Session – 1

PGP – 25 Batch
Business has only two functions -
marketing and innovation.
Law and Business

“rules of the game” for business

operating in a society, appreciate the
legal risks involved in business
decision-making,

Law gives predictability by laying

down structure to everyday life of its
citizens, and it evolves over a period
of time to accommodate and reflect
nation’s needs, norms, and
capabilities.
Contd..
 Applicable to business owners, managers, and other
professionals while taking business decisions.

 Plethora of laws apply to people, similarly, there is a huge

body of law that applies to business.

 - to define unacceptable behavior,

 - to provide certainty and stability,
 - to protect the public, and
 - to provide a mechanism for businesses to resolve disputes.
Legally Astute Manager/
Legally Savvy Leader

Legally astute managers could serve as a:

(i) good citizen by honoring the letter and spirit of
law,
(ii) strong competitors by respecting positive
economic force of a level playing field,
(iii) forward-thinking executives by taking steps
to harness and shape law,
(iv) prudent business people they manage risk by
ensuring that their companies comply with the
laws applicable to their business.
Business Decision Making & Law
 Applying law while taking major business decisions by
managers are very essential

 Relevance of Law in all the Five stages of business

development –
(i) evaluating the opportunity and defending the value proposition
(ii) assembling the team
(ii) raising capital
(iv) developing, producing and marketing their product and service
(v) harvesting the opportunity through sale of the venture, and initial
public offering of stock, etc.,
Implications in Business Entities

Internal organization
- the choice of business entity and the internal relationships
with employees, officers, directors, and investors.
-It affects the firm’s resources, whether physical, human, or
organizational that have the potential of providing sustained
competitive advantage.

External relationships
with customers, suppliers, competitors, and commentators, that
is, players who cause customers to value another firm’s products
and services more.
While in corporate hierarchy
 Spotting legal issues before becoming legal problems.

 Legal nomenclatures and principles most relevant to their

business as much as lawyers must sufficiently understand
the business model and its execution.

 Lawyers and Engineers have lots of commonalities because

Lawyers design social structures and devices in a way that
parallels engineers’ designs of physical structures and
devices.
Contracts, companies, trusts, constitutions, and statutes are the
buildings, bridges, machinery, roads, and railways of social life, etc.,
Law for Business Leaders/Managers

Not to memorize legal rules but understand :

 - business contracts
 - employment law
 - product liability
 - intellectual property
 - government regulation
 - dispute resolution
Significance of Law to Managers

 Law as a social phenomenon, is socially omnipresent, it affects all of

us one way or the other

 Ignorantia juris non excusat - legal maxim which simply means

ignorance of law is not an excuse.

 State which is sovereign has a duty to maintain and enforce law an

order in a society

 reason - people surrender their rights to the state based on “social

contract” theory

 The best example is the Preamble of the Constitution of India, 1950

Law and Indian Constitution

 The Architect and Father of Indian Constitution - Dr. B R

Ambedkar - opined that:
- “Law and order are the medicine of the body politic
and when the body politic gets sick, medicine must be
administered.”

 “Constitution is not a mere lawyers document, it is a

vehicle of Life, and its spirit is always the spirit of Age.”
What is “Law" in India?

 Definition of Law as per Article 13 of the Constitution of

India, 1950:
- Law includes any ordinance, order, bye-law, rule,
regulation, notification, custom or usage having in the
territory of India the force of law”

 Article 141: The law declared by the Supreme Court shall

be binding on all courts within the territory of India
Objective of Law

Object of law is order

- In the Indian Context it is to establish Socio -
Economic Justice and remove existing imbalance in the
socio-economic structure.

Sources of Law:
(i) Constitution and Statutes or Legislations,
(ii) Judicial Decisions (Judges make law in India – Article 141 of
the Constitution),
(iii) Regulations (Administrative orders) reflects society’s
definition of acceptable behaviour that is necessary for
economic prosperity
Locus Standi
 Who can come before the Court?
 Persons including natural, legal and juridical person.
-A company is a legal person.
 Public Interest Litigation/Socio-Action Litigation

 Cases are decided based on Principles of natural justice

(i) audi alteram partem (hear the other side)
(ii) nemo debbet esse judex in propria causa (no one shall be a judge
of his own cause)
(iii) Rule against Bias (All decisions must be reasoned which means
speaking orders)
Thank you &
Happy Learning 
 Session – 2
PGP – 25 Batch
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Ethics as a Practice
⚫ Ethics are a set of moral principles that guide behaviour.

⚫ Individuals have moral values and beliefs about what

constitutes 'right' and 'wrong' behaviour.

⚫ These values often reflect those of the individual's family,

culture and educational environment they are brought up
in.

⚫ Ethics are not the same thing as law or the rules of religion.
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Contd..
⚫ Trust Me – family businesses
⚫ Involve me – Directors & Managers
⚫ Show me - demonstration of trust
⚫ Prove to me - independent verification and assurance
⚫ Obey me – Law comes into picture to deal with
unethical behaviour
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Scandals
⚫ UK has seen a procession of corporate disasters
including the names of Barings Bank, Polly Peck and
Maxwell.

⚫ US has seen scandals concerning Worldcom, Enron

and Tyco.

