Legal Aspects in SCM 738 v1

LEGAL ASPECTS IN SUPPLY
CHAIN MANAGEMENT
Sub Code - 738
Developed by
Prof. Ravikiran Mhalas
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe 2. Dr. B.P. Sabale 3. Prof. Dr. Vijay Khole 4. Prof. Anuradha Deshmukh
Group Director Chancellor, D.Y. Patil University, Former Vice-Chancellor Former Director
Welingkar Institute of Navi Mumbai (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Mr. Smitesh Bhosale

Dean – Finance Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. Dr. V.H. Iyer Prof. Vineel Bhurke

Dean – Management Development Programs Faculty – Rural Management
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Course Editor

Faculty – IT Mr. Anuj Pandey
Welingkar Institute of Management, Mumbai Publisher
Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Coordinators

Faculty – Retail Prof. Dr. Rajesh Aparnath
Welingkar Institute of Management, Mumbai Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Ms. Kirti Sampat

Dean – Banking Manager – PGDM (HB)
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Mr. P.M. Bendre Mr. Kishor Tamhankar

Faculty – Operations Manager (Diploma Division)
Former Quality Chief – Bosch Ltd. Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu

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Faculty – Services Excellence
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1st Edition, November 2021

CONTENTS
Contents
Chapter No. Chapter Name Page No.
1 Supply Chain Management – Legal Aspects 4-13

2 Mercantile and Commercial Laws 14-25
3 Laws of Agency 26-58
4 Arbitration Law 59-77
5 Contracts in Supply Chain Management 78-142
6 Contracts of Indemnity and Guarantee 143-158
7 Sale of Goods and Contracts 159-198
8 Carriage Contracts 199-227
9 Negotiable Instruments Act 228-263
10 The Act of Environmental Protection 264-326
11 Insurance Law and Contracts 327-387
12 Types of Intellectual Property Rights (IPR) 388-425
13 GST and Supply Chain Management 426-453
14 Global Supply Chain Management and WTO 454-485
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SUPPLY CHAIN MANAGEMENT – LEGAL ASPECTS
Chapter 1
Supply Chain Management – Legal Aspects
Learning objectives
At the end of the chapter, you will be able to understand the definition of
Supply Chain Management, the evaluation of Supply Chain Management,
the need of Legal Aspects in the Supply Chain Management, and the
importance of various legal aspects in the Supply Chain Management.
Structure:
1.1 Introduction to Supply Chain Management (SCM)
1.2 Definition of Supply Chain Management
1.3 The Evolution of SCM
1.4 Various Types of Legalities in SCM
1.5 Importance of Legal Aspects in SCM
1.6 Activities for the Students
1.7 Summary
1.8 Self Assessment Questions
1.9 Multiple Choice Questions
4
1.1 INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

(SCM)
In the era of competitive market, every company or a service providing

firm is trying to deliver the products/services at highly attractive price
without sacrificing quality and promised delivery time. In order to achieve
this systematically, the scientific process of Supply Chain Management is
being derived and followed. This system integrates supply, distribution and
customer’s logistic requirements into one cohesive process. This system of
SCM, if effectively applied, will reduce the time, redundant efforts and
inventory costs.
1.2 DEFINITION OF SUPPLY CHAIN MANAGEMENT
Supply chain is the complete process of receiving a customer order,

accepting it, to the delivery of the product/services to the customer. It also
includes purchasing and the production of the product and/or value
addition to the services. A supply chain includes all interdependent steps,
and it gives rise to a sole objective of meeting customer requirements.
SCM is a generic term, which includes the coordination of order generation
process, the order taking process and offer fulfillment of distribution of
products to the customer. Here, ‘product’ includes services or information
also.
Various independent suppliers, firms supplying products and service

providers are involved in the supply chain. These include manufacturers,
component/raw material suppliers/packagers/ shippers/couriers/postal
services/senders/receivers/wholesalers/retailers/agents/retailers, etc.
According to the Supply Chain Council, U.S.A., the Supply Chain

