. 36(3)]
Where the goods at the time of sale are in possession of a third person, there is
no delivery by the seller to the buyer unless such third person acknowledges to the buyer
that he holds the goods on his behalf.

Notes It should be noted that this rule does not affect the transfer of goods by means of
a document of title of goods, e.g., where goods have been sold by a bill of lading, consent
of the third party is not necessary.
9. Expenses of delivery
Unless otherwise agreed, the expenses of and incidental to putting the goods into
a deliverable state shall be borne by the seller. In case the buyer is compelled to pay
these expenses, he can recover the same from the seller.
10. Effect of delivery of wrong quantity (Sec. 37)
(i) Short Delivery [Sec. 37(1)]: Where the seller delivers lesser quantity than
contracted for, the buyer has the option to accept or reject the whole. Naturally,
when he accepts, he must pay for them at the contract price.
Example: A ordered B to supply 10 bags of rice. B supplied only 6 bags. A
is at liberty to accept 6 bags or to reject them. When he accepts them, he
must pay for the 6 bags at the contracted price.
A ordered B to supply 10 bags of rice. B supplied 15 bags. A has the option
to accept 10 bags and pay for them. He may accept even 15 bags and pay
for him. He is entitled to reject the whole [Cunliffe v. Harrison],
It should be noted that the right to reject the goods in excess of the contract
does not apply where the variation is negligible. This is due to the reason that
the law does not take account of trifles, i.e., the Court applies the maxim de
minimise non curatlex.
(ii) Delivery of mixed goods [Sec. 37(3)]: Where the seller delivers to the buyer
the goods he contracted to sell mixed with goods of a different description not
included in the contract, the buyer may accept the goods which are in
accordance with the contract and reject the rest, or may reject the whole.
Example: Certain specific articles of China were ordered. The seller in addition
sent some of his articles of China. Held, the buyer could reject the whole [Levy
v. Green.]
These rules can be modified by a contract expressly or implied, i.e., usage or custom
of the trade [Sec. 37 (4)].
11. Delivery by installment (Sec. 38):
Unless otherwise agreed, the buyer of goods is not bound to accept delivery in
installments. He may, if he so desires, refuse the goods.
Example: 25 tons of pepper October/November shipment was sold. The seller shipped
20 tons in November and 5 tons in December. Held, the buyer was entitled to reject the
whole [Reuter v. Sala],
(i) Unconditional delivery to carrier or wharfinger means delivery by buyer (sec. 39):
Where in pursuance of a contract of sale, the seller is authorized or required to send
the goods to the buyer, delivery of goods to a carrier for the purpose of transmission to
the buyer or to a wharfinger for safe custody is prima facie deemed to be a delivery of
the goods to the buyer.
(ii) Seller's duty to reasonably secure goods before delivery [Sec. 39(2)]:
Where the goods are delivered to a carrier or wharfinger, it is the duty of the seller
to reasonably secure the responsibility of the carrier for the safe delivery of the goods.
In case the seller fails to do so, he will be liable to make good the loss suffered by the
buyer.
(iii) Seller's duty to inform the buyer to get the goods insured in case the goods Notes
involve a sea transit [Sec. 39(3)]:
Where the goods are sent by the seller to the buyer by a route involving sea transit,
the seller is bound to give such notice to the buyer as may enable him to insure the goods
during sea transit. Failure to do so will mean that the goods are at the seller's risk during
the transit and the seller will have to make good the loss suffered by the buyer.
7.6 Unpaid Seller and his Rights

The seller who has not received price of goods sold or the seller who has got his
negotiable instrument dishonored will become Unpaid Seller. Sale of goods act, 1930
Section 45 to 55 read about the rights of Unpaid Seller. Those rights can be classified
into two groups.
Rights of Unpaid Seller against Goods
When goods are in existence and title has not gone to buyer, Unpaid Seller can
exercise the rights against goods. These rights are categorized into three types. They
are as follows:
1. Right of lien
Right to retain goods by unpaid seller till amount is recovered is called right of lien.
If unpaid seller wants to exercise right of lien, he has to fulfill the following conditions.
He must be unpaid seller
There should be no credit terms in the Contract of Sale.
After completion of credit period, right of lien can be exercised.
The unpaid seller should have obtained those goods lawfully.
Amount must be due on those goods only against which right of lien is decided.
2. Right of stoppage in transit
Unpaid Seller has right to stop the goods in the transit itself. To exercise this right
the following conditions are to be fulfilled.
He must be unpaid seller.
Buyer must be insolvent.
There should be no credit terms in the Contract of Sale. After expiry of Credit period,
this right can be exercised.
Amount must be due on those goods only against which this right is desired.
At times the transport company may refuse to deliver the goods to buyer due to
any reason. Then the goods are said to be in transit. At times, the buyer may retain the
goods at the transport company. Then the goods are said to be not in transit.
3. Right to re-sale
The unpaid seller can re-sell the goods for non-payment of price by buyer. He can
exercise this right when the goods are of perishable nature while doing so it is beneficiary
to the seller to give a notice to buyer with regard to resale. If such notice is given seller
can claim loss. If any on resale from the buyer. On the other hand if there is profit on
resale the former buyer cannot claim that profit. If notice is not given the seller has to
face adverse consequence. If there is any loss on re-sale, that loss cannot be recovered
Notes from buyer. But in case of profit, seller has responsibility to pay that amount of profit to
buyer.
Rights of Unpaid Seller against Buyer
At times it becomes inevitable choice to exercise rights on buyer for non-payment

of price. The unpaid seller can file suits against the buyer as explained below:
1. Right to sue for price
It is fundamental right of buyer to file a suit for recovery of unpaid price. In the case
of sale. Suit will be made for price balance, but not for compensation.
2. Right to sue to interest
If the buyer makes unreasonable delay for making payment, the seller has right to
claim interest also.
3. Right to sue for compensation
When an agreement to sell is breached, the seller can see only for compensation
for the breach of Contract. Under such circumstances he cannot sue for price.
4. Right to Sue for anticipatory contract
When an agreement to sell is breached by buyer before date of performance. It is
called anticipatory breach. Then also seller can sue for compensation.
7.7 Remedies for breach of contract

Whenever contract is breached by one of the Party in a contract, the other party
comes across some suffering. Therefore, contract act has given certain rights to such
suffering party. Those rights are called remedies for breach of contract. Those are given
below:
1. Rights to sue for Specific Performance
At times the suffering party may file a suit claiming specific performance form the
party which has breached the contract. But this type of suit very rarely becomes
successful. The following are some circumstances where suit for specific performance will
not be taken into consideration.
Example 1: When performance depends upon personal talent and the party has
list Such talent.
Example 2: When court thinks that it is just and equitable to arrange for
compensation.
2. Rights to sue for Injunction Order
The order issued by court restrict in a person from doing a particular thing is called
injunction order. Upon breach of contract the suffering party may proceed legally for
injunction order.
A case on this point is BarnerBros.Vs Nelson. In this case a contract gets formed
between A and B according to which B has to conduct his dance programs at A`s theater
only for certain period. But B breaches the contract and arranges his programs at other
theaters also before expiry of agreed period. A`s sues for injunction order. Then court
issues injunction order saying that B should not conduct his programs at other theaters
before expiry of agreed period.

3. Rights to sue for Quantum Meruit Notes

Whenever a party performs the contract partially and then the other party breaches
the contract, Suit can be filed claiming proportionate remuneration. It is called suit for
quantum meruit.
A case on this point is FlanchVsKarlbarn. In this case A is editor of a magazine
and B is a writer. According to their contract B has to supply story to A`s magazine for
certain number of weeks for a particular consideration. B supplies story for some weeks
and there after A closes down his magazine. B sue`s for proportionate remuneration and
it is allowed by court.
4. Rights to sue for Recession of Parties
At times, the suffering party may sue for recession for contract.
Example: A contract has got formed between A and B on 1st January. According
to their contract A has to supply 100 pairs of readymade dresses to B, on 1st April on
28th March strike by transport companies is announced which will be called off on 3rd
April. It should be noted that A cannot supply on 1st April. But B is in need of those
dresses only on 1st April. Hence B can sue for recession on contract.
5. Right to sue for Damages
Damages in legal terms called Compensation. Whenever one of the parties in the
Contract comes across breach of Contract, the other party rights to sue for damages.
7.8 Summary
The law as to the sale of goods was originally embodied in section 76 to 123 of
the Indian Contract Act 1872. Law relating to sale of goods is a branch of contract law
as the general principles of contracts are applicable to contracts for sale of goods such
as offer and its acceptance capacity of party’s free consent.
Sale of goods has two elements one is sale and both the other is delivery of goods.
The sale of goods act applies only to movables other than actionable claims and money
and not to immovable which are governed by the transfer of property act 1882.
Goods mean every kind of movable property other than actionable claims and money
and include stock and shares. Growing crops grass and things attached. To or forming
part of the land which are agreed to be served before save or under the contract of sale
shares and stock are goods. Even things like goodwill copyright trade more. Parent etc.
are all goods gas and electricity though not governed by the sale of goods act has been
held to be goods by calculate and Madhya Pradesh high courts. Money is the only
consideration in sale of goods money means current money is not goods. If goods are
sold for goods the transaction rest exchange governed by the transfer of property act 1882.
Document of title to goods includes a bill of lading dock warrant warehouse keepers
certificate what fingers certificate railway receipt warrant or order for the delivery of goods
and any other document used in the ordinary course of business as proof of the possession
or control of goods. Bill of lading dock warrant warehouse keepers certificate what fingers
certificate delivery warrant are some of the documents of little to goods. Bill of leading
it is well settled in commercial world that a bill of lading represents the goods and the
transfer of it operates as a transfer of the goods. General property means ownership of
the goods special property means special interest in the goods. Transfer of property is
thus transfer of property determines transfer of risk from seller to buyer.

Notes 7.9 Check Your Progress

1. Extremely small item of evidence such as hair that is believed to be transferred
from one object to the other is usually referred to as _____________.
2. Evidence such as pry marks on a doorjamb which establishes that a crime has
been committed is referred as _____________.
3. Evidence such as fingerprints and blood stains that link a suspect with a crime
is called _____________.
4. _____________ evidence consists of a verbal statement offered by a witness
while under oath or affirmation.
5. A preliminary begins when the ____ officer receives a radio call to a crime scene.
6. __________ are spontaneous unplanned remarks made by a person at the crime
scene.
II. True or False

1. The law as to the sale of goods was originally embodied in sections 76 to 123
of the Indian Contract Act 1872.
2. 1930 is based upon and is largely a re-production of the English sale of good
Act.
3. 1894 and in principal the law of sale of goods in both the countries is now the
same.
4. Law relating to sale of goods is a branch of contract law as the general principles
of contracts are applicable to contracts for sale of goods such as offer and its
acceptance capacity of parties, free consent consideration and legality of the
object.
5. Sale of goods has two elements one is the sale and other is delivery of goods.

1. The sale of goods act applies only………………
[a] Movable goods
[b] Actionable claims
[c] Both a and b
[d] Immovable goods
2. Which section lays down goods?
[a] Sec 2[7]
[b] Sec 7[2]
[c] Sec 8[3]
[d] Sec 3[8]
3. Goods means…………..
[a] Stocks and shares
[b] Growing crops
[c] Movable shares
[d] All of these

4. Kinds of goods…………….. Notes

[a] Specific goods
[b] Future goods
[c] Generic goods
[d] All of these
5. A sale of one kg of oil from 100kgs oil with the merchant is a sale is
called……………………
[a] Specific goods
[b] Generic goods
[c] Future goods
[d] Both a and c

1. Define the term Sale.
2. What is Contract of sale?
3. Define the term Goods?
4. What is Convenience Goods?
5. What is Shopping Goods?
6. What is pricing?
7. What is Condition?
8. What is Warranty?
9. What is Performance of a contract of sale?
10. What is unpaid seller?

1. Discuss in details about Contract of Sale.
2. Explain about Goods and their classification.
3. Discuss various types of Pricing?
4. Discuss various types of pricing strategy?
5. Explain in details about Conditions and Warranties.
6. Discuss about performance of a contract of sale.
7. Explain in details about unpaid seller and his rights.
8. Discuss about remedies for breach of contract.
7.11 Key Terms

z Contract of Sale: A contract of sale is a legal contract. It is a contract for
the exchange of goods, services or property that are the subject of exchange
from seller (or vendor) to buyer (or purchaser) for an agreed upon value in money
(or money equivalent) paid or the promise to pay same. It is a specific type
of legal contract. An obvious ancient practice of exchange, in many common-
law jurisdictions it is now governed by statutory law. A contract of sale lays

Notes out the terms of a transaction of goods or services, identifying the goods sold,
listing delivery instructions, inspection period, any warranties and details of
payment.
z Buyer: ‘Buyer” means a person, who buys or agrees to buy goods,
z Delivery: “Delivery” means voluntary transfer of possession from one person
to another.
z Sales: “Sale” means transfer of property in goods for a price.
z Hire Purchase: “Hire – Purchase Agreement” means the seller delivers the
possession of the goods to the other person and he charges rent for the goods.
After receiving the price of the goods, the ownership of the goods is passed
on to the purchaser
z Goods: Goods are material things wanted by human beings. They can be seen
or touched. When we are hungry, we take food. When we fall sick, we take
medicines. When we study, we use book, notebook, pen, paper etc. All these
are examples of goods which satisfy some of our wants. All the things which
satisfy human wants are good.
z Contingent goods: These are goods the acquisition of which by seller depends
upon a contingency which may or may not happen.
z Price: Price is a value that will purchase a definite quantity, weight, or other
measure of a good or service. The considerations in exchange for transfer of
ownership, price forms the essential basis of commercial transactions. It may
be fixed by a contract, left to be determined by an agreed upon formula at a
future date or discovered or negotiated during the course of dealings between
the parties involved.
z Pricing: Pricing is the process of determining what a company will receive in
exchange for its product. It is the method adopted by a firm to set its selling
price. It depends on the firm's average costs, and on the customer's perceived
value of the product in comparison to his or her perceived value of the competing
products.
z Competition-based pricing: Competition-based pricing is a pricing method in
which a seller uses prices of competing products as a benchmark instead of
considering own costs or the customer demand. Setting the price based upon
prices of the similar competitor products.
z Mark-up pricing: Mark-up is the difference between the costs of producing and
selling a product (fixed costs plus variable costs) and the market selling price
of the product. It is the difference between what you spend to produce the
product and what the customer spends to purchase it.
z Conditions: A condition is a stipulation essential to the main purpose of the
contract and forms the very basis of the contract. Its breach gives rise to a
right to treat the contract as repudiated.
z Warrant: A warranty is a stipulation collateral to the main purpose of the
contract, that is to say, it is a subsidiary promise. Its breach does not entitle
the aggrieved party to repudiate the contract. He can only claim damages.
Where there is a breach of warranty on the part of the seller, the buyer must
accept the goods and claim damages.
z Performance of a Contract of Sale: The term 'performance of the contract
of sale' may be defined as the performance of the respective duties of the seller
and the buyer as per the terms of the contract.

z Unpaid seller and his rights: The seller who has not received price of goods Notes
sold or the seller who has got his negotiable instrument dishonored will become
Unpaid Seller. Sale of goods act, 1930 Section 45 to 55 read about the rights
of Unpaid Seller. Those rights can be classified into two groups.

1. Trace evidence 2. Corpus deficits
3. Associative evidence 4. Testimonial evidence
5. Responding 6. Res Geste evidence
II. True or False
1. True 2. True
3. False 4. True
5. True
1. [c] 2. [a]
3. [d] 4. [d]
5. [b]
7.13 Case Study

The Appellant-Company sold a certain number of fogging machines (used for killing
mosquitoes) to the Respondent-Corporation for which the payment had to be made within
one week of delivery. The Respondents did not pay within one week. The Respondent
did not communicate with the appellants w.r.t the payment afterwards too. After 6 months
of using the machine, the Respondents communicated with the appellants, but only to
complain about the fogging machines’ inefficiency. They said that the machines were
defective. Next, the Respondents intended to return the machines. The Appellants have
filed this suit to recover the payment of machines from the respondents. This Judgement
is given after three year of the delivery of goods.
According to section 42 of the Sale of Goods Act, the act of receiving the machine,
after demonstration, using it and retaining it for a long time amounts to valid acceptance.
In this case, the Respondents have accepted the machines.
The Court in this case discussed Section 32 of the Act (payment and delivery are
concurrent conditions) and noted that the law provides that payment and delivery are
concurrent but that is subject to an agreement otherwise. Here the agreement was for
payment within one week of delivery. Furthermore, in the present case, three years are
over.
Section 13 (2) of the Indian Sale of Goods Act, 1930, clearly states that where there
is a warranty then at best the purchaser can raise a claim for damage but cannot repudiate
the transaction itself as is being sought to be done by the Corporation. This section was
read with Section 59 of the Act. Section 59 says that a buyer is not by reason of a breach
of warranty (by the seller) entitled to reject the goods. He may sue for damages or for
breach of warranty. Here too, the Respondents, after using the machines for a long time,
cannot simply return the machines to the appellants without payment for the machines.
The court eventually held that the Respondent-Corporation is at fault in law for the
non-payment. The facts are merely a pretext to withhold the payment.
Notes Questions:
1. Do you think the court eventually held that the Respondent-Corporation which
is at fault in law for the non-payment?
2. Whether the Respondents are liable to pay for the machines?

7.15 Bibliography
Press.
Kluwer Law Intl
±±±±
Law of Negotiable Instruments 153
Notes
Unit 8: Law of Negotiable Instruments
Structure:
8.1 Negotiable Instruments
8.2 Presentment of Negotiable Instruments
8.3 Dishonour of Cheques
8.4 Crossing of Cheques
8.5 Paying Banker
8.6 Summary
8.9 Key Terms
8.11 Case Study
8.13 Bibliography
Objectives

z Negotiable Instruments
z Presentment of Negotiable Instruments
z Dishonour of Cheques
z Crossing of Cheques
z Paying Banker

Notes 8.1 Negotiable Instruments

‘Negotiable’ means transferable whereas ‘instrument’ means a document, therefore
negotiable instruments means a transferable document. A negotiable instrument is one
which entitles the holder to the receipt of money. It gives him the right to transfer the
same by mere delivery or endorsement thereon. The negotiability of the instrument
continues till its maturity. A negotiable instrument may be made payable to two or more
payees jointly or it may be made payable in the alternative to one or two, or one or some
of several payees.
Under the UCC, an unqualified endorser who receives payment or consideration for
a negotiable instrument provides a series of implied warranties to the transferee and any
subsequent holder in due course. An unqualified endorser warranties that he or she has
good title to the instrument or represents a person with title, and that the transfer is
otherwise rightful. The endorser also warranties that all signatures are genuine or
authorized, that the instrument has not been materially altered, that no defense of any
prior party is good against the endorser, and that the endorser has no knowledge of any
insolvency proceeding involving the payer.
Other issues concerning negotiable instruments are also covered in Article 3 of the
UCC. In the case of a forgery, the negotiable instrument becomes inoperative. Antedated
or past-dated instruments are not invalid, provided the dating was not done for fraudulent
or illegal purposes. Negotiable instruments that have been materially altered without the
permission of all parties involved are void. But a holder in due course who is not party
to the material alteration can enforce payment according to the instrument's original terms.
Also covered in Article 3 are interpretations of contradictions that may appear from time
to time in negotiable instruments.
Meaning of Negotiable Instrument
Negotiable Instrument is a transferable, signed document that promises to pay to

a certain person or to the bearer of the instrument, a certain sum of money at a future
date or on demand. Examples: Cheques, Bills of exchange and Promissory notes.
Definitions of Negotiable Instrument
According to Section 13 (a) of the Negotiable Instruments Act 1881, “Negotiable

instrument means a promissory note, bill of exchange or cheque payable either to order
or to bearer, whether the word “order” or “ bearer” appear on the instrument or not.”
According to Justice, Willis, “A negotiable instrument is one, the property in which
is acquired by anyone who takes it bonafide and for value notwithstanding any defects
of the title in the person from whom he took it”.
Characteristics of Negotiable Instrument
The important features or characteristics of negotiable instrument are:

1. Property: Negotiable instrument is the property like other valuable assets. The
person for whom the instrument is drawn is the holder and owner of that property.
2. Defects in Title: The holder in good faith and for value called the ‘holder in
due course’ gets the instrument free from all defects of any previous holder.
3. Payable to certain person: Certain person is a person whose name is
mentioned in negotiable instrument. The Negotiable instrument instructs to pay
only to the certain person.
4. Right: The holder in due course is not affected by certain defences which might Notes
be available against previous holder, for example, fraud, to which he is not a
party.
5. Payable to Order: All the negotiable instruments are payable to order which
is expressed to a particular person.
6. Payable to Bearer: The negotiable instrument is expressed to be payable to
bearer when it is blank endorsement. It specifies that the person in possession
of the bill is a bearer of the instrument which is so expressed payable to bearer.
7. Payment: A negotiable instrument may be made payable to two or more payees
or it may be payable in alternative to one or two payees.
8. Consideration: Consideration is the concept of legal value in connection with
contracts. Consideration in the case of a negotiable instrument is assumed.
Types of Negotiable Instrument
A negotiable instrument can be of the following types:

1. Promissory Notes
A “promissory note” is an instrument in writing containing an unconditional
under-taking, signed by the maker, to pay a certain sum of money only to, or to the order
of, a certain person, or to the bearer of the instrument.
Features or Characteristics of a Promissory Note
The important features or characteristics of a promissory note are:
i) Instrument in Writing: The promissory note must be in writing. Oral
engagement or promise is excluded.
ii) Undertaking to Pay: It is not necessary to use the word “promise” but the
intention must clearly show an ‘unconditional undertaking’ to pay the amount.
iii) Unconditional: It must contain definite and an unconditional undertaking to pay.
Promise to pay should be unconditional. A conditional instrument is invalid.
iv) Signed by the maker: The instrument must be signed by the maker thereof.
Person must sign with his consent. It should not only be a physical act but
also a mental act with an intention to sign.
v) Payable to certain person: The maker and payee of the instrument must be
a definite person. A note may be made by several people to bind them jointly.
A promissory note cannot be made by two persons. Two different people should
fill in the role of a maker and payee.
vi) Certain sum of money: The maker of the promissory note promises to pay
a certain sum of money only.
vii) Payable on demand: The amount is payable on demand of payee.
viii) Stamping: Promissory notes are chargeable with stamp duty. An unstamped
or improperly or insufficiently stamped promissory note is not valid as evidence
in court of law. No suit can be maintained upon an unstamped or improperly
stamped promissory note.
2. Bills of Exchange
A Bill of Exchange has been defined under Section 5 of the NI Act as “an instrument
in writing containing an unconditional order, signed by the maker, directing a certain person
to pay a certain sum of money only to or to the order of certain persons or to the bearer
of the instrument.”

Notes Features or Characteristics of Bills of Exchange

The important features or characteristic of bills of exchange are as follows:
i) Instrument in writing: A bill of exchange must be in writing and may be in
any language and in any form.
ii) Signed by the drawer: The bill must be signed by the drawer.
iii) Unconditional: It must contain definite and an unconditional order to pay. A
conditional instrument is invalid.
iv) Order to Pay: The bill of exchange must contain an order by the drawer to
the drawee to pay under any circumstances.
v) Payable to a certain person: Bill may be made payable to two or more payees
jointly or in the alternatives.
vi) Certain Sum of money: The sum payable may be ‘certain’ although it includes
future interest or is payable at an indicated rate of exchange, or is according
to the course of exchange.
vii) Payable on demand: The amount is payable on demand of payee.
viii) Stamping: Bills of exchange are chargeable with stamp duty. An unstamped
or improperly or insufficiently stamped bill of exchange is not valid as evidence
in court of law.
3. Cheques
A Cheque is an instrument in writing, containing an unconditional order, drawn on
a specified banker, signed by the drawer, directing the banker, to pay, on demand, a certain
sum of money only, to a certain person or to his order or to the bearer of the instrument.
A cheque is a document or instrument that orders a payment of money from a bank
account. The person writing the cheque, the drawer, usually has a current account, or
checking account, or chequingaccount where their money was previously deposited. The
drawer writes the various details including the money 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.
4. Certificate of Deposit
Certificate of deposit is a negotiable financial instrument issued by a bank
documenting a deposit; with principal and interest repayable to the bearer at a specified
future date.
Importance of Certificate of Deposit
1. These are freely transferable by endorsement and delivery.
2. Issued at discount to face value.
3. These are document of title to time deposits.
4. Repayable on a fixed date without grace.
5. The most convenient instruments to depositors as they enable short term
surpluses to earn higher returns.
6. CDs offer maximum liquidity as they are transferable by endorsement and
delivery. The holder can resell his certificate to another person or party.
7. From the view of issuing bank, it is a means to raise resources in times of
need and improve their lending capacity. The CDs are fixed term deposits which
cannot be withdrawn until the redemption date.

8. It is an ideal instrument for banks with short term surplus funds to invest at Notes
attractive rates.
5. Commercial Paper
A Commercial Paper is an unsecured promissory note issued with a fixed maturity,
short-term debt instrument issued by a corporation approved by RBI, typically for the
financing of accounts receivable, inventories and meeting short-term liabilities. Maturities
on commercial paper rarely range any longer than 270 days. The debt is usually issued
at a discount, reflecting prevailing market interest rates. Commercial paper is not usually
backed by any form of collateral, so only firms with high-quality debt ratings will easily
find buyers without having to offer a substantial discount (higher cost) for the debt issue.
6. Treasury Bills
A treasury bill is a kind of finance bill or promissory note issued by the government
of the country to raise short term funds. According to one categorisation, Treasury bills
are ad hoc, tap, and action bills. India has experimented with 91days Treasury bills, 182
days Treasury bills, 364-day Treasury bills, and two types of 14-day Treasury bills. The
treasury bills are purchased by foreign banks in India scheduled banks, National Co-
operative Development organisations, financial institutions, joint stock companies, DFHI
and others.
8.2 Presentment of Negotiable instruments

Presentment means a demand made by or on behalf of a person entitled to enforce
an instrument (i) to pay the instrument made to the drawee or a party obliged to pay the
instrument or, in the case of a note or accepted draft payable at a bank, to the bank,
or (ii) to accept a draft made to the drawee.
The following rules are subject to Article 4, agreement of the parties, and clearing-
house rules and the like:
(1) Presentment may be made at the place of payment of the instrument and must
be made at the place of payment if the instrument is payable at a bank in the
United States; may be made by any commercially reasonable means, including
an oral, written, or electronic communication; is effective when the demand for
payment or acceptance is received by the person to whom presentment is made;
and is effective if made to any one of two or more makers, acceptors, drawees,
or other payors.
(2) Upon demand of the person to whom presentment is made, the person making
presentment must (i) exhibit the instrument, (ii) give reasonable identification
and, if presentment is made on behalf of another person, reasonable evidence
of authority to do so, and (iii) sign a receipt on the instrument for any payment
made or surrender the instrument if full payment is made.
(3) Without dishonoring the instrument, the party to whom presentment is made
may (i) return the instrument for lack of a necessary endorsement, or (ii) refuse
payment or acceptance for failure of the presentment to comply with the terms
of the instrument, an agreement of the parties, or other applicable law or rule.
(4) The party to whom presentment is made may treat presentment as occurring
on the next business day after the day of presentment if the party to whom
presentment is made has established a cut-off hour not earlier than 2 p.m. for
the receipt and processing of instruments presented for payment or acceptance
and presentment is made after the cut-off hour.

Notes 8.3 Dishonour of Cheque

A cheque is said to be dishonoured when the payment is not made (to a customer)
on its presentment to the banker.
Circumstances for dishonour of Cheques
A paying banker must refuse payment on cheques, issued by his customers, in the
following circumstances:
1. Insufficiency of funds: When adequate funds are not available in the account
of a customer, then the cheque can be dishonoured. If the banker pays a
countermanded cheque, he will not only be required to reverse the entry but
also be held liable to pay damages for dishonoring the cheques presented
subsequently which would have been honored otherwise.
2. Notice of the Customer’s Death: The banker should not make payments on
cheques presented after the death of the customer. He should return the cheque
with the remark ‘Drawer Deceased’. However, if the payment is made without
knowing the fact of the customer’s death, the banker cannot be held liable.
3. Notice of Customer’s Insanity: The banker should stop the payment on
cheques drawn and received after the receipt of notice of the customer’s insanity.
However, the banker should be very careful in this regard. He can believe that
the customer is insane only when the latter is sent to the lunatic asylum.
Otherwise, he has to obtain a certificate from competent doctor. Cheques drawn
at a time when the customer was rational may be honoured.
4. Notice of the Customer’s Insolvency: A banker should refuse payment on
the cheques soon after the customer is adjudicated as insolvent.
5. Receipt of the Garnishee Order: Where Garnishee order is received attaching
the whole amount, the banker should stop payment on cheques received after
the receipt of such an order. But if the order is for a specific amount, leaving
the specified amount, cheques should be honoured if the remaining amount is
sufficient to meet them.
6. Notice of Assignment: The banker should stop the payment, on receipt of the
notice of assignment signed by the customer of the credit balance in his
account.
7. Trust Accounts: If the banker feels suspicious that the trustee wants to use
the amount of the cheque for his personal use, he must stop payment.
8. Suspicion about the title over the Cheque: When the banker believes that
the person presenting the cheque is not entitled to receive the payment, he
should refuse to make payment. For example: stolen cheque.
9. Presentation of a stale cheque or post datedcheque: The banker may refuse
the cheque when they are presented after three months of its issue or they
are presented before due date in case of stale cheques and post datedcheques
respectively.
10. Joint Accounts: In the case of joint account, the banker can refuse to make
payment on the cheque if it is not signed by all the joint account holders.
11. Material Alterations: When there is material alteration in the cheque, the
banker may refuse payment.
12. Stale Cheques: When the cheque is presented after a period of three months
from the date it bears, the banker may refuse to make payment.

13. Drawer’s Signature: If the signature of the drawer on the cheque does not Notes
tally with the specimen signature, the banker may refuse to make payment.
14. Difference between Words and Figures: If there is difference between the
amount written in words and figures, the banker may refuse to make payment.
15. Endorsement: If the endorsement is irregular, the banker may refuse payment
on the cheque.
16. Proper Form of the Cheque: If the cheque is not in the proper form i.e., in
accordance with the provisions of the Negotiable Instruments Act and with
conditions, the banker should refuse the payment.
17. Drawn on another Branch: If the cheque is presented at another branch of
the same bank, it should not be honoured unless special arrangements are
made by the customer in advance.
Types of Dishonour
Dishonour of cheque can be divided into two categories i.e.,:

(a) Rightful Dishonour: Dishonour of cheque by the drawee banker for any of the
reasons specified above or for any other rightful reason. In this case there is
no remedy available against the banker but the holder in due course has remedy
both civil and criminal against the drawer.
(b) Wrongful Dishonour: Dishonour of cheque by the banker due to negligence
or carelessness by its employees. The drawer may bring an action against the
bank for losses suffered by him. The payee has no action against the banker
in this case.
Dishonour of Cheque is an Offence
Section 138 of the Negotiable Instruments Act states that the return of a cheque
by a banker because the money standing to the credit of the account holder is insufficient
to honour the cheque or that it exceeds the amount arranged to be paid from the account
by an agreement made with the bank, is a criminal offence. The drawer shall be deemed
to have committed an offence and such offence will be punishable with imprisonment for
a term up to two years imprisonment or with a fine twice the amount of the cheque or
both.
Provisions of section 138 of the Act are applicable only if –
(a) The cheque in question has been issued in discharge of a liability only. Unless
contrary is proved, as per the provisions of section 139, a cheque is presumed
to have been received by the holder in discharge of a debt or liability. A cheque
given as gift will not fall in this category.
(b) The cheque is presented to the bank for payment within six months or its specific
validity period, whichever is earlier.
(c) The payee or holder in due course has given notice demanding payment within
thirty days of the receiving information of dishonour which should be for a reason
other than insufficiency of funds.
(d) The drawer does not make payment within 15 days of the receipt of the notice.
The complaint can be made only by the payee/holder in due course, within one
month.
Offences by companies: If the person committing an offence under section 138 is
a company, every person who was in charge of the affairs of the company and was

Notes responsible for the business of the company at the time offence was committed shall be
deemed to be guilty of the offence and shall be liable to be proceeded against and punished
accordingly. (Section 139) However, a person shall not be punishable under section 139
if it is proved that the offence has been committed without his knowledge or consent and
that he had taken all due care to prevent commission of the offence.
Action to be taken:If a cheque is dishonoured for lack of funds, the drawer can be
punished with imprisonment up to one year and/ or within a fine up to double the amount
of the cheque if:
(i) The cheque has been presented to the bank within a year from the date on
which it was drawn or within its validity.
(ii) The payee or holder makes a demand for payment by giving notice in writing
to the drawer within thirty days of the receipt of the information.
(iii) The drawer of the cheque fails to make payment within fifteen days of receipt
of the notice.
Grounds of Dishonour of Cheques
Section 138 creates statutory offence in the matter of dishonour of cheques on the
ground of insufficiency of funds in the account maintained by a person with the banker.
Section 138 of the Act can be said to be falling either in the Acts which are not criminal
in real sense, but are acts which in public interest are prohibited or those where although
the proceeding may be in criminal form, they are really only a summary mode of enforcing
a civil right. Normally in criminal law existence of guilty intent is an essential ingredient
of a crime. However the Legislature can always create an offence of absolute liability or
strict liability where ‘mensrea’ is not all necessary.
Creation of the strict liability is an effective measure by encouraging greater vigilance
to prevent usual callous or otherwise attitude of drawers of cheques in discharge of debts
or otherwise. The words as appearing in clause (b) of section 138 cannot be construed
even to imply failure without reasonable cause in view of the explicit language in which
the provisions is couched, the principle of strict liability incorporated in the main enacting
clause.
The Supreme Court in the case of Electronics Trade & Technology Development
Corporation (Supra(c) struck a somewhat discordant note whilst going out of it’s way to
observe that sec. 138 of the Negotiable Instruments Act is not attracted if the payee being
put to notice not to deposit a cheque issued in his favour nonetheless presents such
cheque for encashment and finds that it is dishonoured. It was really concerned with a
situation where the drawer after issuing a cheque instructed the bank to stop payment
and when the cheque was dishonoured contended that Sec. 138 was not attracted because
it was not a case of dishonour for insufficiency of funds. This contention was rejected
by the Supreme Court rightly holding that the provisions of Sec. 138 could not be whittled
down by issuing a stop payment order to the drawer’s bank after a cheque had been issued
by the drawer in discharge of his liability” but it needlessly added that instructions to the
payee not to deposit a cheque issued to him before he actually presented it would have
the effect of avoiding the rigors of Sec. 138. The Supreme Court also held that the said
section raised a presumption of dishonesty if a person draws a cheque on a bank without
supporting funds in the account at that time.
Ingredients and requirements of the Penal Provisions
Section 138 creates an offence for which the mental elements are not necessary.
It is enough if a cheque is drawn by the accused on an account maintained by him with

a banker for payment of any amount of money to another person from out of that account Notes
for discharge in whole or in part ,of any debt or other liability due. Therefore, whenever
the cheques are on account of insufficiency of funds or reasons referable to the drawer’s
liability to provide for funds, the provisions of section 138 of the Act would be attracted,
provided the following conditions are satisfied.
1. Existence of a Live Account
Existence of a “live account” at the time of issue of cheque is a condition precedent
for attracting penal liability for the offence under this section.
2. Issue of a cheque in discharge of a debt or liability
The cheque issued unpaid by the bank must have been issued in discharge of a
debt or other liability wholly or in part. Where a cheque is issued not for the purposes
of discharge of any debt or other liability ,the maker of the cheque is not liable for
prosecution under section 138 of the Act. A cheque given as a gift or for any other reasons
and not for the satisfaction of any debt or other liability, partly or wholly even if it is returned
unpaid will not meet penal consequences. If the above conditions are fulfilled, irrespective
of the mental conditions of the drawer he shall be deemed to have committed an offence,
provided the other three requisites are fulfilled.
(a) Presentation of the cheque within six months or within the period of its validity:
The cheque must have been presented to the bank within a period of six months
from the date on which it is drawn or its period of validity, whichever is earlier
.Thus if a cheque is valid for three months and is presented to the bank within
a period of six months the provisions of this section shall not be attracted.
However if the period of validity of the cheque is not specified or prescribed the
cheque is presented within six months from the date the cause of action can
arise. The six months are taken from the date the cheque was drawn.
(b) Return of the cheque unpaid for reason of insufficiency of funds: The cheque
must be returned either because the money standing to the credit of that account
is insufficient to honour the cheque or that it exceeds the arrangement made
to be paid from that account by an agreement with the bank. Even if the cheque
is returned with the endorsement “account closed” section 138 is attracted.
(c) Issue of the notice of dishonour demanding payment within thirty days of receipt
of information as to dishonour of the cheque: The payee or the holder in due
course of the cheque has to give a notice in writing making a demand for
payment of the said amount of money to the drawer of the cheque. Such notice
must be given within 30 days of information from the bank regarding the return
of cheque as unpaid.
(d) Failure of the drawer to make the payment within fifteen days of the receipt
of the payment: After the receipt of the above notice the drawer of the cheque
has to make payment of the said mount of money to the payee or to the holder
in due course of the cheque within 15 days of the receipt of the notice .If the
payment is not made after the receipt of the notice within stipulated time a cause
of action for initiating criminal proceedings under this section will arise. It is
distinctly possible that each of these ingredients may arise in a different locality
and therefore the court in each of these localities may assume jurisdiction to
try the offence. This is the plain reading of section 177 of the Criminal Procedure
Code. (K.BhaskaranvsSankaranVaidhyanBalan reported in 1999 Criminal Law
Journal 4606)

Notes Presumptions
Under Section 139, a court must presume that the holder of a cheque received it
for the discharge, in whole or in part, of a legally enforceable debt or other liability. This
presumption is rebuttable.
Consequences of Wrongful Dishonour of Cheques
The various consequences for wrongful dishonour of cheques are as follows:

(i) The damages that the banker has to pay will be more in case of wrongful
dishonour of cheques of the trader-customer.
Example: New Central Hall vs. United Commercial Bank Ltd.
(ii) The amount of damages claimed by the customer need not depend on the
amount of the cheque. It means the smaller is the amount of the cheque
dishonoured, the greater will be the amount of damages. This is because it is
presumed that the dishonour of a cheque of a smaller amount will result in
greater loss to the credit of the customer.
(iii) The customer can declare substantial general damages without having any
monetary loss.
(iv) In case of trustee account, normally substantial general damages will be
awarded for wrongful dishonour.
(v) In case of non-trader customer, the damage will be nominal.
(vi) The particular damages are awarded for the financial loss incurred by the
customer as a consequence of wrongful dishonour, provided the loss must be
proved by the customer.
8.4 Crossing of Cheques

A crossed cheque is a cheque which is payable only through a collecting banker
and not directly at the counter of the bank. Crossing ensures security to the holder of
the cheque as the collecting banker credits the proceeds to the account of the payee
of the cheque.
a) General Crossing
It is a cheque which bears across its face two parallel transverse lines without or
with any words as (& Co.), A/C Payee, Not Negotiable written in between these two lines.
Specimen of General Crossing

b) Special Crossing Notes

It is a cheque in which the name of the bank is written between the two parallel
lines and hence it can be paid to that specific banker only.
Specimen of Special Crossing
c) Double Crossing
Double crossing is a form of special crossing of cheque under which two collecting
bankers’ name is mentioned between two parallel lines. One is the collecting banker of
the payee and another banker is the agent for collection of cheque.It is very important
to include the words “as agent for collection” under double crossing.
Specimen of Double Crossing
Difference between General Crossing and Special Crossing
General Crossing Special Crossing

1. General crossing where a cheque bears 1. Special crossing where a cheque bears
across its face, an addition of the words; across its face, an addition of the name
and company or any abbreviation thereof of a banker, with or without the words
between two parallel transverse lines or “Not Negotiable”, that addition shall be
of two parallel transverse lines simply, deemed a crossing, and the cheque
either with or without the words “not shall be deemed to be crossed specially,
negotiable”, that addition shall be deemed and to be crossed to that banker.
to be a crossing and the cheque shall be
deemed to be crossed generally.
2. The objective of general crossing is to 2. The objective of special crossing is to
make the cheque secure. provide a greater degree of security to
the cheque.
3. In general crossing, the use of words 3. In special crossing, the mention of the
between the two parallel lines is optional. name of a specific bank between the
two parallel lines is essential.
Notes 4. In case of general crossing, the 4. In case of special crossing, the payment
payment for the cheque may be for the cheque can be received only from
received through any bank. the bank in whose name the cheque has
been crossed.
5. The general crossing of cheque in the 5. The special crossing of cheque in the
nature of general purposes. nature of special purposes.
8.5 Paying Banker
Meaning of Paying Banker
Paying banker refers to the banker who holds the account of the drawer of the cheque
and is obliged to make payment, if the funds of the customer are sufficient to cover the
amount of his cheque drawn or if overdrawing facility is given to the customer.
The banker who is liable to pay the value of a cheque of a customer as per the
contract, when the amount is due from him to the customer is called Paying Banker. The
payment to be made by him has arisen due to the contractual obligation. He is also called
drawee bank as the cheque is drawn on him.
Precautions while making payment of Cheques
The banker has to take the following precautions while honouring the cheques of
his customers:
1. Open or Crossed Cheque: The most important precaution that a banker should
take is about crossed cheques. A banker has to verify whether the cheque is
open or crossed. He should not pay cash across the counter in respect of
crossed cheques. If the cheque is a crossed one, he should see whether it
is general crossed or special crossed. If it is general crossing, the holder must
be asked to present the cheque through some banker and should be paid to
a banker. If the cheque bears a special crossing, the banker should pay only
the bank whose name is mentioned in the crossing. If it is a open cheque, a
banker can pay cash to the payee or the holder across the counter. If the banker
pays against the instructions as indicated above, he is liable to pay the amount
to the true owner for any loss sustained. Further, a banker loses statutory
protection in case of forged endorsement.
If it is a ‘Not Negotiable’ crossing, the paying banker has to verify the
genuineness of all the endorsements. If it is an ‘Account Payee’ crossing, the
banker can credit the account of the payee named in the cheque and not that
of any other person.
2. Proper Form: A banker should see whether the cheque is in the proper form.
That means the cheque should be in the manner prescribed under the provisions
of the Negotiable Instruments Act. It should not contain any condition.
3. Presentment of Cheque: A banker can honour the cheques provided it is
presented with that branch of the bank where the drawer has an account. If
the cheque is presented at another branch of the same bank, it should not be
honoured unless special arrangements are made by the customer in advance.
The reasons are:
(a) A banker undertakes to pay cheques only at the branch where the
account is opened.

(b) The specimen signature of the customer will be with the office of the bank Notes
at which he has an account.
(c) It is not possible for other branches to know that the customer has
adequate balance to meet the cheque.
4. Date of the Cheque: The paying banker has to see the date of the cheque.
It must be properly dated. It should not be either a post-dated cheque or a stale-
cheque. If a cheque carries a future date, it becomes a post-dated cheque. If
the cheque is presented on the date mentioned in the cheque, the banker need
not have any objection to honour it. If the banker honours a cheque before the
date mentioned in the cheque, he loses statutory protection. If the drawer dies
or becomes insolvent or countermands payment before the date of the cheque,
he will lose the amount. The undated cheques are usually not honoured.
A stale cheque is one which has been in circulation for an unreasonably long
period. The custom of bankers in this respect varies. Generally, a cheque is
considered stale when it has been in circulation for more than three months.
Banker does not honour such cheques. However, banker, may get confirmation
from the drawer and honourcheques which are in circulation for a long time.
So, verification of date is very important.
5. Mutilated Cheque: The banker should be careful when mutilated cheques are
presented for payment. A cheque is said to be mutilated when it has been cut
or torn, or when a part of it is missing. Mutilation may be either accidental or
intentional. If it is accidental, the banker should get the drawer’s confirmation
before honouring it. If it is intentional, he should refuse payment. The cheque
is to be returned with a remark ‘Mutilated cheque’ or ‘Mutilation Requires
Confirmation’. In ScholeyVsRamsbottom, the banker was held liable for wrong
payment of a cheque which was dirty and bore visible marks of mutilation.”
6. Words and Figures: The amount of the cheque should be expressed in words,
or in words and figures, which should agree with each other. When the amount
in words and figures differ, the banker should refuse payment. However, Section
18 of the Negotiable Instruments Act provides that, where there is difference
between the amount in words and figures, the amount in words is the amount
payable. If the banker returns the cheque, he should make a remark ‘amount
in words and figures differ’.
7. Alterations and Overwriting: The banker should see whether there is any
alteration or over-writing on the cheque. If there is any alteration, it should be
confirmed by the drawer by putting his full signature. The banker should not
pay a cheque containing material alteration without confirmation by the drawer.
The banker is expected to exercise reasonable care for the detection of such
alterations. Otherwise, he has to take risk. Material alterations make a cheque
void.
8. Proper Endorsements: Cheques must be properly endorsed. In the case of
bearer cheque, endorsement is not necessary legally. In the case of an order
cheque, endorsement is necessary. A bearer cheque always remains a bearer
cheque. The paying banker should examine all the endorsements on the cheque
before making payment. They must be regular. But it is not the duty of the paying
banker to verify the genuineness of the endorsements, unless the cheque bears
‘Not-Negotiable’ crossing. He is not expected to know the signatures of all
payees. So he gets statutory protection in case of forged endorsements. In India,
even in the case of bearer cheques, bankers insist on endorsement though it
is not required.