⚫ Europe did not escape and has seen its share of

problems with Parmalat and in Asia, Mitsubishi
Motors and Daewoo have had issues too
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Contd..
⚫ Tocounter this lack of trust, many corporations have
developed ethical strategies and policies to provide
guidance and training for theiremployees.

⚫ Set by the leadership and fed into all areas of the

business and becomes part of the cultural DNA of the
organisation.
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Five Theories
● Egoism
● the self and its needs (Self-Interest)

● Utilitarianism
● overall pleasure and pain for allconcerned (Greatest
Happiness)

● Deontology
● Duty (Invoke Duty)

● Care Ethics
● relationships,vulnerability,and empathy (Care)

⚫ Virtue Ethics
⚫ Character (Virtue)
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Egoism
● Famous Proponents: Ayn Rand, Adam Smith
● What makes something good or bad, right orwrong, is
that itsatisfiesone’sdesires, or meets one’sneeds
● Basic Principle: Self-interestof person doing,
considering, or affected by theaction
● One should chose theaction which most realizesor
conduces toone’sownself-interest
● Conception of Rational Self-Interest is basic
component of capitalisteconomy and businessmodels
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Utilitarianism
● Famous Proponents: Jeremy Bentham, J.S. Mill
● What makes something good or bad, right orwrong,
is that it produces the greatestamountof pleasure
(or lack of pain) for the greatest numberof people
● Basic Principle: “Greatest Happiness Principle”
● Maximizing positiveoutcomesforthe largest
numberof people, negativeoutcomes for lowest
numberof people
● One should chose the actionwhichwill lead to the
greatest
⚫ happiness (i.e. pleasure, lack of pain) overall
● One’sown pleasureand painonly count as much as any
⚫ other person’saffected
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Deontology
● Famous Proponents: Immanuel Kant, W.D. Ross
● What makes something good or bad, rightorwrong, is
that it conformstosome (rational) duty
● Basic Principle: Fulfilling duties towardsself orother
persons
● One should chose the action which best conformstoone’s
recognized duties
● Kant’sversion: Reason reveals ourduty
● Ross’sVersion: Common sense intuition revealsour
prima facie duties
● Duty of non-injury haspriority
● Other duties: fidelity, reparation,gratitude, beneficence,
justice, self-improvement
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Care Ethics
● Famous Proponents: Carol Gilligan, Virginia Held,
Michael Slote (developed as feminist response to other
ethics –those ref lectiveof experienceof men, not
women)
● What makes something good or bad, right orwrong, is that
it involves caring for another, and supports relationship
with otherpeople
● Basic Principle:action which is caring towardsthose who
are vulnerableor needsupport
● One should chose the action which supports or nurtures
other people, particularly those who are most vulnerable
(e.g. children, workers)
● Note: often viewed as supplement to other ethical theories,
rather than as comprehensivetheory in own right
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Virtue Ethics
● Famous Proponents: Aristotle, Confucius
● What makes something good or bad, rightorwrong, is
that it actually embodies or promotes traits culturally
acknowledged as good or bad (e.g. courage, justice)
● These in turn lead togreateror lesser realization of
potential for fully human lives(“f lourishing”
● Basic Principle: actions ref lective or productive of
good or bad character, embodied in developed and
lasting traitsor habits
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Certain Normative Theories

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Normative Theories of Business

Ethics
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Stockholder/Shareholder Theory
● Famous Proponents: Milton Friedman
● ‘There is one and only one social responsibility of
business—to use its resources and engage in the activities
designed to increase its profits so long as it stays within the
rules of the game, which is to stay engaged in open and free
competition without deception or fraud.”
● Basic Principle: managers (including BoD) not to spend the
available resourceson any activity without the
authorization from their owners, regardless of any societal
benefits that could be accrued by doing
● Managers/BoD are merelyauthorized to maximise profits
within capital provided
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Contd..
⚫ One’s pursuit of profit, clubbed with one’senlightened
self interest in a free market economy leads collectively
to the promotion of general interestas well, guided as
it is by Adam Smith’s ‘invisible hand’.

⚫ ‘Invisible Hand’ - each individual in his/her economic

activitiesacts in his/her own interestsuch actions are
guided by a sort of ‘invisible hand’ which ensures that
they are also to the advantageof thecommunity as a
whole.
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Contd..
⚫ Firm is an instrument for coordinating stakeholder
interests and considers managers as having a fiduciary
responsibility not merely to the shareholders, but to all of
them.

⚫ When conflicts of interestsarise, managers should aim at

optimum balanceamong them.

⚫ Managers obliged to partially sacrifice the interests of

shareholders to those of other stakeholders - corporations
do have social responsibilities.
⚫
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2 principles:
⚫ Principle of corporate legitimacy - ‘the corporation should
be managed for the benefit of its stakeholders: its
customers, suppliers, owners, employees and the local
communities.

⚫ Stakeholder fiduciary principle - ‘management bears a

fiduciary relationship to stockholders and to the
corporation as an abstract entity.

⚫ Hence, act as their agent – and ensure the survival of the

firm, safeguarding the long term stakes of each group
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Social contract theory

⚫ Ethically duty bound - welfare of the society by catering to the
needs of the consumers and employees following principles of
natural justice.