Management includesmanaging supply and demand, sourcing raw
materials and parts, manufacturing and assembly,warehousing and
inventory tracking, order entry and order management, distribution across
all channels, and delivery to the customer.
Thus, the Supply Chain Management encompasses every effort involved in

producing and delivering a final product or service, from the supplier’s
supplier to the customer’s customer.
5
1.3 THE EVOLUTION OF SCM
1904 – Traces of outsourcing was seen when Charles S. Rolls became

selling agent for cars made by F. Henry Royce
1960 - 75 – The necessity of SCM was understood with the first phase of
inventory ‘push’ era that focused on physical distribution of finished goods.
1975 -1980 – Companies began migrating from an inventory ‘push’ to

customer ‘pull’ channel.
1980 – Emergence of SCM
1985 – WallMart introduced the concept of Cross-docking.
1996 – Internet revolutionized the distribution system of the business.
1998 – Concept of e-Commerce changed the definition of business and

logistics played a major role in SCM.
1.4 VARIOUS TYPES OF LEGALITIES IN SCM
Purchasing is one of the major activities of SCM. For each and every
transaction of purchase, several legal implications are involved. Several
laws are to be followed for every purchasing activity. If the purchasing is
made from outside the country, then the laws of country of origin will also
have to be studied and obeyed. This requires thorough knowledge of the
applicable laws and regulations. Thus, the laws sometimes play more
important role than the cost or price of desired component or service. Let
us study the following example to understand the importance of various
laws.
6
Illustration:
A company ‘ABC’ which is a public limited company, having its

manufacturing plant at Pune, places an order for raw material ‘RM’ with a
company ‘XYZ’ which is a partnership firm of Surat. The purchaser had
agreed to a bill of exchange drawn by the supplier for the full invoice value,
which the supplier could discount with his banker. The item ‘RM’ was
excisable and also liable to sales tax. Further, it will attract octroi duty/LBT
while entering at Pune/PCMC corporation limits. The item is fragile and also
highly vulnerable to damage in transit. The price agreed was Rs. 300/- per
kg., ex-godown plus other taxes and levies. The material was to be
supplied by road.
Now, the following acts and laws become applicable in the purchasing
transaction –
1. Indian Contract Act – The order placed by company ‘ABC’ on company
‘XYZ’ is a contract between the two companies, which is to be honoured
throughout the transaction.
2. Sales of Goods Act – Since this contract is a sale for company ‘XYZ’,
the conditions of Sales of Goods Act are to be followed.
3. Indian Negotiable Instruments Act – To take care of the Bill of
Exchange drawn on ABC and discounted by XYZ, the Indian Negotiable
Instruments Act is to be referred.
4. Companies Act – Since ABC is a public limited company, the provisions
as mentioned in the Companies Act are to be honored.
5. Indian Partnership Act – Since XYZ is a partnership firm, the
conditions as mentioned in Indian Partnership Act are to be honoured.
6. Law of Insurance – These provisions are to be taken care considering
that the material is fragile and sensitive.
7. Carriers Act – As the material is to be transported through road by a
public carrier, the Carriers Act comes into picture for the transaction.
8. Central Excise Act – Since the material is liable for central excise duty.
9. Central Sales Tax Act – Since the material is transported from Gujarat
State to Maharashtra State, Central Sales Tax rules are to be followed.
(From 01/04/2016, GST laws will prevail.)
7
10.Octroi/LBT Act at Pune – As may be applicable during the execution

of contract.
Thus, so far in this illustration ten different acts have played their
important role in the transaction. This list cannot be made exhaustive in
the complexities of Indian Legal System. This is merely an illustrative list.
Each transaction of purchase is peculiar by itself and may invoke varieties
of provisions of various Laws and Acts.
The complexity can be further illustrated by studying the following
examples –
1. The company X buys valves to install in their boilers. This contract is
subject to the Indian Boilers Regulation Act.
2. The company Y manufactures cosmetics and buys chemicals for the
same. This is subject to the provisions of Drugs and Cosmetics Act.
3. The company Z makes cartons for packaging and supplies to various
companies to pack their products. It follows the provisions of Packaged
Commodities Act as well as Standards of Weights and Measures.
4. Companies doing procurement and storage of some petroleum products
follow the regulations made by the Directorate of Explosives.
Thus the list goes on and on depending on the activity or nature of product
involved.
1.5 IMPORTANCE OF LEGAL ASPECTS IN SCM
The following facts are to be considered while understanding the