Notes Statutory Protection for Paying Banker
The payment must be made to the right person and the banker must get order from
his customer to debit his account. The banker might not be able to make detailed enquiries
before making the payment. Thus, the act provides him some legal protection, if the banker
fulfills the obligations laid down by the Act. The paying banker should take the following
protection, in order to protect himself and customer’s interest, while making the payment
of his customer’s cheques.
(i) Protection regarding the cheque
In case of an order cheque, Section 85(1) of the NI Act provides statutory protection
to the paying banker as follows, where a cheque payable to order purports to be endorsed
by or on behalf of the payee, the drawee is discharged by payment in due course.
In case, payment is made to a wrong person whose signature is not according to
specimen signature, the protection is given to a banker under Section 16 (2) of the
Negotiable Instruments Act: “It is not possible for a banker to know each of the endorsers
and their signatures.” For getting the protection, the banker should note the following:
(a) Regular Endorsement: According to Section 85 (1) of the Act the endorsement
should be regular. For example, if a cheque is payable to a right person and
signature is bearing same name and the same spelling this is known as regular
endorsement. Though; this is not a valid endorsement.
(b) Payment in Due Course: According to Section 10 of the Act the cheque should
be paid in due course. In case the payment is made on forged signature of
the endorser and not that of the drawer, the banker gets statutory protection
under Section 10 of the Act.
(ii) Protection in case of bearer cheques
Section 85 (2) of the Negotiable Instruments Act, 1881 states, “Whereas a cheque
is originally expressed to be payable to bearer, the drawee is discharged by payment
in due course to the bearer thereof, notwithstanding any endorsement whether in full or
in blank appearing thereon, notwithstanding that any such endorsement purports to restrict
or exclude further negotiation.” The protection is given in the Act on the basis that a bearer
cheque always remains a bearer cheque and it bears endorsement in blank or full whether
any endorsement restricts further negotiation or not. In case a bearer cheque is stolen
or lost and the banker honours the cheque without any knowledge, the banker will be
discharged from his duty under the protection given in Section 85 (2) of the said Act.
In such a case, the paying banker is not required to verify the endorsement on bearer
cheque. In case a bearer cheque is crossed, the paying banker has no right to pay it
across the counter in disregard of the crossing.
(iii) Protection in case of crossed cheques
Regarding payment of crossed cheque, the paying banker gets the protection under
Section 128 of the Negotiable Instruments Act, 1881: “Whereas the banker on whom a
crossed cheque is drawn has paid the same in due course, the banker paying the cheque
and the drawer thereof (in case such cheque has come to the hands of the payee) shall
be entitled respectively to the same rights and placed in the same position if the amount
of the cheque had been paid to and received by the true owner thereof.”
In case the payment is made on the instructions of the drawer in good faith without
any negligence, the paying banker gets the statutory protection under the Negotiable
Instruments Act, 1881: “The payment of crossed cheque in due course makes the drawee

banker liable to the true owner of the cheque besides disentitling himself to debit the Notes
customer’s account.”
(iv) Protection in case of obliterated cheques
Payment of instrument on which alteration is not apparent where a promissory note,
bill of exchange or cheque has been materially altered but does not appear to have been
so altered, or where a cheque is presented for payment which does not at the time of
presentation appear to be crossed or to have had a crossing which has been obliterated,
payment thereof by a person or banker liable to pay, and paying the same according to
the apparent tenor thereof at the time of payment and otherwise in due course, shall
discharge such a person or banker from all liability thereon, and such payment shall not
be questioned by reason of the instrument having been altered, or the cheque crossed.
(v) Protection in case of draft
Section 85A of the NI Act states that, Drafts drawn by one branch of a bank on
another payable to order where any draft, that is an order to pay money, drawn by one
office of a bank upon another office of the same bank for a sum of money payable to
order on demand, purports to be endorsed by or on behalf of the payee, the bank is
discharged by payment in due course.
8.6 Summary
Negotiable instrument is a document guaranteeing the payment of a specific amount
of money, either on demand, or at a set time, with the payer usually named on the
document.
A promissory note is an instrument in writing containing an unconditional undertaking,
signed by the maker, to pay a certain sum of money only to, or to the order of a certain
person, or to the bearer of the instrument.
Bill of exchange is an instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of money only to, or to
the order of a certain person or to the Bearer of the instrument.
Cheque is an instrument in writing, containing an unconditional order, drawn on a
specified banker, signed by the drawer, directing the banker, to pay, on demand, a certain
sum of money only, to a certain person or to his order or to the bearer of the instrument.
A crossed cheque is a cheque which is payable only through a collecting banker
and not directly at the counter of the bank. Crossing ensures security to the holder of
the cheque as the collecting banker credits the proceeds to the account of the payee
of the cheque.
A cheque is said to be dishonoured when the payment is not made (to a customer)
on its presentment to the banker.
Dishonour of cheque by the drawee banker for any of the reasons specified above
or for any other rightful reason. In this case there is no remedy available against the banker
but the holder in due course has remedy both civil and criminal against the drawer.
Dishonour of cheque by the banker due to negligence or carelessness by its
employees. The drawer may bring an action against the bank for losses suffered by him.
The payee has no action against the banker in this case.
Double crossing is a form of special crossing of cheque under which two collecting
bankers’ name is mentioned between two parallel lines. One is the collecting banker of

Notes the payee and another banker is the agent for collection of cheque. It is very important
to include the words “as agent for collection” under double crossing.

1. ___________ is a document guaranteeing the payment of a specific amount
of money, either on demand, or at a set time, with the payer usually named
on the document.
2. …………….is an instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of money only
to or to the order of a certain person or to the Bearer of the instrument.
3. Crossed cheque is a cheque which is payable only through a collecting banker
and not directly at the counter of the……………..
4. ………………by the drawee banker for any of the reasons specified above or
for any other rightful reason.
5. …………….is a form of special crossing of cheque under which two collecting
bankers’ name is mentioned between two parallel lines.
II. True or False
1. Negotiable instrument is a document guaranteeing the payment of a specific

amount of money, either on demand, or at a set time, with the payer usually
named on the document.
2. Bill of exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money
only to or to the order of a certain person or to the Bearer of the instrument.
3. Crossed cheque is a cheque which is payable only through a collecting banker
and not directly at the counter of the bank.
4. Dishonour of cheque by the drawee banker for any of the reasons specified above
or for any other rightful reason.
5. Double crossing is a form of special crossing of cheque under which two
collecting bankers’ name is mentioned between two parallel lines.
1. What is a document guaranteeing the payment of a specific amount of money,

either on demand, or at a set time, with the payer usually named on the
document?
a) Negotiable instrument
b) Bill of exchange
c) Crossed cheque
d) Dishonour of cheque
2. What is an instrument in writing containing an unconditional order, signed by
the maker, directing a certain person to pay a certain sum of money only to,
or to the order of a certain person or to the Bearer of the instrument?
b) Bill of exchange

c) Crossed cheque Notes

3. What is a cheque which is payable only through a collecting banker and not
directly at the counter of the bank?
b) Bill of exchange
c) Crossed cheque
4. What is the drawee banker for any of the reasons specified above or for any
other rightful reason?
b) Bill of exchange
c) Crossed cheque
5. What is a form of special crossing of cheque under which two collecting bankers’
name is mentioned between two parallel lines.
b) Double crossing
c) Crossed cheque

1. What is Negotiable Instrument?
2. Give the meaning of Promissory Note?
3. State various parties of Promissory Note.
4. Give the meaning of bill of exchange.
5. Mention various parties of bill of exchange.
6. What is Accommodation bill?
7. Define the term Cheque.
8. State various parties of Cheque.
9. What is Stale Cheque?
10. Give the meaning of Bearer Cheque?
11. What is crossing of a Cheque?
12. Give the meaning of Double Crossing.
13. What is post-dated cheque?
14. State any two features of cheque.
1. Explain features of Negotiable Instrument.

2. Discuss features of Promissory Notes.
3. Explain various features of Bills of Exchange.

Notes 4. Distinguish between Promissory Note and Bills of Exchange.

5. Explain various features of Cheque.
6. Distinguish between Cheque and Bills of Exchange.
7. Explain various types of Negotiable Instruments.
8. Discuss various types of a Cheque?
8.9 Key Terms

z Negotiable instrument: Negotiable instrument is a document guaranteeing the
payment of a specific amount of money, either on demand, or at a set time,
with the payer usually named on the document.
z Promissory notes: A promissory note is an instrument in writing containing
an unconditional undertaking, signed by the maker, to pay a certain sum of
money only to, or to the order of a certain person, or to the bearer of the
instrument.
z Bill of Exchange: Bill of exchange is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to pay a
certain sum of money only to, or to the order of a certain person or to the Bearer
of the instrument.
z Cheque: Cheque is an instrument in writing, containing an unconditional order,
drawn on a specified banker, signed by the drawer, directing the banker, to pay,
on demand, a certain sum of money only, to a certain person or to his order
or to the bearer of the instrument.
z Crossed cheque: A crossed cheque is a cheque which is payable only through
a collecting banker and not directly at the counter of the bank. Crossing ensures
security to the holder of the cheque as the collecting banker credits the proceeds
to the account of the payee of the cheque.
z Dishonour of Cheque: A cheque is said to be dishonoured when the payment
is not made (to a customer) on its presentment to the banker.
z Rightful Dishonour: Dishonour of cheque by the drawee banker for any of the
reasons specified above or for any other rightful reason. In this case there is
no remedy available against the banker but the holder in due course has remedy
both civil and criminal against the drawer.
z Wrongful Dishonour: Dishonour of cheque by the banker due to negligence
or carelessness by its employees. The drawer may bring an action against the
bank for losses suffered by him. The payee has no action against the banker
in this case.
z Double Crossing: Double crossing is a form of special crossing of cheque under
which two collecting bankers’ name is mentioned between two parallel lines.
One is the collecting banker of the payee and another banker is the agent for
collection of cheque. It is very important to include the words “as agent for
collection” under double crossing.

1. Negotiable instrument
2. Bill of exchange

3. Bank Notes
4. Dishonour of cheque
5. Double crossing
II. True or False

1. True 2. True
3. True 4. True
5. True
1. [a] 2. [b]
3. [c] 4. [d]
5. [b]
8.11 Case Study

By means of fall preference A has obtain from B a cheque crossed “not negotiable”
he took that cheque to a bank (other than drawee bank) which paid it. B sues the bank
for conversion.
1. Has A committed any offence or irregularity?
2. Is B entitled to get any relief?
3. How will you decide the case?
Answer:
The given case is under the chapter of negotiable instrument which means promissory
notes, bills of exchange or cheque payable either to order or to bearer.
In this set case because of fall preference A obtain a cheque from B a crossed cheque
saying not negotiable. He took the cheque to bank (collecting banker) which paid it. Here
the not negotiable word came on crossing because of this crossing the cheque becomes
made available to pay to bearer that is to anyone who holds it therefore here A did a
lawful negotiation as he got a cheque and went to the collecting banker who collects the
cross checks on behalf of their customer, Because of not negotiable tittle bank paying
in good faith and without negligence to their regular customer to ensure the interest of
customers.
Judgement
Here the cheque is crossed with the the label “not negotiable” which means the
transferee cannot get a better title than that of transferor. It also means that it can be
paid only to a certain person. A negotiable cheque is one which is made payable to bearer
that is to anyone who “holds it. Here because of fall preference A has obtain a cheque
because of that “not negotiable” cross cheque gives authority to receive the payment of
check therefore A followed the rules and regulations covered under negotiable instrument
hence A the did not committed any offence or irregularity under the Negotiation instrument.
Here because of fall preference A obtain a cheque from B with the cross cheque
“not negotiable” because of this crossing the cheque becomes made available to pay to
bearer that is to anyone who holds it. Hence here B will not get any relif as the transaction
is lawful under the negotiable instrument act, 1881.

Notes 8.12 Further Readings

8.13 Bibliography
Press.
Kluwer Law Intl
Press.
±±±±
Banking and Insurance Law 173
Notes
Unit 9: Banking & Insurance Law
Structure:
9.1 Introduction
9.2 Control and Regulation of Banking
9.3 Insurance in India
9.4 Regulation of Insurance Sector
9.5 Summary
9.8 Key Terms
9.10 Case Study
9.12 Bibliography
Objectives

z Introduction
z Control and Regulation of Banking
z Insurance in India
z Regulation of Insurance Sector


The banking system in India is significantly different from that of other Asian nations
because of the country’s unique geographic, social and economic characteristics. India
has a large population and land size, a diverse culture, and extreme disparities in income,
which are marked among its regions. There are high levels of illiteracy among a large
percentage of its population but, at the same time, the country has a large reservoir of
managerial and technologically advanced talents. Between about 30 and 35 percent of
the population resides in metro and urban cities and the rest is spread in several semi-
urban and rural areas. The country’s economic policy framework combines socialistic and
capitalistic features with a heavy bias towards public sector investment. India has followed
the path of growth-led exports rather than the “exported growth” of other Asian economies,
with emphasis on self-reliance through import substitution. These features are reflected
in the structure, size, and diversity of the country’s banking and financial sector. The
banking system has had to serve the goals of economic policies enunciated in successive
five year development plans, particularly concerning equitable income distribution,
balanced regional economic growth, and the reduction and elimination of private sector
monopolies in trade and industry. In order for the banking industry to serve as an instrument
of state policy, it was subjected to various nationalization schemes in different phases
(1955, 1969 and 1980). As a result, banking remained internationally isolated because
of preoccupations with domestic priorities, especially massive branch expansion and
attracting more people to the system. Moreover, the sector has been assigned the role
of providing support to other economic sectors such as agriculture, small-scale industries,
exports, and banking activities in the developed commercial centres (i.e., metro, urban
and semi-urban centres).
The banking system’s international isolation was also due to strict branch licensing
controls on foreign banks already operating in the country as well as entry restrictions
facing new foreign banks. A criterion of reciprocity is required for any Indian banks to open
an office abroad. These features have left the Indian banking sector with weaknesses and
strengths. A big challenge facing Indian banks is now, under the current ownership
structure, to attain operational efficiency suitable for modern financial intermediation. On
the other hand, it has been relatively easy for the public sector banks to recapitalize,
given the increases in Non-Performing Assets (NPAs), as their Government dominated
ownership structure has reduced the conflicts of interest that private banks would face.
Meaning of Bank
The term bank refers to a financial institution which deals with deposits and advances
and other related services. Bank receives money from those who want to save in the form
of deposits and it lends money to those who need it.
Definition of Bank
Oxford Dictionary defines a bank as “an establishment for custody of money, which
it pays out on customer’s order.”
The Indian Banking System
The banking system in India is significantly different from that of other Asian nations
because of the country’s unique geographic, social and economic characteristics. India
has a large population and land size, a diverse culture, and extreme disparities in income,
which are marked among its regions. There are high levels of illiteracy among a large

percentage of its population but, at the same time, the country has a large reservoir of Notes
managerial and technologically advanced talents. Between about 30 and 35 percent of
the population resides in metro and urban cities and the rest is spread in several semi-
urban and rural centres.
The country’s economic policy framework combines socialistic and capitalistic
features with a heavy bias towards public sector investment. India has followed the path
of growth-led exports rather than the “exported growth” of other Asian economies, with
emphasis on self-reliance through import substitution. These features are reflected in the
structure, size, and diversity of the country’s banking and financial sector.
The banking system has had to serve the goals of economic policies enunciated
in successive five year development plans, particularly concerning equitable income
distribution, balanced regional economic growth, and the reduction and elimination of
private sector monopolies in trade and industry.
In order for the banking industry to serve as an instrument of state policy, it was
subjected to various nationalization schemes in different phases (1955, 1969, and 1980).
As a result, banking remained internationally isolated (few Indian banks had presence
abroad in international financial centres) because of preoccupations with domestic
priorities, especially massive branch expansion and attracting more people to the system.
Meaning of Commercial Bank
Commercial bank refers to a bank that lends money and provides transactional,
savings, and money market accounts and that accepts time deposit. A commercial bank
is a type of financial institution and intermediary. Commercial banks engage for providing
documentary and standby letter of credit, guarantees, performance bonds, securities
underwriting commitments and other forms of off balance sheet exposures.
Definitions of Commercial Bank
According to Crowther, “A Commercial Bank is an institution which collects money

from those who have it to spare or who are saving it out of their income and lends this
money out to those who require it. In order to understand more about Commercial Banks
it is necessary to discuss its functions”.
Significance of Commercial Banks
Banks play a vital and dynamic role in the economic life of the nation as they keep
the wheels of trade, commerce and industry always revolving. They mobilize the dormant
funds into a productive channel. The economic importance of the Commercial Banks can
be summarized as follows:
i) Capital Formation: Banks facilitate capital formation by promoting savings.
ii) Innovation: Bank credit enables the enterprises to innovate and invest and thus
uplift economic activity.
iii) Monetary Policy: A well-developed banking system is required to promote
economic development by controlling a period of inflation and deflation.
iv) Credit Creations: Credit creation enables the expansion of business and
mitigation of unemployment and raises production.
v) Encouragement of Trade and Industry: Banking system encourages trade
and industry by providing long-term loans to traders and industrialists at low
rates.

Notes vi) Promotion of Habit of Thrift: Banks encourage savings habit by accepting,
deposits and giving interests on it.
vii) Volume of Production: Production volume can be increased by expansion of
credit by banks.
viii) Negotiate economy: Banks enable to do away with negotiate economy.
Functions of Commercial Bank
Commercial bank being the financial institution performs diverse types of functions.
It satisfies the financial needs of the sectors such as agriculture, industry, trade,
communication, etc. The commercial bank performs the following functions:
1. Primary Functions
Primary banking functions of the commercial banks include:
i) Acceptance of Deposits
Commercial bank accepts various types of deposits from public especially from its
clients. These deposits are payable after a certain time period. Banks generally accept
three types of deposits viz., (a) Current Deposits (b) Savings Deposits (c) Fixed Deposits
and d) Recurring Deposit.
(a) Current Deposits: These deposits are also known as demand deposits. These
deposits can be withdrawn at any time. Generally, no interest is allowed on
current deposits, and in case, the customer is required to leave a minimum
balance undrawn with the bank. Cheques are used to withdraw the amount.
These deposits are kept by businessmen and industrialists who receive and
make large payments through banks. The bank levies certain incidental charges
on the customer for the services rendered by it.
(b) Savings Deposits: This is meant mainly for professional men and middle class
people to help them deposit their small savings. It can be opened without any
introduction. Money can be deposited at any time but the maximum cannot
go beyond a certain limit. There is a restriction on the amount that can be
withdrawn at a particular time or during a week. If the customer wishes to
withdraw more than the specified amount at any one time, he has to give prior
notice. Interest is allowed on the credit balance of this account. The rate of
interest is greater than the rate of interest on the current deposits and less than
that on fixed deposit. This system greatly encourages the habit of thrift or
savings.
(c) Fixed Deposits: These deposits are also known as time deposits. These
deposits cannot be withdrawn before the expiry of the period for which they are
deposited or without giving a prior notice for withdrawal. If the depositor is in
need of money, he has to borrow on the security of this account and pay a
slightly higher rate of interest to the bank. They are attracted by the payment
of interest which is usually higher for longer period. Fixed deposits are liked
by depositors both for their safety and as well as for their interest. In India, they
are accepted between three months and ten years.
d) Recurring Deposit: Recurring Deposits are a special kind of Term Deposits
offered by banks in India which help people with regular incomes to deposit a
fixed amount every month into their Recurring Deposit account and earn interest
at the rate applicable to Fixed Deposits. It is similar to making FDs of a certain
amount in monthly installments, for example Rs 1000 every month. This deposit
matures on a specific date in the future along with all the deposits made every

month. Thus, Recurring Deposit schemes allow customers with an opportunity Notes
to build up their savings through regular monthly deposits of fixed sum over a
fixed period of time.
ii) Advancing Loans
Loans are made against personal security, gold and silver, stocks of goods and other
assets. The second primary function of a commercial bank is to make loans and advances
to all types of persons, particularly to businessmen and entrepreneurs. The most common
way of lending is by:
(a) Overdraft Facilities: In this case, the depositor in a current account is allowed
to draw over and above his account up to a previously agreed limit. Suppose
a businessman has only Rs. 6,000/- in his current account in a bank but requires
Rs. 12,000/- to meet his expenses. He may approach his bank and borrow the
additional amount of Rs. 6,000/-. The bank allows the customer to overdraw
his account through cheques. The bank, however, charges interest only on the
amount overdrawn from the account. This type of loan is very popular with the
Indian businessmen.
(b) Cash Credit: Under this account, the bank gives loans to the borrowers against
certain security. But the entire loan is not given at one particular time, instead
the amount is credited into his account in the bank; but under emergency cash
will be given. The borrower is required to pay interest only on the amount of
credit availed to him. He will be allowed to withdraw small sums of money
according to his requirements through cheques, but he cannot exceed the credit
limit allowed to him. Besides, the bank can also give specified loan to a person,
for a firm against some collateral security. The bank can recall such loans at
its option.
(c) Discounting Bills of Exchange: This is another type of lending which is very
popular with the modern banks. The holder of a bill can get it discounted by
the bank, when he is in need of money. After deducting its commission, the
bank pays the present price of the bill to the holder. Such bills form good
investment for a bank. They provide a very liquid asset which can be quickly
turned into cash. The commercial banks can rediscount the discounted bills
with the central banks when they are in need of money. These bills are safe
and secured bills. When the bill matures the bank can secure its payment from
the party which had accepted the bill.
(d) Money at Call: Bank also grant loans for a very short period, generally not
exceeding 7 days to the borrowers, usually dealers or brokers in stock exchange
markets against collateral securities like stock or equity shares, debentures,
etc., offered by them. Such advances are repayable immediately at short notice
hence; they are described as money at call or call money.
(e) Term Loans: Banks give term loans to traders, industrialists and now to
agriculturists also against some collateral securities. Term loans are so-called
because their maturity period varies between 1 to 10 years. Term loans; as such
provide intermediate or working capital funds to the borrowers. Sometimes, two
or more banks may jointly provide large term loans to the borrower against a
common security. Such loans are called participation loans or consortium
finance.
(f) Consumer Credit: Banks also grant credit to households in a limited amount
to buy some durable consumer goods such as television sets, refrigerators, etc.,
or to meet some personal needs like payment of hospital bills etc. Such

Notes consumer credit is made in a lump sum and is repayable in installments in

a short time. Under the 20-point programme, the scope of consumer credit has
been extended to cover expenses on marriage, funeral etc., as well.
(g) Miscellaneous Advances: Among other forms of bank advances there are
packing credits given to exporters for a short duration, export bills purchased/
discounted, import finance-advances against import bills, finance to the self-
employed, credit to the public sector, credit to the cooperative sector and above
all, credit to the weaker sections of the community at concessional rates.
iii) Creation of Credit
Credit creation is the multiple expansions of banks demand deposits. It is an open
secret now that banks advance a major portion of their deposits to the borrowers and keep
smaller parts of deposits to the customers on demand. Even then the customers of the
banks have full confidence that the depositor’s lying in the banks is quite safe and can
be withdrawn on demand. The banks exploit this trust of their clients and expand loans
by much more time than the amount of demand deposits possessed by them.
iv) Promote the Use of Cheques
The commercial banks render an important service by providing to their customers
a cheap medium of exchange like cheques. It is found much more convenient to settle
debts through cheques rather than through the use of cash. The cheque is the most
developed type of credit instrument in the money market.
v) Financing Internal and Foreign Trade
The bank finances internal and foreign trade through discounting of exchange bills.
Sometimes, the bank gives short-term loans to traders on the security of commercial
papers. This discounting business greatly facilitates the movement of internal and external
trade.
vi) Remittance of Funds
Commercial banks, on account of their network of branches throughout the country,
also provide facilities to remit funds from one place to another for their customers by issuing
bank drafts, mail transfers or telegraphic transfers on nominal commission charges. As
compared to the postal money orders or other instruments, bank drafts have proved to
be a much cheaper mode of transferring money and have helped the business community
considerably.
2. Secondary Functions
Secondary banking functions of the commercial banks include:
i) Agency Services
ii) General Utility Services
i) Agency Services
Commercial banks act as attorney for their clients. They buy and sell shares and
bonds, receive and pay utility bills, premiums, dividends, rents and interest for their clients.
Banks also perform certain agency functions for and on behalf of their customers. The
agency services are of immense value to the people at large. The various agency services
rendered by banks are as follows:
(a) Collection and Payment of Credit Instruments: Banks collect and pay
various credit instruments like cheques, bills of exchange, promissory notes
etc., on behalf of their customers.

(b) Purchase and Sale of Securities: Banks purchase and sell various securities Notes
like shares, stocks, bonds, debentures on behalf of their customers.
(c) Collection of Dividends on Shares: Banks collect dividends and interest on
shares and debentures of their customers and credit them to their accounts.
(d) Acts as Correspondent: Sometimes banks act as representative and
correspondents of their customers. They get passports, traveler’s tickets and
even secure air and sea passages for their customers.
(e) Income-tax Consultancy: Banks may also employ income tax experts to
prepare income tax returns for their customers and to help them to get refund
of income tax.
(f) Execution of Standing Orders: Banks execute the standing instructions of
their customers for making various periodic payments. They pay subscriptions,
rents, insurance premia etc., on behalf of their customers.
(g) Acts as Trustee and Executor: Banks preserve the ‘Wills’ of their customers
and execute them after their death.
ii) General Utility Services
General utility services are those services which are rendered by commercial banks
not only to the customers but also to the general public. In addition to agency services,
the modern banks provide many general utility services for the community as given below:
a) Safe Deposit Vault
A bank undertakes the safe custody of the customer’s valuables and documents
by providing a safe deposit vault. These are kept in specially constructed strong rooms.
There are lockers available to the customer on a nominal charge. There are two keys for
each locker, one is given to the customer and the other remains with the Bank Manager.
The locker is opened as well as closed by both the keys one after another. Customers
can keep custody. A register is maintained by the bank in which all the particulars about
the valuables and documents are recorded in it. Banks provide the services of safe deposit
vault on hire basis to the customers.
b) Collection of Cheques, Bills and promissory Notes
The customers deposit cheques, bills of exchange and promissory note into their
accounts with the banks. These instruments are collected by the bank on behalf of their
customers and credited to their accounts. These services are provided by the cheques,
bills and promissory notes issued on branches out of the city are collected with some
nominal charges for postage etc. this is a very popular and essential service provided by
the banks to their customers.
c) Issuing Letter of Credit
A letter of credit is a commercial instrument of assured payment. It is widely used
by the businessman for various purposes. The bank undertakes to make payment to a
seller on production of documents stipulated in the letter of credit. It specifies as to when
payment is to be made which may be either on presentation of documents by the paying
bank or at some future date depending upon the terms stipulated in the letter. There are
many parties involved in the letter of credit. One is the applicant who is the buyer of goods
or importer of goods. He makes an application to a bank who issues the letter of credit.
The bank is known as issuing bank. The beneficiary is named in the letter of credit who
is the seller of goods or exporter. Other banks are also involved in the transaction such
as negotiating bank, confirming bank and advising bank. There are different types of letter

Notes of credit. This is a very important service provided by the banks especially for the importers
and exporters.
d) Bank Drafts
A bank draft is an order from one branch to another branch of the same bank to
pay a specified sum of money to a person named therein or to his order. A draft is always
payable on demand. Banks issue drafts at the request of the customers on their branches
at the place of destination for remitting money from one place to another place. Any person
who wants to remit money has to purchase a draft from the bank by paying the amount
in advance to the bank. The purchaser of the draft then sends the draft to the payee’s
place of residence by post or courier for the purpose of encashment at the drawee branch
of the bank. The bank issuing the draft charges some commission depends upon the
amount of the draft. The purchaser need not be a customer of the bank.
e) Automated Teller Machine (ATM)
ATM is a channel of banking service to its customers. It’s traditional and primary
use is to dispense cash upon insertion of a plastic card and its unique PIN i.e. Personal
Identification Number. The banks issue ATM card to their customers having current or
savings account holding a certain minimum balance in their accounts. ATM card is a
plastic card with a magnetic strip with the account number of the individuals. When the
card is inserted into the machine the sensing equipment of the machine identifies the
account holder and asks his PIN. It is a secret number which is known only to the account
holder.
If the PIN is matched, the ATM pops up a menu screen which allows the user to
transact almost all types of banking transactions, such as withdrawal of cash, deposit
of cash/cheques.
f) Debit Card
A debit card is a plastic card that provides an alternative payment method to cash
when making purchases. Functionally, it can be called an electronic check, as the funds
are withdrawn directly from either the bank account or from the remaining balance on the
card. In some cases, the cards are designed exclusively for use on the Internet, and so
there is no physical card.
In many countries the use of debit cards has become so widespread that their volume
of use has overtaken or entirely replaced the check and, in some instances, cash
transactions. Like credit cards, debit cards are used widely for telephone and Internet
purchases and, unlike credit cards, the funds are transferred immediately from the bearer's
bank account instead of having the bearer pay back the money at a later date.
g) Credit Card
A credit card is an instrument of payment. It is a source of revolving credit. The cards
are plastic cards issued by the banks to their customers. The name of the customer,
card number and expiry date are printed on the plastic cards. Some banks also use the
photograph of the customers on the credit card. The cardholder can buy goods or services
from various merchant establishments where such arrangements exist. The card issuing
bank makes the payment to the supplier or seller. The outstanding amount on account
of use of the credit card is payable by the card holder to the bank over a specific period
which carries a fixed amount of interest. A debit card is a payment card used to obtain
cash, goods and services automatically debiting the payments to the cardholder’s bank
account instantly, in which credit balance exists.

h) Tele Banking Notes

Telephone banking is a service provided by a Commercial Banks, which allows its
customers to perform transactions over the telephone.
i) Internet Banking
Internet is a channel of service to banking customers. The access to account
information as well as transaction is offered through the world-wide-web network of
computers on the internet. Each account holder is provided with a PIN similar to that of
ATM or phone banking. The access to the account is allowed to the customer upon a
match of the account details and PIN entered on the computer system. A higher level
of security may be reached by an electronic fingerprint. Transaction such as e-business,
Railway-Air Reservation, payment of bills, transfer of money can be carried out while sitting
in the house with the help of an internet.
9.2 Control and Regulation of Banking

The Reserve Bank of India (RBI) is India’s Central banking institution, which controls
the monetary policy of the Indian rupee. The Reserve Bank of India was established on
April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934.
Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully
owned by the Government of India.
Monetary Policy of Reserve Bank of India
The Reserve Bank of India Act, 1934 sets out broadly the objectives of monetary
policy: "To regulate the issue of Bank notes and the keeping of reserves with a view to
securing monetary stability in India and generally to operate the currency and credit
system of the country to its advantage".
Although there is no explicit mandate for price stability, the objectives of monetary
policy in India have evolved as maintaining price stability and ensuring adequate flow of
credit to the productive sectors of the economy to support economic growth. The relative
emphasis placed on price stability and economic growth is modulated according to the
circumstances prevailing at a particular point in time and is spelt out, from time to time,
in the policy statements of the Reserve Bank. In the recent period, considerations of
financial stability have assumed an added importance in view of increasing openness of
the Indian economy.
The Reserve Bank has multiple instruments at its command for implementation of
monetary policy such as repo and reverse repo rates; cash reserve ratio (CRR); open
market operations, including LAF and market stabilization scheme (MSS); special market
operations; sector-specific liquidity facilities; and prudential tools.
Definitions of Monetary Policy

Many economists have given various definitions of monetary policy. Some prominent
definitions are as follows:
According to Prof. Harry Johnson, "Monetary policy is a policy employing the
central banks control of the supply of money as an instrument for achieving the objectives
of general economic policy is a monetary policy."
According to A.G. Hart, "Monetary policy is a policy which influences the public
stock of money substitute of public demand for such assets of both that is policy which
influences public liquidity position is known as a monetary policy."
Notes Credit Control by RBI
Credit Control is an important tool used by Reserve Bank of India, a major weapon
of the monetary policy used to control the demand and supply of money (liquidity) in the
economy. Central Bank administers control over the credit that the commercial banks
grant. Such a method is used by RBI to bring “Economic Development with Stability”.
It means that banks will not only control inflationary trends in the economy but also boost
economic growth which would ultimately lead to increase in real national income with
stability. In view of its functions such as issuing notes and custodian of cash reserves,
credit not being controlled by RBI would lead to Social and Economic instability in the
country.
Meaning of Credit Control
Credit control refers to the process of monitoring and collecting the money owed
to a business. This includes those measures and procedures adopted by a firm to ensure
that its credit customers pay their accounts.
Objectives of Credit Control
Controlling credit in the Economy is amongst the most important functions of the
Reserve Bank of India. The basic and important objectives of Credit Control in the economy
are:
i) To encourage the overall growth of the “priority sector” i.e. those sectors of the
economy which is recognized by the government as “prioritized” depending upon
their economic condition or government interest. These sectors broadly totals
to around 15 in number.
ii) To keep a check over the channelization of credit so that credit is not delivered
for undesirable purposes.
iii) To achieve the objective of controlling “Inflation” as well as “Deflation”.
iv) To boost the economy by facilitating the flow of adequate volume of bank credit
to different sectors.
v) To develop the economy.
Banking Regulation Act, 1949
The provisions of Banking Regulation Act shall be in addition to, and not, save as
hereinafter expressly provided, in derogation of the Companies Act, 1956, and any other
law for the time being in force.
1. Power to suspend operation of Act
(a) The Central Government, if on a representation made by the Reserve Bank in
this behalf it is satisfied that it is expedient so to do, may by notification in
the Official Gazette, suspend for such period, not exceeding sixty days, as may
be specified in the notification, the operation of all or any of the provisions of
this Act, either generally or in relation to any specified banking company.
(b) In a case of special emergency, the Governor of the Reserve Bank, or in his
absence a Deputy Governor of the Reserve Bank nominated by him in this behalf
may, by order in writing, exercise the powers of the Central Government under
sub-section (1) so however that the period of suspension shall not exceed thirty
days, and where the Governor or the Deputy Governor, as the case may be,

does so, he shall report the matter to the Central Government forthwith, and Notes
the order shall, as soon as may be, be published in the Gazette of India.
(c) The Central Government may, by notification in the Official Gazette, extend from
time to time the period of any suspension ordered under sub-section (1) or sub-
section (2) for such period, not exceeding sixty days at any one time, as it
thinks fit so however that the total period does not exceed one year.
2. Important Definitions under this Act
1. Approved securities means securities in which a trustee may invest money
under clause (a), clause (b), clause (bb), clause (c) or clause (d) of section
20 of the Indian Trust Act, 1882; such of the securities authorized by the
Central Government under clause of section 20 of the Indian Trust Act, 1882,
as may be prescribed.
2. Banking means the accepting, for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise and
withdraw able by cheque, draft, order or otherwise.
3. Banking company means any company which transacts the business of banking
in India.
4. Banking policy means any policy which is specified from time to time by the
Reserve Bank in the interest of the banking system or in the interest of monetary
stability or sound economic growth, having due regard to the interests of the
depositors, the volume of deposits and other resources of the bank and the need
for equitable allocation and the efficient use of these deposits and resources.
5. Corresponding new bank" means a corresponding new bank constituted under
section 3 of the Banking Companies Act, 1970, or under section 3 of the Banking
Companies Act, 1980.
6. Demand liabilities means liabilities which must be met on demand, and "time
liabilities" means liabilities which are not demand liabilities.
7. Deposit Insurance Corporation means the Deposit Insurance Corporation
established under section 3 of the Deposit Insurance Corporation Act, 1961.
8. Development Bank means the Industrial Development Bank of India established
under section 3 of the Industrial Development Bank of India Act, 1964.
9. Exim Bank means Export-Import Bank of India established under section 3 of
the Export-Import Bank of India Act, 1981.
10. Reconstruction Bank means the Industrial Reconstruction Bank of India
established under section 3 of the Industrial Reconstruction Bank of India Act,
1984.
3. Act to override memorandum, articles, etc. Save as otherwise expressly provided
in this Act:
(a) The provisions of this Act shall have effect notwithstanding anything to the
contrary contained in the memorandum or articles of a banking company, or
in any agreement executed by it, or in any resolution passed by the banking
company in general meeting or by its Board of Directors, whether the same
be registered, executed or passed, as the case may be, before or after the
commencement of the Banking Companies (Amendment) Act, 1959; and
(b) Any provision contained in the memorandum, articles, agreement or resolution
aforesaid shall, to the extent to which it is repugnant to the provisions of this
Act, become or be void, as the case may be.

Notes 4. Restrictions on power to remit debts

(1) Notwithstanding anything to the contrary contained in section 293 of the
Companies Act, 1956, a banking company shall not, except with the prior
approval of the Reserve Bank, remit in whole or in part any debt due to it by-
(a) Any of its Directors, or
(b) Any firm or company in which any of its Directors is interested as
Director, Partner, Managing Agent or Guarantor, or
(c) Any individual if any of its Directors is his Partner or Guarantor.
(2) Any remission made in contravention of the provisions of sub-section (1) shall
be void and of no affect.
5. Power of Reserve Bank to control advances by banking companies
(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the
public interest or in the interests of depositors or banking policy so to do, it
may determine the policy in relation to advances to be followed by banking
companies generally or by any banking company in particular, and when the
policy has been so determined, all banking companies or the banking company
concerned, as the case may be, shall be bound to follow the policy as so
determined.
(2) Without prejudice to the generality of the power vested in the Reserve Bank
under sub-section (1), the Reserve Bank may give directions to banking
companies, either generally or to any banking company or group of banking
companies in particulars, as to-
(a) The purposes for which advances may or may not be made;
(b) The margins to be maintained in respect of secured advances;
(c) The maximum amount of advances or other financial accommodation
which, having regard to the paid-up capital, reserves and deposits of a
banking company and other relevant considerations, may be made by
that banking company to any one company, firm, association to persons
or individual;
(d) The maximum amount up to which, having regard to the considerations
referred to in clause (c), guarantees may be given by a banking company
on behalf of any one company, firm, association of persons or individual;
and
(e) The rate of interest and other terms and conditions on which advances
or other financial accommodation may be made or guarantees may be
given.
(3) Every banking company shall be bound to comply with any directions given to
it under this section.
9.3 Insurance in India

Insurance is a contract between two parties whereby one party agrees to undertake
the risk of another in exchange for consideration known as premium and promises to pay
a fixed sum of money to the other party on happening of an uncertain event (death) or
after the expiry of a certain period in case of life insurance or to indemnify the other party
on happening of an uncertain event in case of general insurance.
Insurance provides financial protection against a loss arising out of happening of an
uncertain event. A person can avail this protection by paying premium to an insurance
company. A pool is created through contributions made by persons seeking to protect Notes
themselves from common risk. Premium is collected by insurance companies which also
act as trustee to the pool. Any loss to the insured in case of happening of an uncertain
event is paid out of this pool.
Insurance works on the basic principle of risk-sharing. A great advantage of insurance
is that it spreads the risk of a few people over a large group of people exposed to risk
of similar type. Insurance is the equitable transfer of the risk of a loss, from one entity
to another in exchange for payment. It is a form of risk management primarily used to
hedge against the risk of a contingent, uncertain loss.
An insurer or insurance carrier, is a company selling the insurance; the insured, or
policyholder, is the person or entity buying the insurance policy. The amount of money
to be charged for a certain amount of insurance coverage is called the premium. Risk
management, the practice of appraising and controlling risk, has evolved as a discrete
field of study and practice.
The concept behind insurance is that a group of people exposed to similar risk come
together and make contributions towards formation of a pool of funds. In case a person
actually suffers a loss on account of such risk, he is compensated out of the same pool
of funds. Contribution to the pool is made by a group of people sharing common risks
and collected by the insurance companies in the form of premiums.
Insurance may be described as a social device to reduce or eliminate risk of life
and property. Under the plan of insurance, a large number of people associate themselves
by sharing risk, attached to individual. The risk, which can be insured against include
fire, the peril of sea, death, incident, & burglary. Any risk contingent upon these may
be insured against at a premium commensurate with the risk involved.
Meaning of Insurance
Insurance refers to a contract or policy in which an individual or entity receives

financial protection or reimbursement against losses from an insurance company. The
company pools clients' risks to make payments more affordable for the insured.
Definition of Insurance
According to J.B. Maclean, “Insurance is a method of spreading over a large number

of persons a possible financial loss too serious to be conveniently borne by an individual”.
According to Oxford Dictionary, “Insurance is an arrangement by which a company
or the state undertakes to provide a guarantee of compensation for specified loss, damage,
illness or death in return for payment of a specified premium”.
Types of Insurance
Different types of insurance are used to cover different properties and assets such
as vehicles, home, health care etc. Basically, an insurance policy can also be known
as a protection net which secures from any financial losses in future. The Insurance can
be broadly classified into two categories such as:
1. Life Insurance
2. Non-life Insurance or General Insurance

Notes 1. Life Insurance

Life Insurance refers to the insurance which gives a protection against the loss of
income that would result if the insured passed away. The named beneficiary receives the
proceeds and is thereby safeguarded from the financial impact of the death of the insured.
Types of Life Insurance
Life insurance protection comes in many forms and not all policies are created equal.
While the death benefit amounts may be the same, the costs, structure, durations, etc.
vary tremendously across the types of policies.
i) Whole Life Insurance
Whole life insurance provides guaranteed insurance protection for the entire life of
the insured, otherwise known as permanent coverage. These policies carry a "cash value"
component that grows tax deferred at a contractually guaranteed amount usually a low
interest rate until the contract is surrendered. The premiums are usually level for the life
of the insured and the death benefit is guaranteed for the insured's lifetime.
With whole life payments, part of your premium is applied toward the insurance
portion of your policy, another part of your premium goes toward administrative expenses
and the balance of your premium goes toward the investment, or cash, portion of your
policy.
ii) Universal Life Insurance
Universal life insurance is a variation of whole life insurance. Like whole life, it is
also a permanent policy providing cash value benefits based on current interest rates.
The feature that distinguishes this policy from its whole life cousin is that the premiums,
cash values and level amount of protection can each be adjusted up or down during the
contract term as the insured's needs change. Cash values earn an interest rate that is
set periodically by the insurance company and is generally guaranteed not to drop below
a certain level.
iii) Variable Life
Variable life insurance is designed to combine the traditional protection and savings
features of whole life insurance with the growth potential of investment funds. This type
of policy is comprised of two distinct components: the general account and the separate
account. The general account is the reserve or liability account of the insurance provider,
and is not allocated to the individual policy. The separate account is comprised of various
investment funds within the insurance company's portfolio, such as an equity fund, a
money market fund, a bond fund, or some combination of these. Because of this underlying
investment feature, the value of the cash and death benefit may fluctuate, thus the name
"variable life".
iv) Variable Universal Life
Variable universal life insurance combines the features of universal life with variable
life and gives the consumer the flexibility of adjusting premiums, death benefits and the
selection of investment choices. These policies are technically classified as securities
and are therefore subject to Securities and Exchange Commission (SEC) regulation and
the oversight of the state insurance commissioner. Unfortunately, all the investment risk
lies with the policy owner; as a result, the death benefit value may rise or fall depending
on the success of the policy's underlying investments. However, policies may provide some
type of guarantee that at least a minimum death benefit will be paid to beneficiaries.

v) Term Life Notes

Term insurance can help protect your beneficiaries against financial loss resulting
from your death; it pays the face amount of the policy, but only provides protection for
a definite, but limited, amount of time. Term policies do not build cash values and the
maximum term period is usually 30 years. Term policies are useful when there is a limited
time needed for protection and when the dollars available for coverage are limited. The
premiums for these types of policies are significantly lower than the costs for whole life.
They also (initially) provide more insurance protection per dollar spent than any form of
permanent policies. Unfortunately, the cost of premiums increases as the policy owner
gets older and as the end of the specified term nears.
2. General Insurance
General insurance or non-life insurance policies, including automobile and
homeowners policies, provide payments depending on the loss from a particular financial
event. General insurance typically comprises any insurance that is not determined to be
life insurance.
Types of General Insurance
i) Motor Insurance Plans

A standard motor insurance or better known as a car insurance policy is usually
the insurance coverage mandated by law to drive on the road. Thus, it primarily covers
you against liability damages and unexpected repairs. These liability damages can be
of two types. First is when a bodily injury has been caused to a third person. Second
is where the property of a third person and own car.
ii) Health Insurance
Health is insurance against the risk of incurring medical expenses among individuals.
By estimating the overall risk of health care and health system expenses among a targeted
group, an insurer can develop a routine finance structure, such as a monthly premium
or payroll tax, to ensure that money is available to pay for the health care benefits specified
in the insurance agreement. The benefit is administered by a central organization such
as a government agency, private business, or not-for-profit entity.
iii) Marine Insurance
Marine Insurance and marine cargo insurance cover the loss or damage of vessels
at sea or on inland waterways, and of cargo in transit, regardless of the method of transit.
When the owner of the cargo and the carrier are separate corporations, marine cargo
insurance typically compensates the owner of cargo for losses sustained from fire,
shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's
insurance. Many marine insurance underwriters will include "time element" coverage in
such policies, which extends the indemnity to cover loss of profit and other business
expenses attributable to the delay caused by a covered loss.
iv) Travel Insurance
Travel insurance is insurance that is intended to cover medical expenses, financial
default of travel suppliers, and other losses incurred while travelling, either within one's
own country, or internationally. Temporary travel insurance can usually be arranged at
the time of the booking of a trip to cover exactly the duration of that trip, or a "multi-
trip" policy can cover an unlimited number of trips within a set time frame.