⚫ Famous Proponents : Thomas Hobbes, John Lockeand Jean

Jacques Rousseau

⚫ Members of the society give the firms legal recognition - right to

exist, engage them in any economic activity and earn profit by
using the society’s resources such as land, raw materials and
skilled labour – it owes obligation to society.

⚫ Business entities are expected to create wealth by producing

goods and services, generate incomes by providing employment
opportunities, and enhancesocial welfare..
 Session – III
PGP – 25 Batch
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Christianity - CST
⚫ Catholic School of Thought (CST) – focuses on poverty and
marginalization of the disadvantaged, first in the
industrialized countries and then in the Third World.

⚫ Pope Paul VI in his encyclical, Popularum Progressio - ‘The

superfluous wealth of rich countries should be placed at
the service of poor nations … Otherwise their continued
greed will certainly call down on them the judgment of
God and the wrath of the poor.’

⚫ Excessive consumption of earth’s resourceswas of grave

concern.
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Indian Ethical Tradition

⚫ Hindu Scriptures : Gita, the Upanishads, etc.

⚫ Speaks of performanceof right duty, at the right time in the right manner.

⚫ Righteousness as a Way in the Bhagwad Gita

⚫ Emphasizing on the dignityof human life and right to live in a respectful

manner.

⚫ Nishkama Karma: work or karma is the driving force of life, and this work
has to be ethical.

⚫ ChapterII Verse 47: “You havea right to perform your prescribed duty, but
you are not entitled to the fruits of action. Never consider yourself the
cause of the results of your activities and never be attached to not doing
yourduty”
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Gandhian Philosophy
⚫Principle of trusteeship - an industrialist or
businessman should consider himself to be a
trustee of the wealth he possesses.

⚫He should think that he is onlya custodian of

his wealth meant to be used for the purpose
of business.

⚫Origin - concept of non-possession detailed

 in Bhagawad Gita and Sarvodaya, meaning
welfare for all.
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Islam and Ethics

⚫ Holy Quran - the Hadith (collection of the Prophet’s sayings).

⚫ No exploitation of people in need through lending them money

at interestand doing business through false advertising.

⚫ Shariah bans the taking of interest, because according to this

law, investors can make profits only from business based on
exchange of assets and not on money. As per the law, bankers sell
sukuk or Islamic bonds only by the use of property and other
assets so as to generate income which would be equal to the
interest they would be paying on conventional debt
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Contd..

⚫ No fraud or deceit
⚫ No excessive oaths in a sale
⚫ Need for mutual consent
⚫ Be strict in regard to weights and measures
⚫ The prophet was very much against
monopoly
⚫ Free enterprise
⚫ Hoarding is forbidden
⚫ Forbidden transactions
Combining Business and Legal strategy

 Swedish company “Saab” and “Adani group” entered into an

important contract on September 1,2017

 Business Strategy: Indian Air Force (IAF) gearing up to

issue a multibillion dollar tender for over a 100 single
engine fighter jets

 Legal Strategy: The Adani group signing a partnership with

Swedish defence major SAAB to manufacture Gripen
fighter jets in India.

 Key beneficiary in India – Adani Group (Make in India)

Basics of Contract Law
 Article 19 (1) (g) of the Constitution of India, 1950
guarantees;
- Fundamental right to practise any profession, or to
carry on any occupation, trade or business.

Indian Contract Act, 1872

- Base for entire business relationships
- Deals with rights and duties
- Enforcement of such rights and duties
- Contract is an agreement enforceable by law.
Indian Contract Act, 1872
Governs:
- Principles of formation, performance, enforceability
of contracts, rules relating to contracts
- Special contracts – indemnity, guarantee, bailment,
pledge and agency

Classification of contract is based on validity,

formation and performance

Validity – valid, voidable, void, illegal and

unenforceable
Formation – Express, Implied, Quasi and E-commerce
Performance – Executed, executory, unilateral and
bilateral
Formation of a Contract
Basics of Formation of a Contract:
Enforceable by Contract
Agreement
Law

Promise Consideration Agreement

Promise
Proposal Acceptance
Offer/Proposal
 Intention to create legal obligation
 Certainty
 To do something/abstain from doing something
(Act/Abstinence)
 Communication
 Positive in nature

 For Example, a Job Offer Letter

 Exclusion clauses (Tickets,Vouchers etc., wherein the

offeror is excluding his/her responsibility)
 Exemption Clauses (Limiting their liability – against
doctrine of fundamental breach)
 Offer & Acceptance
 One has to communicate his/her intention to form an agreement by
offering the other.

 Acceptance by second party is necessary to consider the same as

promise.

 Communication of offer and/or acceptance can be express or implied.

 Communication of offer is distinguished from a communication

which is only an invitation to offer.

 An offer must be firm, clear and unambiguous made with the intention
to form a binding relationship.

 For ex: Ravi says: “ I want Apple iPhone 6”. Salesman replies: It ranges
from 10K to 26K”. Ravi says: I want one.
Invitation to Offer
Any communication in which merely the price is
indicated is only an invitation to offer.

This includes shop window, price list, catalogues and

pamphlets. This is because if these were offers, the
suppliers would get bound to supply unlimited
quantities, which they never intended.