importance of legal aspects in Supply Chain Management –
• There are many laws which are to be studied, followed and considered
before initiating any transaction of purchase or services in the supply
chain management.
• All such laws must be applicable within the framework of the basic law of
the land, Viz., Constitution of India for transactions between Indian
companies.
• For global transaction, the latest laws applicable to the countries of trade
as well as the treaties and acts between the two countries are to be
strictly followed.
8
• The laws and regulations keep changing at regular as well as at sporadic
intervals.
• There are few laws which have not undergone any major change for
decades together, e.g., Contract Act, Partnership Act, etc. On the other
hand, some laws are amended frequently by notifications, clarifications
or circulars like Central Excise & Customs Laws.
• The interpretation of a law may change depending on the judicial
pronouncements.
• Sometimes, some laws are amended with ‘retrospective effect’. So the
latest and updated knowledge of the applicable laws and regulations is a
must and plays an important role in Supply Chain Management.
A TYPICAL FLOW CHART IN A MANUFACTURING COMPANY
SUPPLY CHAIN MANAGEMENT IS A MUST FOR COST REDUCTION
9
1.6 ACTIVITIES FOR THE STUDENTS

1. Considering your daily meals as the product, and considering you as
customer, draw a line diagram of the supply chain of the food.
2. Study the supply chain management of a nearby grocery shop and list
the laws which are required to be followed for its basic operations.
3. Find out the evolvement of Supply Chain Management in the 20th
Century by doing Google search and list the major milestones year wise.
10
1.7 SUMMARY
Legal aspects play an important role in Supply Chain Management. All the
applicable acts and laws are to be followed while designing and
implementing the supply chain management system. Various Mercantile/
Commercial/Business laws of the local government and country where the
business is done, are to be considered while doing the business and
executing a contract. Thus, the legal aspects play a vital role in Supply
Chain Management.
1.8 SELF ASSESSMENT QUESTIONS

1. Give brief definition of ‘Supply Chain Management’.
2. Explain in details how the Legal Aspects play an important role in Supply
Chain Management.
3. Name minimum three major Legal Acts and Laws and their importance
in SCM.
4. Explain which are the factors of SCM those help to reduce the costs of
production/ intermediate services to ultimately reduce the product/
service costs.
5. Explain in brief the ways and means of cost reduction and how SCM is
playing important role to give the company the competitive edge.
11
1.9 MULTIPLE CHOICE QUESTIONS
1. In SCM, C denotes which of the following?

a. Challenge
b. Chain
c. Commercial
d. Commerce
2. SCM relates to the activity of –

a. Purchase
b. Sales
c. Production
d. All of the above
3. SCM is applicable in case of following industry/activity –

a. Products
b. Services
c. Information
d. All of the above
4. In the term SCM, S denotes for –

a. Service
b. Several
c. Supply
d. Survival
5. SCM is to be effectively applied to mainly achieve the –

a. Cost reduction
b. Increase in exports
c. Satisfy the Government
d. Reduce the pollution
Answers : (1-b), (2-d), (3-d), (4-c), (5-a).
12
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture
13
MERCANTILE AND COMMERCIAL LAWS
Chapter 2
Mercantile And Commercial Laws
Learning objectives
At the end of the chapter, you will be able to understand the definition and
objectives of the Mercantile or Commercial or Business laws. Also, you will
know about the scope of Mercantile Act and about the scope of Commercial
Act. The need and requirements of the Mercantile and Commercial Laws
will also be understood by the reader.
Structure:
2.1 Definition of Mercantile Law/Commercial Law/Business Law
2.2 Objectives of Business Law
2.3 Sources of Mercantile Law
2.4 Business Law – Needs and Necessity
2.5 Mercantile Law – Scope and Boundaries
2.7 Summary
14
2.1 DEFINITION OF MERCANTILE LAW/COMMERCIAL LAW/