Notes v) Aviation Insurance

Aviation Insurance grants protection against the loss of or damage to the aircraft
as also the legal liability to third parties and to passengers arising out of the operation
of the aircraft.
It covers Freight liability, Airmail liability, Personal accident Insurance and Loss of
license insurance. Aviation insurance protects aircraft hulls and spares, and associated
liability risks, such as passenger and third-party liability. Airports may also appear under
this subcategory, including air traffic control and refueling operations for international
airports through to smaller domestic exposures.
vi) Personal Accident Insurance
This policy provides that if the insured shall sustain any bodily injury resulting solely
and directly from accident caused by external violent and visible means then the company
shall pay to the insured or his legal representative, the sum or sums set forth in the policy.
Statistics reveal that at least thirteen people die every hour in road accidents in India.
Accident can make a terrible impact on finances with increased spending towards
treatment and disrupting income until recovery. In such a bumpy scenario, it is personal
accident insurance that can be vital to keep finances smooth and sailing.
vii) Disability Insurance
Disability Insurance policies provide financial support in the event of the policyholder
becoming unable to work because of disabling illness or injury. It provides monthly support
to help pay such obligations as mortgage loans and credit cards. Short-term and long-
term disability policies are available to individuals, but considering the expense, long-term
policies are generally obtained only by those with at least six-figure incomes, such as
doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically
up to six months, paying a stipend each month to cover medical bills and other necessities.
viii) Crime Insurance
This is a form of casualty insurance that covers the policyholder against losses
arising from the criminal acts of third parties. For example, a company can obtain crime
insurance to cover losses arising from theft or embezzlement.
Crime insurance is insurance to manage the loss exposures resulting from criminal
acts such as robbery, burglary and other forms of theft. It is also called "fidelity insurance".
Many businesses purchase crime insurance that allows them to file claims for employee
theft or other offenses with the potential to cause financial ruin.
9.4 Regulation of Insurance Sector

The Insurance Regulatory and Development Authority of India (IRDA) which is
constituted under the Insurance Regulatory and Development Authority Act 1999, and
which derives its powers from the Insurance Act 1938 (as amended) regulates entities
which carry on insurance business and intermediary business (such as brokers, insurance
surveyors, loss assessors, insurance agents and third party administrators) in or from
India.
1. The Insurance Regulatory and Development Authority (IRDA)
The Insurance Regulatory and Development Authority (IRDA) is a national agency
of the Government of India, based in Hyderabad. It was formed by an act of Indian
Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some
emerging requirements. Mission of IRDA as stated in the act is "to protect the interests
of the policyholders, to regulate, promote and ensure orderly growth of the insurance Notes
industry and for matters connected therewith or incidental thereto."
In 2010, the Government of India ruled that the Unit Linked Insurance Plans (ULIPs)
will be governed by IRDA, and not the market regulator Securities and Exchange Board
of India
2. Expectations
The law of India has following expectations from IRDA:
i) To protect the interest of and secure fair treatment to policyholders.
ii) To bring about speedy and orderly growth of the insurance industry (including
annuity and superannuation payments), for the benefit of the common man, and
to provide long term funds for accelerating growth of the economy.
iii) To set, promote, monitor and enforce high standards of integrity, financial
soundness, fair dealing and competence of those it regulates.
iv) To ensure that insurance customers receive precise, clear and correct
information about products and services and make them aware of their
responsibilities and duties in this regard.
v) To ensure speedy settlement of genuine claims, to prevent insurance frauds
and other malpractices and put in place effective grievance redressal machinery.
vi) To promote fairness, transparency and orderly conduct in financial markets
dealing with insurance and build a reliable management information system to
enforce high standards of financial soundness amongst market players.
vii) To take action where such standards are inadequate or ineffectively enforced.
viii) To bring about optimum amount of self-regulation in day to day working of the
industry consistent with the requirements of prudential regulation.
3. Duties, Powers and Functions of IRDA
Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA:
1. Subject to the provisions of this Act and any other law for the time being in
force, the Authority shall have the duty to regulate, promote and ensure orderly
growth of the insurance business and re-insurance business.
2. Without prejudice to the generality of the provisions contained in sub-section
(1), the powers and functions of the Authority shall include:
a) Issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration;
b) Protection of the interests of the policy holders in matters concerning
assigning of policy, nomination by policy holders, insurable interest,
settlement of insurance claim, surrender value of policy and other terms
and conditions of contracts of insurance;
c) Specifying requisite qualifications, code of conduct and practical training
for intermediary or insurance intermediaries and agents;
4. Advisory committee of IRDA
IRDA consists of a Chairman and some permanent as well as part time members.
The regulations, however, are enacted under the guidance of a statutory advisory
committee. The advisory committee consists of following individuals and ex-officio
authorities:
i) Chairman: Hari Narayana is the current Chairman of IRDA.

Notes ii) Full-time Members: Currently, they are Mr K K Srinivasan (Nonlife Member),
Sri G Prabhakara (Life Member), Dr R Kannan (Member, Actuary) and Sri R.K.
Nair (Member, F & I). There is provision for a panel of other members and part
time members. IRDA formed a high powered Insurance Law Reforms Committee
known as KPN Committee with important insurance advisors like Mr N
Govardhan and Dr K C Mishra as its members. There were also a few non-
advisory committee members like Mr Liaquat Khan and Mr T Viswanathan etc.
5. Chairman selection process
Government of India has circulated to broad base IRDA chairman selection process.
It is felt in the market that placing of retired civil servants as IRDA Chairman has served
the purpose of administrative fiefdom of the regulator. Mostly, the regulator has become
passive to market realities and most of the original public policy intentions have been
systematically replaced by personal preferences. There seems to be no oversight of public
policy erosions. Taking advantage of the completion of term of current incumbent, there
seem to be an attempt to correct the future course but people do not perceive any outcome
to result as the market does not seem to throw up candidates of the stature of Howard
Davies for Indian market. But a right leadership is the solution to the requirement of this
booming market.
6. Code of Conduct for agents
In supporting agents to carry out their role in a professional manner, every licensed
agent must adhere to the Code of Conduct specified by the IRDA in the Insurance
Regulatory and Development Authority (Licensing of Insurance Agents) Regulations 2000
as per Regulation 8. In the Code of Conduct the IRDA gives details as to what an agent
shall and shall not do. For instance, the agent should disclose all information relating
to the insurance company that they represent and the products they are recommending.
They should act in the best interests of the client while at the same time making sure
that there is no adverse selection against the insurance company. In addition, the
insurance agent needs to take steps to keep the business they have secured for their
company. To do this they need to make every attempt both orally and in writing to ensure
that the policyholder pays the premium within the required time.
9.5 Summary
The term bank refers to a financial institution which deals with deposits and advances
and other related services. Bank receives money from those who want to save in the form
of deposits and it lends money to those who need it.
Reserve Bank of India is the apex monetary Institution of India. It is also called as
the central bank of the country. The Reserve Bank of India was established on April 1,
1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central
Office of the Reserve Bank was initially established in Calcutta but was permanently moved
to Mumbai in 1937. The Central Office is where the Governor sits and where policies are
formulated.
Commercial bank refers to a bank that lends money and provides transactional,
savings, and money market accounts and that accepts time deposit. A commercial bank
is a type of financial institution and intermediary. Commercial banks engage for providing
documentary and standby letter of credit, guarantees, performance bonds, securities
underwriting commitments and other forms of off balance sheet exposures.
Recurring Deposits are a special kind of Term Deposits offered by banks in India
which help people with regular incomes to deposit a fixed amount every month into their
Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits. It Notes
is similar to making FDs of a certain amount in monthly installments, for example Rs
1000 every month. Telephone banking is a service provided by a Commercial Banks, which
allows its customers to perform transactions over the telephone.
Internet is a channel of service to banking customers. The access to account
information as well as transaction is offered through the world-wide-web network of
computers on the internet. Each account holder is provided with a PIN similar to that of
ATM or phone banking.
Many economists have given various definitions of monetary policy. Monetary policy
is a policy employing the central banks control of the supply of money as an instrument
for achieving the objectives of general economic policy is a monetary policy.
Credit control refers to the process of monitoring and collecting the money owed
to a business. This includes those measures and procedures adopted by a firm to ensure
that its credit customers pay their accounts.
Insurance refers to a contract or policy in which an individual or entity receives
financial protection or reimbursement against losses from an insurance company. The
company pools clients' risks to make payments more affordable for the insured.
Life Insurance refers to the insurance which gives a protection against the loss of
income that would result if the insured passed away. The named beneficiary receives the
proceeds and is thereby safeguarded from the financial impact of the death of the insured.
General insurance or non-life insurance policies, including automobile and
homeowners policies, provide payments depending on the loss from a particular financial
event. General insurance typically comprises any insurance that is not determined to be
life insurance.

1. ……………receives money from those who want to save in the form of deposits
and it lends money to those who need it.
2. …………….is the apex monetary Institution of India. It is also called as the
central bank of the country.
3. ………………….refers to a bank that lends money and provides transactional,
savings, and money market accounts and that accepts time deposit.
4. Telephone banking is a service provided by a Commercial Banks, which allows
its customers to perform transactions over the…………………..
5. …………………is a policy employing the central banks control of the supply
of money as an instrument for achieving the objectives of general economic
policy is a monetary policy.
II. True/False
1. Bank receives money from those who want to save in the form of deposits and
it lends money to those who need it.
2. Reserve Bank of India is the apex monetary Institution of India. It is also called
as the central bank of the country.
3. Commercial bank refers to a bank that lends money and provides transactional,
savings, and money market accounts and that accepts time deposit.

Notes 4. Internet banking is a service provided by a Commercial Banks, which allows

its customers to perform transactions over the telephone.
5. Monetary policy is a policy employing the central banks control of the supply
of money as an instrument for achieving the objectives of general economic
policy is a monetary policy.
1. Which of the following receives money from those who want to save in the form
of deposits and it lends money to those who need it?
a) Bank
b) Reserve Bank of India
c) Commercial bank
d) Telephone banking
2. What is the apex monetary Institution of India. It is also called as the central
bank of the country?
a) Bank
c) Commercial bank
3. Which of the following refers to a bank that lends money and provides
transactional, savings, and money market accounts and that accepts time
deposit?
a) Bank
c) Commercial bank
4. What is a service provided by a Commercial Banks, which allows its customers
to perform transactions over the telephone?
a) Bank
c) Commercial bank
5. What is a policy employing the central banks control of the supply of money
as an instrument for achieving the objectives of general economic policy is a
monetary policy.
a) Monetary policy
c) Commercial bank

1. Define Bank.
2. Who is a Banker?
3. Define Banker.
4. Define Customer. Notes

5. What is meant by Bankers Right to self-off?
6. What constitutes a customer according to Sir John Paget?
7. What do you means by Lien?
8. State the duties of Banker.
9. What is Garnishee Order?
10. What is Clayton’s case?
11. What is Bank charge?
12. Can a money lender be called a Banker?
13. What is Insurance?
14. What is Life Insurance?
15. What is General Insurance?
1. Discuss the origin of Bank.
2. What is Bankers Lien? Distinguish between General Lien and Special Lien?
3. Analyze the conditions to exercise the right of self-off.
4. What are the circumstances under which a banker can exercise lien?
5. Explain in details the evaluation of banking in India.
6. Explain General relationship between Banker and customer.
9.8 Key Terms

1) Bank: The term bank refers to a financial institution which deals with deposits
and advances and other related services. Bank receives money from those who
want to save in the form of deposits and it lends money to those who need
it.
2) Reserve Bank of India: Reserve Bank of India is the apex monetary Institution
of India. It is also called as the central bank of the country. The Reserve Bank
of India was established on April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank
was initially established in Calcutta but was permanently moved to Mumbai in
1937. The Central Office is where the Governor sits and where policies are
formulated.
3) Commercial Bank: Commercial bank refers to a bank that lends money and
provides transactional, savings, and money market accounts and that accepts
time deposit. A commercial bank is a type of financial institution and
intermediary. Commercial banks engage for providing documentary and standby
letter of credit, guarantees, performance bonds, securities underwriting
commitments and other forms of off balance sheet exposures.
4) Recurring Deposit: Recurring Deposits are a special kind of Term Deposits
offered by banks in India which help people with regular incomes to deposit a
fixed amount every month into their Recurring Deposit account and earn interest
at the rate applicable to Fixed Deposits. It is similar to making FDs of a certain
amount in monthly installments, for example Rs 1000 every month. Tele
Banking: Telephone banking is a service provided by a Commercial Banks,
which allows its customers to perform transactions over the telephone.

Notes 5) Internet Banking: Internet is a channel of service to banking customers. The

access to account information as well as transaction is offered through the world-
wide-web network of computers on the internet. Each account holder is provided
with a PIN similar to that of ATM or phone banking.
6) Monetary Policy: Many economists have given various definitions of monetary
policy. Monetary policy is a policy employing the central banks control of the
supply of money as an instrument for achieving the objectives of general
economic policy is a monetary policy.
7) Credit Control: Credit control refers to the process of monitoring and collecting
the money owed to a business. This includes those measures and procedures
adopted by a firm to ensure that its credit customers pay their accounts.
8) Insurance: Insurance refers to a contract or policy in which an individual or
entity receives financial protection or reimbursement against losses from an
insurance company. The company pools clients' risks to make payments more
affordable for the insured.
9) Life Insurance: Life Insurance refers to the insurance which gives a protection
against the loss of income that would result if the insured passed away. The
named beneficiary receives the proceeds and is thereby safeguarded from the
financial impact of the death of the insured.
10) General Insurance: General insurance or non-life insurance policies, including
automobile and homeowners policies, provide payments depending on the loss
from a particular financial event. General insurance typically comprises any
insurance that is not determined to be life insurance.

1. Bank
2. Reserve Bank of India
3. Commercial bank
4. Telephone
5. Monetary policy
II. True or False
1. True
2. True
3. True
4. False
5. True
1. [a]
2. [b]
3. [c]
4. [d]
5. [a]


Mr. and Mrs. a both worked in a local factory, earning modest wages. They were
using the overdraft facility on their current account to its full extent. They also had a
personal loan from their bank and had borrowed from various credit card companies.
In March 2004, realising they were in financial difficulty but unsure what to do about
it, they visited their bank. They explained their situation to the lending officer, who told
them the bank could give them a consolidation loan to cover all their existing debts.
Mr. and Mrs. A were pleased with this suggestion and they took out the loan, which
paid off all their existing debts and returned their current account into credit. But the bank
left the couple's overdraft facility in place on their current account and within a couple
of months Mr. and Mrs. A had begun to go overdrawn again.
In June, having found they were unable to keep within the overdraft limit, Mr and Mrs
A visited the bank to discuss the position. The bank's lending officer arranged another
consolidation loan for them, to cover the overdraft debt.
Again, the bank left the couple's overdraft facility in place, and within a few months
Mr. and Mrs. A were again in financial difficulties. When they visited the bank in November
they were given a third loan. This covered the debts that the couple had acquired since
taking out the consolidation loan in June. It also covered an additional £500. The bank
agreed to lend them this because they had said they were worried about how they would
pay for all the "extras" they would need over the Christmas period.
By early 2005, realising that they were unable to meet their repayment commitments,
Mr and Mrs A complained to the bank. They said they had asked for help in managing
their debts but - instead - it had made their situation worse.
Questions:
1. How the bank's initial offer of a consolidation loan to be helpful?
2. Why the Mr. and Mrs. A thought that taking a further loan must be the best way
of tackling the situation?

1. A.K. Majumdar Company Law & Practice ( Taxmann’s) 13th Ed. 2008


Press.
Kluwer Law Intl
Press.
Pearson.
±±±±
Consumer Protection Act 197
Notes
Unit 10: Consumer Protection Act
Structure:
10.1 Introduction
10.2 Rights of Consumers
10.3 Nature and Scope of Complaints
10.4 Remedies Available to Consumers
10.5 Summary
10.8 Key Terms
10.10 Case Study
10.12 Bibliography
Objectives

z Concept of Consumer Protection Act, 1986
z Rights of Consumers
z Nature and Scope of Complaints
z Remedies Available to Consumers


India is a fast developing country where majority of the people still belong to the
rural areas. Such of those people are many times innocent and ignorant of their products.
It is due to lack of information or knowledge of the market position. Such of those persons
who may be termed as consumers. These are to be given support and protection from
the unscrupulous sellers. The marketers are to be socially responsible in protecting the
interest of the consumers. Consumers are considered as one of the pillars of the business.
Peter F. Drucker was apt in saying, “it is the consumer who determines what a
business is, what the consumer thinks he is buying, what he considers ‘value’ is decisive
– it determines what a business is, what it produces and whether it will prosper.”
According to Adam Smith; “Consumption is the sole end and purpose of all
production.”
The consumer is the king in a free market economy. The consumers must be given
priority to enable him to fulfill his wants and desires according to his capacity. He is to
be protected from unsafe, harmful, unsuitable alternatives and thus he will be freed from
insecurity and fear of exploitation. Many a times the consumers may not be in a position
to approach civil court, as the matter is involved with comparatively small, both in respect
of product and price. It will thus be seen that only a social movement can ensure such
a condition.
Consumerism has been defined again by Philip Kotler as “a social movement seeking
to augment the rights and powers of the buyers in relation to sellers”. From this it can
be known that the consumers are to be treated as kings. But what is the status of
consumers in India? The Indian philosophy of tolerance and perseverance has still been
accepted in many parts of India. To create awareness among the consumers there are
many consumer protection organization. To provide awareness towards rights to safety,
right to be informed, the right to choose and right to be heard, a special legislation is
enacted by the Central Government.
In order to make the consumers more powerful a separate legislation namely, the
Consumer Protection Act, 1986 was enacted. To seek speedy/quick, cheap and efficient
remedies and to benefit the consumers and consumer groups, the Act was amended,
known as The Consumers Protection (Amendment) Act, 1993. It is also known as COPRA
which is not only recognised consumer rights but also established a redressal system,
which is of unique in nature.
The Consumer Protection Act, 1986
Consumer Protection Act was enacted in the year 1986 to provide a better
protection of the interests of consumers and encourage the consumer movements through
consumer councils and other authorities for the settlement of consumer’s disputes and
for matters connected therewith. The Act gives full freedom to consumers in getting legal
protection and free from fear, complexities and technicalities involved with the various legal
procedure in the regular course of action like complaints and so on. Moreover there is
no court fees or stamp duty to be affixed, no matter whatever may be the amount involved
in the complaints. So the Act facilitates the consumers a better, inexpensive and speedy
remedy. The Act shall be applicable to all goods and services unless otherwise, expressly
provided by the Central Government by notifications. The law shall see to the benefit of
the general public, that is the consumers. The act applies in addition to the sale of all
goods and services, in the private sector and the public sector as well as Government

agencies. It provides for the establishment of Central Consumer Protection Council by the Notes
Central Government and likewise State Consumer Protection Councils by the respective
State Governments.
The Act is considered as a revolutionary piece of legislative which can grow into
an important tool for development. The objects and reasons behind the Act are based
on inherent rights. The Act also seeks to provide for better protection of the interests of
consumers. In addition to this it also makes provision for the establishment of consumer
councils and other authorities for the settlement of consumer disputes.
There are six consumer rights recognised by the Act in form of its objects, and
are as follows:
(a) The right to be protected against marketing of goods and services which are
hazardous to life and property. So consumers should always sport an attitude
of beware as, “Don’t sell me goods hazardous to my life and property”.
(b) Secondly, ‘the right to be informed’ about the quality, quantity, potency, (marked
or branded) purity, standards and price of goods and services to protect against
unfair trade practices.
(c) Then, ‘the right to be assured’, whenever possible, access to an authority of
goods and services at competitive prices.
(d) ‘The right to be heard’ and to be assured that the consumers interest will receive
due consideration from appropriate forums.
(e) The right to seek redressal against unfair trade practices or restrictive trade
practice or unscrupulous exploitation; and finally;
(f) The right to consumer education.
Definitions under the Act
Section 2 of the Act gives provision on who can file a complaint, what type of
compliant can be filed, on what the complaint can be filed and so on. The following are
the extraction of some of the definitions;
(i) Consumer:
According to the Sec 2 (1) (d), “Any person, who buys any goods against
consideration is a consumer.”
(ii) Who can file a Complaint?
The following categories of persons may file a complaint under the Act:
(a) A consumer [Sec 2 (1) d]
(b) Any voluntary organisation, registered under, “The Societies Registration Act”,
1860 or The Companies Act 1956 or render any law for the time being in force.
(c) The Central Government.
(d) The State Government or Union Territory Administrations [Sec 2 (1) (b)]
(e) One or more consumers, where there are numerous consumers having the same
interest.
10.2 Rights of Consumers

(Sec. 6). Infact the objects of the central council are the various rights of consumers
recognised under the Act which are to be promoted and protected by the council. Thus

Notes the Act (under Section 6) has enumerated some rights of consumers which need to be
protected by the council. These rights of consumers are:
(i) Right to Safety
This right has been recognized by Sec. 6(a) as, “the right to be protected against
the marketing of goods and services which are hazardous to life and property”. The rationale
behind this provision is to ensure physical safety of the consumers. The law seeks to
ensure that those responsible for bringing goods to the market, in particular,
manufacturers, distributors, retailers and the like should ensure that the goods are safe
for the users. In case of dangerous or risky goods, consumer should be informed of the
risk involved in improper use of goods. Vital safety information should be conveyed to
consumers.
Illustration: M bought an insecticide from N. N did not inform M that touching this
insecticide with bare hands can create skin problem. M, while using the insecticide came
in contact with it and suffered from skin problem consequently. Here can be held liable
under the Act.
(ii) Right to Information
Under Section 6(b) this right has been recognized as, “the right to be informed about
the quality, quantity, potency, purity, standard and price of goods or services, as the case
may be, so as to protect the consumer against unfair trade practices.” Adequate
information is very important in order to make a right choice of goods to be purchased.
This right ensures that the consumer should be made aware of the quality, weight, content
and price of the product at the very pre-purchase stage. The fixing of I.S.I mark and agmark
enables the consumer to know about its quality. Under some other legislations it is
mandatory for the manufactures and packers to provide information on the package to
the consumers about the contents, weight, purity and potency of the product being sold.
Consumers suffer much on the price front as the prices often printed or tagged in the
product are misleading and no price control is there expect with respect to essential
commodities. Advertisements also often mislead the consumers.
(iii) Right to Choose
This right has been recognised by Section 6(c) as, “the right to be assured, wherever
possible, access to a variety of goods and services at comprtitive prices.” Fair and effective
competition must be encouraged so as to provide consumers with maximum information
about the vide variety of competing goods available in the market. Shoppers or buyers
guide should be made available to the consumers by the Government or Business
organizations to protect this right of consumers.
(iv) Right to be heard
This right is ensured by Section 6(d) as, “the right to be heard and to be assured
that consumers interests will receive due consideration at appropriate forums.” The
Consumer Protection Act, 1986 has well taken care of this right by providing three stages
redressal machinary to the consumers, namely, District Forum, State Commission and
National Commission. Every consumer has a right to file complaint and be heard in that
conext. Further, with a view to providing better protection of this right various public and
private sector undertakings have provided Consumer Ombudsman (Complaint cells) to
provide redressal to consumer complaints outside the courts.
(v) Right against exploitation
This right is guaranteed under Section 6(e) of the Act as, “the right to seek redressal
against unfair trade practices or restrictive trade practices or unscrupulous exploitation

to consumers.” Consumers are the most helpless lot in our country due to very many Notes
factors. When consumers are exploited, adequate remedy must be made available. The
Act has thus ensured to prevent exploitation of consumers by invoking the jurisdiction
of consumer Forums in cases involving unfair trade practices and restrictive trade practices.
(vi) Right to Education
This right has been recognized under Section 6(f) of the Act as, “ the right to
consumer education.” The right to consumer education is a right which ensures the
remedies available to them. Unless the consumers are aware of their rights and remedies,
protection of their interest shall remain a myth. In this connection the role of Consumer
protection Councils is very vital.
10.3 Nature and Scope of Complaints
Complaint
When one makes any allegation in writing under Section [2 (1) (c)] and to remember
in writing to invoke the provisions of this Act to obtain certain relief on account of any
grievance occasioned by:
(a) an unfair trade practice or restrictive trade practice adopted by any trader
burdening a consumer with loss or damage:
(b) defective goods bought or agreed to be bought;
(c) deficiency in service availed or agreed to be availed,
(d) price charged in excess of fixed or displayed price.
(e) hazardous goods and services being offered for sale.
The compliant can be attached with receipt, invoice guarantee or warranty cards,
correspondence and so on.
Again under section 12(1)B and section 12(1); A detail provision on, “who can file
a complaint”? Which is given under in detail.
Nature of Complaints under Consumer Protection Act
In order to address rights of consumers against unethical and exploitative business

practices by traders, the Consumer Protection Act was passed by the Indian Parliament
in 1986. This Act provided for the establishment of Consumer Protection Councils as well
as Consumer Forums for the settlement of consumer disputes. The Consumer Protection
Act is a unique legislation enacted in India to protect consumers. The main objective of
this Act is to provide better protection to consumers. To provide simple, speedy and
inexpensive redressal of consumer grievances, the Act envisages three-tier quasi-judicial
machinery at the district, state and national levels. At the district level, the redressal forum
is called as District Forum. The State Government may, if it deems fit, establish more
than one District Forum in a district. At the state level, there are to be similar redressal
commissions to be known as State Commissions and at the national level, there is a
National Consumer Disputes Redressal Commission to be known as National
Commission.
The consumer to whom such goods are sold or delivered or agreed to be sold or
delivered or such service provided or agreed to be provided. In case of death of a consumer,
the legal heir or representative can file a complaint.

Notes Any recognised consumers association namely, any voluntary consumer association
registered under the Companies Act, 1956, or any other law for the time being in force.
It is not necessary that the consumer is a member of such an association.
One or more consumers, where there are numerous consumers having the same
interest, with the permission of the District Forum, on behalf of, or for the benefit of, all
consumers so interested.
Procedure in respect of goods where the defect requires no testing or analysis: The
District Forum should send a copy of admitted complaint to the opposite party mentioned
in the complaint within 21 days of admission. He should be instructed to provide his version
of the case within 30 days or may be granted a further extension of 15 days, at the
discretion of the Forum. If the opposite party disputes the allegations or fails to take any
action, the forum can settle the disputes as specified in the Act.
Procedure in respect of goods where the defect requires analysis or testing: With
respect to goods which need to be tested or analysed for defects, the District Forum should
obtain a sample of goods from the complainant and should take steps to seal and
authenticate the sample and send it to the appropriate laboratory for testing or analysis.
This exercise should be carried out to ascertain whether the goods suffer from defects
alleged by the complainant and the results of such tests must be provided within 45 days.
This period may be extended by the Forum, if necessary. The complainant is obliged to
bear the necessary charges towards the analysis/testing and needs to deposit these fees
to the forum.
Scope of Complaints under Consumer Protection Act
The complaint and feedback policy is applicable to all DPC employees who may
receive, manage, investigate and respond to complaints and feedback from members of
the public. Where a fit for purpose alternate complaint and feedback policy and procedure
for a departmental group is implemented, the guiding principles of this policy are to be
included.
Matters not considered applicable to this policy are complaints relating to;
Administrative law, appeal decisions, judicial decisions, internal staff complaints, panel
selection grievances, official misconduct or the matters relating to the Whistleblowers
Protection Act 1993. Where an alternative whole of government Complaints Management
Policy is mandated, the DPC complaint and feedback policy is not applicable, for example,
the State Procurement Board's Supplier Complaints Policy. Scope of Complaints under
Consumer Protection Act can be summarized as follows:
(1) To Organize Consumers: Indian consumers are scattered over a wide
geographical area. They are not well organized. They have a low power and
businessmen exploit consumers. Here we need consumer protection.
(2) Provide Market Information: Majority of the consumers have no information
about quality, type, price and other marketing facilities. Many customers buy
without product knowledge and this make them suffer losses.
(3) Importance of Physical Safety: Indian markets are over flooded with products.
The products may be adulterated and may be health hazardous. This may
endanger their life and due to this a consumer needs to be protected.
(4) Avoiding Monopoly: Consumer Protection is very important in terms of
avoiding monopoly. Monopoly is the crown of modern market. Most of the
organizations, irrespective of various restrictions follow monopoly practice. Due
to this consumers get affected and needs to be protected.

(5) Prevention from Malpractices: Business malpractices are rapidly growing in Notes
modern market. Businessmen follow unfair trade practices, restrictive trade
practices and monopolistic trade practice and consumer protection plays a vital
role.
(6) Avoiding Pollution: Pollution is very serious issue taken by every country.
Pollution affects the mind and health of not only consumers but also citizens.
It is important to avoid pollution to save society at large from pollution.
(7) Misleading Advertisements: Many organizations deliberately cheat consumers
through wrong or misleading advertisements. This will protect consumers from
getting exploited.
(8) Informing Consumers about their Basic Rights: Majority of the consumers
are ignorant. They do not know about consumer rights. Consumer movements
inform consumers about their rights and protect their interest and rights.
Authorities under the Consumer Protection Act
1. Consumer Protection Councils

(i) The Central Consumer Protection Council
Section 4 of the Act provides that
(1) The Central Government may, by notification, establish with effect from such
date as it may specify in such notification, a council to be known as the ‘Central
Consumer Protection Council’.
(2) The Central Council shall consist of the following members namely;
(a) The minister incharge of the ‘Consumer Affairs’ in the Central
Government, who shall be its chairman, and
(b) Such number of other official or non - official members representing such
interests as may be prescribed.
[Note: The word “Consumer affairs” has been substituted by the “Consumer
Protection”and the same is known as The Consumer Protection (Amendment) Act, 1993
with effect from 18th June 1993.
The Consumer Protection Rules were formulated in the year 1987. It Provides that
the Central Council shall consist of the following 150 members namely:
(i) The minister incharge of Consumer Affairs in the Central Government who shall
be Chairman of the Central Council.
(ii) The minister of State or Deputy minister incharge of Consumer Affairs in the
Central Government, who shall be the Vice-Chairman of the Central Council.
(iii) The minister of Food and Civil Supplies or minister incharge of Consumer Affairs
in the State.
(iv) Eight members of the Parliament:– Five from Lok Sabha and three from Rajya
Sabha.
(v) The Secretary of the National Commission for Scheduled Castes and Scheduled
Tribes.
(vi) Representatives of the Central Governmental Departments and autonomous
organisations concerned with consumer interests not exceeding twenty.
(vii) Representatives of women not less than ten.
(ix) Representatives of farmers, trade and industries not exceeding twenty.

Notes (x) Persons capable of representing consumer interest not specified above, not
exceeding fifteen.
(xi) The secretary in the Department of Civil supplies shall be the member secretary
of the Central Council.
2. The State Consumer Protection Councils
Section 7 of the Act provides a separate Council,
(i) The State Government may, by notification, establish with effect from such date
as it may specify in such notification a council to be known as the Consumer
Protection Council for (E.g. Karnataka), there in after referred to as the State
Council.
(ii) The State Council consist of the following members, namely –
(a) The minister incharge of consumer affairs in the State Government who
shall be its chairman.
(b) Such number of other official or non–official members representing such
interests as may be prescribed by the State Government.
(iii) The State Council shall meet as and when necessary but not less than two
meetings shall be held every year.
(iv) The State Council shall meet at such time and place as the chairman may think
fit and shall observe such procedure in regard to the transaction of the business
as may be prescribed by the State Government.
Object of the State Council
Act provides under Section 8, the objects of the State Council, to promote and to
protect, the rights of the consumers within the state laid down in clauses (a) to (f) of
Section-6.
Consumer Redressal Agencies
The Consumer Protection Act under Chapter III explains about the Consumer
Disputes Redressal Agencies. Section 9 of the Act gives the provision for establishment
of Consumer Disputes Redressal Agencies. In this the provision is to create a “three–
tier remedial machinery” for inexpensive and expeditions redressal of consumer grievances
by way of an alternative to the ordinary process of instituting actions before a Civil Court
with all its heavy court fees, cost and enormous delay.
Section 9, provides that the following agencies are required to be established for the
purpose of the Act:
(i) The Consumer Disputes Redressal Forum to be known as the ‘District Forum’.
The District Forum is to be established by the State Government in each state
by notification. The State Government, if it deems fit, establish more than one
District Forum.
(ii) A Consumer Disputes Redressal Commission to the known as State
Commission. ‘This is also to be established by the State Government by means
of notification.
(iii) A National Consumer Disputes Redressal Commission to be established. This
is to be established by the Central Government by means of a notification.
The forum exercises quasi-judicial powers for redressal of consumer dispute. The
authorities here should record reasons, how so ever brief, for their conclusions. (Charan
Singh Vs Healing Touch Hospital (2000)).
3. District Forums Notes

The formation of District Forums and other relevance given in the Sec 10 of the
Consumer Protection Act. According to this,
(i) Each District Forum shall consist of:
(a) a person who is, or has been, or is qualified to be a District Judge, who
shall be its president.
(b) two other members shall be persons of ability, integrity and standing,
and have adequate knowledge or experience, or have shown capacity in
dealing with, problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, and one of whom
shall be a women.
Appointment:
Every appointment under Section 10 & sub-section (1) shall be made by the
State Government as the recommendation of a selection committee consisting
of the following, namely;
(a) The president of the State Commission – Chairman.
(b) Secretary, Law Department of the State – Member
(c) Secretary in-charge of the department dealing with consumer affairs in
the State as Member
(ii) Term of office: Under Sec. 10 and sub-section (2), every member of the District
Forum shall hold office for a term of five years or up to the age of 65 years,
whichever is earlier, and shall not be eligible for re-appointment.
Resignation: The same Section provides that a member may resign his office
in writing, addressed to the State Government and on such resignation being
accepted, his office shall become vacant and may be filled by the appointment
of a person possessing any of the qualification mentioned in Sub-section (i) in
relation to the category of the member who has resigned.
(iii) Salary and honorarium: The salary or honorarium and other allowances
payable to and the other terms and conditions of service of the members of
the District Forum shall be such as may be prescribed by the State Government.
(iv) No effect of Vacancy: According to Section 29 (A), no act or proceeding of
the District Forum, the State Commission or the National Commission shall
be invalid by reason only of the existence of any vacancy amongst its members
or any defect in the constitution there of.
Jurisdiction of the District Forum
Section 11 (1) Provides that District Forum shall have jurisdiction to entertain
complaints where the value of goods or services are the compensation if any, claimed
which does not exceed five lakhs.
(2) A compliant shall be instituted in a District Forum within the local limits of whose
jurisdiction.
(a) The opposite party or each of the opposite parties, where there are more than
one, at the time of the institution of the complaint, actually and voluntarily
resides or carries on business or has a branch office or personally works for
gain, or
(b) Any of the opposite parties, where there are more than one, at the time of the
institution of the compliant, actually and voluntarily resides or carries on

Notes business or has a branch office, or personally works for gain, provided that in
such case either the permission of the District Forum is given, or the opposite
parties who do not reside, or carry on business or have a branch office, or
personally work for gain, as the case may be, acquiesce in such institution;
or
(c) The cause of action, wholly or in part, arises.
Manner in which complaint shall be made
Section 12 provides, a complaint, in relation to any goods sold or delivered or agreed

to be sold or delivered or any service provided or agreed to be provided may be filed in
a District Forum by,
(a) The consumer to whom such goods are sold or delivered or agreed to be
delivered or such service provided or agreed to be provided;
(b) Any recognised consumer association, whether the consumer to whom the
goods sold or delivered or agreed to be sold or delivered or service provided
or agreed to be provided is a member of such association or not;
(c) One or more consumers, where there are numerous consumers having the same
interests, with the permission of the District Forum, on behalf of, or for the benefit
of, all consumers so interested; or
(d) The Central or the State Government.
Composition of the National Commission – Section 20
(1) 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;
(b) Four other members who shall be persons of ability, integrity and standing
and have adequate knowledge or experience of, or have shown capacity
in dealing with, problems relating to economics, law, commerce,
accountancy, industry, public affairs administration, one of whom shall
be a woman:
Provided that every appointment under this clause shall be made by the Central
Government on the recommendation of a selection committee consisting of the
following namely:
(a) A person who is a Judge of the Supreme Court, to be nominated by the
Chief Justice of India–Chairman.
(b) The Secretary in the Department of Legal Affairs in the Government of
India–Member.
(c) Secretary of the Department dealing with consumer affairs in the
Government of India–Member.
(2) The salary or honorarium and other allowances payable to and the other terms
and conditions of service of the Members of the National Commission shall be
such as may be prescribed by the Central Government.
Every member of the National Commission shall hold office for a term of five
years or upto the age of seventy years, whichever is earlier and shall not be
eligible for re-appointment.
(4) Not withstanding anything contained in Sub-section (3), a person appointed as
a President or a Member before the commencement of the Consumer Protection

(Amendment) Ordinance, 1993, shall continue to hold such office as President Notes
or Member, as the case may be, till the completion of his term.
Jurisdiction of the National Commission –
Section 2, says, Subject to the other provisions of this Act, the National Commission
shall have jurisdiction –
(a) To entertain:
(i) Complaints where the value of the goods or services and compensation,
if any, claimed exceeds rupees twenty lakhs and
(ii) Appeals against the orders of any State Commission; and
(b) To call for records and pass appropriate orders in any consumer dispute which
is pending before or has been decided by any State Commission where it
appears to the National Commission that such State Commission has exercised
a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so
vested, or has acted in the exercise of its jurisdiction illegally or with material
irregularity.
Power of and procedure applicable to the National Commission:
The National Commission shall, in the disposal of any complaints or any proceedings
before it, have –
(a) The powers of a Civil Court as specified in Sub-sections (4), (5) and (6) of Section
13;
(b) The power to issue an order to the opposite party directing him to do any one
or more of the things referred to in clauses (a) to (i) of Sub-section (1) of Section
14, and follow such procedure as may be prescribed by the Central Government.
Appeal – According to Section 23, any person, aggrieved by an order made by the
National Commission in exercise of its powers conferred by Sub-clause (i) of clause (a)
of Section 21, may prefer an appeal against such order to the Supreme Court within a
period of thirty days from the date of the order:
Provided that the Supreme Court may entertain an appeal after the expiry of the said
period of thirty days if it is satisfied that there was sufficient cause for not filing it within
that period.
Finality of orders – According to Section 24, every order of a District Forum, the
State Commission or the National Commission shall, if no appeal has been preferred
against such order under the provisions of this Act, be final.
Limitation period – According to Section 24(A),
(1) The District Forum, the State Commission or the National Commission shall
not admit a complaint unless it is filed within two years from the date on which
the cause of action has arisen.
(2) Not withstanding anything contained in Sub-section (1), a complaint may be
entertained after the period specified in Sub-section (1), if the complainant
satisfies the District Forum, the State Commission or the National Commission,
as the case may be, that he had sufficient cause for not filing the complaint
within such period:
Provided that no such compliant shall be entertained unless the District Forum, the
State Commission or the National Commission, as the case may be, records its reasons
for condoning such delay.

Notes Enforcement of orders by the Forum, the State Commission or the National
Commission –
According to Section 25, every order made by the District Forum, the State
Commission or the National Commission may be enforced by the District Forum, the State
Commission or the National Commission, as the case may be, in the same manner as
if it were decree or order made by a court in a suit pending therein and it shall be lawful
for the District Forum, the State Commission or the National Commission to send, in the
event of its inability to execute it, such order to the court within the local limits of whose
jurisdiction:
(a) In the case of an order against a company, the registered office of the company
is situated, or
(b) In the case of an order against any other person, the place where the person
concerned voluntarily resides or carries on business or personally works for gain,
is situated and thereupon, the court to which the order is so sent, shall execute
the order as if it were a decree or order sent to it for execution.
Dismissal of frivolous or vexatious compliants –
According to Section 26, where a complaint instituted before the District Forum the
State Commission or the National Commission, as the case may be, is found to be
frivolous or vexatious, it shall, for reasons to be recorded in writing dismiss the compliant
and make an order that the complainant shall pay to the opposite party such cost, not
exceeding ten thousand rupees, as may be specified in the order.
Penalties –
According to Section 27, where a trader or a person against whom a compliant is
made or the complainant fails or omits to comply with any order made by the District
Forum, the State Commission or the National Commission, as the case may be, such
trader or person or complainant shall be punishable with imprisonment for a term which
shall not be less than one month but which may extend to three years, or with fine which
shall not be less than two thousands rupees but which may extend to ten thousand rupees,
or with both:
10.4 Remedies Available to Consumers

Under this Act, the remedies available to consumers are as follows:
(a) Removal of Defects
If after proper testing the product proves to be defective, then the ‘remove its defects’
order can be passed by the authority concerned.
(b) Replacement of Goods
Orders can be passed to replace the defective product by a new non-defective product
of the same type.
(c) Refund of Price
Orders can be passed to refund the price paid by the complainant for the product.
(d) Award of Compensation
If because of the negligence of the seller a consumer suffers physical or any other
loss, then compensation for that loss can be demanded for.

(e) Removal of Deficiency in Service Notes

If there is any deficiency in delivery of service, then orders can be passed to remove
that deficiency. For instance, if an insurance company makes unnecessary delay in giving
final touch to the claim, then under this Act orders can be passed to immediately finalize
the claim.
(f) Discontinuance of Unfair/Restrictive Trade Practice
If a complaint is filed against unfair/restrictive trade practice, then under the Act that
practice can be banned with immediate effect. For instance, if a gas company makes
it compulsory for a consumer to buy gas stove with the gas connection, then this type
of restrictive trade practice can be checked with immediate effect.
(g) Stopping the Sale of Hazardous Goods
Products which can prove hazardous for life, their sale can be stopped.
(h) Withdrawal of Hazardous Goods from the Market
On seeing the serious adverse effects of hazardous goods on the consumers, such
goods can be withdrawn from the market. The objective of doing so that such products
should not be offered for sale.
(i) Payment of Adequate Cost
In the end, there is a provision in this Act that the trader should pay adequate cost
to the victim concerned.
10.5 Summary
Consumer protection has always been sought to be maintained and enhanced from
ancient times in different parts of the world. It is considered as an essential part towards
the welfare of the population. People in the society in 320 B.C, Kautilya, have codified
the rules of conduct of merchants, artisans, craftsmen and professionals. Manu in his
Dharma Shastra, has given a detailed description of unethical trade practices and the
punishments to be met by the traders.
This right has been recognized by Sec. 6(a) as, “the right to be protected against
the marketing of goods and services which are hazardous to life and property”. The rationale
behind this provision is to ensure physical safety of the consumers.
Under Section 6(b) this right has been recognized as, “the right to be informed about
the quality, quantity, potency, purity, standard and price of goods or services, as the case
may be, so as to protect the consumer against unfair trade practices.” Adequate
information is very important in order to make a right choice of goods to be purchased.
This right ensures that the consumer should be made aware of the quality, weight, content
and price of the product at the very pre-purchase stage.
This right has been recognised by Section 6(c) as, “the right to be assured, wherever
possible, access to a variety of goods and services at comprtitive prices.” Fair and effective
competition must be encouraged so as to provide consumers with maximum information
about the vide variety of competing goods available in the market. Shoppers or buyers
guide should be made available to the consumers by the Government or Business
organizations to protect this right of consumers.
This right is ensured by Section 6(d) as, “the right to be heard and to be assured
that consumers interests will receive due consideration at appropriate forums.” The
Consumer Protection Act, 1986 has well taken care of this right by providing three stages

Notes redressal machinary to the consumers, namely, District Forum, State Commission and
National Commission. Every consumer has a right to file complaint and be heard in that
conext.
This right is guaranteed under Section 6(e) of the Act as, “the right to seek redressal
against unfair trade practices or restrictive trade practices or unscrupulous exploitation
to consumers.” Consumers are the most helpless lot in our country due to very many
factors. When consumers are exploited, adequate remedy must be made available. The
Act has thus ensured to prevent exploitation of consumers by invoking the jurisdiction
of consumer Forums in cases involving unfair trade practices and restrictive trade practices.
This right has been recognized under Section 6(f) of the Act as, “ the right to
consumer education.” The right to consumer education is a right which ensures the
remedies available to them. Unless the consumers are aware of their rights and remedies,
protection of their interest shall remain a myth. In this connection the role of Consumer
protection Councils is very vital.

1. ……………….has always been sought to be maintained and enhanced from
ancient times in different parts of the world.
2. According to the Sec 2 (1) (d), “Any person, who buys any goods against
consideration, is a…………………..”
3. …………………is the right to be protected against the marketing of goods and
services which are hazardous to life and property.
4. Right to Information is the right to be informed about the quality, quantity,
potency, purity, standard and price of…………….
5. The …………….is a right which ensures the remedies available to them.
II. True/False
1. Consumer protection has always been sought to be maintained and enhanced
from ancient times in different parts of the world.
2. According to the Sec 2 (1) (d), “Any person, who buys any goods against
consideration, is a consumer.”
3. Right to Safety is the right to be protected against the marketing of goods and
services which are hazardous to life and property.
4. The rationale behind Right to Safety is to ensure physical safety of the
consumers.
5. Right to Education is the right to be informed about the quality, quantity,
potency, purity, standard and price of goods or services.
1. Who defined, “Consumption is the sole end and purpose of all production.”?
a) Peter F. Drucker
b) Adam Smith
c) Philip Kotler
d) None of the above
2. Which of the following year the Consumer Protection Act was enacted?
a) 1988

b) 1987 Notes
c) 1986
d) 1984
3. Which of the following is not the right under various consumer rights?
a) The right to safety
b) The right to be informed
c) The right to consumed
d) The right to be heard
4. Who was the foremost important person among Indians to focus on
businessmen’s outlook on the consumer?
a) Mahatma Gandhi
b) Bhimrao Ramji Ambedkar
c) Atal Bihari Vajpayee
d) None of the above
5. Right to Safety has been recognized by………………….
a) Sec. 6(a)
b) Sec. 6(b)
c) Sec. 6(c)
d) Sec. 6(d)

1. Who is a consumer?
2. What is Consumer Protection?
3. What is Rights of Consumer?
4. What is Right to Safety?
5. What is Right to Information?
6. What is Right to Choose?
7. What is Right to be heard?
8. What is Right against exploitation?
9. What is Right to Education?
10. What is Complaint?
11. Who can file a Complaint?
1. Discuss the background of Consumer Protection.
2. Explain about Contributors for Consumer Protection.
3. Discuss about the Consumer Protection Act 1986.
4. Explain various Rights of Consumers.
5. Discuss Nature and Scope of Complaints.
6. Who can file a Complaint? Discuss.
7. Discuss nature of Complaints under Consumer Protection Act.
8. Explain scope of Complaints under Consumer Protection Act.

Notes 9. Discuss about Authorities under the Consumer Protection Act.

10. Explain about remedies available to Consumers.
10.8 Key Terms

z Consumer Protection: Consumer protection has always been sought to be
maintained and enhanced from ancient times in different parts of the world. It
is considered as an essential part towards the welfare of the population. People
in the society in 320 B.C, Kautilya, has codified the rules of conduct of
merchants, artisans, craftsmen and professionals. Manu in his Dharma Shastra,
has given a detailed description of unethical trade practices and the punishments
to be met by the traders.
z Consumer: According to the Sec 2 (1) (d), “Any person, who buys any goods
against consideration is a consumer.”
z Right to Safety: This right has been recognized by Sec. 6(a) as, “the right
to be protected against the marketing of goods and services which are
hazardous to life and property”. The rationale behind this provision is to ensure
physical safety of the consumers.
z Right to Information: Under Section 6(b) this right has been recognized as,
“the right to be informed about the quality, quantity, potency, purity, standard
and price of goods or services, as the case may be, so as to protect the
consumer against unfair trade practices.” Adequate information is very important
in order to make a right choice of goods to be purchased.
z Right to Choose: This right has been recognised by Section 6(c) as, “the right
to be assured, wherever possible, access to a variety of goods and services
at comprtitive prices.” Fair and effective competition must be encouraged so
as to provide consumers with maximum information about the vide variety of
competing goods available in the market.
z Right to be heard: This right is ensured by Section 6(d) as, “the right to be
heard and to be assured that consumers interests will receive due consideration
at appropriate forums.” The Consumer Protection Act, 1986 has well taken care
of this right by providing three stages redressal machinary to the consumers,
namely, District Forum, State Commission and National Commission. Every
consumer has a right to file complaint and be heard in that conext.
z Right against exploitation: This right is guaranteed under Section 6(e) of the
Act as, “the right to seek redressal against unfair trade practices or restrictive
trade practices or unscrupulous exploitation to consumers.” Consumers are the
most helpless lot in our country due to very many factors. When consumers
are exploited, adequate remedy must be made available.
z Right to Education: This right has been recognized under Section 6(f) of the
Act as, “the right to consumer education.” The right to consumer education is
a right which ensures the remedies available to them. Unless the consumers
are aware of their rights and remedies, protection of their interest shall remain
a myth. In this connection the role of Consumer protection Councils is very vital.