However, if the communication, by supplying

additional information, specifies the quantity, the
communication could become an offer.
Offer or Invitation to Offer
Example
A customer called up the number of a pizza store and
asked for home delivery of a pizza from their menu.
The store first confirmed the address. The customer
read out the pizza he wanted from the menu card of
the store: ‘Large, farm fresh, deep pan pizza, price Rs.
500’ The store replied: ‘Your order is confirmed. The
pizza will be delivered to you in 30 minutes.’

What are the inferences from the above

statement?
Offers in Standard Form Contracts

 Online Transactions/LIC/Railway Administration and

so on where standard printed forms of contracts are
signed by the parties.

 Such standardized contracts contains terms and

conditions in fine print which restrict and often
exclude liability under the contract.

 Parties bound by the terms and conditions even when

they not read it – because they have signed it.
 Salient Features of a Business
contract
 Minimum 2 parties – consensus ad idem (meeting of minds)
 Offer and Acceptance
 Intention
 Certainty and possibility of performance
 Legal formalities

Essential Element are:

 Free Consent
 Lawful Consideration
 Lawful Object
 Competent parties/capacity to contract
 Session – IV
PGP – 25 Batch
Key points
• Intention to enter into binding agreement and certainty
of performance should be clear from the language of the
contract

• Reduce ambiguity to ensure courts do not interpret

against your interest
 PepsiCo versus Farmers case?

value building burden for

tools corporates
Void and Voidable Contract:
Void Contract
1. Illegal/ Unlawful contract
2. Restraint of trade
3. Mistake of Identity and subject-matter
4. Impossibility, Wager and Restraint of proceedings

 Voidable Contract
1. Misrepresentation and fraud (coercion, fraud,
misrepresentation and undue influence)
Agreements expressly declared void

 Agreements unlawful in part

 Agreements without consideration
 Agreements in restraint of marriage
 Agreements in restraint of trade
 Agreements in restraint of legal
proceedings
 Unmeaning agreements
 Wagering agreements
Unlawful Agreements
The consideration or object of an
agreement is unlawful if:
(i) Forbidden by law;
(ii) Defeat any law;
(iii) Fraudulent;
(iv) Injurious to person/property
(v) Immoral; and
(vi) Against Public Policy.
 Free Consent (S.13 – 14)
 Consent is defined as:
“Two or more persons are said to consent when they
agree upon the same thing in the same sense.”

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

 Coercion
 Undue Influence
 Fraud
 Misrepresentation
 Mistake
Consideration
 Nude Contracts
An agreement made without consideration is void

 It is a “right, interest, profit or benefit” for one party.

 It can also be some forbearance, detriment, loss or

responsibility given, suffered or undertaken by the other.

 (i) Pre-existing duty to Third party

 (ii) Pre-existing duty to same party
 (iii)Part-payment of debt

A pre-existing duty of a person can be a consideration for

another contract with third party.
Contd..
Remission: Mutual consent to end a contract
Alteration: changing terms of contract by mutual
agreement
Novation: replace existing contract with new one
Lesser amount of debt in lieu of full and final payment
of entire debt could discharge of debt.
Capacity to Contract
 The following persons are incompetent to contract:

 Minors
 Persons of unsound mind
 Idiot
 Lunacy or insanity
 Drunkenness or intoxication
 Disqualified persons
 Alien enemies
 Foreign sovereigns & ambassadors
 Convicts
 Undischarged insolvent
 Minors
 A contract with a minor is void abinitio
 Based on Indian Majority Act, 1875 and Guardians
and Wards Act, 1890.
 Payment can be made out of the property of a
minor for the necessaries of life supplied to him.
 Necessaries are those without which an individual cannot
reasonably exist.
 A minor cannot ratify any contract made during
his minority.
 A minor may be admitted to the benefits of a
partnership.
 The minor’s contracts do not impose any liability
on his parents even if the contract is for
necessaries.
Contd..
 A minor cannot be declared insolvent because
he is incapable of contracting debts.
 If a minor takes the plea of minority in
fulfilling contractual obligations, the court
would accept it and hold the contract
unenforceable. However, it would restore the
benefits to the other party
 Doctrine of restitution: Restoration of the
contract possible so long as the property is
traceable to the possessions of the minor.
Essentials of a Contract
 An agreement is formed when two minds meet (Meeting of minds on
same subject-matter).

 Such agreements must be supported by consideration (Money or

money’s worth). Consideration is the benefit a party receives the other
or any detriment a party suffers at the request of another.

 Law overrides contracts. Contracts against law are not enforced.

 The Contracts must be entered into voluntarily (Not through fraud,

coercion; misrepresentation or mistake)

 For a breach of a duty in the valid contract, the innocent party gets
damages from the defaulter.
Boilerplate clauses
Most litigated and negotiated provisions in contract law include:

 Damages

 Liquidated damages

 Force majeure
 In case of breach of contract terms parties can claim for
Damages- Section 73 of ICA
 Damages is the suffering party’s right to compensation
Non-Binding Term Sheet – Business
Strategy

 Force Motors Ltd. entered into a non-binding term sheet with Rolls-
Royce Power Systems Ag (R-Rps) to form an Indian Joint Venture
Company for producing Engines (for power generation and rail
application), and complete power Generation Systems, including
associated spare parts for Indian and global markets.