BUSINESS LAW
All the three terms, i.e., Mercantile Law/Commercial Law/Business Law are
one and the same, or synonymous. Business law is the branch of a civil
law, i.e., a general law. It is dealing with the rights and obligations of
business persons arising out of business transactions in respect of business
operations or business property. A ‘Business person’ is a person who
carries on commercial transactions of the business. He/She may be a
single person or individual or a sole trader or a partnership firm or even a
company. The business transactions relate mostly to what is known as
merchandise in business language, or movable property or goods, which is
separately distinguishable than immovable property.
After the year 1960, the business in India has shown tremendous growth,
and this has made much impact on the Parliament and State Legislators to
introduce new chapters of legislation and amend the existing legislations to
regulate various business transactions. This growth has taken a big leap
since introduction of online business and e-transactions in the last decade.
A large amount of labor and capital are involved. In a socialistic form of
country like India, wealth should be adequately distributed to bridge the
gap between the rich and the poor. To achieve this objective, the law
regulates various transactions of business community. Though it is not
possible for every businessman to learn every clause of the law, he must
get the knowledge of the general principles of the law of the country. It
may be noted here that ignorance of the law is not an excuse for any
Indian Citizen doing business in India.
The modern business world has expanded, and accordingly, the scope of
business law has been largely widened. It is generally understood to
include the laws related to contracts, sale of goods, private limited,
proprietary and partnership companies, negotiable instruments, insurance,
property dealings, foreign exchange, competition, environment, pollution,
carriage of goods, arbitration, consumer protection, foreign country taxes
and bans, intellectual property, etc.
15
A point which should not be neglected is that Business Law is not

altogether separate from other branches of law and hence, has its own
importance. In its application, recourse is often taken to other pieces of
legislation. Laws as such are all interrelated. It is a matter of convenience
that legislation is classified into Business Law, Labor Law, Mercantile Law,
etc.
2.2 OBJECTIVES OF BUSINESS LAW
Business Law’s nature and complex nature explains the fact that the
subject has many objectives to be achieved, a few of which are listed
below -
a. The law explains the framework within which business activities shall be
carried out. For example, a company in India releases an advertisement
mentioning the products of its competitor company. The former
company also prohibits its dealers to distribute the products of the latter
company. This action of former company is not in conformity with some
legal rules prescribed by some statute or the other. In such case, the
latter can enforce its rights which have been infringed by the former
company.
b. A business person can raise an issue to various legal and semi-legal
authorities against the government in case his legal rights have been
violated.
c. Some laws are made to encourage the business persons to achieve their
goals fast. For example, business has been extended the facility of
doing business by getting a company incorporated, offering all the
advantages of incorporation, such as separate legal entity, limited
liability, etc.
d. The Business Law also has social objectives to serve the society at
large. The Anti-competition laws, Pollution control laws, etc., are a few
examples. Also, the laws concerning the regulation of essential
commodities, prevention of food adulteration in the interest of
consumers, are some of the commonly known examples which serve the
social objectives. Recently, the control of prices of generic medicines by
law has also played a role of government in the interest of the society.
e. Lastly, business laws tries to prevent the concentration of economic
power to some extent and helps in the fast settlement of claims of
individuals against business houses.
16
2.3 SOURCES OF MERCANTILE LAW
During the earlier days of constituting and implementation of the

Mercantile Law, business transactions were regulated by the personal laws
of the parties to the suit. The rights of the Hindus and the 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 respective religion’s Law was applied. In case where
one party was a Hindu and other party was a Muslim, the personal law of
the defendant was applied. In case of persons other than Hindus and
Muslims, and also where the laws of usages of Hindus and Muslims were
silent on any point, the courts generally applied the principles of the
English Law.
Subsequently, need for the enactment of a uniform law regulating the