1. Consumer protection
2. Consumer
3. Right to Safety Notes

4. Goods or services
5. Right to consumer education
II. True or False
1. True
2. True
3. True
4. True
5. False
1. [b] 2. [c]
3. [c] 4. [a]
5. [a]
10.10 Case Study

In September 2017, Joseph purchased a backpack for $60. In less than three months,
the threads adjoining one of the zip seams got tangled in the zip track. Hence, the zipper
on the backpack could not work properly. Joseph returned to the shop but was informed
to check with the manufacturer of the backpack instead. He disagreed and requested for
the retailer to repair the defective backpack or replace it with a new one.
Under the Lemon Law, retailers are obliged to repair or replace a defective product.
If this is not possible, or will cause significant inconvenience to the consumer, they are
obliged to reduce the price or provide a refund for the product. CASE highlighted the Lemon
Law to the retailer, and the consumer was able to get a replacement backpack.
Questions:
1. Justify the consumer protection act from the given case?
2. Do you the retailers are obliged to repair or replace a defective product? Why?



Press.
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±±±±
The Competition Act 215
Notes
Unit 11: The Competition Act
Structure:
11.1 Introduction
11.2 Enquiry into Certain Agreements and Dominant Position of Enterprise
11.3 Inquiry into Combination by Commission
11.4 Miscellaneous Provisions under Competition Act
11.5 Finance, Accounts and Audit Commission Under Competition Act
11.6 Summary
11.9 Key Terms
11.11 Case Study
11.13 Bibliography
Objectives

 Concepts of Competition Act
 Enquiry into Certain Agreements and Dominant
 Position of Enterprise and Combinations
 Miscellaneous Provisions
 Finance, Accounts and Audit Commission Under Competition Act


Society and Business are inter woven and business thrive on competition.
Competition is a critical element that distinguishes dynamic economics. Competition and
its relations and relevance are universal. However intense competition or cut throat
competition in business will create healthy business environment. There needs to have
the codified and comprehensive law dealing with unfair competition or anti-trust issues.
Competition Act in the 2002 has been enacted in order to fulfill the country’s obligations
under the World Trade Organisation agreement. The Monopolies and Restrictive trade
practices Act 1969, (MRTP) which had been found to be in adequate and in order to fulfill
the gap a new Act has been enacted which is known as The Competition Act 2002. After
the liberalisation policy, Indian industries geared up their production both qualitatively and
quantitatively to maintain standard with the Multi-National companies. Since the
contributions of Indian industries are great booster to the economy they have to demand
a special legislative action to ensure a “level playing” with the multi-national companies.
This is also one of the reasons to bring the competition law in to force in the year 2002.
Competition Law, to prohibit the behaviour of any restrictive business practices as
competition. According to the competition Act, 2002 which begin with the statement as
“An Act to provide keeping in view of the economic development of the country, for the
establishment of a commission to prevent practices having adverse effect as competition,
to promote and sustain competition in markets, to protect the interests of consumers and
to ensure freedom of trade carried on by other participants in markets. In India and for
matters connected there with or incidental there to”.
The above statement can be understood as to cut or to prevent the practices of
competition which create adverse effect for growth of the market. Both consumers and
traders should enjoy their freedom in the markets and it should give way to the growth
of the Indian economy.
Scope of the Act
This Act is very new and it is introduced to remove the in adequacy of the Monopolies
and Restrictive Trace Practices Act of 1969. The MRTP was needed for an appropriate
change. The following are the scope of this Act.
1) It extends to the whole of India except the state of Jammu and Kashmir.
2) It comprises of 66 sections.
3) It covers definitions, anti competitive agreement, Abuse of dominant commission
of India.
4) It also covers selection of chair person and members, their terms, resignation,
removal and suspension
5) It covers financial and administrative powers, duties powers and functions of
commission.
6) It continues with Duties of director general to investigate contraventions, offences
and penalties.
Objectives of the Act
1) To ensure fair competition in India

2) To prohibits trade practices which cause adverse effect on competition in
markets within India.

3) To curbe negative aspects of competition through the competition commission Notes

of India (CCI).
Need for competition Law in India
Most developed countries and many developing countries have evolved laws, which
regulate monopolisation of economic power while encouraging competition. In India too,
economy is being exposed to deregulation and privatisation. History bears witness that
unless these forces are kept under least, participants can misuse the freedom to frustrate
competition. The participants form cartels which are anticompetitive agreements by
competitors to fix prices, restrict output, submit collusive tenders, or divide or share
markets. By raising prices and restricting supply they make goods and services
completely unavailable to some purchasers and unnecessarily expensive for others.
In India the law presently addressing the above issue is the Monopolies and
Restrictive Trade Practices Act, 1969 (MRTP Act). The Act deals with control, regulation
and prohibition of unfair, restrictive and monopolistic trade practices as defined in the Act.
The aim of the Act is to ensure that the concentration of economic power does harm the
public interest and to provide effective steps for its control. The Act, seeks to achieve
this purpose through the machinery created under the Act consisting the MRTP
Commission, Director General of Investigation and Registration and other staff. MRTP
Commission has powers to grant injunctions, damages and pass other orders appropriate
for the concerned prejudicial activity – be it unfair trade practice, restrictive trade practice
or monopolistic trade practice. The MRTP Commission can also order division of
undertakings or severance of inter-connection in case the same is found to be in public
interest to avoid the perpetration of restrictive or monopolistic trade practices. The division
or severance is achieved by ordering disinvestment or sale in the concerned unit of shares
or the holdings. The contravention of the provisions of the Act or orders of the MRTP
Commission is dealt with by providing various sanctions like proceeding for contempt,
imprisonment upwards of a year and large sums in fine which increase with every day
of failure to comply.
The MRTP Act explaines the UTP and RTP which are replaced under the comprtition
laws. They are briefed as below:
Unfair Trade Practice (UTP)
Section 2(1) (r) defines “unfair trade practice” as follows:

“Unfair trade practice” means a trade practice which, for the purposes of promoting
the sale, use or supply of any goods ar for the provision of any service, adopts any unfair
method or unfair or deceptive practice including any of the following practice, namely -
(i) Falsely represents that the goods are of a particular standard, quality, quantity,
grade, composition, style or model;
(ii) Falsely represents that the services are of a particular standard, quality or grade;
(iii) Falsely represents any re-built, second-hand, renovated, reconditioned or old
goods as new goods;
(iv) Represents that the goods or services have sponsorship, approval, performance,
characteristics, accessories, uses or benifits which such goods or services do
not have;
(v) Represents that the seller or the supplier has a sponsorship or approval or
affiliation which such seller or supplier does not have;

Notes (vi) Makes a false or misleading representation concerning the need for or the
usefulness of any goods or services;
(vii) Gives to the public any warranty or guarantee of the performance, efficacy or
length of life of a product or of any goods that is not based on an adequate
or proper test thereof;
(viii) Makes to the public a representation in a form that purports to be -
(a) A warranty or guarantee of a product or of any goods or services; or
(b) A promise to replace, maintain or repair an article or any part there of
or to repeat or continue a service until it has achived a specified result.
If such purported warranty or guarantee or promise is meterially misleading or
if there is no reasonable prospect that such warranty, guarantee or promise will
be carried out;
(ix) Materially misleads the public concerning the price at which a product or like
products or good or services, have been or are, ordinarily sold or provided and
for this purpose, a representation as to price shall be deemed to refer to the
price at which the product or goods or services has or have been sold by sellers
or provided by suppliers generally in the relevant market unless it is clearly
specified to be the price at which the product has been sold or services have
been provided by the person by whom behalf the representation is made;
Restrictive Trade Practice (RTP)
Section 2(1) (nnn) defines “restrictive trade practice” as follows:

“Restrictive trade practice” means a trde practice which tends to bring about
manipulation of price or its conditions of delivery or to affect flow of supplies in the market
relating to goods or services in such a manner as to impose on the consumers unjustified
costs or restrictions and shall include:
(a) Delay beyond theperiod agreed to by a trader in supply of such goods or in
providing the services which has led or is likely to lead to rise in the price;
(b) Any trade practice which requires a consumer to buy, hire or avail of any goods
or as the case may be, services as condition precedent to buying, hiring or
availing of other goods or services.
The definiton of the expression “restrictive trade practice” inter-alia, that where sale
or purchase of a product or service is made conditional on the sale or purchase of one
or more other products or services, it amounts to restrictive trade practice. Thus where
a cooking gas distributor insists his customers to buy gas stove as a condition to give
gas connection, it amounts to restrictive trade practice. However, where there is no such
precondition and the buyer is free to take either product, no tying arrangement could be
alleged even though the seller may offer both the products as a unit at a composite price.
Illustration: A furniture dealer offers to sell a sofa at Rs. 20,000 and double bed
at Rs. 15,000. He has an offer that whoever will buy sofa and bed both, he will charge
Rs. 30,000 only. Here the choice is open to the customer to buy the products single or
composite. This is not a restrictive trade practice.
Defect [Sec. 2(1) (f)]. “Defect” means any fault, imperfection of shortcoming in the
quantity, quality, potency, purity or standard which is required to be maintain by or under
any law for the time being in force or under any contract, express or implied or as is
claimed by the trader in any manner whatsover in relation to any goods.

This is an exhaustive definition. It means that the Act recognises only those defects Notes
which are covered by the definition. For example, A sells a stolen car to B. B wants to
sue A for defect in the title of the car. B cannot sue A under the Consumer Protection
Act as the defect in title of goods does not constitute defect in goods as defined under
the Act.
Deficiency [Sec. 2(1) (g)]. “Deficiency” means any fault, imperfection, shortcoming
or inadequacy in the quality, nature and manner of performance which is required to be
maintained by or under any law for the time being in force or has been undertaken to
be performed by a person in pursuance of a contract or otherwise in relation to any service.
Competition Commission of India (CCI)
Establishment of Commission – With effect from such date as the Central

Government may, by notification, appoint, there shall be established, for the purposes
of this Act, a Commission to be called the “Competition Commission of India.”
The Commission shall be a body corporate by the name aforesaid having perpetual
succession and a common seal with power, subject to the provisions of this Act, to acquire,
hold and dispose of property, both movable and immovable, and to contract and shall,
by the said name, sue or be sued.
The head office of the Commission shall be at such place as the Central Government
may decide from time to time.
The Commission may establish offices at other places in India (S.7)
Composition of Commission: The Commission shall consist of a Chairperson and
not less than two and not more than ten other Members (Whole time) appointed by the
Central Government.
Provided that the Central Government shall appoint the Chairperson and a Member
during the first year of the establishment of the Commission.
The Chairperson and every other Member shall be a person of ability integrity and
standing and who has been, or is qualified to be, a judge of a High Court or has special
knowledge of, and professional experience of not less than fifteen years in international
trade, economics, business, commerce, law, finance accountancy, management,
industry, public affairs, administration or in any other matter which, in the opinion of the
Central Government, may be useful to the Commission (S.8)
11.2 Enquiry into Certain Agreements and Dominant Position of

Enterprise
(1) The Commission may inquire into any alleged contravention of the provisions
contained in Sub-section (1) of section 3 or sub-section (1) of section 4 either
on its own motion or on receipt of a complaint, accompanied by such, tee as
may be determined by regulations, from any person, consumer or their
association or trade association; or a reference made to it by the Central
Government or a State Government or a statutory authority.
(2) Without prejudice to the provisions contained in sub-section (1), the powers and
functions of the Commission shall include the powers and functions specified
in sub-sections (3) to (7).
(3) The Commission shall, while determining whether an agreement has an
appreciable adverse effect on competition under section 3, have due regard to

Notes all or any of the factors, namely: creation of barriers to new entrants in the
market; driving existing competitors out of the market foreclosure of competition
by hindering entry into the market; accrual of benefits to consumers;
improvements in production or distribution of goods or provision of services; or
promotion of technical, scientific and economic development by means of
production or distribution of goods or provision of services.
(4) The Commission shall, while inquiring whether an enterprise enjoys a dominant
position or not under section 4, have due regard to all or any of the factors,
namely: market share of the enterprise; size and resources of the enterprise;
size and importance of the competitors; economic power of the enterprise
including commercial advantages over competitors; vertical integration of the
enterprises or sale or service network of such enterprises; dependence of
consumers on the enterprise; monopoly or dominant position whether acquired
as a result of any statute or by virtue of being a Government company or a
public sector undertaking or otherwise; countervailing buying power; market
structure and size of market; relative advantage and social obligations and social
costs; relative advantage and any other factor which the commission may
consider relevant for the in query.
(5) For determining whether a market constitutes a “relevant market” for the
purposes of this Act, the Commission shall have due regard to the “relevant
geographic market” and “relevant product market”.
(6) The Commission shall, while determining the relevant geographic market”, have
due regard to all or any of the factors, namely: regulatory trade barriers; local
specification requirements; national procurement policies; adequate distribution
facilities; transport costs; language; consumer preferences; need for secure or
regular supplies or rapid after-sales services.
(7) The Commission shall, while determining the “relevant product market”, have
due regard to all or any of the factors, namely: physical characteristics or end-
use of goods; price of goods or service; consumer preferences; exclusion of
in-house production; existence of specialised producers; classification of
industrial products (S.19).
11.3 Inquiry into Combination by Commission

(1) The Commission may, upon its own knowledge or information relating to
acquisition referred to in clause (a) of section 5 or acquiring of control referred
to in clause (b) of section 5 or merger or amalgamation referred in clause (c)
of that section, inquire into whether such a combination has caused or is likely
to cause an appreciable adverse effect on competition in India. Provided that
the Commission shall not initiate any inquiry under this subsection after the
expiry of one year from the date on which such combination has taken effect.
(2) The Commission shall, on receipt of a notice under sub-section (2) of section
6 or upon receipt of a reference under sub-section (2) of section 21, inquire
whether a combination referred to in that notice or reference has caused or is
likely to cause an appreciable adverse effect on competition in India.
(3) Notwithstanding anything contained in section 5, the Central Government shall,
on the expiry of a period of two years from the date of commencement of this
Act and thereafter every two years, in consultation with the Commission, by
notification, enhance or reduce, on the basis of the wholesale price index or
fluctuations in exchange rate of rupee or foreign currencies, the value of assets
or the value of turnover, for the purposes of that section.
(4) For the purposes of determining whether a combination would have the effect Notes
of or is likely to have an appreciable adverse effect on competition in the relevant
market, the Commission shall have due regard to all or any of the factors,
namely: actual and potential level of competition through imports in the market;
extent of barriers to entry to the market; level of combination in the market;
degree of countervailing power in the market; likelihood that the combination
would result in the parties to the combination being able to significantly and
sustainably increase prices or profit margins; extent of effective competition
likely to sustain in a market; extent to which substitutes are available or are
likely to be available in the market; market share, in the relevant market, of
the persons or enterprise in a combination, individually and as a combination;
likelihood that the combination would result in the removal of a vigorous and
effective competitor or competitors in the market, nature and extent of vertical
integration in the market; possibility of a failing business nature and extent of
innovation: relative advantage, by way of the contribution to the economic
development, by any combination having or likely to have appreciable adverse
effect on competition; whether the benefits of the combination outweigh the
adverse impact of the combination, if any (S.20)
Benches of Commission:
(1) The jurisdiction, powers and authority of the Commission may be exercised by
Benches thereof.
(2) The Benches shall be constituted by the Chairperson and each Bench shall
consist of not less than two Members.
(3) Every Bench shall consist of at least one Judicial Member.
(4) The Bench over which the Chairperson presides shall be the Principal Bench
and the other Benches shall be known as the Additional Benches.
(5) There shall be constituted by the Chairperson one or more Benches to be called
the Mergers Bench or Mergers Benches, as the case may be, exclusively to
deal with matters referred to in sections 5 and 6.
(6) The places at which the Principal Bench, other Additional Bench or Mergers
Bench shall ordinarily sit shall be such as the Central Government may, by
notification, specify. (S.22)
11.4 Miscellaneous Provisions under Competition Act

The Competition Act, 2002, has provisions for imposing penalties: The provisions
include: Contravention of Orders of Commission-
(1) Without prejudice to the provisions of this Act, if any person contravenes without
any reasonable ground, any order of the Commission, or any condition or
restriction subject to which any approval Sanction, direction or exemption in
relation to any matter has been accorded, given, made or granted under this
Act or fails to pay the penalty imposed under this Act, he shall be liable to
be detained in civil prison for a term which may extend to one year, unless
in the meantime the Commission directs his release and he shall also be liable
to a penalty not exceeding Rs. 10 lakhs (S. 42)
(2) The Commission may, while making an order under this Act, issue such
directions to any person or authority, not inconsistent with this Act, as it thinks
necessary or desirable, for the proper implementation or execution of the order,

Notes and any person who commits breach of, or fails to comply with, any obligation
imposed on him under such direction, may be ordered by the Commission to
be detained in civil prison for a term not exceeding one year unless in the
meantime the Commission directs his release and he shall also be liable to
a penalty not exceeding Rs. 10,00,000.
 Penalty for failure to comply with directions of Commission and Director-
General - Rs. 1,00,00 for each day during which such failure continues
(S. 43)
 Penalty for making false statement or omission to furnish material
information. - a penalty which shall not be less than Rs. 50,00,000 but
which may extend to rupees one crore, as may be determined by the
Commission (S. 44).
 Penalty for offences in relation to furnishing of information. - a penalty
which may extend to Rs. 10,00,000 (S. 45).
Power to Impose Lesser Penalty:
The Commission may, if it is satisfied that any producer, seller, distributor, trader
or service provider included in any cartel, which is alleged to have violated section 3, has
made a full and true disclosure in respect of the alleged violations and such disclosure
is vital, impose upon such producer, seller, distributor, trader or service provider a lesser
penalty as it may deem fit, than leviable under this Act or the rules or the regulations
(S. 46).
Contravention by Companies:
(1) Where a person committing contravention of any of the provisions of this Act
or of any rule, regulation, order made or direction issued thereunder is a
company, every person who, at the time the contravention 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
contravention and shall be liable to be proceeded against and punished
accordingly:
Provided that nothing contained in this sub-section shall render any such person
liable to any punishment if he proves that the contravention was committed
without his knowledge or that he had exercised all due diligence to prevent the
commission of such contravention.
(2) Notwithstanding anything contained in sub-section (1), where a contravention
of any of the provisions of this Act, or of any rule, regulation, order made or
direction issued thereunder has been committed by a company and it is proved
that the contravention has taken place 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 contravention and shall be liable to
be proceeded against and punished accordingly (S. 48).
11.5 Finance, Accounts and Audit Commission Under Competition Act

1. Proper and accurate compilation of financial information of a corporate and its
disclosure, in a manner that is standardized and understood by stakeholders,
is central to the credibility of the corporates and soundness of investment
decisions by the investors. The preparation of financial information and its audit,
therefore, needs to be regulated through law with stringent penalties for non-

observance. It would however, not be feasible for the law to prescribe all the Notes
details guiding the treatment of this subject.
2. The present statute provides for a mechanism for development of Accounting
Standards. We understand that Accounting Standards for the use of Indian
corporate sector, taking into account International Accounting Standards, are
being developed through the instrumentality of the National Advisory Committee
on Accounting Standards (NACAS). This is an important aspect that needs to
be pursued. In the meantime, the Institute of Chartered Accountants of India
(ICAI) has done useful work in prescribing operational standards of accounting
to fill the gap till Accounting Standards could be notified. We expect that the
process of notification of Accounting Standards, incorporating international best
practices, would be completed shortly.
3. The Committee took note of the contribution made by the ICAI and the NACAS
in development of proposals for Accounting Standards and took the view that
the existing institutional mechanism for formulating and notifying Accounting
Standards under the Companies Act, 1956 may be retained.
4. The Committee took the view that consolidation of financial statements of
subsidiaries with those of holding companies should be mandatory. The
Committee discussed the question of the manner of maintenance of accounts
of entities other than companies but controlled by companies registered under
the Act.
5. With consolidation of financial statements by holding companies on mandatory
basis, the provisions requiring attaching the accounts of subsidiary companies
with those of holding companies, for circulation to shareholders in accordance
with the provisions of the present Companies Act should be done away with.
In case the financial statements of a foreign subsidiary are required to be
furnished to the shareholders of the holding company, these should be accepted
in the same format and currency in which these were prepared as per laws of
the relevant country.
6. Further, the Committee took the view that the holding companies should be
required to maintain records relating to consolidation of financial statements for
specified periods. Presentation of consolidated financial statements by the
holding company should be in addition to the mandatory presentation of
individual financial statements of that holding company.
7. At present, Section 209 (4A) of the Act requires companies to preserve the
books of accounts, together with the vouchers relevant to any entry in such
books of account, in good order, relating to a period of not less than 8 years
immediately preceding the current year. The Committee felt that the rules may
provide for preservation of books of account and records of the company for a
period of 7 years to bring it in harmony with Income Tax Act.
8. In order to bring about more transparency and uniformity in the maintenance
of accounts, the Committee felt that the companies should continue to be
mandated to maintain their books of accounts on accrual basis and double entry
method of book keeping. The question arose before the Committee as to whether
the form and content of the financial statements needs to be specified separately
in the Act or should be left to the Accounting Standards prescribed by the
Central Government in consultation with NACAS.
9. The companies should have an option to keep records outside the country
provided financial information in compliance with the Companies Act is available
within the country and written notice is given to the Registrar of the place where
Notes the records are kept. However, such a Company should be obligated to produce
the records that are kept outside the country, if and when required to do so
as specified in the Rules.
10. World over, the importance of Cash Flow Statement is being specifically
recognized. At present, the listed companies are mandated to include a Cash
Flow Statement in the Annual Report and the Standards of Accounting
prescribed by ICAI also requires in specified cases a Cash Flow Statement to
be submitted along with the Balance Sheet and Profit & Loss Account with a
view to make Cash Flow Statement mandatory. The Committee felt that there
was a need to include the definition of the term Financial Statement in the Act,
to include Profit & Loss Account, Balance Sheet, Cash Flow Statement and
Notes on Accounts.
11. The Committee was of the view that Small Companies need not be subject to
the costs of a regime suited to large companies with a wide stakeholder base.
Relaxations to small companies with regard to the format of accounts to be
prescribed in the Act/Rules may also be considered. If necessary, a separate
format for small companies may be devised. Exemptions from certain
disclosures may also be considered and relaxations, if any required, in respect
of compliance with Accounting Standards may be provided for while notifying
the Accounting Standards. If necessary, a separate Accounting Standard may
be framed for small companies.
12. The Companies Act at present does not contain any provision relating to the
minimum period of a Financial Year. The Concept Paper has defined the
Financial Year with the minimum period of six months. The Committee dwelt
on the subject and came to the conclusion that the first financial year should
begin from the date of incorporation and end on the immediately succeeding
31st March and the subsequent Financial Years should also end on 31st March
every year.
13. The Committee discussed at length the existing provisions of the Act regarding
approval and authentication of accounts, circulation of accounts and filing of
accounts with the Regulatory body. The Committee was of the view that the
concept of appointment of CFO should be recognized under the Act who should
be made responsible for preparation and submission of financial statements to
the Board.
14. It was brought to the notice of the Committee that provisions should be made
in law for revision of accounts after its adoption/approval by the shareholders
subject to conditions laid down under the law. This should however be possible
only in cases where changes in law necessitate restatement with retrospective
effect or for rectifying the errors apparent from the records.
15. The provisions under the Companies Act relating to circulation of financial
statements should continue. However, the Committee recommended that the
financial statements should be permitted to be sent by electronic means instead
of hard copy. In the case of listed Companies. Where abridged financial
statements are circulated amongst members, the full financial statements
should be made available on the web-site and the hard copy thereof should also
be made available on request.
16. The Committee noted that the Companies Act was amended by inserting section
217 (2AA) by the Companies (Amendment) Act, 2000, which has brought about
inclusion of Directors’ Responsibility Statement in the report of the Board of
Directors. The Committee was of the view that in addition to the existing

requirements, the Responsibility Statement should include that the related party Notes
transactions and have been entered into at arm’s length, and if not, the
relationships of the directors in such transactions along with the amounts
involved have been disclosed as a part of the Director’s Report along with
management justification thereof. The existing requirement in Section 217 (2AA)
requiring a Director Responsibility statement indicating that the Directors have
taken proper and sufficient care for the maintenance of adequate accounting
records in accordance with the provisions of the Act and that the books of
accounts comply with the accounting standards and policies should continue.
17. The Committee discussed other miscellaneous matters in relation to definition
of certain terms such as “derivative”, “employees stock option”, “net worth” etc.
the need for rules relating to “Transfer of Profit to Reserves” and “Declaration
of Dividend out of Reserves” and related matters.
18. The Committee also took the view that the two sets of existing rules relating
to declaration of dividend out of reserves and transfer of profit to reserve were
irrelevant in the present environment and may be deleted.
19. The relevance of Section 205(2)(c) of the Act requiring companies to write off
at least 95% of the original cost of the asset to the Company was discussed
at length. The Committee agreed that there need not be any restriction of writing
off 95% of the original cost to the company of the asset over a specified period,
on the Central Government in approving the basis of providing depreciation.
20. The measure of depreciation is based on three important parameters viz.
depreciable amount, estimated useful life and estimated scrap value. The policy
of liberalization of the economy has brought about a public-private co-operation
especially in infrastructure projects.
21. Law needs to recognize a modified approach for providing depreciation to the
assets coming under the category of infrastructure assets. In fact, in some
countries, law has recognized that there cannot be a statutory limit on the useful
life of a capital asset. Expenditure incurred/to be incurred to maintain the
operating capabilities of such eligible assets could be charged off towards
permissible depreciation.
22. The issue of appointment of First Auditor of the Company and his subsequent
appointments were discussed at length. The relevant provisions as existing in
Indian law vis-à-vis those prevalent in USA, UK, Australia and Canada were also
discussed. The Committee acknowledged the role of the Audit Committee
wherever such Committees were mandated, in recommending the appointment
of the Auditors to the Board in general.
23. Subsequent to the appointment of First Auditors, the appointment of Auditors
should be done on AGM to AGM basis with a power to the Board to fill any
casual vacancy. There should not be any situation where the company is without
duly appointed Auditors. Such appointment of Auditors should be made by the
shareholders taking into account the recommendations of the Board, which, in
turn should be arrived at after obtaining the recommendations of the Audit
Committee, where such a Committee is mandated or is in existence. In case
any of the shareholders wish to propose any other Auditor in place of retiring
Auditors, this process should also necessarily seek the views of the Audit
Committee. There should be an obligation to intimate appointment of Auditor
to Registrar of Companies by the Company within 7 days.
24. The Committee discussed the provisions relating to the payment of remuneration
to the Auditors and felt that this should be subject to decision by shareholders
Notes and that the provisions in the existing law provided a suitable framework for the
purpose. However, the Committee felt that the basic remuneration to be termed
as ‘Audit Fee’ should be distinguished from reimbursement of expenses.
Reimbursement of expenses to Auditors should not form part of remuneration
but should be disclosed separately in the Financial Statements along with the
Auditor’s fees.
25. There was a detailed discussion on the need for rotation of Auditors. The view
that rotation of Audit partner should take place every five years in the case of
all listed Companies was also considered by the Committee. However, the
Committee thought it fit that the matter of change of Auditors be left to the
shareholders of the Company and the Auditors themselves rather than be
provided under law.
26. The Committee took note of the fact that rendering of non-audit services by
Auditors of the Company was is a matter of general concern. The Committee
was of the view that rendering of all services by the Auditors which were not
related to audit, accounting records or financial statements, should not be
prohibited from being rendered by the Auditors subject to a prescribed threshold
of materiality.
27. The Committee deliberated on issues relating to disqualification of Auditors. The
relevant provisions of the Companies Act in different countries including those
existing in India as well as the views of the ICAI on the matter were discussed.
The Committee was of the view that the Auditors’ position and responsibilities
involved access to sensitive market information particularly relating to the profits
of the company. There was a possibility of misuse of such information.
28. The Committee discussed and agreed that the existing provisions of the
Companies Act relating to appointment of Auditors were well established and
should continue. However, the retiring auditor should be appointed if in the
Annual General Meeting, the accounts of the company for the immediately
preceding financial year are not approved.
29. Auditors have the general duty of discharging their statutory functions with care
and diligence. Many stakeholders would rely on the auditor’s reports for
accessing the financial picture of the company. However, there cannot be any
specific prescription of negligence keeping in view the expectations of all the
stakeholders. However, auditors are required to carry out their work within the
discipline of the legal provisions and the standards of accounting/Accounting
Standards (where notified). There is a necessity that the work of the auditors
should uphold the highest standards of excellence and independence. Non-
compliance with such standards should invite stringent penalties. The
Committee was of the view that the basic duties of the Auditors and their liability
need to be laid down in the law itself instead of in the Rules. Quantification
of penalty for Auditors may be prescribed in the Rules.
30. A view was expressed that the Auditor signing the consolidated financial
statement should be empowered to access the books, records and documents
of the entities whose accounts are consolidated. It was also felt that such right
of the Auditor would be subject to the rules to be framed under the Act. In view
of the legal position that a statutory auditor will not be able to access to all
books and records of all entities whose accounts are consolidated, by virtue
of the limitations of his appointment in the holding company, adequate records
stating the basis for consolidation of accounts should be made available to him.

31. The Committee dwelt at length matters connected with Audit and the basic Notes
principles governing Audit. The Committee felt the need for a high quality of
financial reporting, a strengthened corporate governance mechanism, an
independent audit and fearless expression of opinion by the Auditors. The
Committee feels that the internal controls in any organization constitute the pillar
on which the entire edifice of Audit stands. For this purpose, it was felt that
public listed companies be required to have a regime of internal financial controls
for their own observance.
32. While considering issues relating to management and governance structures
in a company (Chapter IV, para 17.1), this Committee has recommended a
committee of the Board on accounting and financial matters to be termed as
the Audit Committee.
33. All matters relating to appointment of auditors, examination of the auditor’s
report along with financial statements prior to consideration and approval by the
Board, related party transactions, valuations and other matters involving conflicts
of interest should also be referred to the Board only through the Audit
Committee.
34. At present, the Companies Act contains provisions relating to maintenance of
Cost Records under section 209 (1) (d) and Cost Audit under section 233B of
the Companies Act in respect of specified industries. The Committee felt that
Cost Records and Cost Audit were important instruments that would enable
companies make their operations efficient and exist in a competitive
environment.
35. The Committee noted that the present corporate scenario also included a
sizeable component of Government owned enterprises or companies operating
under administered price mechanism or a regime of subsidies. It would be
relevant for the Government or the regulators concerned with non-competitive
situations to seek costing data. The Committee, therefore, took the view that
while the enabling provision may be retained in the law providing powers to the
Government to cause Cost Audit, legislative guidance has to take into account
the role of management in addressing cost management issues in context of
the liberalized business and economic environment. Further, Government
approval for appointment of Cost Auditor for carrying out such Cost Audit was
also not considered necessary.
36. The Committee felt that the provisions in the present Act requiring Special Audit
under certain circumstances were not relevant in view of the detailed
investigation provisions recommended by the Committee. During the course of
investigation, it is expected that the inspector would have access to the
specialized expertise of various professionals as may be required. Further, such
investigation may be carried out by private professionals operating individually
or in teams. In this background, Special Audit taken in isolation would serve
no useful purpose and may be dispensed with.
37. The Committee discussed the application of the corporate law framework to
Government companies on many occasions and took the view that in general,
there should not be any special dispensation for such companies. In respect
of audit of Government companies however, Companies Act provide a special
regime.
38. The Committee noted with concern the delays in finalization of the accounts
of Government companies. In many cases, Government companies and their
directors become liable for penal action but are provided selective exclusions

Notes from their liabilities only because they are Government companies. This is
leading to an unhealthy situation which must be addressed.
39. While considering classifications of companies in Chapter III of this Report, the
Committee discussed the manner in which company law should apply to
Government companies (Chapter III, para 7.1-7.4). The law should clearly provide
the definition of a Government company in context of ownership of the Central
and/or State Government. Therefore, the extension of special exemptions and
protections to various commercial ventures taken up by Government companies
in the course of their commercial operations along with strategic partners or
general public should be done away with so that such entities can operate in
the market place on the same terms and conditions as other entities. In
particular, reflection of financial information of such ventures by Government
companies and their audit should be subject to the common legal regime
applicable. The existing delays are enabling a large number of corporate entities
to evade their responsibilities and liability for correct disclosure of true and fair
financial information in a timely manner. In this context, the relevance of the
present section 619B of the Act was considered appropriate for a review.
40. The Committee felt that since statutory audit is conducted by the statutory
auditor appointed by the C&AG in the manner directed by him, the test/
supplementary audit is superfluous since it would duplicate audit work already
done by statutory auditor. Further, where any directions are given by the C&AG
to the Statutory Auditor not in accordance with the Accounting Standards, the
Statutory Auditor may be required to mention the same in the notes on
accounts.
11.6 Summary
Society and Business are interring woven and business thrive on competition.
Competition is a critical element that distinguishes dynamic economics. Competition and
its relations and relevance are universal. However intense competition or cut throat
competition in business will create healthy business environment. There needs to have
the codified and comprehensive law dealing with unfair competition or anti-trust issues.
Competition Act in the 2002 has been enacted in order to fulfill the country’s obligations
under the World Trade Organisation agreement. The Monopolies and Restrictive trade
practices Act 1969, (MRTP) which had been found to be in adequate and in order to fulfill
the gap a new Act has been enacted which is known as The Competition Act 2002. After
the liberalisation policy, Indian industries geared up their production both qualitatively and
quantitatively to maintain standard with the Multi-National companies. Since the
contributions of Indian industries are great booster to the economy they have to demand
a special legislative action to ensure a “level playing” with the multi-national companies.
This is also one of the reasons to bring the competition law in to force in the year 2002.
Most developed countries and many developing countries have evolved laws, which
regulate monopolisation of economic power while encouraging competition. In India too,
economy is being exposed to deregulation and privatisation. History bears witness that
unless these forces are kept under least, participants can misuse the freedom to frustrate
competition. The participants form cartels which are anticompetitive agreements by
competitors to fix prices, restrict output, submit collusive tenders, or divide or share
markets. By raising prices and restricting supply they make goods and services
completely unavailable to some purchasers and unnecessarily expensive for others.

In India the law presently addressing the above issue is the Monopolies and Notes
Restrictive Trade Practices Act, 1969 (MRTP Act). The Act deals with control, regulation
and prohibition of unfair, restrictive and monopolistic trade practices as defined in the Act.
The aim of the Act is to ensure that the concentration of economic power does harm the
public interest and to provide effective steps for its control. The Act, seeks to achieve
this purpose through the machinery created under the Act consisting the MRTP
Commission, Director General of Investigation and Registration and other staff.
MRTP Commission has powers to grant injunctions, damages and pass other orders
appropriate for the concerned prejudicial activity – be it unfair trade practice, restrictive
trade practice or monopolistic trade practice. The MRTP Commission can also order
division of undertakings or severance of inter-connection in case the same is found to
be in public interest to avoid the perpetration of restrictive or monopolistic trade practices.
The division or severance is achieved by ordering disinvestment or sale in the concerned
unit of shares or the holdings. The contravention of the provisions of the Act or orders
of the MRTP Commission is dealt with by providing various sanctions like proceeding for
contempt, imprisonment upwards of a year and large sums in fine which increase with
every day of failure to comply.
Establishment of Commission – With effect from such date as the Central
Government may, by notification, appoint, there shall be established, for the purposes
of this Act, a Commission to be called the “Competition Commission of India.”
The Commission shall be a body corporate by the name aforesaid having perpetual
succession and a common seal with power, subject to the provisions of this Act, to acquire,
hold and dispose of property, both movable and immovable, and to contract and shall,
Subject to the provisions of this Act, it shall be the duty of the Commission to
eliminate practices having adverse effect on competition, promote and sustain competition,
protect the interests of consumers, and ensure freedom of trade carried on by other
participants, in markets in India.
The Commission may, upon its own knowledge or information relating to acquisition
referred to in clause (a) of section 5 or acquiring of control referred to in clause (b) of
section 5 or merger or amalgamation referred in clause (c) of that section, inquire into
whether such a combination has caused or is likely to cause an appreciable adverse effect
on competition in India. Provided that the Commission shall not initiate any inquiry under
this subsection after the expiry of one year from the date on which such combination has
taken effect.
The Commission shall, on receipt of a notice under sub-section (2) of section 6 or
upon receipt of a reference under sub-section (2) of section 21, inquire whether a
combination referred to in that notice or reference has caused or is likely to cause an
appreciable adverse effect on competition in India.
Proper and accurate compilation of financial information of a corporate and its
disclosure, in a manner that is standardized and understood by stakeholders, is central
to the credibility of the corporates and soundness of investment decisions by the investors.
The preparation of financial information and its audit, therefore, needs to be regulated
through law with stringent penalties for non-observance. It would however, not be feasible
for the law to prescribe all the details guiding the treatment of this subject. This is a
technical matter which needs to be gone into by experts keeping in view the requirements
of proper disclosures of financial information in the interests of healthy corporate
governance. However, once developed, use of such principles should be mandated through

Notes law. Accounting Standards serve a vital function in this respect. These should be developed
keeping in view international best practices and provided statutory backing. There should
be integration of Accounting Standards with substantive law.
The present statute provides for a mechanism for development of Accounting
Standards. We understand that Accounting Standards for the use of Indian corporate
sector, taking into account International Accounting Standards, are being developed
through the instrumentality of the National Advisory Committee on Accounting Standards
(NACAS). This is an important aspect that needs to be pursued. In the meantime, the
Institute of Chartered Accountants of India (ICAI) has done useful work in prescribing
operational standards of accounting to fill the gap till Accounting Standards could be
notified. We expect that the process of notification of Accounting Standards, incorporating
international best practices, would be completed shortly.
The Committee took note of the contribution made by the ICAI and the NACAS in
development of proposals for Accounting Standards and took the view that the existing
institutional mechanism for formulating and notifying Accounting Standards under the
Companies Act, 1956 may be retained.

1. ………… means any person who buys any goods for a consideration which was
been paid or promised or partly paid and partly promised.
2. ………………..means a person or a department of the Government, who or which
is or has been, engaged in any activity, relating production, storage and
distribution.
3. …………………..means a market comprising all those products or services
which are regarded as interchangeable or substitutable by the consumer.
4. ………………….means a trade practices which, for the purposes of promoting
the sale, use or supply of any goods is for the provision of any service.
5. The Commission shall be a body corporate by the name aforesaid having
perpetual succession and a………………...
II. True/False
1. Consumer means any person who buys any goods for a consideration which
was been paid or promised or partly paid and partly promised.
2. Enterprise means a person or a department of the Government, who or which
is, or has been, engaged in any activity, relating production, storage and
distribution.
3. Relevant Product Market means a market comprising all those products or
services which are regarded as interchangeable or substitutable by the
consumer.
4. Service means service of any description which is made available to potential
users and includes the provision of services in connection with business.
5. Unfair trade practice means a trade practices which, for the purposes of
promoting the sale, use or supply of any goods is for the provision of any service.

III. Multiple Choice Questions Notes

1. What means any person who buys any goods for a consideration which was
been paid or promised or partly paid and partly promised?
a) Consumer
b) Enterprise
c) Relevant Product Market
d) Unfair trade practice
2. What means a person or a department of the Government, who or which is,
or has been, engaged in any activity, relating production, storage and
distribution?
a) Consumer
b) Enterprise
3. What means a market comprising all those products or services which are
regarded as interchangeable or substitutable by the consumer?
a) Consumer
b) Enterprise
4. What means a trade practices which, for the purposes of promoting the sale,
use or supply of any goods is for the provision of any service?
a) Consumer
b) Enterprise
5. What means a trade practice which tends to bring about manipulation of price
or its conditions of delivery?
a) Restrictive trade practice
b) Enterprise

1. Define the term Consumer.
2. What is Enterprise?
3. What is Relevant Product Market?
4. Define the term Service.
5. What is Unfair Trade Practice?
6. What is Restrictive Trade Practice?
7. What is Competition Commission?

Notes 8. What is Agreement?

9. What is Dominant?
10. Who is an Auditor?

1. Give an introduction on Competition Act.
2. Discuss about Enquiry into Certain Agreements and Dominant.
3. Explain about Position of Enterprise and Combinations.
4. Discuss the Miscellaneous Provisions.
5. Explain about Finance, Accounts and Audit related to Competition Act.
11.9 Key Terms

z Consumer: Consumer means any person who buys any goods for a
consideration which was been paid or promised or partly paid and partly
promised, of under any system of deferred payment and includes any user of
such goods other than the person who buys such goods for consideration paid
or promised or partly paid or partly promised, or under any system of deferred
payment when such use is made with the approval of such person, whether
such purchase of goods is for resale or for any commercial purpose or for
personal use.
z Enterprise: Enterprise means a person or a department of the Government,
who or which is, or has been, engaged in any activity, relating production,
storage, supply, distribution, acquisition or control of articles or the provision
of services, of any kind, or in investment, or in the business of acquiring, holding,
underwriting or dealing with shares, debentures or other securities of any other
body corporate, either directly or through one or more of its divisions or
subsidiaries.
z Relevant Product Market: Relevant Product Market means a market
comprising all those products or services which are regarded as interchangeable
or substitutable by the consumer, by reason of characteristics of the products
or services, their prices and intended use.
z Service: Service means service of any description which is made available to
potential users and includes the provision of services in connection with
business of any industrial or commercial matters such as banking, communication,
education, financing, insurance, chit funds, real estate, transport, storage,
material treatment, processing, supply of electrical or other energy, boarding,
lodging, entertainment, amusement, construction, repair, conveying of news or
information and advertising.
z Unfair Trade Practice: “Unfair trade practice” means a trade practice which,
for the purposes of promoting the sale, use or supply of any goods are for the
provision of any service, adopts any unfair method or unfair or deceptive practice.
z Restrictive Trade Practice (RTP): Restrictive trade practice means a trade
practice which tends to bring about manipulation of price or its conditions of
delivery or to affect flow of supplies in the market relating to goods or services
in such a manner as to impose on the consumers unjustified costs or
restrictions.
z Competition Commission of India (CCI): The Commission shall be a body
corporate by the name aforesaid having perpetual succession and a common
seal with power, subject to the provisions of this Act, to acquire, hold and Notes
dispose of property, both movable and immovable, and to contract and shall,

1. Consumer
2. Enterprise
3. Relevant Product Market
4. Unfair trade practice
5. Common seal with power
II. True or False

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

1. [a] 2. [b]
3. [c] 4. [d]
5. [a]
11.11 Case Study

Killing Competition? The Fast Track vs. Ola
Fast Track contended that, Ola occupies a dominant position in the market of radio
taxi services in the various cities in India and they have abused their dominant position
by engaging in predatory pricing. According to Fast Track, Ola spends more money on
discounts and incentives (apart from the variable costs it may be incurring) on customers
and drivers as opposed to revenue earned by them. According to Fast Track, Ola spends
around Rs. 574 per trip while earning an average revenue of Rs. 344 leading to a direct
loss of Rs. 230 per trip.
Abuse of dominant position through predatory pricing is prohibited under Sec 4 of
the Act. Dominant position is defined as the position of strength enjoyed by an enterprise
that enables it to operate independently of competitive forces in the relevant market or
affect its competitors or consumers or the relevant market in its favour. Whether or not
an enterprise enjoys a dominant position is determined by an assessment of factors
provided under Sec 19 (4) of the Act such as market share, resources, economic power,
vertical integration, competitors and dependence of consumers, technical advantage, etc.
Being dominant is not illegal but its abuse is prohibited.
'Predatory price' is defined under Sec 4 of the Act as the sale of goods or provision
of services at a price below the cost, with a view to reduce competition or eliminate the
competitors. Though Sec 4(2)(a)(ii) of the Act provides that an enterprise shall be abusing

Notes its dominant position if it imposes predatory pricing, an explanation to Sec 4(2)(a)(ii),
however makes it clear that predatory price adopted to meet competition will not amount
to abuse of dominant position. Thus, mere provision of goods / services at a price below
cost will not in itself amount to predatory pricing within the meaning of the Act.
Questions:
1. Do you think the Ola occupies a dominant position in the market of radio taxi
services in the various cities in India?
2. How do you justify the comments on “Being dominant is not illegal but its abuse
is prohibited”?