 Not generally legally binding and unenforceable

 Is similar to letter of intent (LOI) when the action is predominately

one-sided, as in acquisitions, or a working document to serve as a
jumping-off point for more intensive negotiations.
Unfair terms or Misinterpreted
clauses
 Terms and conditions: relating to price, delivery, title,
risk, obligations of both parties
 Warranty
 Status of Liabilities
 Termination
 Indemnity
 IPR
 Force majeure
 Governing Law and Jurisdiction
Termination of Contract
 Breach of a core part of the contract gives the right to
elect to terminate the contract while the breach of a
secondary term does not give the right to terminate.

 The core part of a contract is called a “condition”

while the secondary part is called a “warranty”.

 Time of performance of contract in commercial

contracts is taken to be a condition of contract.
Contd..
 Every contract has a termination clause which provides on
termination for breach.

 The expression, ‘time as an essence of contract’ is used to

indicate that time of performance is a condition of
contract.

 On breach of a condition (called repudiatory breach), the

innocent party gets the option to terminate the contract.
The innocent party must elect to terminate the contract
and communicate the decision to the other party.
Anticipatory Breach
 Decision to terminate the contract should be
communicated at the earliest.

 Informing the other party in advance of possible breach - a

condition of the contract (repudiatory breach), is called an
anticipatory breach.

 The other party can elect to accept it. In that case the
contract will be terminated and the innocent party can
claim damages

 A party can reject an anticipatory breach. Contract subsist

and both the parties remain bound.
Contd..
 Termination for breach clause - the contract can be
terminated only for the breach covered by the clause.

 Termination for convenience clause - gives right to a

party to terminate a contract for its convenience.

 The contract gets terminated, but neither party can

claim damages arising from such a termination.
 Session – V
PGP – 25 Batch
Impossibility or Force Majeure
 Courts very stringent in giving this remedy due to
misuse

 Some stipulated time is provided in the contract to

perform contract after the impossibility

 Force majeure clause lists the events of impossibility

– war/hostilities, riot or civil disturbance, earthquake,
flood, tempest, lightening of natural disaster,
restrictions imposed by govt. which delays the
performance of contract.
Damages
 In the case of a breach of any term, whether condition
or warranty the innocent party gets the right to receive
compensation.

 Specific performance of contracts is done only in the

contracts of rights in immovable property.

 In other contracts, a money equivalent covering the

losses is given. Every contract has a stipulation in the
parties not being responsible for indirect or
consequential losses.
Contd..
 In business contracts, the courts take the loss of profit or
production loss as immediate and in contemplation of the
parties and award it.

 The principle for award of damages is put the party in a situation

he would be if the contract were performed.

 The amount of money specified in a contract to be paid in the

case of a breach is called liquidated damages.

 The courts award this if this appears to be a genuine pre-estimate

of the losses. If not, the courts ask the parties to establish actual
losses and award only this.
Contd..
 In some contracts, it is not possible to work out the
loss of profit. In these contracts, the wasted resources
or production losses are awarded as damages.

 A breach of a contract creates an endless chain of

implications.
Liquidated Damages
 A contract can provide the damages to be paid by a party in case it breaches the
contract.

 The amount provided for is called ‘Liquidated Damages’.

 ONGC v. Saw Pipes (2003) case

 Liquidated damages are awarded if these, in the context of contract, are
genuine pre-estimates of the losses.

 Ordinarily, compensation for mental agony due to breach of contract, is not

awarded by the courts.

 However, the courts have come to award it in contracts where they very object
of the contract is leisure, enjoyment or peace of mind.
Kinds of contracts
 (i) Standard Form Contract: Businesses have
standard pre-printed forms on which they would do
business with the customers. The customer fills up
signs and submits the document which becomes the
offer. The corporation can accept or reject the offer. All
business-to-business contracts have also come to be
done through the standards forms called the General
Conditions of Contract (GCC) and Special Conditions
of Contract (SCC).

Ex: Online Transactions, LIC etc.,

(ii) Negotiated Contract

 Negotiated Contract: A contract can get formed by

the parties communicating with each other where at
the end of it, one party makes and offer and the other
accepts. The communication can be in writing through
mail or email, oral, or implied.

 Ex: Job Offer Letter

(iii) Auction
 Auction: In an ordinary auction, each bid is an offer
which the auctioneer can accept or reject and the
announcement of auction is an invitation to offer. A
variation is ‘without reserve’ where the auctioneer
undertakes to award to the highest bidder. This does
not fit in the formula of offer and acceptance but the
auctioneer is bound to it.

 Ex: Bidding
(iv) Tender
 Tender: In an ordinary tender, announcement of tender is an
invitation to offer and each tender is an offer, which the party
inviting the tender can accept or reject. The party inviting the
tender has pre-printed documents which the tenders have to
complete, sign and submit. This becomes the offer document. A
tender can be a single bid tender (commercial bid) where
everything is specified by the party inviting the tender other
than the price. In a two bid tender, the tender documents are in
two parts, technical and commercial. The tender provides the
technical details of his offer under the technical bid and
price/cost in the commercial part. The two documents become
the offer document.