contracts was realized and this gave birth to The Indian Contract Act
,1872. Afterwards, a number of statutes have been enacted, viz., The
Negotiable Instruments Act,1881; The Sale of Goods Act, 1930; The Indian
Partnership Act 1932; The Insurance Act, 1938; The Arbitration Act, 1940,
etc.
Sources of Mercantile Law in India :
The English Mercantile Law, The Acts enacted by the Indian Legislature,
The Judicial decisions and precedents; The Customs and Trade Usages, and
The Justice, Equity and Good Conscience Laws are the main sources of
Mercantile (Commercial) Law in India. Let us examine them one-by-one.
1. English Mercantile Law: The English Mercantile Law constitutes the
foundation on which the main structure of the Indian Mercantile Law has
been constructed. Even now, despite the enactment of various statutes
relating to the matters falling within the purview of the Mercantile Law,
our courts generally take references from the English Law where, some
principles are not crystal clear, or where there are confusions in
understanding.
17
2. Judicial Decisions and Precedents: Judicial decisions are usually

referred to as precedents and are binding on all courts having
jurisdiction lower to that of the court which gave the judgment. They
are also generally followed even by those of equal jurisdiction in
deciding similar points of law. Whenever, an Act is silent on a point or
there is ambiguity, as per the normal practice, the judge has to decide
the case according to the principles of justice, equity and good
conscience.
3. The Customs and Trade Usages: Customs or usage of a particular
trade also guides the courts in deciding disputes arising out of
mercantile transactions. Also, where a statute specifically provides that
the rules of law contained therein are subject to any well recognized
custom or usage of trade, then the custom may override the statute
law.
4. The Statute Law: When a bill is passed by the parliament and signed
by the President, it becomes an ‘Act’ or a ‘Statute’. Many of the clauses
and subclauses of Indian Mercantile Law is termed as Statute Law. The
Indian Contract Act, 1872; The Negotiable Instrument Act, 1881; The
Sale of Goods Act,1930; The Indian Partnership Act, 1932; The
Companies Act, 1956 (Now recently revised) ; are the examples of the
Statute Law.
5. Justice, Equity and Good Conscience: The equitable principles of law
developed by the British courts are the guiding force behind most of the
Indian statutes on business laws. Also whenever required, the Indian
courts make wide use of these principles of equity in interpreting the
Indian law.
18
2.4 BUSINESS LAW – NEEDS AND NECESSITY
Each and every business has to be based on strong economics and

commercial activities. Thorough knowledge of business laws is therefore
necessary for survival and profits of the business houses. The general
knowledge of business law will definitely help the businessmen to solve
their business problems and avoid conflicts with others with whom they
carry the business activities. It will also save the valuable time, efforts and
money of the businessmen as it will avoid them from going into wrong
business activities. This is more important for those businessmen involved
in the area of exports and imports to have a proper information about the
business laws of the countries where they are dealing with.
19
2.5 MERCANTILE LAW – SCOPE AND BOUNDARIES
The following acts are most widely used and referred by most of the
businesses and consulting houses in India, for Mercantile Law/Business
Law :
The Companies Act, 1956 (Old); And
The Companies Act, 2013 (Latest Revised) Published on 29th

August, 2013.
Recently revised due to changed conditions and importance of the stock

market, the Companies Act controls all the registered companies.
Companies are registered in India under the Companies Act. The capital
issues of registered companies are regulated by the SEBI. The registrar of
Joint Stock Companies, the Department of Company Affairs, the High
Court, the Official Liquidator, the Corporate Auditors, etc., are acting as
watch-dogs in the public interest under this Act. This Act influences capital
market and distributional channel decisions particularly regarding
appointment of directors and selling agents. The Act is important to be
followed by the companies from their start to the end, and submit the
reports to government from time-to-time in the prescribed formats. This is
the most important Act amongst all the Mercantile Acts, and hence, to be
thoroughly studied.
The Indian Contract Act, 1872
The oldest and widely referred Act of the Indian Business Acts, this Act
helps people to bind and maintain legally enforceable relations and conduct
business and non-business transactions. It basically focuses on an offer
and acceptance in the legal transactions. In case of breach of contract, the
party under damage may claim specific performance or damages and seek
injunction. The agency relationship between the principal and the agent is
also governed by this Act. It prescribes the manner of agency stipulation
and rights and duties of parties.
20
The Indian Sale of Goods Act, 1930
This act governs all the transactions of sale and purchase of a company. Its
importance is thus emphasized on the selling decisions of companies. It
defines ‘contract of sale’ as a ‘contract’, whereby a seller transfers or
agrees to transfer the property in goods to a buyer for a price. Here, the
term ‘property, means ‘goods’ and not the property of real estate, which is
commonly misunderstood by many. It divides the term of sale into
conditions and warranty. Condition is essential to the main purpose while
warranty is collateral to the main purpose. Breach of condition gives a right
of revoking the contract while warranty does not. Warranty entitles to only
damages. The Act proclaims the principle of caveat emptor which has
possibly made many people in the Indian business sales-oriented. It lays
down rules for the performances of the contract of sale.
The Contract of Partnership Act, 1932
Majority of the firms in India are partnership firms, which are controlled by
this Act, hence this is important Act in study of the Mercantile Law. The
law relating to partnership is contained in the Indian Partnership Act, 1932,
which came into force on 1st October, 1932. A contract of partnership is a
special contract. The general principles of the law of contract apply
wherever the points are not elaborated in the Partnership Act.. The Act
contains 74 sections and extends to the whole of India except the state of
Jammu and Kashmir. Section 4 of the Indian Partnership Act defines the
term ‘partnership’ as – “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”. Persons who have entered into a partnership with one
another are individually called as ‘partners’ and collectively as ‘a firm’ and
a name under which their business is carried on is called the ‘firm name.’
21
The Negotiable Instruments Act, 1881