11.13 Bibliography
Press.
Kluwer Law Intl

9. Davies, P. L., Worthington, S. and Gower, L. C. B. (2012a) ‘Chapter 3 - sources Notes

Press.
Pearson.
±±±±

Notes
Unit 12: The Foreign Exchange Management

Act
Structure:
12.1 Introduction
12.2 Regulation and Management of Foreign Exchange
12.3 Contravention and Penalties [Sections13-15]
12.4 Adjudication and Appeal [Sections 16-35]
12.5 Directorate of Enforcement
12.6 Miscellaneous Provisions
12.7 Summary
12.10 Key Terms
12.12 Case Study
12.14 Bibliography
Objectives

 Concepts of Foreign Exchange Management Act
 Regulation and Management of Foreign Exchange
 Contravention and Penalties [Sections 13-15]
 Adjudication and Appeal [Sections 16-35]
 Directorate of Enforcement
 Miscellaneous Provisions

The Foreign Exchange Management Act 237
12.1 Introduction Notes

Development of a country depends upon the development of various sections of the
economy, especially the various sectors. Industrialisation depends upon the investments
made in the economy for starting various project, the project requires capital investment,
material, technical know – how and so on. International Trade also plays an important
role in the development of a country. Even before independence then Government passed
several ordinances regulatory Foreign Exchange Transactions. In 1947, FERA (Foreign
Exchange Regulation Act) was passed by the Government of India for a period of ten years.
It was made permanent in 1957. In the years 1973, the Act was modified and the same
year it was passed. With global economy opening up due to the liberation of economic
policies since 1992, the 1973, Act was relaxed in 1993 and several amendments were
enacted on part of the on – going process of economic liberalisation relating to foreign
investment and foreign trade.
Scope of the Act

(i) It extents to whole of India.
(ii) It shall also apply to all branches, offices and also to any contravention there
under committed out side India by any persons to whom this Act applies.
FEMA, 1999 seeks to establish to more liberal and orderly regulatory frame work
conducive to economic growth by limiting its boundary to:
1. Current Account transactions such as:
(a) Payment due in connection with foreign trade.
(b) Other current business, services and short–term banking and credit
facilities in the ordinary business.
(c) Payments due an internet on loans, and as net income from investment,
remittances for living expenses of parents, spouse and children residing
abroad and expenses in connection with foreign travel, education and
medical care of parents, spouse and children.
2. Capital account transactions such as:
(a) Transactions which alters the assets or liabilities, including contingent
liabilities outside India, of persons resident in India or assets or liabilities
in India of persons resident outside India and include transfer or issue
of an foreign securities by a person resident in / out side India.
(b) Any borrowing or landing in foreign exchange / Indian rupees between
a person resident in/ out side India.
(c) Deposits between persons resident in / out side India.
(d) Export, import or holding of currency or currency notes.
(e) Transfer for immovable property in / out side India, other than a lease
not exceeding 5 years by a person resident in / out side India.
3. Export of Goods and Services.
4. Realisation and repatriation of foreign exchange.
5. Exemption from realisation and repartriation in certain cases.
Objective of FEMA
The Act aims “to consolidate and amend the law relating to foreign exchange with
objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India;

Notes In order words, the objectives are:

(i) To facilitate external trade and payment.
(ii) To promote the orderly development and maintenance of the foreign exchange
market in India.
(iii) To restrict current account transactions by the centre in consultation with the
RBI.
(iv) On the capital account, to allow foreign exchange and flow only for transactions
that are permitted.
12.2 Regulation and Management of Foreign Exchange

Dealing in Foreign Exchange (Section 3)
Same as otherwise provided in this Act, rule, or regulations made there under,
or with the general or special permission of the Reserve Bank, no person shall –
(a) Deal in or transfer any foreign exchange or foreign security to any person not
being authorized person.
(b) Make any payment to or for the credit of any person resident outside India in
any manner.
(c) Receive otherwise through an authorised person, any payment by order or on
behalf of any person resident out side India in any manner.
(d) Enter into any financial transactions in India as consideration for or in
association with acquisition or creation or transfer of a right to acquire, any asset
outside India by any person.
Restriction on Holding of Foreign Exchange [Section – 4]
No person resident – in India shall acquire, hold, own, posses or transfer any foreign
exchange, foreign security or any immovable property situated out side India .
Current Account transactions [Section – 5]
Any person my sell or draw foreign exchange to or from an authorised person if such
sale or drawal of a Current a/c transaction.
Provided that the Central Government may, in public interest and in consultation with
the Reserve Bank, impose such reasonable restrictions for Current a/c transactions as
may be prescribed.
According to section 2(J) “Current Account Transaction” means a transaction other
than a capital account transaction. It include following:-
– Payment due in connection with foreign trade, other current business services
and short term banking and credit facilities in the ordinary course of business.
– Payments due as interest on loans and as net income from investments
– Remittances for living expenses of parents, spouse and children residing abroad
– Expenses in connection with foreign travel, education and medical care of
parents, spouse and children.
Besides above, any expenditure which is not a ‘capital account transaction’ will be
current account transaction.
In certain cases, prior approval of Reserve Bank of India is necessary for current
account transaction. These have been provided in Foreign Exchange Management (Current
Account Transactions) Rules 2000.

No Restrictions on Current Account Transactions Notes

If sale or drawal is a current account transaction, any person can sell or draw foreign
exchange to or from authorised person.
‘Drawal’ means drawal of foreign exchange from an authorised person. It includes
use of international credit card, opening of letter of credit, ATM card or International Debit
Card etc., which results in creating foreign exchange liability.
NO RESTRICTIONS UNLESS SPECIFIED – Basically, all current account
transactions are free, unless specifically restricted by Central Government. For example,
there are no restrictions on following current account transactions:
(1) Payment for imports of goods which are permitted under Open General Licence.
(2) Remittance of interest on investment made from abroad. Remittance of principal
amount i.e. capital is permitted subject to restrictions imposed in the scheme.
(3) Remittance of dividend is permitted if the foreign investment was as per approved
scheme.
(4) Remittance of interest on funds borrowed from abroad as per approved schemes.
(5) Salary/remuneration to foreign nationals/foreign directors.
(6) Booking for foreign travel with airline/shipping companies or booking of cargo
in ships and aircrafts. Indian office/agent can accept payment in rupees and
make remittance abroad to principal.
(7) Export Commission with exceptions.
(8) Advertisement abroad, except TV advertisement in foreign country.
Capital account transactions [Section 6]

(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign
exchange to or from an authorised person for a capital account transaction.
(2) The Reserve Bank may, in consultation with the Central Government, specify-
(a) Any class or classes of capital account transactions which are
permissible;
(b) The limit up to which foreign exchange shall be admissible for such
transaction:
Provided that the Reserve Bank shall not impose any restriction on the drawal
of foreign exchange for payments due on account of amortization of loans or
for depreciation of direct investments in the ordinary course of business.
(3) Without prejudice to the generally of the provisions of sub-section (2), the
Reserve Bank may, be regulations, prohibit, restrict or regulate the following-
(a) Transfer or issue of any foreign security by a person resident in India;
(b) Transfer or issue of any security by a person resident outside India;
(c) Transfer for issue of any security or foreign security by any branch, office
or agency in India of a person resident outside India;
(d) Any borrowing or lending in foreign exchange in whatever form or by
whatever name called;
(e) Any borrowing or lending in rupees in whatever form or whatever name
called between a person resident in India and a person resident outside
India;
(f) Deposits between persons resident in India and persons resident outside
India;
Notes (g) Export, import or holding or currency or currency notes;

(h) Transfer of immovable property outside India, other than a lease not
exceeding five years, by a person resident in India;
(i) Acquisition or transfer of immovable property in India, other than a lease
not exceeding five years, by a person resident outside India;
(j) Giving of a guarantee or surety in respect of any debt, obligation or other
liability incurred-
(i) By a person resident in India and owed to a person resident outside
India;
(ii) By a person resident outside India
Realization and repatriation of foreign exchange [Section – 8]
Same as otherwise provided in this act, where any amount of foreign exchange is
due or has accrued to any person resident in India, such person shall take all reasonable
steps to realise and repatriate to India such foreign exchange within such period and in
such manner as may be specified by the Reserve Bank.
Exemption from realization and repatriation
Section (9) provides exemption from provisions of section 4 & 8 in the following cases:
(a) Possession of foreign currency or foreign coins by any person up to such limit
as the Reserve Bank may specify.
(b) Foreign currency account held or operated by such person or class of persons
and the limit up to which the Reserve Bank may specify.
(c) Foreign exchange acquired or received before the 8th day of July 1947 or any
income arising or accruing thereon which is held outside India by any person
in pursuance of a general or special permission granted by the Reserve Bank.
(d) Foreign exchange held by a person resident in India upto such limit as the
Reserve Bank may specify, if such foreign exchange was acquired by way of
gift or inheritance from a person referred to in clause (e) including any income
arising there from;
(e) Foreign exchange acquire a from employment, business, trade, vocation,
services, honorarium, gifts, inheritance or any other legitimate means up to such
limit as the Reserve Bank may specify; and
(f) Such other receipts in foreign exchange as the Reserve Bank may specify.
Authorised Person (Section – 10)
Section-10 empowers the RBI to authorise persons to deal in foreign exchange &
foreign security. It may specify conditions while granting authorisation. It may revoke
authorisation in public interest in case there is contravention or failure to comply with
prescribed conditions:
 Only a person appointed by RBI can deal in foreign exchange or in foreign
securities as an authorised dealer.
 No payment can be made to a person resident outside India, without the
permission of RBI.
 No one can receive any payment from a person resident outside India without
the permission of Reserve Bank.

12.3 Contravention and Penalties [Sections13-15] Notes
Contravention and Penalties [Section – 13]
Section 13 deals with the contraventions as civil offences as distinguished from

criminal offences under FERA 1973.
The adjudicating officers are empowered to impose following penalties:
1. If any person contravenes any provisions of FEMA – he be liable to a penalty
up to “Thrice” the sum involved in such contravention where such amount is
quantifiable.
2. Up to two lakhs where the amount is not quantifiable.
3. If contravention is continues everyday further penalty which may extend to Rs.
5,000/- for every day after the first day during which contravention continues
on him within a period of 90 days, he shall be liable to civil imprisonment.
Enforcement of the Orders of Adjudicating Authority (Section–14)
FEMA, 1999 has made stringent provisions to ensure compliance with orders passed
by Adjudicating Authorities. Section 14 lays down the procedure for payment of penalty
and the consequences of civil imprisonment for failure to make full payment of the penalty
within a specified period.
Penalties under Foreign Exchange Management Act, 1999
If any person contravenes any provision of this Act, or contravenes any rule,
regulation, notification, direction or order issued in exercise of the powers under this Act,
or contravenes any condition subject to which an authorisation is issued by the Reserve
Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved
in such contravention which has quantifiable amount or up to ? 2 lakhs which includes
not quantifiable amount and where such contravention is a continuing one, further penalty
which may extend to five thousand rupees for every day after the first day during which
the contravention continues.
If any person contravenes any provision of this Act or contravenes any rule, regulation,
notification, direction or order issued in exercise of the powers under this Act, or
contravenes any condition subject to which an authorisation is issued by the Reserve Bank
of India, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved
in such contravention where such amount is quantifiable, or up to two lakh rupees where
the amount is not quantifiable, and where such contravention is a continuing one, further
penalty which may extend to five thousand rupees for every day after the first day during
which the contravention continues.”
Any Adjudicating Authority adjudging any contravention under sub-section (1), may,
if he thinks fit in addition to any penalty which he may impose for such contravention
direct that any money, safety or any other money or property in respect of which the
contravention has taken place shall be confiscated to the Central Government and further
direct that the foreign exchange holdings, if any, of the persons committing the
contraventions or any part thereof, shall be brought back into India or shall be retained
outside India in accordance with the directions made in this behalf.
Explanation for this subsection, “property” in respect of which contravention has taken
place, shall include -

Notes Deposits in a bank, where the said property is converted into such deposits; Indian
currency, where the said property is converted into that currency and Any other property
which has resulted out of the conversion of that property.
12.4 Adjudication and Appeal [Sections 16-35]
Procedure for Adjudication
The following is the procedures prescribed in the Act and Rules for Adjudication:
• The Adjudicating Authority shall hold an inquiry only on a complaint in writing
made by an officer authorized by a general or special order by the Central
Government;
• Where any person has committed any contravention as specified in Section
13 of the Act, the Adjudicating Authority shall issue a notice to such person
requiring him to show cause within such period as may be specified in the notice
as to why an inquiry should not be held against him. Normally the period of
notice shall not be less than 10 days from the date of service of notice;
• Every notice shall indicate the nature of contravention alleged to have been
committed by him;
• The person on whom the notice is issued shall given reply within the time
prescribed;
• After considering the reply by such person the Adjudicating Authority is of the
opinion that an inquiry should be held, he shall issue a notice fixing a date for
the appearance of that person either personally or through his legal practitioner
or a Chartered Accountant duly authorized by him;
• On the date fixed, the Adjudicating Authority shall explain to the person the
contravention alleged to have been committed by him indicating the provisions
of the Act or of Rules, regulation, notifications, directions or orders or any
condition subject to which an authorization is issued by the RBI in respect of
which contravention is alleged to have taken place;
• The Adjudicating Authority shall, then, given an opportunity to that person to
produce such documents or evidence as he may consider relevant to the inquiry
and if necessary, the hearing may be adjourned to a future date and in taking
such evidence the Adjudicating Authority shall not be bound to observe the
provisions of the Indian Evidence Act;
• While holding an inquiry the Adjudicating Authority shall have the power to
summon and enforce attendance of any person acquainted with the facts and
circumstances of the case to give evidence or to produce any document which
in the opinion of the Adjudicating Authority may be useful to or relevant to the
subject matter of the inquiry;
• If any person fails, neglects or refuses to appear before the Adjudicating
Authority, the Authority may proceed with the adjudication in his absence after
recording reasons for doing so;
• If, upon consideration of the evidence produced, the Adjudicating Authority is
satisfied that the person has committed the contravention, he may, by order
in writing, impose such penalty as he thinks fit, in accordance with the provisions
of Section 13 of the Act;

• The Adjudicating Authority, if he thinks fit in addition to any penalty direct that Notes
any currency, security or any other money or property in respect of which the
contravention has taken place shall be confiscated to the Central Government;
• The Adjudicating Authority may direct that the foreign exchange holdings, if any
of the persons committing the contraventions or any part thereof, shall be
brought back into India or shall be retained outside India in accordance with
the directions made in this behalf;
• Every complaint shall be dealt as expeditiously as possible and endeavor shall
be made to dispose of the complaint finally within one year from the date of
receipt of the complaint;
• If the complaint could not be disposed within the said period, the Adjudicating
Authority shall record periodically the reasons in writing for not disposing of the
complaint within the said period;
• Every order made shall specify the provisions of the Act or of the rules,
regulations, notifications, directions or orders or any condition subject to which
an authorization is issued by the RBI in respect of which contravention has taken
place and shall contain reasons for such decisions;
• Every order made shall be dated and signed by the Adjudicating Authority;
• A copy of the order made shall be supplied free of charge to the person against
whom the order is made and all other copies of proceedings shall be supplied
to him on payment of copying fee of ? 2 per page;
• The copying fee shall be paid in cash or by Demand draft drawn in favor of the
Adjudicating Authority.
Enforcement of the orders of Adjudicating Authority
Section 19 of the Act provides that if any aggrieved person wants to file appeal before
the appellate authority against the order of Adjudicating Authority, he is to file appeal within
forty five days from the date of receipt of the order. If no appeal is filed then the order
of Adjudicating Authority would be final and it could be enforced. Section provides the
procedure for enforcement of the orders of Adjudicating Authority as detailed below:
• If any person fails to make full payment of the penalty imposed within a period
of ninety days from the date on which the notice for payment of such penalty
is served on him he shall be liable to civil imprisonment;
• Before that the Adjudicating Authority is to issue notice and service upon the
defaulter calling upon him to appear before him on the date specified in the notice
and to show cause why he should be committed to the civil prison;
• The order of arrest is to be issued by the Adjudicating Authority if he is satisfied
that-
• the defaulter, with the object or effect of obstructing the recovery of penalty,
has after the issue of the notice by the Adjudicating Authority, dishonestly
transferred, concealed or removed any part of his property; or
• The default has, or has had since the issuing of notice by the Adjudicating
Authority, the means to pay the arrears or some substantial part thereof and
refuses or neglects or has refused or neglected to pay the same;
• A warrant of arrest of the defaulter may be issued by the Adjudicating Authority
if the Adjudicating Authority is satisfied by affidavit or otherwise, that the object
or effect of delaying the execution of the certificate the defaulter is likely to
abscond or leave the local limits of the jurisdiction of the Adjudicating Authority;

Notes • If the default does not appear before the Adjudicating Authority, he may issue
a warrant for the arrest of the defaulter;
• A warrant of arrest may also be executed by any other Adjudicating Authority
within whose jurisdiction the defaulter may for the time being be found;
• The person so arrested shall be brought before the Adjudicating Authority issuing
the warrant as soon as practicable and in any event within 24 hours of his arrest,
exclusive of the time required for the journey;
• If the defaulter pays the amount entered in the warrant of arrest as due and
the costs of the arrest to the officer arresting him, such officer shall at once
released him;
• If the defaulter appears before the Adjudicating Authority he shall give the
defaulter an opportunity showing cause why he should not be committed to civil
prison;
• Pending conclusion of the inquiry, the Adjudicating Authority may, in his
discretion, order the defaulter to be detained in the custody of such officer as
he think fit or release him on furnishing the security to the satisfaction of the
Adjudicating Authority for his appearance as and when required;
• The Adjudicating Authority may leave the defaulter for a specified period not
exceeding 15 days or release him on his furnishing security for his appearance
at the expiration of the specified period if the arrears are not satisfied;
• When the Adjudicating Authority does not make an order of detention he shall,
if the defaulter is under arrest, direct his release;
• Every person detained in the civil prison-
• Where the certificate is for a demand of an amount exceeding ? 1 crore, up
to three years; and
• In any other case, up to six months;
• The person detained shall be released if the amount is paid to the officer-in-
charge of civil prison;
• A detention order may be executed at any place in India in the manner provided
for the execution of warrant of arrest under Cr. PC, 1973.
Appeal to Special Director
Section 17 provides for filing appeal against the order of Adjudicating Authority to
Special Director. The Central Government shall appoint one or more Special Directors
(Appeals) to hear appeals by means of Notification in which the Central Government also
to indicate the matter and places in relation to which the Special Director (Appeals) may
exercise jurisdiction. The appeal procedure is detailed as below:
• The appeal to Special Director shall be filed within forty five days from the date
on which the copy of the order made by Adjudicating Authority is received;
• The Special Director may entertain an appeal after the expiry of forty five days,
if he is satisfied that there was sufficient cause for not filing it within that period;
• The delayed appeal shall be accompanied by a petition, in triplicate, duly verified
and supported by the documents, if any, relied upon by the applicant, showing
cause how the applicant had been prevented from preferring the appeal within
the said period of 45 days;
• The appeal shall be in Form – I signed by the appellant;

• The appeal shall be filed in triplicate and accompanied by a fee of 5,000/- in Notes
form of cash or demand draft payable in favor of the Special Director (Appeals);
• The appeal may set forth concisely and under distinct heads the grounds of
objection to the order appealed against without any argument of narrative and
such grounds shall be numbered consecutively; and shall specify the address
for service at which notice or other processes may be served on the applicant,
the date on which the order appealed against was served on the applicant;
• On receipt of appeal, the Special Director (Appeals) shall send a copy of the
appeal, together with a copy of the order appealed against, to the Director of
Enforcement;
• The Special Director (Appeals) shall, then, issue notices to the appellant and
the Director of Enforcement fixing a date for hearing of the appeal;
• On the date fixed for hearing or any other day to which the hearing of the appeal
may be adjourned, the appellant as well as the Presenting Officer of the
Directorate of Enforcement shall be heard;
• Any appellant may appoint a legal practitioner or a Chartered Accountant to
appear and plead and act on his behalf before the Special Director (Appeals)
under the Act;
• The Special Director (Appeals) shall have the same powers of a civil court which
are conferred on the Appellate Tribunal;
• The Special Director (Appeals) may decide the appeal on merits, after giving
both the parties the opportunity of being heard;
• The appeal is to be decided within 180 days from the date of appeal;
• The order of Special Director (Appeals) shall be in writing and shall state briefly
the grounds for the decision;
• The order of Special Director shall be signed by the Special Director (Appeals)
hearing the appeal;
• The Special Director (Appeals) shall send a copy of every order made by him
to the parties to appeal and to the concerned Adjudicating Authority.
Appeal to Appellate Tribunal
Section 18 of the Act provides that the Central Government shall, by notification,
establish an Appellate Tribunal to be known as the Appellate Tribunal for Foreign Exchange
to hear appeals against the orders of the Adjudicating Authorities and the Special Director
(Appeals) under this Act. The procedure involved in appeal to the Appellate Tribunal is
discussed as follows:
• The Central Government or any person aggrieved by an order made by an
Adjudicating Authority, other than specified in Section 17(1) or the Special
Director (Appeals), may prefer an appeal to the Appellate Tribunal;
• The appeal shall be filed within a period of 45 days from the date on which a
copy of the order made by the Adjudicating Authority or the Special Director
is received;
• The appeal shall be in Form II signed by the applicant;
• The appeal shall be in triplicate by a fee of 10,000/- in the form of cash or demand
draft payable in favor of the Registrar, Appellate Tribunal for Foreign Exchange,
New Delhi;

Notes • While filing the appeal, the appellant is to deposit the penalty imposed against
him;
• Where in any particular case, the Appellate Tribunal is of the opinion that the
deposit of such penalty would cause undue hardship to such person, the
Appellate Tribunal may dispense with such deposit subject to such conditions
as it may deem fit to impose so as to safeguard the realization of penalty;
• The Appellate Tribunal may entertain an appeal after the expiry of 45 days if
it is satisfied that there was sufficient cause for not filing it within the said period;
• In such cases the appeal shall be accompanied by a petition, in triplicate, duly
verified and supported by the documents, if any, relied upon by the applicant,
showing cause how the applicant had been prevented from preferring the appeal
within the said period of 45 days;
• The appeal shall set forth concisely and under distinct heads the grounds of
objection to the order appealed against without any argument of narrative and
such grounds shall be numbered consecutively; and shall specify the address
for service at which notice or other processes may be served on the appellant;
• On receipt of the appeal the Appellate Tribunal shall send a copy of the appeal
together with a copy of the order appealed against, to the Director of
Enforcement;
• The Appellate Tribunal shall issue notices to the appellant and the Director of
Enforcement fixing a date for hearing of the appeal;
• The appellant may appoint a legal practitioner or a Chartered Accountant to
appear and plead and act on his behalf before the Special Director (Appeals);
• On the date fixed for hearing or any other day to which the hearing of the appeal
may be adjourned, the applicant or the presenting officer fail to appeal when
the appeal is called on for hearing, the Appellate Tribunal may decide the appeal
on the merits of the case;
• The order of the Appellate Tribunal shall be in writing and shall state briefly the
grounds for the decision;
• The order shall be signed by the Chairman or Member of the Appellate Tribunal
hearing the appeal;
• The appeal shall be disposed within 180 days from the date of receipt of the
appeal. If it could not been disposed within 180 days the Tribunal shall record
its reasons in writing for not disposing of the appeal within the said period;
• The Tribunal may, for the purpose of examining the legality, propriety or
correctness of any order may be the Adjudicating Authority in relation to any
proceeding, on its own motion or otherwise, call for records of such proceedings
and make such order in the case as it thinks fit;
• The Appellate Tribunal shall send a copy of every order made by it to the parties
to the appeal and to the concerned Adjudicating Authority or the Special Director
(Appeals) as the case may be.
Procedure and Powers of Tribunal and Special Director (Appeals)
The Appellate Tribunal and the Special Director (Appeals) shall not be bound by the
procedure laid down in CPC but shall be guided by the principles of natural justice and,
subject to other provisions of this Act, the Appellate Tribunal and the Special Director
(Appeals) shall have the powers to regulate its own procedures. They are having the same
powers as are vested in a Civil Court while trying a suit, in respect of the following matters:

• summoning and enforcing the attendance of any person and examining him on Notes
oath;
• requiring the discovery and production of documents;
• receiving evidence on affidavits;
• subject to the provisions of Sections 123 and 124 of the Indian Evidence Act,
1872 requisitioning any public record or document or copy of such record or
document from any office;
• issuing commissions for the examination of witnesses or documents;
• reviewing its decisions;
• dismissing a representation of default or deciding it ex-parte;
• setting aside any order of dismissal of any representation for default or any order
passed by it ex-parte; and
• any other matter which may be prescribed by the Central Government.
An order may be the Tribunal or the Special Director (Appeals) shall be executable
by them as a decree of civil court and, for this purpose, the Appellate Tribunal and the
Special Director (Appeals) shall have all the powers of a civil court. They may transmit
any order to a civil court having local jurisdiction and such civil court shall execute the
order as if it were a decree made by the court.
12.5 Directorate of Enforcement

The Directorate of Enforcement was established in the year 1956 with its
Headquarters at New Delhi. It is responsible for enforcement of the Foreign Exchange
Management Act, 1999 (FEMA) and certain provisions under the Prevention of Money
Laundering Act. Work relating to investigation and prosecution of cases under the PML
has been entrusted to Enforcement Directorate. The Directorate is under the administrative
control of Department of Revenue for operational purposes; the policy aspects of the
FEMA, its legislation and its amendments are within the purview of the Department of
Economic Affairs. Policy issues pertaining to PML Act, however, are the responsibility
of the Department of Revenue. Before FEMA became effective (1 June 2000), the
Directorate enforced regulations under the Foreign Exchange Regulation Act, 1973.
Shri Sudhir Nath, an officer of the rank of Additional Special is the Director. There
are two Special Directors at Headquarters and one Special Director at Mumbai.
The Directorate has 10 Zonal offices each of which is headed by a Deputy Director
and 11 sub Zonal Offices each of which is headed by an Assistant Directors
Zonal offices Mumbai, Delhi, Chennai, Kolkata, Chandigarh, Lucknow, Cochin,
Ahmedabad, Bangalore & Hyderabad
Sub Zonal offices Jaipur, Jalandhar, Srinagar, Varanasi, Guwahati, Calicut, Indore,
Nagpur, Patna, Bhubaneshwar & Madurai.
Functions:
a) To collect, develop and disseminate intelligence relating to violations of FEMA,
1999, the intelligence inputs are received from various sources such as Central
and State Intelligence agencies, complaints etc.
b) To investigate suspected violations of the provisions of the FEMA, 1999 relating
to activities such as “hawala” foreign exchange racketeering, non-realization of

Notes export proceeds, non-repatriation of foreign exchange and other forms of

violations under FEMA, 1999.
c) To adjudicate cases of violations of the erstwhile FERA, 1973 and FEMA, 1999.
d) To realize penalties imposed on conclusion of adjudication proceedings.
e) To handle adjudication, appeals and prosecution cases under the erstwhile
FERA, 1973
f) To process and recommend cases for preventive detention under the
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act
(COFEPOSA)
g) To undertake survey, search, seizure, arrest, prosecution action etc. against
offender of PMLA offence.
h) To provide and seek mutual legal assistance to/from contracting states in
respect of attachment/confiscation of proceeds of crime as well as in respect
of transfer of accused persons under PMLA.
12.6 Miscellaneous Provisions under Foreign Exchange Management

Act (FEMA)
Provisions of Foreign Exchange Management Act (FEMA) provides free transaction
on current account subject to the guidelines by the RBI. Enforcement of Foreign Exchange
Management Act (FEMA) is entrusted to a separate directorate, which undertakes
investigations on contraventions of the Act.
Provisions of FEMA are grouped under four heads. Important provisions under each
of the four heads, having a bearing on promoting economic development through foreign
investment with enabling provisions to ensure the curtailing of inflationary trends from such
transactions, are outlined below.
Regulation for Current Account Transaction:
Any person can sell or draw foreign exchange to or from an authorised dealer (if
such sale or withdrawal is a current account transaction) except for certain prohibited
transactions like remittance of lottery winnings, remittance of interest income on funds
held in Non-Resident Special Rupee (NRSR) account scheme, etc.
Besides these cases, there are certain other transactions, for which specific RBI
approval will be required. For instance, Reserve Bank approval is required for importers
availing of Supplier’s Credit beyond 180 days and Buyer’s Credit irrespective of the period
of credit.
Authorised dealers are permitted remittance of surplus freight/passage collections
by shipping/airline companies or their agents, multimodal transport operators, etc. after
verification of documentary evidence in support of the remittance.
Regulations Relating to Capital Account Transactions:

i. Foreign nationals are not allowed to invest in any company or partnership firm
or proprietary concern, which is engaged in the business of Chit Fund or in
Agricultural or Plantation activates or in Real Estate business (other than
development of township, construction of residential/commercial premises,
roads or bridges) or construction of farm houses or trading in Transferable
Development Rights (TDRs). Listing of permissible classes of Capital account
transaction for a person resident in India and also by a person resident outside
India has been provided in the regulations.
ii. Detailed rules and regulations are provided on borrowing and lending in Foreign Notes
Currency as well as India Rupee by a person resident in India form/to a person
resident outside India either on non-repatriation or repatriation basis.
iii. Authorised dealers are now permitted to grant rupee loans to NRIs against
security of shares or immovable property in India, subject to certain terms and
conditions. Authorised dealers or housing finance institutions approved by
National Housing Bank can also grant rupee loans to NRIs for acquisition of
residential accommodations subject to certain terms and conditions.
iv. General permission has been granted to Indian company (including Non-Banking
Finance Company) registered with Reserve Bank to accept deposits from NRIs
on repatriation basis subject to the terms and conditions specified in the
schedule.
Indian proprietorship concern/firm or a company (including Non-Banking Finance
Company) registered with Reserve Bank can also accept deposits from NRIs on non-
repatriation basis subject to the terms and conditions specified in the schedule.
Regulations relating to export of goods and services:
Export proceeds are required to be realised within a period of 6 months from the
date of shipment. In the case of exports to a warehouse established abroad with the
approval of Reserve Bank, the proceeds have to be realised within 15 months from the
date of shipment.
An enabling provision has been made in this regulation to delegate powers to
authorised dealers to allow extension of time. Export of goods on elongated credit terms
beyond six months requires prior approval of Reserve Bank.
12.7 Summary
The exporter prefers to have home currency or hard currency while the importer
prefers to have his home currency for settlement of international transactions. Capital
expenditure analysis helps to make international investment decisions. Government of
India shelved the proposal of convertibility of the Rupee on Capital account. The market
intermediaries of foreign exchange market include exchange banks, bills brokers,
acceptance house, and cultural bank of the country. Global business risks include political,
commercial, exchange rate fluctuations etc. These risks can be managed by maintaining
sound diplomatic relations, estimating demand for the products in foreign countries
actuality and the like.
International finance is the branch of economics that studies the dynamics of
exchange rates, foreign investment, global financial system, and how these affect
international trade. It studies international projects, international investments and capital
flows, and trade deficits. It includes the study of futures, options and currency swaps.
The balance of trade is the difference between the monetary value of exports and
imports of output in an economy over a certain period. It is the relationship between a
nation's imports and exports. A positive balance is known as a trade surplus if it consists
of exporting more than is imported; a negative balance is referred to as a trade deficit
or, informally, a trade gap. The balance of trade is sometimes divided into a goods and
a services balance.
Large imbalances may sometimes be a sign of underlying economic problems or
rigidities. An example includes a situation where exchange rates have been fixed or pegged
for political reasons at levels impeding a correction of a trade imbalance.

Notes Deficits may have intergenerational effects by shifting consumption over time, some
generations may gain at the expense of other citizens of countries that run up cumulative
trade deficits leave it to their children to pay the bill, in the form of either interest and
dividend payments to the rest of the world, or to seeing more and more assets being owned
by the rest of the world.
A large trade deficit can only be sustained as long as the rest of the world is willing
to finance it. If, for whatever reasons, this ceases, a country may find itself unable to
meet its obligations. The mere possibility thereof is likely to result in a rise in interest
rates and/or a depreciation of its currency. A trade surplus may appear to be a good thing
but may not always be so. It is possible for the terms of trade to be lower than before
if there is an improvement in the balance of trade. In addition, country with a surplus may
come to rely on foreign demand for its industry, which may be problematic once the foreign
demand dries up.
Foreign exchange rates policy of government towards the level of the exchange rate
of its currency. It influences the exchange rate by using its gold and foreign currency
reserves held by its central bank to buy and sell its currency.
Foreign exchange rate refers to an exchange rate between two currencies at which
one currency will be exchanged for another. It is also regarded as the value of one country’s
currency in terms of another currency. Exchange rates are determined in the foreign
exchange market, which is open to a wide range of different types of buyers and sellers
where currency trading is continuous 24 hours a day except weekends.
The origin of the Foreign Exchange Regulation Act dates back to the year of Indian
independence, 1947. At that time, it was legislated as a temporary measure to regulate
the inflow of foreign capital in the form of branches and concerns with the substantial non-
resident interest, and the employment of foreigners and later in 1957, it was placed
permanently.
Globalization of the world economy is a reality that makes opening up of the capital
account and integration with global economy an unavoidable process. Today capital
account liberalization is not a choice.
Numerous factors determine exchange rates and all are related to the trading
relationship between two countries. Remember, exchange rates are relative, and are
expressed as a comparison of the currencies of two countries.
Interest rates, inflation and exchange rates are all highly correlated. By manipulating
interest rates, central banks exert influence over both inflation and exchange rates, and
changing interest rates impact inflation and currency values. Higher interest rates offer
lenders in an economy a higher return relative to other countries.
The current account is the balance of trade between a country and its trading
partners, reflecting all payments between countries for goods, services, interest and
dividends. A deficit in the current account shows the country is spending more on foreign
trade than it is earning, and that it is borrowing capital from foreign sources to make up
the deficit.
Foreign investors inevitably seek out stable countries with strong economic
performance in which to invest their capital. A country with such positive attributes will
draw investment funds away from other countries perceived to have more political and
economic risk. Political turmoil, for example, can cause a loss of confidence in a currency
and a movement of capital to the currencies of more stable countries.

Spot rate of exchange is the rate at which foreign exchange is made available on Notes
the spot. It is also known as cable rate or telegraphic transfer rate because at this rate
cable or telegraphic sale and purchase of foreign exchange can be arranged immediately.
Spot rate is the day-to-day rate of exchange.
Forward rate of exchange is the rate at which the future contract for foreign currency
is made. The forward exchange rate is settled now but the actual sale and purchase of
foreign exchange occurs in future. The forward rate is quoted at a premium or discount
over the spot rate.
Flexible or floating exchange rate refers to the system in which the rate of exchange
is determined by the forces of demand and supply in the foreign exchange market. It is
free to fluctuate according to the changes in the demand and supply of foreign currency.
Multiple rates refer to a system in which a country adopts more than one rate of
exchange for its currency. Different exchange rates are fixed for importers, exporters, and
for different countries.
Two-tier exchange rate system is a form of multiple exchange rate system in which
a country maintains two rates, a higher rate for commercial transactions and a lower rate
for capital transactions.
The management of the exchange rate is possible only if the government pursues
a monetary-fiscal policy mix which is consistent with its exchange rate targets. In this
paper with uncertainty concerning the length of individual life the real consequences of
exchange rate management depend on the precise time pattern of the accompanying
policies.
Bilateral exchange rate involves a currency pair, while an effective exchange rate is
a weighted average of a basket of foreign currencies, and it can be viewed as an overall
measure of the country's external competitiveness.
The foreign exchange market assists international trade and investment, by enabling
currency conversion. For example, it permits a business in the United States to import
goods from the United Kingdom and pay pound sterling, even though its income is in United
States dollars. It also supports direct speculation in the value of currencies, and the carry
trade, speculation on the change in interest rates in two currencies.
Foreign exchange fixing is the daily monetary exchange rate fixed by the national
bank of each country. The idea is that central banks use the fixing time and exchange
rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value
of equilibrium in the market. Banks, dealers and traders use fixing rates as a trend
indicator.
Terms of trade affect the real exchange rate through income effect and substitution
affect and net affect depends on the relative strength of these affects as both effects work
in reverse direction to each other.

1. Foreign exchange is bought and sold in _________ markets.
2. __________ enables the companies to pay the net balance only.
3. __________ helps sellers and buyers to come together.

Notes 4. __________ accept the bills of exchange on behalf of customers.

5. __________ bank of the country deals in foreign exchange.
6. The transaction in the foreign exchange market, viz., buying and selling foreign
currency take place at a rate which is called __________.
II. True/False
1. Under open account the importer first receives the goods and then arranges
for the payments.
2. Payment in advance is most undesirable from the point of view of the importer.
3. Documentary collection is one of the important financial instruments.
4. Sight bill of exchange is not required payment immediately after the transfers
of little of the goods.
5. Time bill of exchange required the importers to arrange for the payment after
some time.

1. Which of the following provides for fixed exchange rate between the two
countries?
a) Fixed rate system
b) Fixed rate system
c) Both (1) and (2)
d) Pegging system
2. Balance of payments approach is proposed by ……………..
a) Allen and Kennen
b) Alejandra and Kennen
c) Allen and Kurian
d) St. Frances
3. Who proposed the theory of monetary approach of flexible?
a) Frenkel
b) Alejandra and Kennen
c) Allen and Kurian
c) St. Frances
4. Currency that facilitates the payment to other countries to complete the
transactions is called ………………………
a) Foreign exchange
b) Money exchange
c) Currency exchange
d) All the above
5. Which of the following deals with short term financing?
a) Working capital management
b) Cash Budget
c) Liquidity
d) All the above

12.9 Questions and Exercises Notes

1. What is FEMA?
2. What is Foreign Exchange?
3. What is Exchange Rate?
4. What is Regulation and Management of Foreign Exchange?
5. What is Contravention?
6. What is Penalty?
7. What is Adjudication?
8. What is Appeal?
9. What is Directorate of Enforcement?

1. Give an introduction to FEMA.
2. Discuss about Regulation and Management of Foreign Exchange.
3. Explain in details about Contravention and Penalties.
4. Discuss about Adjudication and Appeal under FEMA.
5. Explain about Directorate of Enforcement.
12.10 Key Terms

 Security: “Security” means shares, stocks, bonds and debentures, Govt.
securities as defined in the Public debt Act, 1944, Savings certificate Act, 1959
applies, deposit receipts in respect of deposits or securities and units of the
Unit Trust of India established under the Unit Trust of India Act, 1963 or of any
mutual fund and includes certificates of title to securities but does not include
Bills of Exchange or Promissory notes or any other instruments which may be
notified by the Reserve Bank as security for the purposes of this Act.
 Service: Service means service of any description which is made available to
potential users and includes the provision of facilities in connection with banking,
financing, insurance, medical assistance, legal assistance, chit fund, real
estate, transport, processing supply of electrical or other energy, boarding or
lodging or both entertainment, amusement or the purveying of news or other
information, but does not include the rendering of any service free of charge
or under a contract of personal service.
 Authorized Person: Authorized Person mean an authorised dealer, money
changer, off share banking unit or any other person for the time being authorised
under sub–section (1) of section (10) to deal in foreign exchanged or foreign
section securities;
 Current account transaction: Current account transaction means a transaction
other than a capital account transaction and without prejudice to the generality
of the foregoing such transactions.
 Capital account transaction: Capital account transaction means a transaction
which alters the assets or liabilities, including contingent liabilities, in India of
persons resident outside India of persons resident in India of assets or liabilities

Notes in India of persons resident outside India, and includes transactions referred to
in sub–section (3) of section 6.
 Foreign security: It means any security, in the form of shares, stocks bonds,
debentures or any other instrument denominated or expressed in foreign
currency and includes securities expressed in foreign currency, but where
redemption or any form of return such as interest or dividends is payable in
Indian currency.
 Civil Imprisonment for failure to deposit penalty amount: Subject to the
provisions of section 19 (2), if any person fails to make full payment of the penalty
imposed on him under section 13 within a period of 90 days from the date on
which the notice for payment of such penalty is served on him, he shall be liable
to civil imprisonment.
 Warrant for Arrest if defaulter likely to Abscond: Notwithstanding anything
contained in sub-section (1), a warrant for the arrest of the defaulter may be
issued by the Adjudicating Authority if the Adjudicating Authority is satisfied,
by affidavit or otherwise, that with the object or effect of delaying the execution
of the certificate the defaulter is likely to abscond or leave the local limits of
the jurisdiction of the Adjudicating Authority.
 Appeal to Appellate Tribunal: Section 18 of the Act provides that the Central
Government shall, by notification, establish an Appellate Tribunal to be known
as the Appellate Tribunal for Foreign Exchange to hear appeals against the
orders of the Adjudicating Authorities and the Special Director (Appeals) under
this Act.
 Directorate of Enforcement: The Directorate of Enforcement was established
in the year 1956 with its Headquarters at New Delhi. It is responsible for
enforcement of the Foreign Exchange Management Act, 1999 (FEMA) and
certain provisions under the Prevention of Money Laundering Act. Work relating
to investigation and prosecution of cases under the PML has been entrusted
to Enforcement Directorate.

1. Foreign exchange
2. Netting
3. Bill brokers
4. Acceptance house
5. Central
6. Exchange rate
II. True or False

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


1. [d]
2. [a]
3. [a]
4. [a]
5. [a]
12.12 Case Study

The Reserve Bank of India (RBI) has asked the Anil Dhirubhai Ambani Group firm,
Reliance Infrastructure (earlier, Reliance Energy), to pay just under Rs 125 crore as
compounding fees for parking its foreign loan proceeds worth $300 million with its mutual
fund in India for 315 days, and then repatriating the money abroad to a joint venture
company. These actions, according to an RBI order, violated various provisions of the
Foreign Exchange Management Act (FEMA).
In its order, RBI said Reliance Energy raised a $360-million ECB on July 25, 2006,
for investment in infrastructure projects in India. The ECB proceeds were drawn down on
November 15, 2006, and temporarily parked overseas in liquid assets. On April 26, 2007,
Reliance Energy repatriated the ECB proceeds worth $300 million to India while the
balance remained abroad in liquid assets.
It then invested these funds in Reliance Mutual Fund Growth Option and Reliance
Floating Rate Fund Growth Option on April 26, 2007. On the following day, i.e., on April
27 2007, the entire money was withdrawn and invested in Reliance Fixed Horizon Fund
III Annual Plan series V. On March 5, 2008, Reliance Energy repatriated $500 million
(which included the ECB proceeds repatriated on April 26, 2007, and invested in capital
market instruments) for investment in capital of an overseas joint venture called Gourock
Ventures based in British Virgin Islands. RBI said, under FEMA guidelines issued in 2000,
a borrower is required to keep ECB funds parked abroad till the actual requirement in India.
Further, the central bank said a borrower cannot utilise the funds for any other purpose.
Questions:
1. How the provisions of the Foreign Exchange Management Act (FEMA) work?
2. Do you think the FEMA can control over the funds in Reliance Mutual Fund
Growth Option?


Notes 12. D.J. Hewit Control of Delegated legislation Being a Study of Ultra Vires 1953
12.14 Bibliography
Press.
Kluwer Law Intl
Press.

18. Lowry, J. P., Reisberg, A. and Pettet, B. G. (2012a) ‘Chapter 4 - entrenchment Notes
Pearson.


Notes
Unit 13: The Company’s Act
Structure:
13.1 Introduction
13.2 Formation of a Company
13.3 Memorandum of Association
13.4 Articles of Association
13.5 General Meetings and Proceedings
13.6 Auditor
13.7 Winding up
13.8 Summary
13.11 Key Terms
13.13 Case Study
13.15 Bibliography
Objectives

 Concept of Companies Act 2013
 Salient features of the Companies Act 2013
 Formation of a Company
 Memorandum of Association
 Articles of Association
 General Meetings and Proceedings
 Auditor
 Winding up

The Company's Act 259
Company is a voluntary association of persons formed for the purpose of doing

business having a distinct name and limited liability. It is a juristic person having a separate
legal entity distinct from the members who constitute it, capable of rights and duties of
its own and endowed with the potential of perpetual succession.
It is an association or collection of individual real persons and/or other companies,
who each provide some form of capital. This group has a common purpose or focus and
an aim of gaining profits. The group or association of persons can be made to exist in
law and then a Company is itself considered a “legal person”. The name company arose
because, at least originally, it represented or was owned by more than one real or legal
person.
A joint-stock company is a type of corporation or partnership involving two or more
individuals that own shares of stock in the company. Certificates of ownership are issued
by the company in return for each financial contribution and the shareholders are free to
transfer their ownership interest at any time by selling their shareholding to others.
In modern corporate law, the existence of a joint-stock company is often synonymous
with incorporation and limited liability. As a consequence joint-stock companies are
commonly known as corporations or limited companies.
The company is managed on behalf of the shareholders by a Board of Directors,
elected at an Annual General Meeting. The shareholders also voted to accept or reject
an Annual Report and audited set of accounts. Individual shareholders can sometimes
stand for directorships within the company, should a vacancy occur, but this is uncommon.
The shareholders are usually liable for any of the company debts that exceed the
company’s ability to pay. However, the limit of their liability only extends to the face value
of their shareholding.
Companies Act, 2013
The Companies Act 2013 is an Act of the Parliament of India on Indian company
law which regulates incorporation of a company, responsibilities of a company, directors,
dissolution of a company. The 2013 Act is divided into 29 chapters containing 470 sections
as against 658 Sections in the Companies Act, 1956 and has 7 schedules. The Act has
replaced The Companies Act, 1956 (in a partial manner) after receiving the assent of the
President of India on 29 August 2013. The Act came into force on 12 September 2013
with few changes like earlier private companies maximum number of member was 50 and
now it will be 200. A new term of "one person company" is included in this act that will
be a private company and with only 98 provisions of the Act notified. A total of another
184 sections came into force from 1 April 2014.
Meaning of Joint Stock Company
Joint Stock Company refers to a company having a joint stock or capital that is divided
into units of ownership interest, such as shares which may be transferred without consent
of the other shareholders.