 Ex: Government Contracts

Session – 6
PGP 25
Special Contracts – Overview
Agency
Indemnity
Guarantee
Bailment
Pledge
Hypothecation

 Will try and understand first two –

common business practice
Special Contract of Agency
 Three parties: Principal, Agent and Third Party

Third
Principal Agent
Party

 Agent is the intermediary and the person whom he

represented is called principal
Contd..
 Two contracts evolve in agency:
 (i) Principal enters into a contract with a person,
giving him authority to act on his behalf while
dealing with a third person. (Agency)
 (ii) Post signing agency, Agent deals with third party
and ends up creating rights and obligations
between the principal and third party.

 Hence, Agent has authority to create rights and

obligations for the principal, in relation to third party.
Objective
 To tie the principal and third party in contractual
relationship. Agent acts as intermediary and then make
principal and third party accountable for their determined
obligations.

 Agent becomes liable to pay damages to the third party

if he had no authority to conduct such transaction on
behalf of principal

 Estoppel: Apparent authority – Principal bound for

actions of Agent and cannot deny vesting authority on the
agent.
Example
 Robert a creditor appointed David as his agent to
recover payments from his debtors. David was sent by
Robert to recover rupees Thirty thousand from Perera,
a debtor. David took rupees Thirty thousand from
Perera and ran away with it. Hence Robert cannot ask
Perera to pay the money again. However if David is a
major, then Robert can take legal action against him.
Example
 Agency by Agreement – Actual authority - Power of
Attorney – example

 Insurance Contracts

 LIC Agents and employers agreeing to deduct premium

amount from salary of employee.

 Interesting case, employer deducts premium from salary

and deposits with LIC for first three months. Later though
it is deducted not deposited. Employee dies in the
meanwhile, wife informs LIC for the claim. Remedy ??
What kind of agency??
Apparent authority

 Apparent authority gets created when the principal,

in express terms or impliedly, communicates to the
third party, the authority in another to represent
him.

 Third party must rely on the representation and act

accordingly too.
Example
 Managing Director is appointed by the company.
Company conveys to the world that he has
authority to do all the things necessary to run the
company.

 Apparent authority and principle of estoppel will

be applied on company if it denies the
transactions entered into by Managing Director
on its behalf.
Special Contract of Indemnity
 A contract by which one party promises to save the
other from loss caused to him by the conduct of the
promisor himself , or by the conduct of any other
person, is called a contract of indemnity.

 A contract of indemnity is a contingent contract.

 The liability of the indemnifier arises only when the

loss is suffered.
Contract of Indemnity
Indemnified/Ind
Indemnifier
emnity Holder

 Indemnity is for reimbursement and liability arises

only when the contingent event occurs. Primary
liability vests with the indemnifier.

 The indemnifier after performing his part of the

promise, has no rights against third party. He can
sue the party only if the assignment is in his favour.
Sample Indemnity Clause

 “The Contractor shall indemnify and hold harmless the

Owner ... from and against claims, damages, losses and
expenses ... arising out of or resulting from the
performance of the Work, provided that such claim,
damage, loss or expense is attributable to bodily injury,
sickness, disease or death, or to injury to or destruction
of tangible property (other than the Work itself), but
only to the extent caused by the negligent acts or
omissions of the Contractor, a subcontractor, or anyone
directly or indirectly employed by or anyone for whose
acts they may be liable.”
Indemnity Bond
 Indemnity Bond is the document undertaking to pay
an amount top pay the sum of money.

 Insurance contract is the best example where

Insurance company agrees to suffer and cover for the
loss subject to payment of premium.
Special Contract - Guarantee

 It is a contract to perform the promise, or

discharge the liability, of a third person in
case of his default.

 Three parties:

‘principal ‘creditor’
‘surety’
debtor’
Essential Features
 Enables a person to get a loan, or goods on
credit or an employment.

 Examples would be: Performance guarantee,

bank guarantee, letter of credit, etc..

 Banks have taken the form of a contract of guarantee,

in bank guarantee and performance guarantee, but
made the obligation of the bank to pay unconditional.
Example
 One party invites tender for earnest money deposit. When
Tender is withdrawn, earnest money is forfeited.

 Bank drafts are accepted as earnest money deposits. Banks

become surety to pay a certain amount of money to the
party inviting tenders on behalf of the party making a
tender.

 If the tender is withdrawn, the party inviting tender would

put a notice on the bank (surety) to pay the money.

 Rest of the tenders, bank guarantee lapses after validity

period.
Bank Guarantee
 Do not create a contract of guarantee

 These are bonds as the bank does not stand for the breach
of the other party but stands unconditionally on his own.

 However, the instrument becomes a contract of guarantee,

if the document, invariably due to indifferent wording, tilts
the undertaking to be conditional.

 Indemnity, guarantee and bond have come to form a

continuum, where one can slip from one to the other.
 Essential Features
(i) Principal Debt

(ii) Surety assumes secondary liability while the

primary liability is on Principal debtor

(iii) Co-extensive with that of the principal debtor, unless it is

otherwise provided by the contract.