The term ‘negotiable instrument’ literally means “a document transferable
by delivery.” A negotiable instrument is a written contract with an evidence
for a right to receive money and it may be transferred by negotiation, i.e.,
either by delivery or by endorsement. In India, the law relating to
negotiable instruments is a part of Negotiable Instruments Act, 1881
which came into force 1st March, 1882. Section 13(1) of the Negotiable
Instrument Act states that, a Negotiable Instrument means a promissory
note, bill of exchange or cheque payable either to order or bearer. Whole of
India and all persons resident of India, whether foreigners or Indians are
covered under this Act. The provisions of this Act are not applicable to
Hundis and other native instruments. Special customs and local usages
govern instrument. When no such custom is established, this Act will
equally apply to Hundis.
The overall study of all the above mentioned Acts, along with some other
important acts as mentioned below is the major topic of legal aspects of
Supply Chain Management, hence the knowledge of all these Acts is
essential for persons working in the area of Supply Chain Management.
The other relevant Acts having direct bearing on internal trade, as well as
foreign trade are listed below in the chronological order :
The Stamp Act, 1889 ;
The Indian Registration Act,1908 ;
The Securities Contracts Regulation Act, 1956 ;
The Copyright Act, 1957 ;
The Patents Act, 1970 ;
The Securities Exchange Board of India Act, 1882 ;
The Environment Protection Act, 1986 ;
The Consumer Protection Act, 1986 ;
The Foreign Trade (Development and Regulation) Act, 1992 ;
The Arbitration and Conciliation Act, 1996 ;
The Foreign Exchange Management Act, 1999 ;
The Trademarks Act, 1999 ;
The Competition Act, 2002 ;
22

1. List down the points of influence of customers on a particular trade in
business law.
2. Search from Govt. Websites. The Companies Act, 2013 (Latest Revised)
Published on 29th August, 2013.
3. If you are going to start a partnership business of export of garments to
Nepal, list down the required Acts to be followed to run the business.
2.7 SUMMARY
The terms ‘Mercantile Law’, ‘Commercial Law’, and ‘Business Law’ are
synonymous. The Mercantile Law and Commercial Law deal with mercantile
person in mercantile transactions. The objectives of mercantile and
commercial laws is to facilitate and regulate the business activities to
ensure equity and justice. The sources of mercantile law includes common
law of England, Statute Law, precedents and customs. The Companies Act,
1956 controls all the registered companies from their birth to death.