Notes Definitions of Joint Stock Company
According to H.L. Haney, “A Joint Stock Company is a voluntary association of

individuals for profit, having its capital divided into transferable shares the ownership of
which is the condition of membership”.
Lindley’s L. J. defines a company as “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 (i.e., for a common purpose), and who share the profit or loss (as the
case may be) arising therefrom.
Salient features of the Companies Act 2013

1. Class action suits for Shareholders: The Companies Act 2013 has introduced
new concept of class action suits with a view of making shareholders and other
stakeholders, more informed and knowledgeable about their rights.
2. More power for Shareholders: The Companies Act 2013 provides for
approvals from shareholders on various significant transactions.
3. Women empowerment in the corporate sector: The Companies Act 2013
stipulates appointment of at least one woman Director on the Board (for certain
class of companies).
4. Corporate Social Responsibility: The Companies Act 2013 stipulates certain
class of Companies to spend a certain amount of money every year on activities/
initiatives reflecting Corporate Social Responsibility.
5. National Company Law Tribunal: The Companies Act 2013 introduced
National Company Law Tribunal and the National Company Law Appellate
Tribunal to replace the Company Law Board and Board for Industrial and
Financial Reconstruction. They would relieve the Courts of their burden while
simultaneously providing specialized justice.
6. Fast Track Mergers: The Companies Act 2013 proposes a fast track and
simplified procedure for mergers and amalgamations of certain class of
companies such as holding and subsidiary, and small companies after obtaining
approval of the Indian government.
7. Cross Border Mergers: The Companies Act 2013 permits cross border
mergers, both ways; a foreign company merging with an India Company and
vice versa but with prior permission of RBI.
8. Prohibition on forward dealings and insider trading: The Companies Act
2013 prohibits directors and key managerial personnel from purchasing call and
put options of shares of the company, if such person is reasonably expected
to have access to price-sensitive information.
9. Increase in number of Shareholders: The Companies Act 2013 increased
the number of maximum shareholders in a private company from 50 to 200.
10. Limit on Maximum Partners: The maximum number of persons/partners in
any association/partnership may be upto such number as may be prescribed
but not exceeding one hundred. This restriction will not apply to an association
or partnership, constituted by professionals like lawyer, chartered accountants,
company secretaries, etc. who are governed by their special laws. Under the
Companies Act 1956, there was a limit of maximum 20 persons/partners and
there was no exemption granted to the professionals.
11. One Person Company: The Companies Act 2013 provides new form of private
company, i.e., one person company. It may have only one director and one
shareholder. The Companies Act 1956 requires minimum two shareholders and Notes
two directors in case of a private company.
12. Entrenchment in Articles of Association: The Companies Act 2013 provides
for entrenchment (apply extra legal safeguards) of articles of association have
been introduced.
13. Electronic Mode: The Companies Act 2013 proposed E-Governance for various
company processes like maintenance and inspection of documents in electronic
form, option of keeping of books of accounts in electronic form, financial
statements to be placed on company’s website, etc.
14. Indian Resident as Director: 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.
15. Independent Directors: The Companies Act 2013 provides that all listed
companies should have at least one-third of the Board as independent directors.
Such other class or classes of public companies as may be prescribed by the
Central Government shall also be required to appoint independent directors. No
independent director shall hold office for more than two consecutive terms of
five years.
16. Serving Notice of Board Meeting: The Companies Act 2013 requires at least
seven days’ notice to call a board meeting. The notice may be sent by electronic
means to every director at his address registered with the company.
17. Duties of Director defined: Under the Companies Act 1956, a director had
fiduciary (legal or ethical relationship of trust)duties towards a company.
However, the Companies Act 2013 has defined the duties of a director.
18. Liability on Directors and Officers: The Companies Act 2013 does not restrict
an Indian company from indemnifying (compensate for harm or loss) its directors
and officers like the Companies Act 1956.
19. Rotation of Auditors: The Companies Act 2013 provides for rotation of auditors
and audit firms in case of publicly traded companies.
20. Prohibits Auditors from performing Non-Audit Services: The Companies
Act 2013 prohibits Auditors from performing non-audit services to the company
where they are auditor to ensure independence and accountability of auditor.
21. Rehabilitation and Liquidation Process: The entire rehabilitation and
liquidation process of the companies in financial crisis has been made time
bound under Companies Act 2013.
Advantages of Joint Stock Company
The advantages of a Joint Stock Company are:

1. Limited Liability: Shareholder’s liability is limited to the face value of the shares
held by them.The members are liable only to the extent of unpaid value of share.
If the shares are fully paid up then the member is not liable for any debts of
the company.
2. Continuity and Stability: A company has a long and stable life. Its existence
is not affected bydeath, insolvency or insanity of its members.
3. Professional Management: The company appoints experienced, competent
and experts to manage the business. Their services lead to managerial and
administrative efficiency and accuracy.

Notes 4. Large Capital: A company can collect huge capital for the business through
shares and debentures, public deposits; loans etc. due to huge capital the
company can conduct business on a large scale.
5. Economies of scale: As the company operates on a large scale it enjoys
economies in production,distribution, management and financing.
6. Bargaining Power: Compared to other forms of commercial organization a joint
stock company has strong bargaining power in buying as well as in selling of
goods because of its large scaleproduction.
7. Legal Status: The company enjoys a distinct legal entity separate from its
members. Being a legal creation it enjoys permanent existence.
8. Large Membership: A joint stock company (especially a public company) has
large number ofmembers. Large membership brings in large amount of funds
which can be invested in companies expansion and diversification.
9. Transferability of shares: Shares of a Joint Stock Company (especially public
companies) arefreely transferable. A member who wants to sell his shares can
easily do so in the stock market. This encourages the public and other to invest
in shares.
10. Employment: Joint Stock Company provides employment to a large number
of people directlyand indirectly. This leads to higher national income for the
country and higher standard of living for the people.
11. Government Revenue: Joint Stock Companies provides revenue to the
government in the form of taxes charged directly and indirectly.
12. Research and Development: Joint Stock Companies undertake R & D
continuously thus bringing about new and improved products which benefits
people.
13. Economic Development: Because of Joint Stock Companies there is all round
development oftrade, commerce and industry. The society in general gains the
benefit of the industrial development.
Disadvantages of Joint Stock Company
The disadvantages of a Joint Stock Company are:

1. Lacks Flexibility: The working of a Joint Stock Company is less flexible as
compared to other organizations. For every small thing they either have to follow
a detailed procedure or obtain sanctions from various authorities. This results
in lack of flexibility.
2. No Business secrecy: This form of organization lacks business secrecy
because it is compulsory for the company to publish accounts and other
records.
3. Excessive government regulation: The company is subject to excessive
government control. It has to follow the numerous provision of the Indian
Companies Act. This makes working difficult.
4. Difficult Formation: Formation of a Joint Stock Company is an expensive and
time consuming process as a number of legal formalities have to be undertaken
in order to register the company.
5. Delay in Decision Making: Due to excessive government control and a
democratic set up all decisions are taken in meetings and some decisions
require shareholder’s approval. All this leads to delay in decision making.

6. Lack of contact with customers: Due to large scale operations a company Notes
finds it difficult to maintain direct contact with its customers. This may lead
to poor sales promotion.
7. Lack of contact with employees: The top management may not have personal
contact with their employees. This may cause friction and disputes amongst
the management and workers which may affect the worker’s morale.
8. Conflicts of Interest: There may arise a conflict of interest amongst the various
parties (shareholders, management, workers etc.) in a joint stock company. This
conflicting interest undoubtedly harms the company’s interest.
9. Not suitable for all types of business: This type of an organization is not
suitable for business where personalized services are required.
10. Exploitation of shareholders: Sometimes the Board of Directors may
misappropriate the funds and mislead the shareholders by window dress report.
The directors may even manipulate the share trading on the stock exchange.
Thus shareholders can be exploited by corrupt directors.
13.2 Formation of a Company

Various stages of formation of company are as follows:
Stage-1: Promotion
Promotion of a business simply refers to all those activities that are required to be
undertaken to establish a new business unit for manufacturing or distribution of any product
or provide any service to the people. It starts with conceiving an idea of business or
discovers an opportunity for doing a business, assess its feasibility and then take the
necessary steps to launch the business unit. This involves ascertaining as to whether
all the basic requirements such as land, building, raw material, machine, equipment etc.
are available or not. If they are available one can assemble them, arrange the necessary
funds and set up the business unit to give shape to the initial idea of establishing the
business.
Stage-2: Incorporation
A sole proprietorship or partnership firm can be formed to carry out its business even
without any registration. But a joint stock company cannot be formed or permitted to run
its business without registration. In fact, a company comes into existence only when it
is registered with the Registrar of Companies.
Stage-3: Raising Capital or Subscription of Capital
After the company is incorporated, the next stage is to raise the necessary capital.
In case of a private limited company, funds are raised from the members or through
arrangement from banks and other sources. In case of a public limited company the share
capital has to be raised from the public.
Stage-4: Commencement of Business
In case of a private limited company, it can immediately start its business as soon
as it is registered. In case of public limited company a certificate, known as certificate
of commencement of businesses must be obtained from the Registrar of Companies before
starting its operation. For this purpose it has to file a statement with the following
declarations to the Registrar of Companies.

Notes (a) That a prospectus has been filed with the Registrar of Companies.
(b) That the shares have been allotted up to the amount of the minimum
subscription.
13.3 Memorandum of Association

The Memorandum of Association is the principal document in the formation of a
company. It is called the charter of the company. It contains the fundamental conditions
upon which the company is allowed to be incorporated or registered. It defines the
limitations of the powers of the company. The purpose of memorandum is to enable the
shareholders, creditors and those who deal with the company to know what its permitted
range of activities or operations is. It defines the relationship of the company with the
outside world.
Meaning of Memorandum of Association
Memorandum of Association is a document that regulates a company’s external

activities and must be drawn up on the formation of a registered or incorporated company.
The memorandum of association gives the company’s name, names of its members
(shareholders) and number of shares held by them and location of its registered office.
Clauses of the Memorandum of Association
The Memorandum of Association usually contains the following six clauses:

(a) Name Clause: It contains the name by which the company will be established.
As you know, the approval of the proposed name is taken in advance from the
Registrar of the companies.
(b) Situation Clause: It contains the name of the state in which the registered
office of the company is or will be situated. The exact address of the company’s
registered office may be communicated within 30 days of its incorporation to
the Registrar of Companies.
(c) Objects Clause: It contains detailed description of the objects and rights of
the company, for which it is being established. A company can undertake only
those activities which are mentioned in the objects clause of its memorandum.
(d) Liability Clause: It contains financial limit up to which the shareholders are
liable to pay off to the outsiders on the event of the company being dissolved
or closed down.
(e) Capital Clause: It contains the proposed authorized capital of the company.
It gives the classification of the authorized capital into various types of shares,
(like equity and preference shares) with their numbers and nominal value. A
company is not allowed to raise more capital than the amount mentioned as
its authorized capital. However, the company is permitted to alter this clause
as per the guidelines prescribed by the companies Act.
(f) Subscription Clause: It contains the name and address of at least seven
members in case of public limited company and two members in case of a
private limited company, who agree to associate or join hands to get the
undertaking registered as a company. It contains a declaration by persons who
are desirous of being formed into and agree to subscribe to the number of shares
mentioned against their names.

13.4 Articles of Association Notes

The Articles of Association of a company contains the various rules and regulations
for the day to day management of the company. These rules are also called the bye-
laws. It covers various rights and powers of its members, duties of the management and
the manner in which they can be changed. It defines the relationship between the company
and its members and also among the members themselves. The rules given in the AOA
must be in conformity with the Memorandum of Association.
Meaning of Articles of Association
Article of Association is a document that specifies the regulations for a company’s

operations. The articles of association define the company’s purpose and lays out how
tasks are to be accomplished within the organization, including the process for appointing
directors and how financial records will be handled.
Articles of association often identify the manner in which a company will issue stock
shares, pay dividends and audit financial records and power of voting rights.
Contents of Articles of Association
The contents of Articles of Association are as follows:

1. Share capital, rights of shareholders, variation of these rights, payment of
underwriting commission.
2. Lien on shares.
3. Calls on shares.
4. Transfer of shares.
5. Transmission of shares.
6. Forfeiture of shares.
7. Conversion of shares into stock.
8. General meetings and proceedings thereof.
9. Directors, their appointment, remuneration, qualifications, powers.
10. Dividend and Reserves.
11. Accounts, audit and borrowing powers.
12. Capitalisation of profits.
Alteration of Articles of Association
The articles of association of a Company can be altered at any time subject to the
following conditions:
(i) The alteration must not be inconsistent with (i.e., against) the Memorandum
of Association, the Companies Act and any other law of the country.
(ii) The alteration must not constitute a fraud on the minority of shareholders. It
must be made bonafide for the benefit of the Company as a whole.
(iii) The alteration must not result in breach of contract with outsiders.
(iv) The alteration must be made by passing a special resolution.
(v) A copy of the special resolution must be filed with the registrar within 30 days
of passing the special resolution.

Notes (vi) An altered or revised printed copy of the Article of Association must be filed
with the registrar within 3 months of passing the special resolution.
13.5 General Meetings and Proceedings

Meaning of Meeting
Meeting refers to a formal or informal deliberative assembly of individuals called to
debate certain issues and problems, and to take decisions. Formal meetings are held
at definite times, at a definite place and usually for a definite duration to follow an agreed
upon agenda. It is a gathering of two or more persons who come together for important
discussion and decision on lawful matters.
Definition of Meeting
Meeting can be defined as, “An official gathering to concerned persons who come
together in required number, in order to discuss and arrive at decisions, required for the
functioning of an organization”.
Requisites of a Valid Meeting
The following conditions must be satisfied for a meeting to be called a valid meeting:
1. Proper authority: The proper authority to convene a general meeting of a
company is Board of Directors who should pass a resolution to call the meeting,
at a duly convened Board meeting.
2. Notice of meeting: Proper notice of the meeting should be given to the
members by giving at least 21 days notice in writing to the members.
3. Quorum of meeting: The quorum is generally fixed by the Articles. Quorum
means the minimum number of members who must be present in order to
constitute a meeting and transact business thereat. If the quorum is not present
there is no meeting and the proceedings held thereat are invalid.
4. Chairman of meeting: A chairman is necessary to conduct a meeting.
5. Minutes of meeting: Every company must keep a record of all proceedings
of every meeting.
Essentials for a Meeting
The following are essential for any valid meeting to be recognized as such by law:
1. Notice
Notice is a legal communication about the day, date, time and venue of the meeting.
Under Company law, there should be a 21 days clear notice to hold a meeting of the
members of the company, whereas a seven-day notice is required to hold a meeting of
the board of directors. In the case of joint holders, notice is sent to the address of the
first joint holder. The company is not obliged to send notices to other joint holders. Under
certain circumstances, the members may decide for a notice of less than 21 days also.
The onus on the company is to send the notice, (normally by ordinary post). It is not
necessary for the company to ensure that the same is received by the member.
2. Agenda
Agenda refers to the business to be transacted at the meeting. In the case of meeting
of members, there would be a few matters to be discussed. Therefore, the agenda is built
into the notice itself.

The agenda for a meeting of shareholders could be ordinary business or special Notes
business. The agenda for an annual general meeting is well set. The agenda for other
meetings is to be drafted to cover the points to be discussed. A note ‘any other item
with the permission of the chair’ is added to permit taking up any last-minute inclusions.
But in the case of meetings of board of directors, there could be several items to be
deliberated upon. Therefore, a separate note containing the details of business to be
transacted (the agenda) is sent, along with the notice of meeting, to each of the directors
at the address available with the company. To apprise the directors of the deliberations,
support papers, notes and briefs, are also sent with the notice.
3. Quorum
Quorum refers to the minimum number of members who must be present at a meeting
in order to constitute a valid meeting. A meeting without the minimum quorum is invalid
and decisions taken at such a meeting are not binding. The articles of a company may
provide for a quorum without which a meeting will be construed to be invalid. Unless the
articles of a company provide for larger quorum, 5 members personally present (not by
proxy) in the case of a public company and 2 members personally present (not by proxy)
in the case of a private company shall be the quorum for a general meeting of a company.
4. Proxy
Where a member is not able to personally attend a meeting, he can depute another
person to attend the meeting on his behalf. The member is required to fill in a form giving
the particulars of his share holding and of the proxy. Proxy forms are to be deposited
with the company sufficiently in advance before the commencement of the meeting. These
proxies have restricted rights and are not to be counted for quorum.
5. Chairman
The chairman is the head of the meeting. Generally, the chairman of the Board of
Directors is the Chairman of the meeting. Unless the articles otherwise provide, the
members present in person at the meeting elect one of themselves to be the chairman
thereof on a show of the hands. If there is no Chairman or he is not present within 15
minutes after the appointed time of the meeting or is unwilling to act as chairman of the
meeting, the directors present may elect one among themselves to be the chairman of
the meeting. If, however no director is willing to act as chairman or if no director is present
within 15 minutes after the appointed time of the meeting, the members present should
choose one among themselves to be chairman of the meeting. If, after the election of a
chairman on a show of hands, poll is demanded and taken and a different person is elected
as chairman, then that person will be the chairman for the rest of the meeting.
6. Voting and Demand for Poll
Initially, matters are decided at a general meeting by a show of hands. If the majority
of the hands raise their hands in favour of a particular resolution, then unless a poll is
demanded, it is taken as passed. Voting by a show of hands operates on the principle
of “One Member-One Vote”. However, since the fundamental voting principle in a company
is “One Share-One Vote”, if a poll is demanded, voting takes place by a poll. Before or
on declaration of the result of the voting on any resolution on a show of hands, the chairman
may order of his own motion that a poll be taken. However, when a demand for poll is
made, he must order the poll be taken. The chairman may order a poll when a resolution
proposed by the Board is lost on the show of hands or if he is of the opinion that the
decision taken on the show of hands is likely to be reversed by poll. When a poll is taken,
The decision arrived by poll is final and the decision on the show of hands has no effect.
A poll is allowed only if the prescribed number of members demands a poll.

Notes 7. Amendment
Amendment means any modification to a motion before it is put to vote for adoption.
Amendment may be proposed by any member who has not already spoken on the main
motion or has not previously moved an amendment thereto. There can be an amendment
to an amendment motion also. A motion must be in writing and signed by the mover and
put to the vote of the meeting by the chairman. An amendment must not raise any question
already decided upon at the same meeting and must be relevant to the main motion which
it seeks to amend. The chairman has the discretion to accept or reject an amendment
on various grounds such as inconsistency, redundancy, irrelevance, etc. If the amendment
is adopted on a vote by the members, it is incorporated in the body of the main motion.
The altered motion is then discussed and put to vote and if passed, becomes a resolution.
8. Adjournment
Adjournment means suspending the proceedings of a meeting for the time being so
that the meeting may be continued at a later date and time fixed in that meeting itself
at the time of such adjournment or to decide later on. Only the business not finished at
the original meeting can be transacted at the adjourned meeting.
Guide for making an effective Minutes
The following is a guide for making this task easier:

i) Make sure that all of the essential elements are noted, such as type of meeting,
name of the organization, date and time, name of the chair or facilitator, main
topics and the time of adjournment. For formal and corporate meetings include
approval of previous minutes, and all resolutions.
ii) Prepare an outline based on the agenda ahead of time, and leave plenty of white
space for notes. By having the topics already written down, you can jump right
on to a new topic without pause.
iii) Prepare a list of expected attendees and check off the names as people enter
the room. Or, you can pass around an attendance sheet for everyone to sign
as the meeting starts.
iv) To be sure about who said what, make a map of the seating arrangement, and
make sure to ask for introductions of unfamiliar people.
v) Don’t make the mistake of recording every single comment, but concentrate
on getting the gist of the discussion and taking enough notes to summarize
it later. Remember that minutes are the official record of what happened, not
what was said, at a meeting.
vi) Use whatever device is comfortable for you, a notepad, a laptop computer, a
tape recorder, a steno pad, shorthand. Many people routinely record important
meetings as a backup to their notes.
vii) Be prepared! Study the issues to be discussed and ask a lot of questions ahead
of time. If you have to fumble for understanding while you are making your notes,
they won’t make any sense to you later.
viii) Don’t wait too long to type up the minutes, and be sure to have them approved
by the chair or facilitator before distributing them to the attendees.
ix) Don’t be intimidated, you may be called upon many times to take minutes of
meetings, and the ability to produce concise, coherent minutes is widely
admired and valued.

Minutes of Proceedings of Meeting Notes

Every company must keep minutes of the proceedings of general meetings and of
the meetings of board of directors and its committees. The minutes are a record of the
discussions made at the meeting and the final decisions taken thereat.
Every company must keep minutes containing details of all proceedings at the
meetings. The pages of the minute books must be consecutively numbered and the
minutes must be recorded therein within 30 days of the meeting. They have to be written
directly on the numbered pages. Pasting or attaching of papers is not allowed. Each page
of every such minute’s books must be initialed or signed and last page of the record of
proceedings of each meeting in such books must be dated and signed by:
i) In the case of the meeting of the Board of directors or committee thereof, by
the chairman of that meeting or that of the succeeding meeting.
ii) In the case of a general meeting, by the chairman of the same meeting within
the aforesaid 30 days or in the event of the death or inability of that chairman
within the period, by a director duly authorised by the Board of directors for
the purpose.
Annual General Meeting (AGM)
An annual general meeting is a meeting that official bodies, and associations involving
the public including companies with shareholders, are often required by law. An annual
meeting called by the directors of a company that allow shareholders to stay informed
and involved with company decisions and workings.
Annual general meeting must be held by every type of company, public or private,
limited by shares or by guarantee, with or without share capital or unlimited company,
once a year. Every company must in each year hold an annual general meeting. Not more
than 15 months must elapse between two annual general meetings. However, a company
may hold its first annual general meeting within 18 months from the date of its
incorporation. In such a case, it need not hold any annual general meeting in the year
of its incorporation as well as in the following year only.
In the case there is any difficulty in holding any annual general meeting (except the
first annual meeting), the Registrar may, for any special reasons shown, grant an extension
of time for holding the meeting by a period not exceeding 3 months provided the application
for the purpose is made before the due date of the annual general meeting. However,
generally delay in the completion of the audit of the annual accounts of the company is
not treated as “special reason” for granting extension of time for holding its annual general
meeting. Generally, in such circumstances, an AGM is convened and held at the proper
time all matters other than the accounts are discussed. All other resolutions are passed
and the meeting is adjourned to a later date for discussing the final accounts of the
company. However, the adjourned meeting must be held before the last day of holding
the AGM.
Extraordinary General Meeting
An Extraordinary General Meeting, commonly abbreviated as EGM, is a meeting of

members of an organization, shareholders of a company, or employees of an official body,
which occurs at an irregular time.
Every general meeting (i.e. meeting of members of the company) other than the
statutory meeting and the annual general meeting or any adjournment thereof, is an

Notes extraordinary general meeting. Such meeting is usually called by the Board of Directors
for some urgent business which cannot wait to be decided till the next AGM. Every
business transacted at such a meeting is special business. An explanatory statement
of the special business must also accompany the notice calling the meeting. The notice
should also give the nature and extent of the interest of the directors or manager in the
special business, as also the extent of the shareholding interest in the company of every
such person. In case approval of any document has to be done by the members at the
meeting, the notice state that the document would be available for inspection at the
Registered Office of the company during the specified dates and timings.
The Articles of Association of a Company may contain provisions for convening an
extraordinary general meeting. It may provide that “the board may, whenever it thinks fit,
call an extraordinary general meeting” or it may provide that “if at any time there are not
within India, directors capable of acting who are sufficient in number to form a quorum,
any director or any two members of the company may call an extraordinary general
meeting”.
Extraordinary general meeting on requisition
The members of a company have the right to require the calling of an extraordinary
general meeting by the directors. The board of directors of a company must call an
extraordinary general meeting if required to do so by the following number of members:
i) Members of the company holding at the date of making the demand for an EGM
not less than one-tenth of such of the voting rights in regard to the matter to
be discussed at the meeting ; or
ii) If the company has no share capital, the members representing not less than
one-tenth of the total voting rights at that date in regard to the said matter.
The requisition must state the objects of the meetings and must be signed by the
requisitioning members. The requisition must be deposited at the company’s registered
office. When the requisition is deposited at the registered office of the company, the
directors should within 21 days, move to call a meeting and the meeting should be actually
be held within 45 days from the date of the lodgment of the requisition. If the directors
fail to call and hold the meeting as aforesaid, the requisitionists or any of them meeting
the requirements at (a) or (b) above, as the case may be, may themselves proceed to
call meeting within 3 months from the date of the requisition, and claim the necessary
expenses from the company. The company can make good this sum from the directors
in default. At such an EGM, any business which is not covered by the agenda mentioned
in the notice of the meeting cannot be voted upon.
13.6 Auditor
An auditor is an official whose job it is to carefully check the accuracy of business
records. An auditor might be either an internal auditor, external auditor or independent
auditor for accounting firms in the public or private sector. Auditors can also work for many
different entities, such as the IRS or a state government.
Auditors assess financial operations and ensure organizations run efficiently. Their
job is to follow cash flow from beginning to end and ensure an organization’s funds are
accounted for properly.
Auditors typically have a bachelor’s degree in finance, accounting or business
administration. Many earn graduate degrees in finance or accounting. Professional

designations such as certified public accountant (CPA), certified internal auditor (CIA), Notes
certified government auditing professional (CGAP), certified financial services auditor
(CFSA) or certification in control self-assessment (CCSA) increase job prospects and
income.
Public auditors perform accounting, tax and consulting work for corporations,
governments and individuals. These auditors work with tax forms and balance sheet
statements that companies provide to potential investors. For example, some public
accountants advise corporations on tax advantages of certain business decisions, or
prepare individual income tax returns. Many public auditors are CPAs who work for public
accounting firms or own their own businesses.
Qualities of an Auditor
Following are the essential qualities of an auditor:

1. Auditing
An auditor's knowledge of auditing must be up to date. He must know the techniques
of auditing. He must have the knowledge of other subjects relating to auditing.
2. Accounting Knowledge
The auditor should be at home in all the management accounting cost accounting
and general accounting.
3. Knowledge of Business Law
An auditor must possess a considerable knowledge of business law. He must be
aware about his duties and rights given by law.
4. Professionally Competent
It is a basic quality of an auditor. He must have a complete and thorough knowledge
of the accountancy. To understand the accounting details he can apply his knowledge
and skill. It is only possible if he has a sound background in accountancy and he is
professionally competent.
5. Honest
Justice Hindley says "An auditor must be honest. He must not certify what he does
not believe to be true and he must take a reasonable care and skill before he believes
that what he certifies is true.
6. Knowledge of Taxation Law
Various types’ taxes are imposed by the government on the business. For example
in some countries Income tax, sales tax, gift tax is imposed. So if auditor has not a
considerable knowledge about the taxation. He cannot perform his services properly.
7. Computer Expert
The auditor must be able to operate the computer. Today the business organizations
are using computers. If auditor does not know to use computer, he cannot work efficiently.
8. Knowledge of management System
The auditor must have the knowledge of management information system. It helps
him to understand the internal set up of the business concern and its operation.
9. Preparation of Budget
The auditor must know that how the organization prepares the budget. If he does
not know then it will be not possible for him to audit the various heads of the budget.
Notes 10. Intelligent

It is also important quality of an auditor that he should be intelligent. He must be
able to understand the technical details of any business.
11. Tactful
In a particular situation auditor should deal tactfully. He should ask the questions
in such a manner that it does not show about his ignorance or weakness.
12. Maintain Secrecy
The auditor’s nature of work is confidential. He should maintain secrecy from others
about the affairs of his client.
13. Patience
There should be a quality of patience in the auditor. Before signing on any paper
he should check the evidence and then sign it. He never checks the papers in hurry.
14. Critical Attitude
It is also very essential quality of the auditor. He should examine the statements
critically. He should ask the various questions from the client and try to find contradictions.
15. Bold and Courageous
Auditor should be bold and courageous person. He should not be influenced by any
authority. He should possess the courage to face the difference of opinion between him
and client on any issue.
16. Courteous
It is an important quality which the auditor should possess. His attitude towards the
staff of client should be very humble and polite. He should also stress on his own staff
to be courteous with the client.
17. Independent
The auditor should be impartial. He should not have such relations with the
organization which may affect his independence. He should give his opinion independently.
18. Common Sense
The auditor must have the quality of common sense and judgement. He may be able
to assess the value of depreciation and bad debts.
Appointment of Auditor
Appointment of First Auditors

i) A Board meeting should be conveyed within one month of the date of registration
of the Company and a Resolution should be passed appointing and fixing
remuneration of the first Auditors who shall hold office until the conclusion of
first Annual General Meeting (AGM).
ii) The person being appointed as the first Auditors of the Company should not
hold any security carrying voting right of that Company. If the Board fails to
appoint first Auditors within one month after the registration then a General
Meeting should be held by issuing 21 days notice with relevant Explanatory
statement and Auditor can be appointed by passing ordinary resolution.
iii) In case of listed Public Limited Company for such appointment of Auditors in
General Meeting, 3 copies of the notice and copy of the proceedings of the

General Meeting should be forwarded promptly to the Stock Exchange where Notes
such shares of the Company are listed.
Appointment of Retiring Auditors

i) An Auditor is normally being reappointed at the A.G.M. Therefore, the Company
should obtain a written certificate from the Auditor that the re-appointment, if
made, will be in accordance with the limits specified in Section 224(1B).
ii) Though the limits as specified in section 224(1B) does not apply to a Private
Company after Companies (Amendment) Act, 2000, as per Institute’s Code of
Ethics the limit continues to apply, which should be borne in mind while
accepting the audit.
iii) The Company convening the AGM, (after issuing notices in writing at least 21
days before the meeting along with the Explanatory statement), should pass
ordinary resolution in the A.G.M. appointing the retiring Auditor as Auditor of
the Company, who shall be holding the office till the conclusion of next A.G.M.
and the resolution should also contain details of his remuneration.
iv) Three copies of the notice and proceedings of A.G.M. should be sent to the
Stock Exchange, where such shares of the Company are listed.
v) Instead of Ordinary Resolution, a Special Resolution by 3/4th majority is required
to be passed in case of a Company in which not less than 25% of the subscribed
share capital is held singly or in any combination by Government Company/
Central Government/State Government, Nationalised Banks/Insurance Company/
Financial Institution, etc. [Section 224A(1)]
vi) The Company should intimate the Auditor about his appointment within 7 days
of the passing of the Resolution appointing him.
vii) The Auditor should inform the Registrar of Companies in Form No. 23B within
one month of the receipt of the intimation from the Company that he has
accepted or refused to accept his appointment.
Appointment of Branch Auditor

i) The accounts of the branch office of a Company, if any, is required to be audited
by the Company’s auditor appointed u/s. 224 or by a person qualified for
appointment as auditor u/s. 226. Where the branch office is situated outside
India the accounts to be audited either by the Company’s auditor or by an
accountant duly qualified to act as an auditor in accordance with the laws of
that country. The shareholders may authorise the Board to appoint the branch
auditors in consultation with the Company’s auditors. However the Central
Government is empowered to make such rules as it may deem fit for the matters
specified in relation to the branch auditors.
ii) Notwithstanding that the accounts of the branch are audited by a person other
than the Company’s auditor, the Company’s auditor shall have the right to visit
the branch and have access to the book and accounts and vouchers of the
Company. However, in case of a banking Company having a branch outside
India, the Company’s auditor may have right to access of copies and extracts
of the books of account.
iii) The branch auditors shall have the same powers and duties as that of
Company’s auditors. The branch auditor shall forward his report to the
Company’s auditors.

Notes Rights of Company Auditor
According to section 227 (1) of the Companies Act, 1956, a company auditor has
the following rights:
1. Right of Access to Books of Accounts
Every auditor of a Company has a right of access at all times to the books of accounts
and vouchers of the company whether kept at the head office of the company or elsewhere.
Thus, the auditor may consult all the books, vouchers and documents whenever he so
likes. This is his statutory right. He may pay a surprise visit without informing the Directors
in advance but in practice, the auditors inform the Directors before they pay their visits.
2. Right to obtain Information and Explanations
Auditor has a right to obtain from the Directors and officers of the company any
information and explanation as he thinks necessary for the performance of his duties as
an auditor. This is another important power in the hands of the auditor. He will, however,
decide as to which information or explanations he thinks necessary to obtain. It the
Directors or officers of the company refuse to supply some information on the ground that
in their opinion it is not necessary to furnish it, he has a right to mention the fact in his
report.
3. Right to Correct any Wrong Statement
The auditor is required to make a report to the members of the company on the
accounts examined by him and on every Balance Sheet and Profit and Loss Account
and on every other document declared by this Act to be part of or annexed to the Balance
Sheet or Profit and Loss Account which are laid before the company in General Meeting
during his tenure of office. The Directors have a duty to prepare them and present them
to the auditor.
The auditor cannot require but advise the Directors to amend their system of
maintaining accounts if it is faulty. If his suggestions are not carried out, he has a right
to refer the matter to the members. If the method of accounting is inadequate, he must
state the fact in his report that proper books of accounts have not been kept by the
company.
4. Right to visit Branches
According to section 228, if a company has a branch office, the accounts of the
office shall be audited by the company’s auditor appointed under section 224 or by a person
qualified for appointment as auditor of the company under section 226. Where the Branch
Accounts are not audited by a duly qualified auditor, the auditor has a right of access
at all time to the books, accounts and vouchers of the company and thus, may visit the
branch, if he deems it necessary.
5. Right to Signature on Audit Report
Under section 229, only the person appointed as auditor of the company, or where
a firm is so appointed, only a partner in the firm practicing in India, may sign the auditor’s
report, or sign or authenticate any other document of the company required by law to
be signed or authenticated by the auditor.
6. Right to receive Notice and other Communications relating to General Meeting
and attend them
Under section 231 an auditor of a company has a right to receive notices and other
communications relating to General Meeting in the same way as a member of the

company. He is also entitled to attend any General Meeting which he attends or any part Notes
of the business which concerns him as an auditor.
According to the power of the auditor, he may make any statement or explanation
with regard to the accounts as he may desire. He need not, however, answer any
questions.
Ordinarily, it is not necessary for the auditor to attend every General Meeting, but
it will be good for him to attend meetings in the following circumstances:
(a) When his report contains important qualifications directly affecting the
management, so that his remarks may not be misunderstood or misinterpreted.
(b) When he has received a notice from the company that someone else is going
to be proposed for appointment as auditor of the company at the Annual General
Meeting.
(c) When he has been specially asked by the management to be present.
7. Right of being indemnified
Under section 633, an auditor (being an officer of a company), has a right to be
indemnified out of the assets of the company against any liability incurred by him defending
himself against any civil and criminal proceedings by the company if it is proved that the
auditor has acted honestly or the judgement delivered is in his favour.
8. Right to have Legal and Technical Advice
He has a right to seek the opinion of the experts and, thus, take legal and technical
advice. This is necessary to give his opinion in his report. He has a right to receive his
remuneration provided he has completed the work which he undertook to do.
13.7 Winding up
Meaning of Winding Up
Winding up of a company is a process of putting an end to the life of a company.

It is a proceeding by means of which a company is dissolved and in the course of such
a dissolution its assets are collected, its debts are paid off out of the assets of the company
or from contributions by its members, if necessary. If any surplus is left, it is distributed
among the members in accordance with their rights.
Definition of Winding Up
The process of selling all the assets of a business, paying off creditors, distributing
any remaining assets to the principals or parent company, and then dissolving the
business. Winding up can refer to such a process either for a specific business line of
a corporation or to the dissolution of a corporation itself.
Modes of Winding Up
There are three modes of winding up of a company. These are:

(A) Compulsory winding up by the court.
(B) Voluntary winding up.
(C) Winding up under the supervision of the court.

Notes (A) Winding up by Court
A company may be wound up by an order of the court. This is called compulsory

winding up. Section 433 lays down the following grounds for the winding up of a company
by the court.
1. Special resolution of the company
If the company has by a special resolution resolved that it may be wound up by
the court. The power of the court in such a case is discretionary. The court may refuse
to order winding up where it is opposed to public or company’s interest.
2. Default in holding statutory meeting
If a company makes a default in delivering the statutory report to the registrar or
in holding the statutory meeting, the court may order winding up of the company either
on the petition of the register or on the petition of the contributory. The petition for winding
up must not be filed before the expiration of 14 days after the last day on which the statutory
meeting ought to have been held. However, the court may instead of making a winding
up order, direct the statutory report shall be delivered or that meeting shall be held.
3. Failure to commence or suspension of business
Where a company does not commence its business within a year from its
incorporation, or suspends its business for a whole year, the court may order for its winding
up. The power of the court is discretionary and will be exercised only where there is a
fair indication that the company has no intension to carry on the business. Where the
suspension of the business is temporary or can be satisfactorily accounted for, the court
will refuse to make an order. A company will not be wound up if it abandons one of its
several businesses, unless that business is the main object of the company.
(B) Voluntary Winding up
A company may, voluntary wind up its affairs, if it is unable to carry on its business
or if it was formed only for a limited purpose or if it is unable to meet its financial obligation
and etc. A company may voluntary wind up itself, under any of the two modes:
1. Members’ voluntary winding up
2. Creditors’ voluntary winding up
1. Members’ Voluntary Winding Up
Liquidation of a solvent firm by adoption of a resolution for voluntary winding up of
the business by its shareholders who also choose and appoint the liquidator. Since it
is not an insolvency procedure, it requires a statutory declaration of solvency by the firm's
board of directors Although the involvement of a court is not required, a qualified liquidator
must be appointed after the resolution. If it is discovered that the firm's assets will not
be sufficient to cover its debts, the unsecured creditors can take charge of the liquidation
process which is then termed a compulsory liquidation. Also called members' voluntary
winding up or just voluntary winding up.
Directors of the company shall call for a Board of Directors Meeting, and make a
declaration of winding up, accompanied by an affidavit, stating that;
The company has no debts to pay or
The company will repay it's debts if any, within 3 years from the commencement
of winding up, as specified in declaration (488).

(C) Winding up under the Supervision of the court Notes

Winding up subject to supervision of court, is different from "Winding up by court."?
Here the court only supervises the winding up procedure. Resolution for winding up is
passed by members in the general meeting. It is only for some specific reasons, that
court may supervise the winding up proceedings. The court may put up some special terms
and conditions also.
However, liberty is granted to creditors, contributories or other to apply to court for
some relief. (522)
The court may also appoint liquidators, in addition to already appointed, or remove
any such liquidator. The court may also appoint the official liquidator, as a liquidator to
fill up the vacancy.
Liquidator is entitled to do all such things and acts, as he thinks best in the interest
of company. He shall enjoy the same powers, as if the company is being wound-up
voluntarily.
The court also may exercise powers to enforce calls made by the liquidators, and
such other powers, as if an order has been made for winding up the company altogether
by court.
Dissolution by winding up by or under supervision of Court-

(1) The foregoing provisions of this Part of this Act shall have effect without
prejudice to the operation of this section or of any other enactment under which
societies can be wound up.
(2) A society may be dissolved by winding up, either voluntarily subject to the
supervision of the Court or by the Court, if the Court so orders, on the petition
of any member authorised byspecial resolution to present the petition on
behalf of the society.
(3) A society may be dissolved by winding up by the Court, if the Court so orders,
on the petition of any judgment creditor for a sum exceeding [5000].
(4) A society may be dissolved by winding up by the Court, if the Court so orders,
on the petition of the Registrar acting in the exercise of any power conferred
on him by any provision of this Act.
(5) Subject to the provisions of this Act and of any regulations made thereunder,
a society shall be deemed for the purposes of any winding up under this section
to be a company, and the provisions of the Companies Act 1955 relating to
the winding up of companies, so far as they are applicable and with the
necessary modifications, shall apply accordingly.
(6) Where in the exercise of any power conferred by this Act the Registrar presents
a petition for the winding up of a society under the Companies Act 1955, the
Court may, if it thinks fit, having regard to the interests of those members of
the society (if any) who were not responsible for the relevant default, and to
all the other circumstances, refuse to make an order for winding up, and may
make its refusal subject to any conditions.
(7) The conditions that the Court may impose under subsection (6) of this section,
or under section 250 of the Companies Act 1955 (which authorises the Court
to stay proceedings after the making of an order for winding up), may include
conditions for ensuring-

Notes (a) That the society be dissolved under section 114 or section 115 of this
Act; or
(b) That the society unite under section 32 of this Act with another society
or that it transfer its engagements to another society under section 33
of this Act and may also include conditions for ensuring that the relevant
default be made good and that the costs of the proceedings on the petition
be defrayed by the person or persons responsible for that default.
(8) In this section, the expression ``the relevant default'', in relation to a petition
for winding up, means the default that was the occasion of the petition being
presented.
Commencement of Winding Up
The Companies Act 1956 provides for Winding up of the company. The Winding up
may be voluntary Winding up or Winding up under supervision of the Court. The Voluntary
Winding up may be members voluntary Winding up or creditors voluntary Winding up.
The procedure for members voluntary Winding up under Section 484 of the Companies
Act, 1956, (”hereinafter called the Act”) is given below:
1. First to convene a Board Meeting, the directors have to make a Declaration
of Solvency in Form 149 of the Companies (Court) Rules and forms under section
488 of the Act in a non-judicial stamp paper of requisite value along with a duly
verified affidavit which should be signed by two directors or a majority of them.
A statement of assets and liabilities at estimated realizable values as on the
date of Declaration of Solvency should also be prepared and signed as above.
The Declaration should be accompanied by an audited Balance Sheet and Profit
& loss account as on nearest practicable date before date of declaration along
with Auditor’s Report. The Form 149 and affidavit should be duly notarized and
e-form 62 to be filed with Declaration of Solvency with ROC, the time limit for
such filing being 5 weeks before the date of passing of the Special Resolution
for winding up in a general meeting of members.
2. Next, the Company has to pass at its General Meeting a Special Resolution
called Resolution for Voluntary Winding Up and appointment of Liquidator(s).
3. To Publish a Public notice regarding Voluntary Winding up (section 485) and
the appointment of liquidator (s) and fix their remuneration.
4. Publication of text of Special resolution and Form 151 (Notice of appointment
of Liquidator) in the Official Gazette and in two newspapers circulating in the
district, where the registered office of the Company is situated. One in English
and another in regional language. Though the Act does not stipulate two papers,
this has been the normal existing practice. This is required to be made with
in 14 days of passing of Special Resolution.
5. Form 23 to be filed for Special resolution passed and Liquidator appointment
30 days.
6. Form 62 category – Intimation of Liquidator appointment – Section 493, 10 days
from appointment.
7. Form 62 – Form 152 – Intimation by Liquidator- 30 days from appointment date.
8. In the above forms, Gazette notice copy, newspaper cuttings, EGM notice, true
copy of SR passed have to be attached.
9. To obtain a Statement of Affairs of the Company in Form-57 duly verified by
Affidavit in form-58 from the Directors within 21 days of commencement of
winding up to the liquidator.
The statement of affairs primarily includes: Notes

1. Details of Assets, liabilities and debts due to the company. A liquidator to take
steps determines the Creditors / liabilities of the company and discharges the
same out of the funds available with the company and to call for a General
Meeting. To do the process of collection from Assets and payments to Creditors.
2. The liquidator is then required to do the following things namely speedy
realization of assets, preparation of list of creditors, admission of proof,
statement of list of contributories, making of such calls as are necessary,
payment to secured creditors of costs including the liquidator’s own
remuneration, payment of preferential claims and distribution of surplus after
meeting all the claims of creditors and after adjusting all rights and claims.
3. The Liquidator to intimate about the commencement of liquidation process of
the company to the Income Tax department under section 178 of the Income
Tax Act 1961.
4. The liquidator has to file various forms under The Companies (Court) Rules, 1959
in connection with member’s voluntary winding up with ROC in form 62
electronically. The details of the forms are given below which are to be filed
before Final meeting are:
a) Form 149- Declaration of Solvency- Statement of Assets and Liabilities.
b) Form 152- Notice of appointment of Liquidator.
Consequences of Winding Up Order
The consequences of winding up by the Court are as follows:

1. Intimation to Official Liquidator and Registrar (section 444): Where the
Court makes an order for the winding up of a company, it shall intimate the
Official Liquidator and the Registrar regarding the order of winding up.
2. Copy of winding up order should be filed with the Registrar [section 455
(1) (1-A) and (2)1. Once the winding up order is made, it is the duty of the
petitioner and of the company to file within 30 days a certified copy of the order
with the Registrar.
3. Order for winding up as a notice of discharge [section 455 (3)]: The order
for winding up shall be treated as a notice of discharge to the officers and
employees of the company, until otherwise the company is continue to carry
on its business. In the case of an employee who works for the company on
contract basis, is eligible for damages due to wrongful discharge if the company
received winding up order before the expiry of such a contract.
13.8 Summary
Growth of business and rapid industrialization in early 19th century witnessed
considerable changes in types of business organizations. Proprietary organization though
an ideal type of organization for small scale business or for an enterprise which has grown
from bits had its own limitation. It could not suit large type of organization and meet the
growing needs of expanding business. A partnership type of organization has the greatest
disadvantages of unlimited liability of the partners.
Business continued to expand and capital to an unlimited extent was required
liabilities liability of partner scared way the capital company legislation in Indian owes
its origin to English company law first law regulating companies took us birth in 1850
as joint stock Company’s act.
Notes By companies act [Amendment] act 2000 SEBI is entrusted with powers to
administer in case of listed public companies and also those companies which are likely
to be listed to be listed on all matters relating to public issues and transfers including
the power to prefecture defaulting companies and their director’s strict penal prows ions
by increasing fines. Penalties and prosecutions are introduced in an attempt at protecting
investor interest and enhancing the level of good corporate practices.
Companies [Amendment] act 2002 and companies [Second Amendment] act 2002
comprehensively once again amend the company’s act 1956. Some of the Amendments
have been given effect from 01- 04- 2003 and for some of the Amendments affective date
is not yet notified. An executive take over judicial functions certain provisions in respect
of invitational company law tribunal have been decelerated as unconstitutional by Madras
high court in thrill. Appeal field by central government to Supreme Court is pending.
Companies [Amendment] act 2006. This provides for director identification number [DIN]
by inserting provision to section 253 and inserting section 266A to 266G.
Amendment act also introduces billing of application document inspection ECT. Free
reserves mean all reserves created out of the profits and share premium account but do
not include reserves created out of revaluation of assets write back of depreciation provision
and amalgamation. A company is a form of business organization in which the funds of
a large number of investors are managed by a few persons for the purpose of earning
profits which are shared by all the investors. In common usage a company means an
association of persons association for some common purpose. A company means a
company formed and registered under thus act or an existing company. The articles of
the company provided that the directions could give a board authorized by resolution of
the company.
The company to be registered under the companies act is required to have two
documents stamped, registered and filed with registrar of companies they being
memorandum of association and articles of association of a company as originally framed
on as released from time to in pursuance of any previous companies law or of this act.
Memorandum of association is the document which contains the rules regarding
constitution and activity of object of the company. The memorandum of association defines
the extent and powers of the company. A company cannot exceed the powers conferred
on it under its memorandum of association. The memorandum of association is designed
to make the outside world know the star of affairs of the company.
The prospective investors, shareholders of creditors should know the extent of their
risk and also possibilities of re-company to overcome them. The name of the company
with limited as the last word of the name in case of a public company and private limited
in case of a private company.
Promoters of the company have to make an application to the registrar of companies
for the availability of name. The company shall, from the day on which commences
business as within 30 days after the day of its incorporation have a registered office to
which are communication and notices may be addressed. The company while submitting
its papers for incorporation also files notices of registered office of the company with the
registrar of companies. The notice addressed to the company and served on the directions
is a good service. The activities started which the company proposes to pursued by the
company immediately after incorporation of within a reasonable time thereafter. The other
objects clauses include other activities which the company may plan to pursue at any
later date. The object should not be illegal and against the provisions of the companies
act the statement of object information the investors of the purpose for what the capital
is proposed to be used by the company. The capital with which the company is registered

is called the authorized as nominal share capital. the nominal capital is divided into classes Notes
of shares and their values are mentioned in the clause company shall file with the registrar
a special resolution of a certified copy of the order after the company law board confirming
the alteration with three month from the date of order as cases may exchange together
with the printed copy of the memorandum as altered the registrar of the start form which
such office is transferred shall send to the registrar on that start as documents relating
to the company registered.
Share capital means that amount which the company raises by issue of shares.
Authorized capital is the capital with which the company is registered. It comprises of
the total face value of the share in a company. It is also called “total or nominal capital”
of the company issued capital entire authorized capital may not be required to be raised
by the company initially. The company issues shares to the extent of its requirement.
This is called issued capital subscribes towards the capital accepted by them is called
paid up capital. The company may not require the full amount of the subscribed capital
and therefore it may call up only a part of which has not been called up I.C the remainder
of the subscribed capital is called un-called capital.