 When there is a condition precedent to the surety’s liability, he

will not be liable unless that condition is first fulfilled.(when
another person has to join as a co-surety)
 The liability of a surety is co-extensive with the debtor but arises
only on default by the creditor.
Session – 7
PGP – 25
Various Business Organisations
 (i) Partnership Firm (Indian Partnership Act, 1932)
 (ii) Limited Liability Partnership (LLP Act, 2008)
 (iii) Company (Companies Act, 2013)
 (iv) Sole Proprietorship

 PARTNERSHIP FIRM:
 an association of persons with a defined
mechanism of sharing of profits among the
partners

 Hybrid form of principal-agent relationship

Choice of Entity
Choice of the entity is generally determined by
these factors:
(i) Taxation
(ii) Liability
(iii) Raising Investment
(iv) Separate Legal Entity
(v) Perpetual Succession

Maximum number of partners: 50 as per Section

464 of Companies Act, 2013 and Rule 10 of the
Companies (Miscellaneous) Rules,2014
Sharing P&L
 Instance:
 Partnership deed contained different shares for
partners – profits were divided according to partner’s
respective shares – Dispute arose on sharing of losses

 How to assess and divide losses when it is not

mentioned in the partnership deed?

 Equally or In proportion to partner’s shares??

Solution
 In ordinary mercantile partnerships, where
there is a community of profits in a definite
proportion, the losses also must be in such
proportion
Relationship of Partners
 Right to take part in the conduct of the business
 Differences to be settled through majority
 Not entitled to receive remuneration from
conducting business
 Share profits and loss equally

Mutual Agency:
Person carrying on business acts not only for himself but
for others also. Partners share principal – agent
relationship.
Property of Partnership
 Partners may bring in capital and other immovable property –
“Property of the firm”
 New properties also could be acquired for conducting business
 Partnership is not a distinct person, hence cannot own property
 Property of the firm should be used only for business

 http://www.moneylife.in/article/amarchand-and-
mangaldas-understanding-the-shardul-versus-cyril-shroff-
battle/39529.html
 Legal battle between two brothers

 Warner& Bros Partnership history

Explanation
 Upon dissolution, transferring partner is entitled to
receive share of assets

 Outgoing partner/ Deceased Partner:

- surviving/continuing partners when carry out business
without final settlement of the assets of firm

- Said partners/their legal representative is entitled to

 Either share of profits in accordance with his share of
property
 Or
 @ 6% per annum on amount of his share in the property of
firm
Relationship with Third Party &
Doctrine of Implied Authority
Mutual Agency – every partner is an agent of the
other

Partners are jointly and severally liable for

every act of the firm

Scope of Implied Authority

 an act of partner which is done to carry on business
of the firm in usual way will bind the firm – Doctrine
of Implied Authority
Limits to Implied Authority
 (1) submit a dispute to arbitration
 (2) open bank account on behalf of firm in his name
 (3) compromise/relinquish any claim
 (4) withdraw a suit/legal proceedings filed on behalf of
firm
 (5) admit any liability in suit against firm
 (6) acquire immovable property on behalf of firm
 (7) transfer immovable property of firm in his name
 (8) enter into partnership on behalf of his firm.
Admission of a Partner
With the consent of all the existing
partners.

Not liable for any act done prior to his

admission as a partner
Dissolution of a firm
1) By consent of all partners
2) By agreement – under partnership
deed
3) Contingent Dissolution
- Expiry of term
- Completion of business
- Death of partner
- Insolvency
4) (4) By Court Order
Registration of firm – Procedure

Filing an application with Registrar in

prescribed form with prescribed fee
(i) Name of firm
(ii) Address/Principal place of business
(iii) Names and Addresses of partners
(iv) Date when each partner joined the firm
(v) Duration of the firm
(vi) Date of creation
Contd..
 Authorizes State Govt. to appoint
Registrar of Firms for the purpose
of registration of partnership firms

 Such forms should be duly signed

by each and every partner of the
firm, if not his name must be
dropped as partner
Non-registered firm

1. A partner cannot file a suit against the firm or any

partner, for enforcing a contractual right

2. No suit can be filed against any third party for the

purpose of enforcing a contractual right.
Session – 8
PGP – 25
Limited Liability Partnership (LLP)
Limited Liability Partnership Act, 2008

 Combination of advantages of both the Company

and Partnership
 An alternative to the traditional partnership firm
with unlimited liability.
LLP – Nature
Salient Features of LLP Act:
1) It is a body corporate – legal entity separate from its
partners
2) Minimum 2 persons – for any lawful business by
signing the incorporation document and getting
registered with the Registrar
3) Rights and obligations of Partners - Agreement or
else First Schedule of the Act
4) Partnership firm will be liable to the full extent of
its assets.
5) Partner liable to the extent of his contributions.
Contd..
6) Partners are not agents of co-partners and hence will not
be liable for unauthorized acts or misconducts of
other partners.