1. Give brief definition of ‘Business Law’.
2. Explain in detail the nature of ‘Business Law’.
3. Write down point by point the objectives of ‘Business Law’.
4. List down and elaborate the sources of ‘Business Law’.
5. Explain in details the different enactments coming under the scope of
‘Business Law’.
23
1. A ‘business person’ is a person who –

a. Observes the business keenly
b. Approves the business as per law
c. Carries on commercial transaction of the business
d. Closes the business
2. Mercantile Law deals mainly with –

a. People of India
b. Commercial activities of a business
c. Religious activities
d. All of the above
3. The basic source of Indian Mercantile Law is –

a. English Mercantile Law
b. American Mercantile Law
c. Japanese Mercantile Law
d. All of the above
4. The capital issues of registered companies in India are regulated by –

a. The Mumbai Stock Exchange
b. Finance Minister of India
c. President of India
d. S.E.B.I.
5. The objectives of the ‘Business Law’ include –

a. Legal running of the business
b. Deal with Anti Competition Issues
c. Fulfill Social Objectives
d. All of the above
Answers : (1-c), (2-b), (3-a), (4-d), (5-d).
24
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
25
LAWS OF AGENCY
Chapter 3
Laws Of Agency
Learning objectives
At the end of the chapter, you will be able to understand the concept of
agency, know about the different categories of agents, ways and means of
creating agency, identify the difference between sub-agent and substituted
agent, identify situations where the agents will be held personally liable,
enlist and describe the duties and rights of agent and identify and explain
the situations when the agents can be terminated.
Structure:
3.1 Salient features and tests of Agency
3.2 Creation and Classifications of Agencies
3.3 Agency by Ratification
3.4 Authorities of an Agent
3.5 Rights, Duties and Liabilities of Agent
3.6 Agent and Principal
3.7 Misrepresentation and Fraud by Agents
3.8 Termination of Agency
3.10 Summary
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3.1 SALIENT FEATURES AND TESTS OF AGENCY
Definition : ‘Agency is a comprehensive word, which is used to describe

the relationship which arises where one person is appointed to act as the
representative to another.’ The act of representation may be to sign a
contract, approval of an action, conveyance of land, to exercise the
proprietary rights in case of the power of attorney, to collect the payment
and hand over the receipt or to finalise a discount structure in case of sale,
etc.
Rules - The Law of Agency is based on two general rules –
The person who acts through an agency, is himself acting ; and
Whatever is the act of a person, that may be act of another person
also (with certain exceptions)
Act – The Indian Contract Act, 1872 contains the Law of Agency in
Chapter X.
Concept –
Whenever any two parties create an agreement, which is express or
implied, the agency is created. The relationship of agency arises whenever
one person called agent has an authority to act on behalf of another called
principal. The concept of agency implies that one person brings another
person into a legal relationship. It is to be noted that the agent is not only
a connecting link between the principal and the third party, but he is acting
on behalf of the principal and has the implied or expressed powers for the
principal answerable to third party for his conduct, actions and decisions.
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Contents of Agency Contract –

The main contents of an Agency Contract between the Agent and the
Principal are as follows–
• The appointment of the agent has to be made by the principal.
• The contract may be either documented or verbal and understood.
• The principal should hand over or confer the authority on the agent to act
on his behalf for the specified period/region/products/services as may be
conferred on the agent.
• The authority conferred should be such that the principal is made
answerable to the third party for the decisions/actions of the agent.
• The object of the appointment must be to establish the relationship
between the principal and the third parties.
• The relationship of agency being based on confidence between the
principal and agent. There may or may not be any consideration
involved.
• The contract may specify the period of contract for which it is valid.
• The contract may mention about any sub-agents allowed or not allowed
in the deal.
• The contract may also mention the mode of communication between the
agent and principal and also the approvals of the principal beyond certain
limits as specified in contract.
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Important Aspects of the Contract of Agency-