1. Growth of business and rapid industrialization in early ____________ century
witnessed considerable changes in types of business organization.
2. Proprietary organization though an ideal types of organization for a
______________ scale business or for an enterprise which has grown from bits
had its own limitations.
3. The partnership type of organization has the greatest disadvantage of
______________ of the partners.
4. The ______________ continued to expand and capital to an unlimited extent
was required.
5. The ______________ liability of partners scared away the capital.
6. ___________ is subsidiary to memorandum.
7. ___________ company limited by shares may or may not have articles.
8. ___________ can be easily altered by a special resolution.
9. Section ___________ of the companies Act defines memorandum of association
2(28).
10. The ____________ is the document which contains the rules regarding
constitution and activities or objectives of the company.
II. True/False
1. The doctrine of indoor management is an extension to the doctrine of
constructive notice.
2. The doctrine of indoor management does not apply to acts void ab initio.
3. A company can change its name at its own discretion by passing special
resolution.
4. Any change in the address of the registered office must be communicated to
the registrar within 1 month.

Notes 5. An act altra-virus the directors can be rectified if it is not ultra-virus in the
memorandum.

1. The major changes are incorporated by the Amending act 2002……………..
[a] The national company law tribunal
[b] National company law appellate tribunal is to be constituted
[c] Provision is made for formation of Producer Company as an alternative
to co-operative form of organization
[d] All of these
2. Which of the following companies [Amendment] act 2006 provides?
[a] Director identification number [DIN]
[b] Filling of application
[c] Documents and inspection
[d] All of the above
3. Free reserve means……………
[a] All reserves created out of profits and share premium
[b] All reserves not created to out of profits and share premium
[c] Any reserves created out of profits and share premium
[d] None of these
4. What are the objects of 2009 Amendments?
[a] To encourage investments
[b] To ensure proper admistration
[c] To allow for investigation
[d] All of these
5. Which section defines company
[a] Section 3(1)
[b] Section 2(1)
[c] Section 1(3)
[d] Section 1(2)
6. Memorandum of association is the document it contains……………..
[a] Rules regarding constitution
[b] Actrotes and objectives of the company
[c] Both A and B
[d] None of these
7. What are the contents of memorandum of association?
[a] Objectives of the company
[b] Liability of the members
[c] Details of the share capital of the company
[d] all of the above
8. Which section laws downs register office or the company?
[a] Section 146
[b] Section 148
[c] Section 149 Notes

[d] None of these
9. What are the limits and extent of the activities of the company?
[a] The main object is to be pursued by the company on its incorporation
[b] The objects incidental
[c] Antiquary to the attainment of the main objects
[d] all of the above
10. Which section lays down forms of memorandum of association?
[a] Section 13 and 14
[b] Section 14 and 15
[c] Section 15 and 16
[d] None of these

1. What is Joint Stock Company?
2. What is Formation of a Company?
3. What is Memorandum of Association?
4. What is Articles of Association?
5. What is General Meeting?
6. Who is an Auditor?
7. What is winding up?

1. Discuss various steps of Formation of a Company.
2. Explain in details about Memorandum of Association.
3. Discuss various Articles of Association.
4. Discuss various types of Meeting.
5. Write note on: General Meetings and Proceedings.
6. Explain roles of Auditor.
7. Discuss the process of winding up of a company.
13.11 Key Terms

 Joint Stock Company: Joint Stock Company refers to a company having a
joint stock or capital that is divided into units of ownership interest, such as
shares which may be transferred without consent of the other shareholders.
 Promotion: Promotion of a business simply refers to all those activities that
are required to be undertaken to establish a new business unit for manufacturing
or distribution of any product or provide any service to the people. It starts with
conceiving an idea of business or discovers an opportunity for doing a business,
assess its feasibility and then take the necessary steps to launch the business
unit.

Notes  Incorporation: A sole proprietorship or partnership firm can be formed to carry

out its business even without any registration. But a joint stock company cannot
be formed or permitted to run its business without registration.
 Subscription of Capital: After the company is incorporated, the next stage
is to raise the necessary capital. In case of a private limited company, funds
are raised from the members or through arrangement from banks and other
sources.
 Commencement of Business: In case of a private limited company, it can
immediately start its business as soon as it is registered. In case of public
limited company a certificate, known as certificate of commencement of
businesses must be obtained from the Registrar of Companies before starting
its operation.
 Memorandum of Association: Memorandum of Association is a document
that regulates a company’s external activities and must be drawn up on the
formation of a registered or incorporated company. The memorandum of
association gives the company’s name, names of its members (shareholders)
and number of shares held by them and location of its registered office.
 Articles of Association: The Articles of Association of a company contains
the various rules and regulations for the day to day management of the company.
These rules are also called the bye-laws.
 Auditor: An auditor is an official whose job it is to carefully check the accuracy
of business records. An auditor might be either an internal auditor, external
auditor or independent auditor for accounting firms in the public or private sector.
 Winding up: The winding up activity includes selling all assets, paying off
creditors, and distributing remaining assets to the partners or shareholders.
Winding up can refer to dissolving either a corporation or a partnership.

1. 19th
2. Small
3. Unlimited liability
4. Business
5. Unlimited
6. Articles of association
7. Public company
8. Articles
9. 28
10. Memorandum of association
II. True or False

1. True
2. True
3. True

4. True Notes
5. False

1. [d]
2. [b]
3. [a]
4. [d]
5. [a]
6. [c]
7. [d]
8. [a]
9. [d]
10. [b]
13.13 Case Study

According to Article L.227-3 of the Commercial Code, the transformation of a society
in SAS requires a decision taken unanimously by the partners. This text is also applicable
in case of a merger of SA by SAS. If the converted company has no auditor, commissioner
for the transformation should be appointed to assess the value of the property comprising
the company's assets and advantages.
Individuals can also access the form SAS. The partners are not traders. Incapable
adults and minors can become members of a SAS. Foreigners do not hold a merchant
card can become a shareholder in SAS but cannot direct it. Therefore, nothing contradicts
the fact that SAS is subject to the unanimous agreement of members of limited companies
and the appointment of an auditor.
The contribution of property in the capital of a company leads to transfer of ownership;
the provider is required to guarantee the company against all evictions and any hidden
defects. Contributions in kind to a SAS are subject to the normal verification of inputs
and therefore require the intervention of an external input is designated by the President
of the Commercial Court of competent jurisdiction or by the founders themselves, which
will be to prepare a report evaluating the assets transferred. Thus, the evaluation process
by an external input must be respected (like SA) with increase risk of crime of fraudulent
contributions.
Questions:
1. How to build social capital?
2. Why the capital must be fully subscribed? Justify.


Notes 6. Avtar Singh, Company Law 15th Ed. 2007

13.15 Bibliography
Press.
3. Anand, R.L. & Iyer, Commentary on the Specific Relief Act, 1963 (Act No. 47
Kluwer Law Intl
Press.

16. Ireland, P. (1984) ‘The Rise of the Limited Liability Company’, International Notes


Notes
Unit 14: Regulation to Information
Structure:
14.1 Introduction
14.2 Right to Information Act, 2005
14.3 Information Technology Act, 2000
14.4 Electronic Governance
14.5 Secure Electronic Records and Digital Signatures
14.6 Digital Signature Certificates
14.7 Cyber Regulations Appellate Tribunal
14.8 Offences, Limitations of the Information Technology Act, 2000
14.9 Summary
14.12 Key Terms
14.14 Case Study
14.16 Bibliography
Objectives

 Concept of Right to Information Act, 2005
 Concept of Right to Education
 Objectives of Information Technology Acts
 Benefits of E-governance
 Secure Electronic Records and Digital Signatures
 Concept of Digital Signature Certificates
 Benefits of a Digital Signature Certificate
 Cyber Regulations Appellate Tribunal
 Offences, Limitations of the Information Technology Act, 2000

Regulation of Infromation 289

The Right to Information Act covers the whole of India except Jammu and Kashmir,
where J&K Right to Information Act is in force. It covers all the constitutional authorities,
including executive, legislature and judiciary; any institution or body established or
constituted by an act of Parliament or a state legislature. It is also defined in the Act
that bodies or authorities established or constituted by order or notification of appropriate
government including bodies "owned, controlled or substantially financed" by government,
or non-Government organizations "substantially financed, directly or indirectly by funds".
The Right to information (RTI Act 2005) was touted as one law which would bring
in transparency and eradicate corruption by civil society direct involvement. Failure to
implement it in a thoroughly and efficiently has led to rough loss estimate of $245 million
yearly as per one estimate.
India being a federal state has many items in concurrent list and projects have
multiple departments working on them, and sometimes projects are moved from one
department to another. With Central and State information commissions working in such
a disconnect, and manual transfers of the request for information between departments
lead to big delays, confusion, and loss of traceability. It not only denies timely information,
creates high barriers to information only a few with very strong motivations and means
can cross, but puts a common citizen at the risk by exposing them directly to the
departments and agencies which they are trying to find information on.
14.2 Right to Information Act, 2005

The Right to Information Act (RTI) is an Act of the Parliament of India "to provide
for setting out the practical regime of right to information for citizens" and replaces the
erstwhile Freedom of Information Act, 2002. The Act applies to all States and Union
Territories of India except the State of Jammu and Kashmir. Under the provisions of the
Act, any citizen may request information from a "public authority" (a body of Government
or "instrumentality of State") which is required to reply expeditiously or within thirty days.
The Act also requires every public authority to computerize their records for wide
dissemination and to pro-actively publish certain categories of information so that the
citizens need minimum recourse to request for information formally. This law was passed
by Parliament on 15 June 2005 and came fully into force on 13 October 2005. Information
disclosure in India was restricted by the Official Secrets Act 1923 and various other special
laws, which the new RTI Act relaxes.
Rights to Information under the Act
The various rights to information under the Act are:

1. A citizen has a right to seek such information from a public authority which
is held by the public authority or which is held under its control. This right
includes spection of work, documents and records; taking notes, extracts or
certified copied of documents or records; taking certified samples of material
held by the public authority or held under the control of the public authority.
2. The public authority under the RIT Act is not supposed to create information;
or to interpret information; or to solve the problems raised by the applicants;
or to furnish replies to hypothetical questions. Only such information can be
had under the Act which already exists with the public authority.

Notes 3. A citizen has a right to obtain information in the form of diskettes, floppies,
tapes, video cassettes or in any other electronic mode or through print-out
provided information is already stored in a computer or in any other device from
which the information may be transferred to diskettes.
4. The information to the applicant shall ordinarily be provided in the form in which
it is sought. However, if the supply of information sought in a particular form
would disproportionately divert the resources of the public authority or may
cause harm to the safety or preservation of the records, supply of information
in that form may be denied.
5. The Act gives the right to information only to the citizens of India. It does not
make provision for giving information to Corporations, Associations, Companies
etc. which are legal entities/persons, but not citizens. However, if an application
is made by an employee or office-bearer of any Corporation, Association,
Company, NOG etc. who is also a citizen of India, information shall be supplied
to him/her, provided the applicant given his/her full name. In such cases, it will
be presumed that a citizen has sought information at the address of the
Corporation etc.
Right to Education (RTE)
The Constitution (Eighty-sixth Amendment) Act, 2002 inserted Article 21-A in the
Constitution of India to provide free and compulsory education of all children in the age
group of six to fourteen years as a Fundamental Right in such a manner as the State
may, by law, determine. The Right of Children to Free and Compulsory Education (RTE)
Act, 2009, which represents the consequential legislation envisaged under Article 21-A,
means that every child has a right to full time elementary education of satisfactory and
equitable quality in a formal school which satisfies certain essential norms and standards.
Article 21-A and the RTE Act came into effect on 1 April 2010. The title of the RTE
Act incorporates the words ‘free and compulsory’. ‘Free education’ means that no child,
other than a child who has been admitted by his or her parents to a school which is not
supported by the appropriate Government, shall be liable to pay any kind of fee or charges
or expenses which may prevent him or her from pursuing and completing elementary
education. ‘Compulsory education’ casts an obligation on the appropriate Government and
local authorities to provide and ensure admission, attendance and completion of
elementary education by all children in the 6-14 age group. With this, India has moved
forward to a rights based framework that casts a legal obligation on the Central and State
Governments to implement this fundamental child right as enshrined in the Article 21A
of the Constitution, in accordance with the provisions of the RTE Act.
The RTE Act provides for the:

(i) Right of children to free and compulsory education till completion of elementary
education in a neighbourhood school.
(ii) It clarifies that ‘compulsory education’ means obligation of the appropriate
government to provide free elementary education and ensure compulsory
admission, attendance and completion of elementary education to every child
in the six to fourteen age group. ‘Free’ means that no child shall be liable to
pay any kind of fee or charges or expenses which may prevent him or her from
pursuing and completing elementary education.
(iii) It makes provisions for a non-admitted child to be admitted to an age appropriate
class.

(iv) It specifies the duties and responsibilities of appropriate Governments, local Notes
authority and parents in providing free and compulsory education, and sharing
of financial and other responsibilities between the Central and State
Governments.
(v) It lays down the norms and standards relating inter alia to Pupil Teacher Ratios
(PTRs), buildings and infrastructure, school-working days, teacher-working
hours.
(vi) It provides for rational deployment of teachers by ensuring that the specified
pupil teacher ratio is maintained for each school, rather than just as an average
for the State or District or Block, thus ensuring that there is no urban-rural
imbalance in teacher postings. It also provides for prohibition of deployment of
teachers for non-educational work, other than decennial census, elections to
local authority, state legislatures and parliament, and disaster relief.
(vii) It provides for appointment of appropriately trained teachers, i.e. teachers with
the requisite entry and academic qualifications.
(viii) It prohibits (a) physical punishment and mental harassment; (b) screening
procedures for admission of children; (c) capitation fee; (d) private tuition by
teachers and (e) running of schools without recognition,
(ix) It provides for development of curriculum in consonance with the values
enshrined in the Constitution, and which would ensure the all-round development
of the child, building on the child’s knowledge, potentiality and talent and making
the child free of fear, trauma and anxiety through a system of child friendly and
child centered learning.
14.3 Information Technology Act, 2000

Cyber Law in India is incorporated in the Information Technology Act 2000 (IT Act,
2000).
Objectives of IT Acts
The following are the objectives of Information Technology Act 2000:

 To provide for legal recognition of electronic records and digital signatures.
 To prevent the possible mis-use arising out of transactions and other dealings
concluded over the electronic medium.
 To create civil and criminal liabilities for contravention of the provisions of the
proposed legislation.
 To provide for the use and acceptance of electronic records and digital signatures
in the Government offices and its agencies.
 To facilitate electronic storage of information and data.
 To facilitate electronic fund transfers between financial Institutions and banks.
 To give legal sanctity for books of account maintained in the electronic form
by the banks.
Scope of the Act: This is given under chapter 1 Sec. 1. as: The Act extend to the
whole of India, and unless otherwise provided in the Act, it applies also to any offence
or contravention there under committed outside India by any person.

Notes The Act shall not apply to the following:

1) A negotiable instrument (other than a cheque) as defined in section 13 of the
Negotiate Instrument Act 1881.
2) A power of attorney defined in section 1–A of the Power of Attorney Act 1882.
3) A trust as defined in section 3 of the Indian Trusts Act 1882.
4) A will as defined in clause (h) of section (2) of the Indian succession Act 1925.
5) Any contract for the sale or conveyance of immovable property or any interest
in such property.
6) Any such class of documents or transactions as may be notified by the Central
Government in the official Gazette.
E-Commerce
The term ‘e-commerce’ is more commonly associated with information on buying

and selling of products and services via computer networks using technologies like web,
EDI, EFT, e-mail etc.
E-commerce is “the conduct of transactions by electronic means.” It is used
everywhere in everyday life. It ranges from credit card authorization, travel reservations
over network, fund transfer across the globe, point of sale (POS) transactions in retailing,
electronic banking, fund-raising and auctioneering to arranging marriages and birthday
party services. E-commerce means commerce with anyone, anywhere, anytime.
E-commerce or electronic commerce is broadly defined as a modern business
methodology that addresses the needs of organisations and consumers to reduce the
costs, improve the quality of goods and services and increase the speed of service.
E-commerce is also defined as the process of using digital technology for transmitting
information between organizations.
E- commerce can be formally defined technology – mediated exchanges between
parties (individuals or organisations) as well as the electronically based intra or inter-
organizational activities that facilitate such exchanges.
Paperless Society
It is the new concept used by the society and used extensively in the business world.
As we also know that the digital and information technology are bring a greab revolution
upon the society. Everything and activity is gradually becoming digilised, like books,
newspaper, music, pictures, banking communication and so on. Even same of the things
which cannot be seen but felt like friendship, relationships etc. are going digital. It is
a great question that in the future concept book will survive or not. But the paper books
and usage will not completly vanish in society and in India.
The paper usage in our society ennormous, like for newspapers, magazines, receipts,
notes, money, documents, posters, advertisements, wroppers, boxes and text books are
around us for every day life. It is one of the central prevaity for centuries.
The benifits of paperless society is highlighted as it is easy, cost effectiveness and
environment friendly. The papers usage is one of the main reason for deminising in the
tree population.

Legal aspect of Cyber Crime Notes

The Law is to protect the cyber crime for the computer users theft of or destruction
of informations stored or passed by computers may be the goal of a cyber criminal, while
others may use the computer as a tool to accompanist more abominable acts. For this
the stake or local law enforcement officials and prosecutors must be specially trained
to combat these well equipped criminals, As the law enforcement community is facing
these new challenges, a new discipline of cyber crime Investigation has emerged. As such
agencies will look favourably upon those into technological training in cyber crime.
Information Technology (IT)
Security guidelines
This document provides guidelines for the implementation and management of
Information Technology Security. Due to the inherent dynamism of the security
requirements, this document dose not provide an exact template for the organizations to
follow. However, appropriate suitable samples of security process are provided for
guidelines. It is the responsibility of the recognizations to develop internal processes that
meet the guidelines set forth in this document.
The following words used in the Information Technology security guidelines shall be
interpreted as follows:
 Shall: The guideline defined is a mandatory requirement, and therefore must
be complied with.
 Should: The guideline defined is a recommended requirement. Non-compliance
shall be documented and approved by the management. Where appropriate,
compensating controls shall be implemented.
 Must: The guideline defined is a mandatory requirement, and therefore must be
complied with.
 May: The guideline defined is an optional requirement. The implementation of
this guideline is determined by the organisation’s requirement.
Implementation of an information security programme: Successful
implementation of a meaningful informaiton Security Programme rests with the supports
of the top management. Until and unless the senior managers of the organization
understand and concur with the objectives of the information security programme its
ultimate success is in question.
The information Security programme should be broken down into specific stages as
follows:
a) Adoption of a security policy;
b) Security risk analysis,
c) Development and implementation of a information classification system;
d) Development and implementation of the security standards manual;
e) Implementation of the management security self-assessment process;
f) On-going security programme maintenance and enforcement; and
g) Training,
The principal task of the security implementation is to define the responsibilities of
persons within the organization. The implementation should be based on the general
principle that the person who is generating the information is also responsible for its

Notes security. However, in order to enable him to carry out his responsibilities in this regard,
proper tools, and environment need to be established.
When different pieces of information at one level are integrated to form higher value
information, the responsibility for its security need also should go up in the hierarchy to
the integrator and should require higher level of authority for its access. It should be
absolutely clear with respect to each information as to who is its owner, its custodian,
and its users. It is the duty of the owner to assign the right classification to the information
so that the required level of security can be enforced. The custodian of information is
responsible for the proper implementation of security guidelines and making the information
available to the users on a need to know basis.
14.4 Electronic Governance

Electronic governance or e-governance is the application of information and
communication technology (ICT) for delivering government services, exchange of
information, communication transactions, integration of various stand-alone systems and
services between government-to-citizen (G2C), government-to-business (G2B), government-
to-government (G2G), government-to-employees (G2E) as well as back office processes
and interactions within the entire government framework. Through e-governance,
government services will be made available to citizens in a convenient, efficient and
transparent manner. The three main target groups that can be distinguished in governance
concepts are government, citizens and businesses/interest groups. In e-governance there
are no distinct boundaries.
E-governance has gained more popularity in convoluted business world. Many
management scholars have described the concept of e governance which is emerging as
an important activity in the business field. It is established that E-governance is the
application of information and communication technologies to transform the efficiency,
effectiveness, transparency and accountability of informational and transactional
exchanges with in government, between government & govt. agencies of National, State,
Municipal and Local levels, citizen & businesses, and to empower citizens through access
& use of information.
World Bank explained the E governance as the use by government agencies of
information technologies (such as Wide Area Networks, the Internet, and mobile
computing) that have the ability to transform relations with citizens, businesses, and other
arms of government. These technologies can serve a variety of different ends: better delivery
of government services to citizens, improved interactions with business and industry,
citizen empowerment through access to information, or more efficient government
management. The resulting benefits can be less corruption, increased transparency,
greater convenience, revenue growth, and or cost reductions.
Benefits of E-governance
Benefits of E-governance can be summarized as follows:

1. Speed – Technology makes communication speedier. Internet, Phones, Cell
Phones have reduced the time taken in normal communication.
2. Cost Reduction – Most of the Government expenditure is appropriated towards
the cost of stationary. Paper-based communication needs lots of stationary,
printers, computers, etc. which calls for continuous heavy expenditure. Internet
and Phones makes communication cheaper saving valuable money for the
Government.
3. Transparency – Use of ICT makes governing profess transparent. All the Notes
information of the Government would be made available on the internet. The
citizens can see the information whenever they want to see. But this is only
possible when every piece of information of the Government is uploaded on the
internet and is available for the public to peruse. Current governing process
leaves many ways to conceal the information from all the people. ICT helps make
the information available online eliminating all the possibilities of concealing of
information.
4. Accountability – Once the governing process is made transparent the
Government is automatically made accountable. Accountability is answerability
of the Government to the people. It is the answerability for the deeds of the
Government. An accountable Government is a responsible Government.
14.5 Secure Electronic Records and Digital Signatures
Secure Electronic Records
Where any security procedure has been applied to an electronic record at a specific
point of time, then such record shall be deemed to be a secure electronic record from
such point of time to the time of verification.
Electronic records have the advantage that they are reusable. One can very quickly
adapt a record or compile a new record on the basis of an existing one. This digital
advantage is at the same time vulnerability because adaptations or changes are not always
observable. Because of this, the reliability of electronic records might be questioned.
Finding methods for guaranteeing the reliability of digital documents in general, or
electronic records in particular, is the subject of research in various professional fields.
At present, one of the most widely suggested solutions is digital signing electronic records.
More specifically, the use of asymmetric cryptography and the digital signature is
advanced as a proof of authenticity and integrity for electronic records. This technique
might also be usable to ensure the reliability of electronic records.
Digital Signature
The law of the information technology recognises the digital so that the internet
contract is authenticated and becomes binding on the parties. These are the electronic
equivalent of the hand written signatures. In an electronic message or transaction affixing
hand written signature is not possible. Authentication of the record has to be achived by
some electronic or digital method. “Affixing digital signature” has been defined in section
2(1)(d) of the Act to mean adoption of any methodology or procedure by a person for the
purpose of authenticating an electronic record by means of “digital signature”.
The expression “digital signature” has been defined in section 2(1) (p) of the act to
mean authentication of any electronic record by a subscriber, in the other sense, a person
in whose name the “Digital Signature Certificate” is issued by means of an electronic
method or procedure in accordance with the provision of section 3.
Important feature of the Act

(a) The scope of the Act extends to the whole of India.
(b) It secures Electronic records and Digital signatures.
(c) It encourages the Electronic Governance.

Notes (d) The Act also throws the door open to the business world for Digital Signature
Certificates
(e) It encourages E-commerce or E-Business for its qualitative and quick
functioning.
(f) The Act protects the rights of Intectual property owners.
(g) The Act has major amendments to the Indian Penal code, 1860 and the
Evidence Act, 1872.
(h) It is to regulate the cyber contraventions and cyber crimes
(i) It leives the penalty for damage to computer system, for failure to furnish
information and so on.
(j) It protects the types of offences like Tampering, Hacking, publishing of
information which is obscence in electronic form.
Piracy
Piracy means illegally copying, using or reproducing material which is protected by

way, of copy writing. The software is also recorded (stored) on different types of storage
media like floppies, CDs, hard disks etc. The copy right holder of the software has the
exclusive right granted by law to protect his software by means of copy write. Pirate is
a person who illegally copies the original software prepares its multiple copies.
Why Piracy takes place
Piracy of software take place due to high cost of software products. The users mainly
the individuals or small business houses cannot afford to pay high cost of software or
sometimes they do not want to purchase legal software which cost them heavily. Instead
they go for the pirated software.
Due to piracy, the software industry bear loss of revenue of million of copies of the
software.
a) Provision for Software Patent
The Act gives provisions to protect the original creator of intellectual property through
software patent is a grant of special power of monopoly. The persons to whom a software
patent is granted may prevent others from manufacturing or selling that software or similar
software. However the patent holder, himself may grant a license to the others for limited
use of the patent. A patent right gives the owner exclusive right to use, sell, produce the
patented item. The main reason of granting the patent right to the developer of software
is that his own researches money; time may be used by the others. The developers
prepares special software after putting in a great labour personnel skill, money time and
when this software is created after such great efforts, which should not mis-used by others.
The rights of patent granted are not absolute. These rights are limited to a certain
number of years and the other developer can design a close product.
b) Software copy write
A software copy right is an exclusive property right granted by law to the owner or
producer or author of a work to exploit or authorise the exploitation of the work which
is protected by means of copy right. The creator of the work get exclusive right to protect
his creation or work from being reproduced by any other person.
The software companies have copy right on their products.

C) Infringements of copy rights Notes

Once the copy right is registered, following rights are given to the persons who have
been given the copy rights. Doing any of the acts mentioned in copy right by any other
person shall be termed as infringements of copy rights.
I. a) To reproduce the work in any material form including the storing of it in any
medium by electronic means.
b) To issue copies of the work to the public not being the copies already in
circulation.
c) To, perform the work in public or communicate it to the public, excluding for
education.
d) To make any cinematography film, a sound recording in respect of work.
e) To make any translation of the work
f) To make any adaptations of the work.
g) To sell or give an commercial rental or offer for sale or for commercial rental
any copy of the compliers program.
The law also gives the provisions for the following acts shall not constitute an
infringement of copy right:
II. a) Making of copies or adoption of a computer program by the lawful possessor
of a copy of such computer programme, bean such copy:
(i) In order to utilise the computer program for the purpose for which it was supplied
or
(ii) To make back up copies purely as a temporary protection against loss,
destructive or damage in order to utilise the computer program for the purpose
for which it was supplied.
14.6 Digital Signature Certificates

Digital Signature Certificate is a secure digital key that is issued by the certifying
authorities for the purpose of validating and certifying the identity of the person holding
this certificate. Digital Signatures make use of the public key encryptions to create the
signatures. A digital signature certificate (DSC) contains information about the user’s
name, pin code, country, email address, date of issuance of certificate and name of the
certifying authority. Digital Signature Certificates or DSC or Digital Signature are being
adopted by various government agencies and now is a statutory requirement in various
applications. Capricorn offers different class of certificates to help organization and
individuals secure online transactions with legal validity as per the Indian IT Act, 2000.
Capricorn certificates conform to x.509 standard of Public Key Infrastructure (PKI) in India
where in additionally these are issued as per IVG and IOG guidelines issued by the office
of Controller of Certifying Authorities.
Benefits of a digital signature certificate

1. Digital Signature Certificates are helpful in authenticating the personal
information details of the individual holder when conducting business online.
2. Reduced cost and time: Instead of signing the hard copy documents physically
and scanning them to send them via e-mail, you can digitally sign the PDF
files and send them much more quickly.
3. The Digital Signature certificate holder does not have to be physically present
to conduct or authorize a business
Notes 4. Data integrity: Documents that are signed digitally cannot be altered or edited
after signing, which makes the data safe and secure.
5. The government agencies often ask for these certificates to cross-check and
verify the business transaction.
6. Authenticity of documents: Digitally signed documents give confidence to the
receiver to be assured of the signer’s authenticity. They can take action on the
basis of such documents without getting worried about the documents being
forged.
Certifying Authorities for Digital Signature Certificate
The Controller of Certifying Authority for the purpose of issuing digital signatures in
India has authorized e-Mudhra as one of the certifying authority for issuance of Digital
Signature Certificate.
Other certifying authorities may include (n) Code Solutions, National Informatics
Centre, Safes crypt and Institute for Development and Research in Banking Technology.
Classes of DSC
The type of applicant and the purpose for which the Digital Signature Certificate is
obtained defines the kind of DSC one must apply for depending on the need. There are
three types of Digital Signature certificates issued by the certifying authorities.
Class 1 Certificates: These are issued to individual/private subscribers and are
used to confirm that the user’s name and email contact details from the clearly
defined subject lie within the database of the certifying authority.
Class 2 Certificates: These are issued to the director/signatory authorities of
the companies for the purpose of e-filing with the Registrar of Companies (ROC).
Class 2 certificate is mandatory for individuals who have to sign manual
documents while filing of returns with the ROC.
Class 3 Certificates: These certificates are used in online participation/bidding
in e-auctions and online tenders anywhere in India. The vendors who wish to
participate in the online tenders must have a Class 3 digital signature certificate.
14.7 Cyber Regulations Appellate Tribunal

1. Establishment of Cyber Appellate Tribunal
(1) The Central Government shall, by notification, establish one or more appellate
tribunals to be known as the Cyber Regulations Appellate Tribunal.
(2) The Central Government shall also specify, in the notification referred to in sub-
section (1), the matters and places in relation to which the Cyber Appellate
Tribunal may exercise jurisdiction.
2. Composition of Cyber Appellate Tribunal
A Cyber Appellate Tribunal shall consist of one person only (hereinafter referred to
as the Presiding Officer of the Cyber Appellate Tribunal) to be appointed, by notification,
by the Central Government.
3. Qualifications for appointment as Presiding Officer of the Cyber Appellate Tribunal
A person shall not be qualified for appointment as the Presiding Officer of a Cyber
Appellate Tribunal unless he-

(a) is, or has been, or is qualified to be, a Judge of a High Court; or Notes
(b) is or has been a member of the Indian Legal Service and is holding or has held
a post in Grade I of that Service for at least three years.
4. Term of officer
The Presiding Officer of a Cyber Appellate shall hold office for a term of five years
from the date on which he enters upon his office or until he attains the age of sixtyfive
years, whichever is earlier.
5. Salary, allowances and other terms and conditions of service of Presiding Officer
The salary and allowances payable to, and the other terms and conditions of service
including pension, gratuity and other retirement benefits of, the Presiding Officer or a Cyber
Appellate Tribunal shall be such as may be prescribed: Provided that neither the salary
and allowances nor the other terms and conditions of service of the Presiding Officer shall
be varied to his disadvantage after appointment.
6. Filling up of vacancies
If, for reason other than temporary absence, any vacancy occurs in the office of the
Presiding Officer of a Cyber Appellate Tribunal, then the Central Government shall
appointment another person in accordance with the provisions of this Act to fill the vacancy
and the proceedings may be continued before the Cyber Appellate Tribunal from the stage
at which the vacancy is filled.
14.8 Offences, Limitations of the Information Technology Act, 2000

Cyber offences are the unlawful acts which are carried in a very sophisticated manner
in which either the computer is the tool or target or both. Cybercrime usually includes:
(a) Unauthorized access of the computers (b) Data diddling (c) Virus/worms attack
(d) Theft of computer system (e) Hacking (f) Denial of attacks (g) Logic bombs
(h) Trojan attacks (i) Internet time theft (j) Web jacking (k) Email bombing (l)
Salami attacks (m) Physically damaging computer system.
Offences under the Information Technology Act, 2000
1. Tampering with computer source documents

Section 65 of this Act provides that Whoever knowingly or intentionally conceals,
destroys or alters or intentionally or knowingly causes another to conceal, destroy or alter
any computer source code used for a computer, computer Programme, computer system
or computer network, when the computer source code is required to be kept or maintained
by law for the being time in force, shall be punishable with imprisonment up to three year,
or with fine which may extend up to two lakh rupees, or with both.
Explanation: For the purpose of this section “computer source code” means the listing
of programmes, computer commands, design and layout and programme analysis of
computer resource in any form.
Object: The object of the section is to protect the “intellectual property” invested in
the computer. It is an attempt to protect the computer source documents (codes) beyond
what is available under the Copyright Law.
This section extends towards the Copyright Act and helps the companies to protect
their source code of their programmes.

Notes Section 65 is tried by any magistrate. This is cognizable and non- bailable offence.
Imprisonment up to 3 years and or Fine upto Two lakh rupees.
2. Hacking with the computer system
Section 66 provides that- (1) Whoever with the intent to cause or knowing that he
is likely to cause wrongful loss or damage to the public or any person destroys or deletes
or alters any information residing in a computer resource or diminishes its value or utility
or affects it injuriously by any means, commits hacking.
(2) Whoever commits hacking shall be punished with imprisonment up to three years,
or with fine which may extend up to two lakh rupees, or with both.
Explanation: The section tells about the hacking activity.
Punishment: Imprisoned up to three years and fine which may extend up to two
lakh rupees Or with both.
3. Publishing of obscene information in electronic form
Section 67 of this Act provides that Whoever publishes or transmits or causes to
be published in the electronic form, any material which is lascivious or appeals to the
prurient interest or if its effect is such as to tend to deprave and corrupt persons who
are likely, having regard to all relevant circumstance, to read see or hear the matter
contained or embodied in it, shall be punished on first conviction with imprisonment of
either description for a term which may extend to five years and with fine which may extend
to one lakh rupees and in the event of a second or subsequent conviction with imprisonment
of either description for a term which may extend to ten years and also with fine which
may extend to two lakh rupees.
4. Power of controller to give directions
Section 68 of this Act provides that (1) The Controller may, by order, direct a Certifying
Authority or any employee of such Authority to take such measures or cease carrying
on such activities as specified in the order if those are necessary to ensure compliance
with the provisions of this Act, rules or any regulations made there under.
(2) Any person who fails to comply with any order under sub-section (1) shall be
guilty of an offence and shall be liable on conviction to imprisonment for a term not
exceeding three years or to a fine not exceeding two lakh rupees or to both.
Explanation: Any person who fails to comply with any order under sub section (1)
of the above section, shall be guilty of an offence and shall be convicted for a term not
less than three years or to a fine exceeding two lakh rupees or to both.
5. Protected System
Section 70 of this Act provides that – (1) The appropriate Government may, by
notification in the Official Gazette, declare that any computer, computer system or
computer network to be a protected system.
(2) The appropriate Government may, by order in writing, authorize the persons who
are authorized to access protected systems notified under sub-section (1).
(3) Any person who secures access or attempts to secure access to a protected
system in contravention of the provision of this section shall be punished with imprisonment
of either description for a term which may extend to ten years and shall also be liable
to fine.

Explanation: This section grants the power to the appropriate government to declare Notes
any computer, computer system or computer network, to be a protected system. Only
authorized person has the right to access to protected system.
6. Penalty for misrepresentation
Section 71 provides that- (1) Whoever makes any misrepresentation to, or
suppresses any material fact from, the Controller or the Certifying Authority for obtaining
any license or Digital Signature Certificate, as the case may be, shall be punished with
imprisonment for a term which may extend to two years, or which fine which may extend
to one lakh rupees, or with both.
Punishment: Imprisonment which may extend to two years or fine may extend to
one lakh rupees or with both.
7. Penalty for breach of confidentiality and privacy
Section 72 provides that- Save as otherwise provide in this Act or any other law for
the time being in force, any person who, in pursuance of any of the powers conferred
under this Act, rules or regulation made there under, has secured assess to any electronic
record, book, register, correspondence, information, document or other material without
the consent of the person concerned discloses such material to any other person shall
be punished with imprisonment for a term which may extend to two years, or with fine
which may extend to one lakh rupees, or with both.
Explanation: This section relates to any person who in pursuance of any of the powers
conferred by the Act or it allied rules and regulations has secured access to any: Electronic
record, books, register, correspondence, information, document, or other material.
8. Penalty for publishing Digital Signature Certificate false in certain particulars
Section 73 provides that – (1) No person shall publish a Digital Signature Certificate
or otherwise make it available to any other person with the knowledge that-
(a) The Certifying Authority listed in the certificate has not issued it; or
(b) The subscriber listed in the certificate has not accepted it; or
(c) The certificate has been revoked or suspended, unless such publication is for
the purpose of verifying a digital signature created prior to such suspension or
revocation.
(2) Any person who contravenes the provisions of sub-section (1) shall be punished
with imprisonment for a term which may extend to two years, or with fine which may extend
to one lakh rupees, or with both.
Explanation: The Certifying Authority listed in the certificate has not issued it or,
The subscriber listed in the certificate has not accepted it or the certificate has been
revoked or suspended.
Limitations of the Information Technology Act, 2000
While the Act has been successful in setting down the frame work of regulations
in Cyber Space and addresses a few pressing concerns of misuse of technology, it suffers
from a few serious lacunae that have not been discussed. Many experts, such as Supreme
court lawyer and cyber rights activist, Pavan Duggal, argue that the Act is a toothless
legislation which has not been completely effective in issuing penalties or sanctions
against perpetrators who choose to misuse the reach of cyber space. There are certain
areas of cyber laws which need attention

Notes 1. Spamming
Spam may be defined as Unsolicited Bulk E-mail. Initially it was viewed as a mere
nuisance but now it is posing major economic problems. In the absence of any adequate
technical protection, stringent legislation is required to deal with the problem of spam.
2. Phishing
Phishing is the criminally fraudulent process of attempting to acquire sensitive
information such as usernames, passwords and credit card details, by masquerading as
a trustworthy entity in an electronic communication. Phishing is typically carried out by
e-mail and often directs users to enter personal and financial details at a website. Phishing
is an example of social engineering technique used to fool users. There is no law against
phishing in the Information Technology Act though the Indian Penal Code talks about
cheating, it is not sufficient to check the activity of phishing. Recently a phishing attack
was noticed on the customers of State Bank of India in which a clone of the SBI website
was used. What is worse is that even SBI has not alerted its customers. So the need
of the hour is a legislation which prohibits the activity of phishing in India.
3. Data Protection in Internet Banking
Data protection laws primarily aim to safeguard the interest of the individual whose
data is handled and processed by others. Internet Banking involves not just the banks
and their customers, but numerous third parties too. Information held by banks about their
customers, their transactions etc. changes hand several times. It is impossible for the
banks to retain information within their own computer networks. High risks are involved
in preventing leakage or tampering of data which ask for adequate legal and technical
protection. India has no law on data protection leave alone a law governing an area as
specific as protection of data in electronic banking.
4. Privacy Protection
Privacy and data protection are important issues that need to be addressed today
as information technology assumes greater importance in personal, professional and
commercial spheres. The European Union and the United States have strict policies
relating to privacy and protection of personal data when such data or information is being
transferred out of their domain. It also pertinent to note here, that the absence of a specific
privacy law in India has resulted in a loss of substantial foreign investment and other
business opportunities. This deficiency has also served as an obstacle to the real growth
of electronic commerce. Thus, a statute addressing various issues related to privacy is
of utmost importance today, if not an entire act can be brought into force, then at least
specific provisions relating to privacy and data protection be incorporated into the Act.
5. Identity Theft
Identity theft worldwide is a growing problem. IT act 2000 fails to address this issue.
This is a major drawback considering the fact that majority of outsourcing work that India
does requires the companies in India to ensure there is no identity theft. In fact identity
theft was one of the main reasons for a major hue and cry over an incident involving personal
information of customers and an Indian web marketing company.
6. Cyber War
The issue of Cyber War has also not been discussed in the Act. International law
is an important part of any legal regime and due provisions need to be made in congruence
with the international framework of laws. India, in recent times, has faced a number of
cyber-attacks from China and the Chinese hackers have overridden the Firewalls on Indian
databases like a Mongol army on rampage. In the 26/11 attacks a number of classified

data were provided as Intel to the perpetrators from neighboring nations conspiring against Notes
India. There are no provisions in the Act to make such perpetrators liable for their actions.
14.9 Summary
The Right to Information Act covers the whole of India except Jammu and Kashmir,
where J&K Right to Information Act is in force. It covers all the constitutional authorities,
including executive, legislature and judiciary; any institution or body established or
constituted by an act of Parliament or a state legislature. It is also defined in the Act
that bodies or authorities established or constituted by order or notification of appropriate
government including bodies "owned, controlled or substantially financed" by government,
or non-Government organizations "substantially financed, directly or indirectly by funds".
The Right to information (RTI Act 2005) was touted as one law which would bring
in transparency and eradicate corruption by civil society direct involvement. Failure to
implement it in a thoroughly and efficiently has led to rough loss estimate of $245 million
yearly as per one estimate.
India being a federal state has many items in concurrent list and projects have
multiple departments working on them, and sometimes projects are moved from one
department to another. With Central and State information commissions working in such
a disconnect, and manual transfers of the request for information between departments
lead to big delays, confusion, and loss of traceability. It not only denies timely information,
creates high barriers to information only a few with very strong motivations and means
can cross, but puts a common citizen at the risk by exposing them directly to the
departments and agencies which they are trying to find information on.
The Information Technology Act provides legal framework for electronic governance
by giving recognition to electronic records and digital signatures. The formations of
Controller of Certifying Authorities were directed by the Act, to regulate issuing of digital
signatures. It also defines cybercrimes and prescribed penalties for them. It also
established a Cyber Appellate Tribunal to resolve disputes arising from this new law. The
Act also amended various sections of Indian Penal Code, 1860, Indian Evidence Act, 1872,
Banker's Book Evidence Act, 1891, and Reserve Bank of India Act, 1934 to make them
compliant with new technologies.
The term "information technology" came about in the 1970s. Its basic concept,
however, can be traced back even further. Throughout the 20th century, an alliance between
the military and various industries has existed in the development of electronics,
computers, and information theory. The military has historically driven such research by
providing motivation and funding for innovation in the field of mechanization and computing.
The first commercial computer was the UNIVAC I. It was designed by J. Presper
Eckert and John Mauchly for the U.S. Census Bureau. Since then, four generations of
computers have evolved. Each generation represented a step that was characterized by
hardware of decreased size and increased capabilities.
Data arranged in certain order and form which is useful to the recipient is called
Information. Davis & Olson define a fairly good definition as, “data that have been processed
into a form that is meaningful to the recipient and is of real or perceived value in current
or prospective actions or decisions”.
Information plays a very important role in management. It helps in management
control, in decision-making, and in building models, backgrounds and motivation. In a
business organization, the value of information is affected due to various factors like

Notes completeness, timeliness, correctness, consistency, appropriateness, validity, usability,

relevance and accessibility.
Internal information is the information gathered from within the organization is internal
information. External Information: The information gathered from external agencies and
external sources to the organization is external information. Possibly purchased or found
in the public domain.
Strategic information pertains mostly to the organisation as a whole and its
environments, such as information about population changes, natural resources, new
technologies, and new products.
Tactical information is required for short-term planning by middle level managers,
sales analyses and forecasts, cash flow projections etc., are examples of tactical
information.
Operational information relates to very short period that may be a few hours to a
few weeks. It may be about current stock levels of inventory, outstanding orders from
customers, work schedule for next shift etc.

1. ……………….is an Act of the Parliament of India to provide for setting out the
practical regime of right to information for citizens.
2. ……………….includes records, documents, memos, e-mails, opinions, advices,
press releases, circulars, orders, logbooks, contracts and reports.
3. ………………..is an Act which describes the modalities of the importance of
free and compulsory education for children between 6 and 14 in India under
Article 21a of the Indian Constitution.
4. ………………means authentication for any electronic record by a subscriber by
means of an electronic method or procedure in accordance with the provisions
of section 3.
5. ……………..is the use of any computers, storage, networking and other physical
devices, infrastructure and processes to create, process, store, secure and
exchange all forms of electronic data.
II. True/False
1. Right to Education is an Act of the Parliament of India to provide for setting
out the practical regime of right to information for citizens.
2. Information includes records, documents, memos, e-mails, opinions, advices,
press releases, circulars, orders, logbooks, contracts and reports.
3. Digital signature means authentication for any electronic record by a subscriber
by means of an electronic method or procedure in accordance with the provisions
of section 3.
4. Information technology (IT) is the use of any computers, storage, networking
and other physical devices, infrastructure and processes to create, process,
store, secure and exchange all forms of electronic data.
5. Electronic governance or e-governance is the application of information and
communication technology (ICT) for delivering government services, exchange
of information.

1. What is an Act of the Parliament of India to provide for setting out the practical
regime of right to information for citizens?
a) Right to Information (RTI)
b) Information
c) Right to Education Act (RTE)
d) Digital signature
2. What includes records, documents, memos, e-mails, opinions, advices, press
releases, circulars, orders, logbooks, contracts and reports?
b) Information
3. What is an Act which describes the modalities of the importance of free and
compulsory education for children between 6 and 14 in India under Article 21a
of the Indian Constitution?
b) Information
4. What means authentication for any electronic record by a subscriber by means
of an electronic method or procedure in accordance with the provisions of section
3?
b) Information
5. What is a secure digital key that is issued by the certifying authorities for the
purpose of validating and certifying the identity of the person holding this
certificate?
a) Digital Signature Certificate
b) Information

1. Define the term Information?
2. What is Right to Information?
3. Define the term Information Technology?
4. What is Electronic Governance?
5. What is Digital Signature?