7) Atleast two individuals shall be partners – 1 must be

resident of India

6) A firm, private company or unlisted public company are

to be allowed to convert into LLP

6) An LLP may be wound up voluntarily or by the Tribunal

to be established under the companies.
 Incorporation of LLP
Incorporation Document
 (i) 2/more persons associated for carrying on a lawful
business with a view to profit have to subscribe
their names to an incorporation document
 (ii) This document to be filed with Registrar of State in
which the registered office of the LLP is to be stated
 (iii) statement stating compliance with requirements of
and rules to be submitted
Liability of LLP & its Partners
 Partner is agent of LLP and not of co-partners
 Liable only to the extent of partners wrongful
act/omission done in the course of LLP business
 No personal liability except for wrongful act or
omission on partner’s part.
 Unlimited liability in case of fraud: when an act
is carried out by LLP or any of its partners with
intent to defraud LLP creditors or any person or for
any fraudulent purposes.
 Waiver of Penalty by court/Tribunal – has
provided useful information during investigation
Accounts
 LLP shall maintain annual accounts.

 Audit of the accounts is required only if the

contribution exceeds Rs. 25 lakh or annual turnover
exceeds Rs. 40 lakh.

 A statement of accounts and solvency shall be filed by

every LLP with the Registrar of Companies (ROC)
every year.
HISTORY OF CORPORATE LAW
LEGISLATIONS
 1932 – Indian Partnership Act
 1956 – Companies Act
 1969 – Monopolies and Restrictive Trade Practices Act
 1991 – New Industrial Policy of India
 1995 – India became a member state of World trade
Organisation
 2002 – Competition Act
 2008 – Limited Liability Partnership
 2013 – Companies Act (Amended)
 2016 – Insolvency and Bankruptcy Code
An introduction to company
law
Companies Act, 1956 was amended in 2013 and 2015.

 S. 2 (20) of the Act defines it as a company

incorporated under this Act or under any previous
company law [Section 2(20)].

 A company is a “legal person” or “legal entity” separate

from, and capable of surviving beyond the lives of its
members.
Companies
Paid Minimum & Other Observations
Up Maximum Number of
capital Persons
Public None Minimum 7 to Any subsidiary of public
Company unlimited company shall be treated as
public company even if such
subsidiary company has obtained
the status of a private company
in its articles

Private None 2 - 200 Right to transfer its shares is

Company restricted

One None One Member Can be considered as Private

Person Company
Company
Subsidiary company - Section
2(87)
 In relation to holding company, means a company in which
the holding company—
(i) controls the composition of the Board of Directors;
OR
(ii) exercises or controls more than one-half of the
total share capital either at its own or together with
one or more of its subsidiary companies:

 Provided that such class or classes of holding companies as

may be prescribed shall not have layers of subsidiaries
beyond such numbers as may be prescribed.
Example
 Subsidiary companies of the Tata Group and joint
ventures using 'TATA' in their names include:
 Tata AIG — an insurance based joint-venture company
with American International Group.
 Tata AutoComp Systems - India's leading automotive
components conglomerate
 Tata Capital — a wholly owned subsidiary of Tata
Sons Limited, the apex holding company of the Tata Group.
 Tata Consultancy Services — Asia's largest IT company and
world's largest software and services company
Associate company – Section 2 (6)
 Associate Company:

 If holding company has:

(1) atleast 20% of the total share capital of the later ;
OR
(2) having influence over the later's decision making
process under and agreement
OR
(3) Both are Joint venture companies

Example: DAFPPL
Example – Company Profile of DAFPPL

 Delhi Aviation Fuel Facility Pvt. Ltd. (DAFPPL) is an SPV

promoted by Indian Oil Corporation Ltd.

 IOCL, 37%, Bharat Petroleum Corporation Ltd., 37%, and

Delhi International Airport Pvt. Ltd., 26% stakes
respectively

 To develop and maintain the aviation fuel facilities at

Terminal 3 (T3), cargo terminal and the earlier Terminal 2
(T2) at the Indira Gandhi International Airport at Delhi.
The concession has been granted by DIAL to the SPV for a
period of 25 years starting from July 28, 2010, when T3
became operational.
Public and Private Co.
Private company and Public Company:

(i) Restriction of transferring Shares

(ii)Limits number of its members to 200

(i) Cannot invite the public to subscribe for its capital or

shares of debentures. It has to make its own private
arrangement.
Characteristic Features of
Company
(i) Independent Corporate Existence

 Instance:
 A profitable leather & shoe manufacturing business
was converted into a company. Salomon, his wife &
five children subscribe to one share each. Authorized
capital £ 40000 and business valued at £39,000 & sold
his leather business to company which pays £9,000 in
cash & allots shares worth £ 20,000.,
Contd..
 Salomon loaned the remaining £ 10,000 through
secured debentures. Company took an unsecured
loan of £ 10,000 from another person and
thereafter company falls on hard times. It had to
be liquidated to meet demands of the creditors
and total assets were not sufficient.

House of Lords decided that being an independent

corporate entity Salomon had to be paid first
 Contd..
(ii) Limited Liability
(iii) Perpetual Succession: “An incorporated company
never dies”
(iv) Transferable Shares
(v) Separate property
(vi) Common seal : It is the official signature of the
company. The purpose of the seal is to furnish
evidence regarding authenticity of a document.
Changed as per Companies Act, 2013
(vii)Can sue or be sued in its corporate name
(viii)Attracts professional management
Corporate Personality
 A company is a legal person but not a citizen either
under the Constitution of India, 1950 or the
Citizenship Act, 1955.

 A Company acquires a nationality & a residence

based on its country of incorporation.