Notes 6. What is Digital Signature Certificate?

7. What is Appellate Tribunal?
8. What are Offences?

1. Discuss in details about Right to Information Act, 2005.
2. Explain about Information Technology Act, 2000.
3. Write note on: Electronic Governance.
4. Discuss importance of Electronic Governance.
5. Explain about Secure Electronic Records and Digital Signatures.
6. Discuss in details about Digital Signature Certificates.
7. Explain about Cyber Regulations Appellate Tribunal.
8. Explain about Offences, Limitations of the Information Technology Act, 2000.
14.12 Key Terms

 Right to Information: Right to Information (RTI) is an Act of the Parliament
of India to provide for setting out the practical regime of right to information for
citizens and replaces the erstwhile Freedom of information Act.
 Right to Information Act, 2005: The Right to Information Act (RTI) is an Act
of the Parliament of India "to provide for setting out the practical regime of right
to information for citizens" and replaces the erstwhile Freedom of Information
Act, 2002. The Act applies to all States and Union Territories of India except
the State of Jammu and Kashmir. Under the provisions of the Act, any citizen
may request information from a "public authority" (a body of Government or
"instrumentality of State") which is required to reply expeditiously or within thirty
days.
 Information: Information is any material in any form. It includes records,
documents, memos, e-mails, opinions, advices, press releases, circulars,
orders, logbooks, contracts, reports, papers, samples, models, data material
held in any electronic form. It also includes information relating to any private
body which can be accessed by the public authority under any law for the time
being in force.
 Suo Motu Disclosure: The Act makes it obligatory for every public authority
to make suo-motu disclosure in respect of the particulars of its organization,
functions, duties etc. as provided in section 4 of the Act. Besides, some public
authorities under the Central Government have published other information and
have posted them on their websites.
 Right to Education (RTE): Right to Education Act (RTE), is an Act of the
Parliament of India enacted on 4 August 2009, which describes the modalities
of the importance of free and compulsory education for children between 6 and
14 in India under Article 21a of the Indian Constitution.
 Digital signature: Digital signature means authentication for any electronic
record by a subscriber by means of an electronic method or procedure in
accordance with the provisions of section 3;
 E-Commerce: The term ‘e-commerce’ is more commonly associated with
information on buying and selling of products and services via computer networks
using technologies like web, EDI, EFT, e-mail etc.
 Information Technology (IT): Information technology (IT) is the use of any Notes
computers, storage, networking and other physical devices, infrastructure and
processes to create, process, store, secure and exchange all forms of electronic
data.
 Electronic Governance: Electronic governance or e-governance is the
application of information and communication technology (ICT) for delivering
government services, exchange of information, communication transactions,
integration of various stand-alone systems and services between government-
to-citizen (G2C), government-to-business (G2B), government-to-government
(G2G), government-to-employees (G2E) as well as back office processes and
interactions within the entire government framework. Through e-governance,
government services will be made available to citizens in a convenient, efficient
and transparent manner.
 Digital Signature: The law of the information technology recognises the digital
so that the internet contract is authenticated and becomes binding on the
parties. These are the electronic equivalent of the hand written signatures. In
an electronic message or transaction affixing hand written signature is not
possible. Authentication of the record has to be achived by some electronic
or digital method. “Affixing digital signature” has been defined in section 2(1)(d)
of the Act to mean adoption of any methodology or procedure by a person for
the purpose of authenticating an electronic record by means of “digital
signature”.
 Digital Signature Certificate: Digital Signature Certificate is a secure digital
key that is issued by the certifying authorities for the purpose of validating and
certifying the identity of the person holding this certificate. Digital Signatures
make use of the public key encryptions to create the signatures. A digital
signature certificate (DSC) contains information about the user’s name, pin
code, country, email address, date of issuance of certificate and name of the
certifying authority.

1. Right to Information (RTI)
2. Information
3. Right to Education Act (RTE)
4. Digital Signature
5. Information technology (IT)
II. True or False

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

Notes III. Multiple Choice Questions

1. [a]
2. [b]
3. [c]
4. [d]
5. [a]
14.14 Case Study

An applicant approached an organization - notified by a State Government in the
official Gazette as an "intelligence and security organization" - with an RTI application.
The applicant approached the designated PIO of that organization and asked for information
that he claimed pertained to violation of his human right. At first, the PIO responded saying
that the Public Authority concerned is not bound to give the information. When told that
even an exempted organization has to give information pertaining to Human Rights
Violation, the PIO argued that he was not convinced that the information involved human
right violation. The applicant mentioned to the PIO that he is well-versed with the provisions
of the RTI Act, 2005 and that he will not hesitate to pursue his case not just with the
Information Commission concerned`, but if need be, he'd go all the way to the Supreme
Court. Hearing this, the PIO felt that it would be o.k. to give information to the applicant
right away to avoid any further hassles. In fact, the First Appellate Authority too had asked
the PIO to do so.
Questions
1. Is the applicant right in thinking that he can go all the way to the Supreme
Court seeking a remedy?
2. Because he thinks that the information he is seeking pertains to a violation of
his human right? Why do you think so?


14.16 Bibliography Notes

Press.
Kluwer Law Intl
Press.


Notes
Unit 15: Intellectual Property Laws
Structure:
15.1 Introduction
15.2 Legal Aspects of Patents
15.3 Filing of Patent Applications
15.4 Rights from Patents
15.5 Infringement of Patents
15.6 Copyright and its Ownership
15.7 Infringement of Copyright
15.8 Civil Remedies for Infringement
15.9 Summary
15.12 Key Terms
15.14 Case Study
15.16 Bibliography
Objectives

 Introduction
 Legal Aspects of Patents
 Filing of Patent Applications
 Rights from Patents
 Infringement of Patents
 Copyright and its Ownership
 Infringement of Copyright
 Civil Remedies for Infringement

Intellectual Property Laws 311

Man is a wonderful being with great imagination, marvelous creation and highly
skillful. In some of the situations man is beyond the nature. With the emerging and fast
growing business and market environments, computers and information technology, man’s
contributions and creations are wonderful. These creations are to be protected. In order
to protect inventions and creations a separate legislation has been enacted, which is
known as Intellectual Property Legislation – Patents Act 1970.
Intellectual Property Legislation – Patents Act 1970
Intellectual Property means a property created by human brain or human intellect.

The subject matter of intellectual property (I.P) is very wide which includes literary and
other works like inventions, designs, trademarks, computer programs etc. Earlier I.P were
collectively known as “Industrial property”.
Scope of Intellectual Property Rights
The convention establishing World Intellectual Property Organization (WIPO) has

given a wider definition of IPRs. According to this definition the IPRs shall include the
rights relating to:
(i) Literary, artistic and scientific work;
(ii) Performances of performing artists, phonograms and broadcasts;
(iii) Inventions in all fields of human endeavour;
(iv) Scientific discoveries;
(v) Industrial designs;
(vi) Trademarks, service marks and commercial names and designations;
(vii) Protection against unfair competition and; all other rights resulting from
intellectual activity in the industrial, scientific, literacy or artistic fields.
Kinds of Intellectual Property
Industrial Property and Intellectual Property

(1) Patents, designs and trademarks are considered as “Industrial Property”
(2) Copyright and Confidential information are considered as “Intellectual Property”
According to World Intellectual Property Organisation (WIPO) intellectual property
includes rights relating to –
(1) Industrial designs
(2) Literary, artistic and Scientific works
(3) Protection against unfair competition
(4) Scientific discoveries
(5) Performances of artists and programmes etc.
The concept of ‘intellectual property’ started gaining its importance since 1992 when
the new industrial policies were reformed which gave scope for liberalization and
globalisation of trade.

Notes The Patent Act, 1970
Meaning of Patent: A patent generally speaking, is a grant from government, which

confers on the grantee, for a limited period of time, the exclusive privilege of making, selling
and using the invention for which a patent has been granted and also of authorizing others
to do so.
Thus “Creative work” based on individual initiative is granted the ‘Status of Property’
which can be hired, licensed, purchased or sold. Thus, Patent Acts encourages inventions
and reduces the risk of pirating or copying.
Kinds of Patents
Three kinds of patents are granted under different provisions of the Act. These are
1. Ordinary Patent: Is a “Patent” normally obtained by filing application under
Sec. 6(1) of the Patent Act 1970.
2. Patent of Addition: It is a patent for improvement in or modification of an
invention for which a patent application has already been made or it has been
granted
Sec. 54 to 56 of this Act containing provisions regarding application, sealing
of patent, renewal fees, terms of patent and validity period of patent of addition.
A patent of addition remains in force only as long as the patent for the original
invention remains in force.
3. A patent granted in respect of a convention: Application filed u/s 135 of
the Act under reciprocity arrangements the convention application has to be
made within one year from the date of the first application made in a convention
country in respect of that invention.
Revocation of Patents [Section 64-66]
A patent confers exclusive rights to the first and true inventor. There is elaborate
procedure for grant of patent under this Act and Patent Office will take all possible
precautions before granting a ‘patent’. Under the provisions of this Act it is open to any
person to challenge the validity of patent. If the grounds challenging the grant of patent
are valid or the Government in public interest deems it fit, the exclusive rights granted
to inventor shall be withdrawn. Any such withdrawal of rights granted to patentee is termed
revocation of patent.
Section 64 provides for revocation of patents as follows:
(1) Subject to the provisions contained in this Act, a patent, whether granted before
or after the commencement of this Act, may, on the petition of any person
interested or of the Central Government or on a counter-claim in a suit for
infringements of the patent, be revoked by the High Court on any of the following
grounds;
(a) The invention, was claimed in a valid claim of earlier priority date
contained in the complete specification of another patent granted in India.
(b) [omitted];
(c) Patent was obtained wrongfully in contravention of the rights of the
petitioner or any person under or through whom he claims;
(d) that claim is not an invention within the meaning of this Act;
[e, f omitted]
(g) Invention is not useful; Notes

(h) The complete specification does not sufficiently and fairly describe the
invention and the method by which it is to be performed;
(i) That the scope of any claim of the complete specification is not
sufficiently and clearly defined;
(j) That the patent was obtained on a false suggestion or representation;
(k) That the subject of any claim is not patentable under this act.
(l) The invention was secretly used in India, otherwise than as mentioned
in subsection (3) before the priority date of the claim;
(m) Applicant for the patent has failed to disclose to the Controller the
information required by section 8 or has furnished information which in
any material particular was false to his knowledge;
(n) Applicant contravened any direction for secrecy passed under section 35
or made or caused to be made an application for the grant of a patent
outside India in contravention of section 39.
(o) Leave to amend the completed specification under section 57 or section
58 was obtained by fraud.
(p) That the complete specification does not disclose or wrongly mention the
source or geographical origin of biological material used for the invention.
(q) That the invention so far as claimed in any claim of the complete
specification was anticipated having regard to the knowledge, oral or
otherwise, available within any local or indigenous community in India or
elsewhere.
Without prejudice to the provisions contained in sub-section (1) a patent may be
revoked by the High Court on the petition of the Central Government, if the High court
is satisfied that the patentee has without reasonable cause dialed to comply with the
request of the Central Government within the meaning of section 99 upon reasonable terms.
Revocation of patent in public interest. Where the Central Government is of
opinion that a patent or the mode in which it is exercised is mischievous to the State
or generally prejudicial to the public, it may, after giving the patentee an opportunity to
be heard, make a declaration to that effect in the Official Gazette and thereupon the patent
shall be deemed to be revoked.
Register of patents (Sections 67-72)
Sealing of Patent is done at patent office at Calcutta. The Controller shall enter in
Register of Patent relevant details in respect of patents such as:
(i) Names, addresses and nationality of the patentees,
(ii) Title of the invention,
(iii) Date of the patent, the date of sealing etc.
(iv) Renewal fees and date of renewal
(v) Change of in patentee’s address, if any
According to Section 67.

(1) There shall be kept at the patent office a register of patents, wherein shall be
entered-
(a) the names and addresses of grantees of patents;

Notes (b) notification of assignments and of transmissions of patents, of licenses

under patents, and of amendments, extension, and revocations of
patents; and
(c) particulars of such other matters affecting the validity or proprietorship
of patents as may be prescribed.
(2) No notice of any trust, whether express, implied or constructive, shall be entered
in the register, and the controller shall not be affected by any such notice.
(3) The register shall be kept under the control and management of the Controller.
(4) Notwithstanding anything contained in sub-section (1), it shall be lawful for the
controller to keep the register of patents or any part thereof in computer floppies,
diskettes or any other electronic form subject to such safeguards as may be
prescribed.
(5) In the event the register is kept wholly or partly in computer floppies, diskettes
or any other electronic form-
(a) references in this Act to an entry particulars in the register shall be
deemed to include reference to a record of particulars kept in computer
floppies, diskettes or any other electronic form and comprising the
register or part of the register and references to the rectification of the
register are to be read as including references to the rectification of the
record of particulars kept in computer floppies, diskettes or any other
electronic form and comprising the register or part of the register.
A patent is not valid unless it is in writing and registered with the controller within
6 months. Without registration, there will not be accepted by the court or controller as
evidence.
Working of Patents, Compulsory Licenses and Revocation
Working of Patents: The general principle is that patents for inventions are granted
for being used and not for hoarding. It is essential to secure:
(a) that patents are granted to encourage inventions and to secure that the
inventions are worked in India on a commercial scale and to the fullest extent
that is reasonably practicable without undue delay; and
(b) that they are not granted merely to enable patentees to enjoy a monopoly for
the importation of the patented article.
(c) that the protection and enforcement of patent rights contribute to the promotion
of technological innovation and to the transfer and dissemination of technology,
to the mutual advantage of producers and users of technological knowledge and
in a manner conducive to social and economic welfare, and to a balance of rights
and obligations;
(d) that patents granted do not impede protection of public health and nutrition and
should act as instrument to promote public interest specially in sectors of vital
importance for socio-economic and technological development of India;
(e) that patents granted do not in any way prohibit Central Government in taking
measures to protect public health.
(f) that the patent right is not abused by the patentee or person deriving title or
interest on patent from the patentee, and the patentee or a person deriving title
or interest on patent from the patentee does not resort to practices which
unreasonably restrain trade or adversely affect the international transfer of
technology; and
(g) that patents are granted to make the benefit of the patented invention available Notes
at reasonably affordable prices to the public.
Surrender of Patent: Sec. 63 dealing with surrender of Patents entitles the patentee
to surrender the patent, at any time by giving notice in the prescribed manner to the
controller.
Compulsory Licences (Section 84)
At any time after the expiration of 3 years from the date of the sealing of patent,
any person interested may make an application to the Controller alleging that the
reasonable requirements of public are not satisfied and patented invention is not available
to the public at a reasonable price and praying for the grant of a compulsory licence to
work the patented invention.
(1) Such application may be made by any person who is already a licensee.
(2) That the patented invention is not worked in the territory of India.
(3) The Controller, if satisfied that the reasonable requirements of the public with
respect to the patented invention have not been satisfied or that the patented
invention is not worked in the territory of India or that the patented invention
is not available to the public at a reasonably affordable price, may grant a licence
upon such terms as he may deem fit.
Revocation of patents by the Controller for non-working [Section 85].

(1) Where, in respect of a patent, a compulsory licence has been granted, the
Central Government or any person interested may, after the expiration of two
years from the date of the order granting the first compulsory license, apply
to the Controller for an order revoking the patent on the ground that the patented
invention has not been worked in the territory of India or that reasonable
requirements of the public with respect to the patented invention has not been
satisfied or that the patented invention is not available to the public at a
reasonably affordable price.
(2) Such application shall contain such particulars as may be prescribed, the facts
upon which the application is based, and in the case of an application other
than by the Central Government, shall also set out the nature of the applicant’s
interest.
(3) The Controller, if satisfied may make an order revoking the patent.
(4) Such application shall ordinarily be decided within one year of its being
presented to the controller.
Powers of Controller in granting Compulsory Licences (Section 88)
Where the Controller, is satisfied on applications made under Section 84, he may,
subject to the provisions of that sections, order the grant of licenses under the patent
to such customers of the applicant as he thinks fit as well as to the applicant.
Where an applicant is the holder of a licence under the patent, the Controller may,
if he makes an order for the grant of a licence to the applicant, order the existing licence
to the cancelled, or may, if he thinks fit, instead of making an order for the grant of a
licence to the applicant, order the existing licence to be amended.
The controller while ordering the grant of a licence, may, direct that the licence shall
operate:

Notes (a) to deprive the patentee of any right which he may have as patentee to make,
use, exercise or vend the invention or to grant licences under the patent;
(b) to revoke all existing licences in respect of the invention.
Where two or more patents are held by the same patentee and an applicant for a
compulsory license establishes that the reasonable requirements of the public have not
been satisfied with respect to some only of the said patents, then if the Controller is
satisfied that the applicant cannot efficiently or satisfactory work the licence granted to
him under those patents without infringing the other patents held by the patentee, he may,
by order, direct the grant of a licence in respect of the other patents also to enable the
licensee to work the patent or patents in regard to which a licence is granted under section
84.
Where the terms and conditions of a licence been settled by the controller, the
licensee may, at any time after he has worked the invention on a commercial scale for
not less then twelve months, make an application for the revision of the terms and
conditions on the ground that these have proved to be more onerous than originally
expected and the licensee is unable to work the invention except at a loss: Provided that
no such application shall be entertained a second time.
Register of Patent Agents
As per sec. 125 as per patent (Amendment) Act 2002 requires the controller shall
maintain “register” of patents in which shall be entered, the names and addresses of all
persons qualified to have their names so entered u/s 126. The rule also makes the
controller should keep the register of patents in electronic force.
Qualification for Registration as a Patent Agent: Sec. 126 says that a person shall
be qualified to have his name entered with register of patent agents if he fulfills the following
conditions, namely-
(1) (a)he is a Citizen of India
(b)he has completed the age of years.
(c)he has obtained a degree from any university of India.
(d) paid fees as may be prescribed
(2) A person who has been registered as a patent agent before the commencement
of the Patent Act 2002, shall be entitled to continue to be, or when required
to be re-registered, as a patent agent, on payment of the fee as may be
prescribed [Sec. – 126]
Rights of Patent Agents [Sec. 127]
Sec. 127 says that subject to the provisions contained in this Act and to any rules
made, there under every patent agent whose name is entered in the register shall be
entitled.
(a) to practice before the controller and
(b) to prepare all documents, transact all business and discharge such other
functions as may be prescribed in connection with any proceedings before the
controller under this Act.
The Patent Office: The H.O. is of the Patent Office is located in Kolkata and the
Branch offices at Mumbai, Chennai and Delhi.

Appellate Board (Sec. 116) Notes

The Patent (amendmend) Act, 2002 has replaced the old XIX chapter dealing with
appeals to new chapter XIX titled “Appeals to the Appellate Board”
Appellate Board –
(1) Subject to the provisions of this Act, the Appellate Board established under
section 83 of the Trade Marks Act, 1999 shall be the Appellate Board for the
purpose of this Act and the said Appellate Board shall exercise the jurisdiction,
power and authority conferred on it by or under this Act.
(2) A person shall not be qualified for appointment as a Technical Member for the
purpose of this Act unless he-
(a) has at held the post of Controller or has exercised the functions of the
Controller under this Act for at least five years; or
(b) has been for at least ten years functioned as a Registered Patent Agent
and possesses a degree in engineering or technology or a masters
degree in science from any University established under law for the time
being in force or equivalent; or
(c) has, for at least ten years, been an advocate of a proven specialized
experience in practicing law relating to patents and designs.
15.2 Legal Aspects of Patents

The present Patents Act, 1970 came into force in the year 1972, amending and
consolidating the existing law relating to Patents in India. The Patents Act, 1970 was
again amended by the Patents (Amendment) Act, 2005, wherein product patent was
extended to all fields of technology including food, drugs, chemicals and microorganisms.
After the amendment, the provisions relating to Exclusive Marketing Rights (EMRs) have
been repealed, and a provision for enabling grant of compulsory license has been
introduced. The provisions relating to pre-grant and post-grant opposition have been also
introduced.
An invention relating to a product or a process that is new, involving inventive step
and capable of industrial application can be patented in India. However, it must not fall
into the category of inventions that are non-patentable as provided under Section 3 and
4 of the (Indian) Patents Act, 1970. In India, a patent application can be filed, either alone
or jointly, by true and first inventor or his assignee.
The new patent regime in India touched the hornets’ nest and has raised several
contentious issues relating to right to health of the people, which is in conflict with the
economic right of patent holders. It is also likely to restrict access of allopathic medicines
to only the affluent, affordable and more privileged class of people in India and other
countries in the immediate future. The institutions associated with enforcement and
protection of right to health of human beings whilst upholding the rights of patent holders
are faced with the daunting task and challenge of devising ways and means for fulfilling
their defined, designed and desired roles so that the conflict in rights pertaining to rights
of intellectual property owners and the right to health of human beings is minimized whilst
balancing the prevailing hierarchy of human rights for achieving the social and economic
objectives.
Though India was not a member of Paris convention, but having signed the TRIPS
agreement, India is now obliged to recognise and implement the provision of national

Notes treatment to nationals of other members as has been incorporated in the TRIPS agreement.
The law of patents has also become an important discipline of international trade and
commerce due to great advancement in science and technology, revolutionary changes
in computer software development and with the shift from process to product patent, the
patent law has been striving to keep pace with the changes in technology. The importance
of the subject has grown due to lack of adequate legal literature. The Indian patent system
has been modelled on British system to a great extent and the system of the U.S.A to
some extent. Meaning and Object of Patent A patent is a set of exclusive rights granted
by a state to an inventor or his assignee for a fixed period of time in exchange for the
disclosure of the invention.
15.3 Filing of Patent Applications
Filing an application for a patent
Any person interested in obtaining a patent has to make an application.

(1) An application for a patent for an invention may be made,
(a) by any person who claims to be the true and first inventor of the invention.
(b) by any person being the assignee of the person claiming to be the true
and first inventor in respect of the right to make such an application.
(c) by the legal representatives of the deceased person who immediately
before his death was entitled to make such an application.
(2) An application under Sub Sec. (1) may be made by any of the person referred
to there in either alone or jointly with any other person (Sec. 6)
(a) Applicant need not be citizen of India, it can be made by any person
claming to be the true of first inventor of the invention.
(b) A joint stock company or a partnership firm or a corporation can apply
for a patent only as an assignee of the inventor. This so because, such
bodies cannot invent anything and cannot, therefore, be called “inventors”.
(c) Government Servants are at liberty to apply for grant of patent directly
to patent office subject to any special conditions of service applicable
to employees of any particular department.
(d) Defence Employees are not eligible to apply for patents except in the
manners laid down in special regulations applicable to them.
(e) Railway and Research Establishment employees are not eligible to apply
for patents or permit other person to apply for patent except with the
permission of the govt. and in accordance with the regulations.
(3) u/s 54(1) an application for a patent of addition may be made only by the
applicant for the original patent to which it is an addition, if the application for
the original patent is pending or by the registered Proprietor of such original
patent, if it has been granted.
(4) A convention application may be made by any person who has made an
application for a patent in respect of that invention in a convention country or
by his assignee or his legal representative.
Form 1 – Application for Grant of Patent
As the name suggests, this form is an application for grant of patent in India. In
this form, you will have to furnish information, such as, name and address of the inventor(s),

name and address of the applicant(s), information corresponding to prior patent Notes
applications relating to the current invention, which you or any authorized entity has filed,
and some declarations, among other information.
Form 2 – Provisional/Complete Specification
Form 2 is used to furnish your patent specification. The patent specification can be
provisional or a complete patent specification depending of the type of patent application
(provisional or complete) you are filing. You might find our article on “What are the different
patent filing options?” useful.
Form 3 – Statement and Undertaking under Section 8
Form 3 is used to furnish information/actions relating to patent applications filed in
other countries for the current invention. Additionally, any information relating to the rights
corresponding to the present patent application has to be furnished. Further, you would
be using form 3 to undertake that you will be keeping the patent office informed in writing
the details regarding corresponding applications for patents filed outside India. You can
read more about this in article.
Form 5 – Declaration as to Inventor ship
This application is used to declare the inventors of the subject matter sought to be
protected using the current patent application.
Form 9 – Request for Publication
If this form is not filed, then the patent specification will be published by the patent
office after 18 months from the priority date (filing of the first patent application for the
current subject matter). On the other hand, by filing this form, you can generally have
your patent specification published within 1 month from filing this form. Note that the patent
rights start from the date of publication of the patent application (enforceable after grant
of patent).
Form 18 – Request for Examination of Application for Patent
This form can be filed within 48 months from the priority date. The patent office will
not consider your patent application for examination unless this form is filed. Hence, if
you wish to expedite the patenting process, filing of form 9 and 18 at an early stage is
advised. A startup can also request for expedited examination of their patent application.
The fee for this is INR 8000. At present, the patent office has limited this request to about
1000 request in a year.
15.4 Rights from Patents

A patent owner has the right to decide who may - or may not - use the patented
invention for the period in which the invention is protected. The patent owner may permit
to, or license, other parties to use the invention on mutually agreed terms as long as
patent is in force.
The term international Patent only means that Patent filed in one country can treated
filed in other designated countries as on date of filing in one country if filed within 12 months
from date of application for the purpose of priority date. So if one files an application for
International Patent in India that will be transmitted to an International Bureau that will
further transmit the application to the Patent Office of the designated countries, which
will then examine it whether it can be patented under their respective Patent Laws.
A patent holder may assign or license its patent rights to a third party. An assignment
of a patent results in the transfer of all of the rights owned by the patent holder to a third
Notes party (the assignee). A licence of a patent does not transfer ownership of any patent rights;
rather, it establishes terms upon which a third party (the licensee) may exercise certain
patent rights without such use constituting infringement.
A patent holder is not obliged to exploit an invention claimed in a patent at any time
during the patent term, nor to license or assign its patent rights. However, the failure to
exploit the invention may encourage others to invoke the Crown use or compulsory
licensing provisions in the Patents Act.
For example: A scientist "Mr. X" files a Patent Application in Indian Patent Office
under Patent Cooperation Treaty (PCT) route on 1-1-2004 and wants to file Patent
Application in Denmark. So the Indian Patent Office shall be the receiving office for such
application and then transmit the application to Patent Office of Denmark and then Mr.
X has to file his Patent Application in prescribed form under Patent Act of Denmark within
12 months starting from 1-1-2004.
15.5 Infringement of Patents

Patent infringement is the commission of a prohibited act with respect to a patented
invention without permission from the patent holder. Permission may typically be granted
in the form of a license. The definition of patent infringement may vary by jurisdiction,
but it typically includes using or selling the patented invention. In many countries, a use
is required to be commercial (or to have a commercial purpose) to constitute patent
infringement. The scope of the patented invention or the extent of protection is defined
in the claims of the granted patent. In other words, the terms of the claims inform the
public of what is not allowed without the permission of the patent holder.
Patents are territorial, and infringement is only possible in a country where a patent
is in force. For example, if a patent is granted in the United States, then anyone in the
United States is prohibited from making, using, selling or importing the patented item,
while people in other countries may be free to exploit the patented invention in their country.
The scope of protection may vary from country to country, because the patent is examined
-or in some countries not substantively examined- by the patent office in each country
or region and may be subject to different patentability requirements.
Patent Infringement in India
The Indian Patents Act 1970 does not specifically define activities that constitute
infringement of patents Section 48 of the Indian Patents Act 1970, however, confers
exclusive rights upon the patentee to exclude third parties from making, importing, using,
offering for sale or selling the patented invention, patented product or patented process.
It can therefore be concluded that violation of aforementioned monopoly rights would
constitute infringement of a patent.
The Patent Act of 1970 (IPA) provides for the enforcement of patents by way of suits
for infringement. Post-WTO TRIPS Agreement, various methods have, however, been
adopted by legislators in India to improve patent enforcement measures. The TRIPS
Agreement has introduced several domestic enforcement mechanisms in an attempt to
overcome the shortcomings of pre - existing international IP laws. The 2005 Amendment
of the IPA was a significant breakthrough as it marked the beginning of a product patent
regime in chemicals, food and drugs, and also some of the notable patent litigation between
innovator companies and the Indian generic drug industry. Before delving into the
enforcement measures, it is pertinent to discuss activities amounting to infringement, the
provision in the statute that exempts certain activities from infringement liability and the
defences available in case of an infringement suit. Notes

As per section 104(A) of the Indian Patents Act, 1970, in a patent infringement suit,
where the subject matter of patent is a process for obtaining a new product or there is
substantial likelihood that an identical product is made by the patented process and the
patent holder or a person deriving title or interest in the patent from him, has proved that
the product is identical to the product directly obtained by the patented process but the
patent holder could not establish through reasonable efforts to determine the process
actually used by the infringer, then the court may direct the defendant to prove that the
process used by him to obtain the product, identical to the product of the patented process,
is different from the patented process.
As per section 47 of the Indian Patents Act, 1970, an invention can be used any
time after the application for a patent is filed, or after the patent is granted by the ‘Central
Government’ and by ‘any person authorized by it’. The patented product may be imported
or made by or on behalf of the government. Similarly, the patented process may be used
by or on behalf of the government for its own use.
15.6 Copyright and its Ownership

Copyright is a legal right created by the law of a country that grants the creator of
original work exclusive rights for its use and distribution. This is usually only for a limited
time. The exclusive rights are not absolute but limited by limitations and exceptions to
copyright law, including fair use. A major limitation on copyright is that copyright protects
only the original expression of ideas, and not the underlying ideas themselves.
Copyright is a form of intellectual property, applicable to certain forms of creative
work. Some, but not all jurisdictions require "fixing" copyrighted works in a tangible form.
It is often shared among multiple authors, each of whom holds a set of rights to use or
license the work, and who are commonly referred to as rights holders. These rights
frequently include reproduction, control over derivative works, distribution, public
performance, and moral rights such as attribution.
Copyrights are considered "territorial rights", which means that they do not extend
beyond the territory of a specific jurisdiction. While many aspects of national copyright
laws have been standardized through international copyright agreements, copyright laws
vary by country.
Typically, the duration of a copyright spans the author's life plus 50 to 100 years
(that is, copyright typically expires 50 to 100 years after the author dies, depending on
the jurisdiction). Some countries require certain copyright formalities to establishing
copyright, but most recognize copyright in any completed work, without formal registration.
Generally, copyright is enforced as a civil matter, though some jurisdictions do apply
criminal sanctions.
Most jurisdictions recognize copyright limitations, allowing "fair" exceptions to the
creator's exclusivity of copyright and giving users certain rights. The development of digital
media and computer network technologies have prompted reinterpretation of these
exceptions, introduced new difficulties in enforcing copyright, and inspired additional
challenges to the philosophical basis of copyright law. Simultaneously, businesses with
great economic dependence upon copyright, such as those in the music business, have
advocated the extension and expansion of copyright and sought additional legal and
technological enforcement.

Notes Ownership
The original holder of the copyright may be the employer of the author rather than
the author himself if the work is a "work for hire". For example, in English law the Copyright,
Designs and Patents Act 1988 provides that if a copyrighted work is made by an employee
in the course of that employment, the copyright is automatically owned by the employer
which would be a "Work for Hire". Typically, the first owner of a copyright is the person
who created the work i.e. the author. But when more than one person creates the work,
then a case of joint authorship can be made provided some criteria are met.
Owners hold specific rights but not all rights
The law grants to owners a set of specified rights: reproduction of works; distribution
of copies; making of derivative works; and the public performance and display of works.
Some artworks have "moral rights" regarding the name of the artist on the work, or
preventing destruction of some works. Owners may also have rights to prevent anyone
from circumventing technological protection systems that control access to the works.
Author is the copyright owner
As a general rule, the initial owner of the copyright is the person who does the creative
work. If you wrote the book or took the photograph, you are the copyright owner.
Employer may be the copyright owner
If you created the work as an employee, acting within the scope of your employment,
the work may be a "work made for hire." In that event, the copyright owner is the employer.
If you are an employee, and your job is to create software code, the copyright probably
belongs to your employer.
Copyrights can be transferred
The law may make you or your employer the copyright owner, but the law also allows
the owner to transfer the copyright. With a written and signed instrument, your employer
can give you the copyright. In the academic setting, we are frequently asked to transfer
copyrights in our books and articles to publishers. The ability to transfer or retain our
copyrights is an opportunity to be good stewards of our intellectual works.
Copyright owners may allow public uses
A copyright owner may grant rights to the public to use a protected work. That grant
could be a simple statement on the work explaining the allowed uses, or it may be a
selection of a Creative Commons license. Similarly, the movement to make works "open
access" or "open source" is a choice by the owner of rights to make works available to
the public.
15.7 Infringement of Copyright

For a work to be considered to infringe upon copyright, its use must have occurred
in a nation that has domestic copyright laws or adheres to a bilateral treaty or established
international convention such as the Berne Convention or WIPO Copyright Treaty. Improper
use of materials outside of legislation is deemed "unauthorized edition", not copyright
infringement.
Copyright infringement most often occurs to software, film and music. However,
infringement upon books and other text works remains common, especially for educational
reasons. Statistics regarding the effects of copyright infringement are difficult to determine.
Studies have attempted to determine whether there is a monetary loss for industries
affected by copyright infringement by predicting what portion of pirated works would have
been formally purchased if they had not been freely available. Other reports indicate that Notes
copyright infringement does not have an adverse effect on the entertainment industry, and
can have a positive effect. In particular, a 2014 university study concluded that free music
content, accessed on YouTube, does not necessarily hurt sales, instead has the potential
to increase sales.
15.8 Civil Remedies for Infringement

(1) Where copyright is any work has been infringed, the owner of the copyright shall,
except as otherwise provided by this Act, be entitled to all such remedies by
way of injunction, damages, accounts and otherwise as are or may be conferred
by law for the infringement of a right.
Provided that if the defendant proves that at the date of the infringement he was
not aware and had no reasonable ground for believing that copyright subsisted
in the work, the Plaintiff shall not be entitled to any remedy other than an
injunction in respect of the infringement and a decree for the whole or part of
the profits made by the defendant by the sale of the infringing copies as the
court may in the circumstances deem reasonable.
(2) Where, in the case of a literary, dramatic, musical or artistic work, a name
purporting to be that of the author or the publisher, as the case may be, appears
on copies of the work as published, or, in the case of an artistic work, appeared
on the work when it was made, the person whose name so appears or appeared
shall, in any proceeding in respect of infringement of copyright in such work,
be presumed, unless the contrary is provided, to be the author or the publisher
of the work, as the case may be.
(3) The costs of all parties in any proceeding in respect of the infringement of
copyright shall be in the discretion of the court.
Injunctions –
The power of the Court to grant a temporary injunction is not limited by the absence
of any finding on the question of jurisdiction which has been raised in the case.
The precise rule of law contained in cl. (f), S.56, Specific Relief Act, cannot, interfere
in any way with the discretion of the Court in regard to a temporary injunction the grant
of which should therefore be governed by other principles.
15.9 Summary
Intellectual Property means a property created by human brain or human intellect.
The subject matter of intellectual property (I.P) is very wide which includes literary and
other works like inventions, designs, trademarks, computer programs etc. Earlier I.P were
collectively known as “Industrial property”.
A patent generally speaking, is a grant from government, which confers on the
grantee, for a limited period of time, the exclusive privilege of making, selling and using
the invention for which a patent has been granted and also of authorizing others to do
so.
Thus “Creative work” based on individual initiative is granted the ‘Status of Property’
which can be hired, licensed, purchased or sold. Thus, Patent Acts encourages inventions
and reduces the risk of pirating or copying. Regarding the original development of all
intellectual property rights including patent, England has been considered as an important
Notes place in the world history. It has set the base for patent rights internationally. Patents
played an important role in the development of Industries in the western countries.
Information Security is a multidisciplinary area of study and professional activity
which is concerned with the development and implementation of security mechanisms of
all available types (technical, organizational, human-oriented and legal) in order to keep
information in all its locations (within and outside the organization’s perimeter) and,
consequently, information systems, where information is created, processed, stored,
transmitted and destructed, free from threats. Threats to information and information
systems may be categorized and a corresponding security goal may be defined for each
category of threats. A set of security goals, identified as a result of a threat analysis,
should be revised periodically to ensure its adequacy and conformance with the evolving
environment.
Information Technology Security is information security applied to technology (most
often some form of computer system). It is worthwhile to note that a computer does not
necessarily mean a home desktop. A computer is any device with a processor and some
memory (even a calculator). IT security specialists are almost always found in any major
enterprise/establishment due to the nature and value of the data within larger businesses.
They are responsible for keeping all of the technology within the company secure from
malicious cyber-attacks that often attempt to breach into critical private information or gain
control of the internal systems.
Information assurance is the act of ensuring that data is not lost when critical issues
arise. These issues include but are not limited to: natural disasters, computer/server
malfunction, physical theft or any other instance where data has the potential of being
lost. Since most information is stored on computers in our modern era, information
assurance is typically dealt with by IT security specialists. One of the most common
methods of providing information assurance is to have an off-site backup of the data in
case one of the mentioned issues arises.
Information systems security is responsible for the integrity and safety of system
resources and activities. Most organizations in developed countries are dependent on the
secure operation of their information systems. In fact, the very fabric of societies often
depends on this security. Information systems are at the heart of intensive care units and
air traffic control systems. Financial institutions could not survive a total failure of their
information systems for longer than a day or two. Electronic funds transfer systems (EFTS)
handle immense amounts of money that exist only as electronic signals sent over the
networks or as magnetized spots on storage disks. Information systems are vulnerable
to a number of threats, which require strict controls such as countermeasures and regular
audits to ensure that the system remains secure.
Access controls are security features that control how users and systems
communicate and interact with other systems and resources. Access is the flow of
information between a subject and an object. A subject is an active entity that requests
access to an object or the data within an object e. g. user, program, process etc.

1. Intellectual Property means a property created by human brain or……………...
2. ……………….generally speaking, is a grant from government, which confers on
the grantee, for a limited period of time.
3. ……………is the commission of a prohibited act with respect to a patented Notes

invention without permission from the patent holder.
4. …………is a legal right created by the law of a country that grants the creator
of original work exclusive rights for its use and distribution.
5. Improper use of materials outside of legislation is deemed "unauthorized
edition", not………………...
II. True/False
1. Intellectual Property means a property created by human brain or human
intellect.
2. Patent generally speaking, is a grant from government, which confers on the
grantee, for a limited period of time.
3. Patent infringement is the commission of a prohibited act with respect to a
patented invention without permission from the patent holder.
4. The Indian Patent Act under section 109 provides rights alike to the exclusive
license holder as that of patentee to institute a patent infringement suit if the
act of infringement is committed after the date of the license.
5. Copyright is a legal right created by the law of a country that grants the creator
of original work exclusive rights for its use and distribution.

1. What means a property created by human brain or human intellect?
a) Intellectual Property
b) Patent
c) Patent infringement
d) Copyright
2. What generally speaking, is a grant from government, which confers on the
grantee, for a limited period of time?
b) Patent
d) Copyright
3. What is the commission of a prohibited act with respect to a patented invention
without permission from the patent holder?
b) Patent
d) Copyright
4. What is a legal right created by the law of a country that grants the creator
of original work exclusive rights for its use and distribution?
b) Patent
d) Copyright

Notes 5. What is a multidisciplinary area of study and professional activity which is

concerned with the development and implementation of security mechanisms?
a) Information Security
b) Patent
d) Copyright

1. What is Patent?
2. What is Legal Aspects of Patent?
3. What is Infringement of Patent?
4. What is Copyright?
5. What is Infringement of Copyright?
6. What is Infringement?

1. Discuss in details about Legal Aspects of Patents.
2. Explain in details about Filing of Patent Applications.
3. Discuss about Rights from Patents.
4. Discuss about Infringement of Patents.
5. Explain in details about Copyright and its Ownership.
6. Discuss about Infringement of Copyright.
7. Explain about Civil Remedies for Infringement.
15.12 Key Terms

 Intellectual Property: Intellectual Property means a property created by
human brain or human intellect. The subject matter of intellectual property (I.P)
is very wide which includes literary and other works like inventions, designs,
trademarks, computer programs etc. Earlier I.P were collectively known as
“Industrial property”.
 Patent: A patent generally speaking, is a grant from government, which confers
on the grantee, for a limited period of time, the exclusive privilege of making,
selling and using the invention for which a patent has been granted and also
of authorizing others to do so.
 Revocation of Patent: A patent confers exclusive rights to the first and true
inventor. There is elaborate procedure for grant of patent under this Act and
Patent Office will take all possible precautions before granting a ‘patent’. Under
the provisions of this Act it is open to any person to challenge the validity of
patent. If the grounds challenging the grant of patent are valid or the Government
in public interest deems it fit, the exclusive rights granted to inventor shall be
withdrawn. Any such withdrawal of rights granted to patentee is termed
revocation of patent.

 Compulsory Licences: At any time after the expiration of 3 years from the Notes
date of the sealing of patent, any person interested may make an application
to the Controller alleging that the reasonable requirements of public are not
satisfied and patented invention is not available to the public at a reasonable
price and praying for the grant of a compulsory licence to work the patented
invention.
 Infringement of Patents: Patent infringement is the commission of a prohibited
act with respect to a patented invention without permission from the patent
holder. Permission may typically be granted in the form of a license. The
definition of patent infringement may vary by jurisdiction, but it typically includes
using or selling the patented invention.
 Rights of Exclusive Licensee: The Indian Patent Act under section 109
provides rights alike to the exclusive license holder as that of patentee to
institute a patent infringement suit if the act of infringement is committed after
the date of the license.
 Copyright: Copyright is a legal right created by the law of a country that grants
the creator of original work exclusive rights for its use and distribution. This is
usually only for a limited time. The exclusive rights are not absolute but limited
by limitations and exceptions to copyright law, including fair use. A major
limitation on copyright is that copyright protects only the original expression
of ideas, and not the underlying ideas themselves.
 Infringement of Copyright: For a work to be considered to infringe upon
copyright, its use must have occurred in a nation that has domestic copyright
laws or adheres to a bilateral treaty or established international convention such
as the Berne Convention or WIPO Copyright Treaty.

1. Human intellect
2. Patent
3. Patent infringement
4. Copyright
5. Copyright infringement
II. True or False

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

1. [a]
2. [b]

Notes 3. [c]
4. [d]
5. [a]
15.14 Case Study

Using patent information is an integral tool that Biocon uses to determine which areas
the company’s R&D should focus on. One such example is how the company used patent
information to gain initial access to the field of human insulin production, where it is now
a major player. The product patent on human insulin had long expired, but it was still
protected by strong patents on processes of production. In search of a gap that would
enable the company to gain a foot-hold in the market, Biocon went through all relevant
published patent documents. “We noticed that most of the patented processes used e-
coli and baker’s yeast,” Ms. Mazumdar-Shaw explained. “At Biocon we had expertise in
another sort of yeast, and we had already licensed the intellectual property (IP) for it from
a small company in the United States. So the way was clear. We started making our
own insulin using pichia yeast. This was a new and unique process, which wasn’t covered
by any of the existing patents.”
The resulting product was Insugen, which was released in India in 2004. As of 2010,
Insugen is sold throughout the world, including in international markets such as China
and Germany. It was the world’s first human insulin to use pichia yeast, which is the
world’s first recombinant (artificial DNA, or r-DNA) human insulin. Insugen allowed Biocon
to enter the insulin market in India – which holds 25% of the world’s population living with
diabetes – and also start the company’s efforts in treating diabetes, which is a central
focus of the company’s strategy. Biocon eventually hopes to develop orally administered
insulin, a dream which is close to the heart of Ms. Mazumdar-Shaw. Through using patent
information, Biocon was able to take the first steps towards realizing this goal.
In 1999, Biocon filed its first international application with the Patent Cooperation
Treaty (PCT) system for the company’s PlaFractor innovation, with protection granted by
the European Patent Office (EPO) in 2005. In 2004, Biocon filed a patent application for
Insugen with the Intellectual Property Office of India (IP India), which was granted in 2010
(patent number 239944). By 2010, Biocon had filed over 900 patent applications worldwide,
including over 100 PCT applications, with nearly 200 patents granted covering technology
areas of fermentation, protein purification, drug delivery systems and biotherapeutic
molecules. In 2008, Biocon filed a PCT application for its orally administrable solid
pharmaceutical composition and process innovation to be used in connection with the
development of an oral insulin product.
Questions:
1. Do you think the Social Issues influence the company’s R&D in India?
2. How do you justify the Biocon and its first international application with the
Patent Cooperation Treaty (PCT) system for the company’s PlaFractor
innovation?


4. Asia Pages, Towards a Philosophy of Modern corporation 1967 Notes

15.16 Bibliography
Press.
Kluwer Law Intl
Press.

Notes 15. Ireland, P. (1984) ‘The Rise of the Limited Liability Company’, International


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Introduction to Business Law 1

Unit 1: Introduction to Business Law

After studying this unit, you should be able to understand:

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Notes 1.1 Introduction

Definitions of Law Notes

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Amity Directorate of Distance and Online Education

Amity Directorate of Distance and Online Education

Amity Directorate of Distance and Online Education

The various objectives of law are as follows:

Need for Law

As law is a body of rules passed, and it is guidance which is imposed to certain

Scope of Business Law

Sources of Business Law

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1.2 Nature of Law

1.3 Legal Environment of Business

Notes 1.4 Mercantile Law

Sources of Indian Mercantile Law

3. Judicial Decisions Notes

1.5 Essentials of Law

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Notes 2. Civil liability

1.7 Check Your Progress

I. Fill in the Blanks

1. _______________ in simple term means rules.

II. True or False

1. The law contract is embodied in the Indian Contract Act 1873.

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III. Multiple Choice Questions

1. When the Indian contract act introduced?

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[c] Certainty Notes

1.8 Questions and Exercises

1.9 Key Terms

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1.10 Check Your Progress: Answers

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II. True or False Notes

III. Multiple Choice Questions

1.11 Case Study

1.12 Further Readings

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Notes 10. Charlesworth’s Company Law 8th Edition 1965

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Unit 2: Law of Contract

After studying this unit, you should be able to understand:

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Notes 2.1 Introduction and Relevance of Law of Contract

2.2 Definition of a Valid Contract

According to Halsburey, “A contract is an agreement between two or more persons Notes

Essential Elements of a Valid Contract

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Notes 5. Capacity of parties

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2.3 Offer and Acceptance

Meaning and Definition of Offer

Essentials of a Valid Offer

1. Capable of creating legal relationship

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Notes 5. To obtaining the acceptance

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