• Main object of employing an agency is to bring the principal into legal
relations with third person. This object is kept in mind in designing the
contract of agency.
• Every person who acts for another person is not an agent. He should be
authorized to do so. To be an agent, the person must be authorized to do
any act for another, or to represent another in dealings with third
persons, as specified in the section of the Act. The person for whom such
act is done, or who is so represented is called ‘The Principal’.
• The Indian Contracts Act specifies that any person may become an
agent. In other words, even a minor can be employed as agent and the
principal shall be bound by the acts of such an agent. But no person who
is not of the age of majority and of sound mind can become an agent so
as to be responsible to the principal. Thus, if an agent is to be held liable
to the principal, he must be major and of sound mind.
• A person who is major and of sound mind can employ another person as
an agent. The Act states that a person who is of the age of majority and
is of sound mind can become principal. So, a minor cannot act as
principal.
• Consideration is the essential element for the validity of every contract.
However, the Act also mentions that ‘no consideration is necessary to
create an agency’. Thus, if a person ‘Mohan’ appoints a person ‘Gopal’ as
an agent, the affairs of ‘Mohan’ are placed in the hands of ‘Gopal’,
therefore, no further consideration in the form of remuneration need be
present.
• A contract of agency is based on ‘good faith’. The agent must disclose to
his principal every information coming to his knowledge which may
influence the principal in making of the contracts with third parties. Also,
the agent must not deal on his own account or must not settle adverse
title, nor should he use information obtained in the course of agency
against the interests of the principal.
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LAWS OF AGENCY
Necessary and Sufficient Conditions to Determine an Agency –

To determine the existence of an agency, the answers to the following
questions are sought –
1. Whether the person has the capacity to bind the principal and make him
answerable to third parties.
2. Whether he can create legal relations between the principal and such
third party and thus, establish privities of contract between the principal
and the third party.
If answers to both of the above questions are affirmative, then there is
relationship of an agency.
In legal terms, every person who acts for another is not an agent. For
instance, a domestic servant rendering personal services, that person may
work in his master’s workshop or factory or field, aiding in the performance
of his legal or contractual obligations to third parties, but he is not an
agent in such cases. It is only when he acts as a representative of the
other in business negotiations or in creation, modification or termination of
contractual obligations between the other and the third person, then he is
an agent. The fact that the parties have called their relationship as an
agency is not conclusive. The representative character and authority given
to the another person may broadly be said to be the important features of
an agent.
Now, let us distinguish between the Agent from a Contractor, a Bailee, a

Servant and a Trustee.
Differences between an Agent and a Contractor–

• A person who undertakes to do something for another is called
independent contractor. A contractor merely undertakes to perform
certain specified work; whereas an agent is bound to follow the
instructions of the principal and is subject to his directions and control.
• An agency is a person employed to do any act for another or to represent
another in dealings with third persons. Thus, an agent can represent the
principal and bind him by entering into contracts with other persons
within the scope of his authority. An independent contractor cannot
represent the principal like an agent, nor can he bind the principal by
entering into a contract with other persons. The question of authority
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does not arise at all; consequently, he is personally liable for all acts
done by him
Differences between an Agent and a Bailee -

• In case of a bailor and bailee, the relationship between them exists so
long as the bailee holds goods belonging to the bailor, whereas this is not
necessary for the existence of the agency relationship. Sometimes, the
bailee may become an agent when he is authorized to dispose of the
bailor’s property according to his directions. Similarly, in some cases the
agent may be in possession of the principal’s property and to that extent,
he may become a bailor.
• An agent is a representative with an authority to contract on behalf of his
principal, whereas the bailee does not have such power.
Differences between an Agent and a Servant –

An agent is employed to act on behalf of the principal and to bring him into
legal relations with third parties. A servant does not have such authority.
• A principal has the right to direct what work the agent is to do, but an
employer has further right to direct how the work is to be done. So a
servant has to act under direct control and supervision of the employer
but the agency, though bound to follow instructions of the principal, is
not subject to direct control or supervision of his employer.
• A principal is liable only for the acts of his agent done within the scope of
authority and is not for those acts of the agent which are done outside
the scope of such authority. On the other hand, the employer is liable for
the wrongful acts of his servant, if such acts are committed in the course
of employment.
• An agent is usually paid commission on the basis of the work done by
him, whereas the servant is usually remunerated by way of salary or
wages. So a servant usually works for only one employer, but an agent
may work for several principals at the same time.
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Difference between an Agent and a Trustee –

• Both, the agent and trustee, exercise their powers and authority in the
interest of other persons, however, a trustee exercise powers in his own
name and on his behalf. The agent, however, exercises merely the
delegated powers authorized to him by the principal.
• In the case of trustee, he manages a property which is vested to him,
while the agent is doing the same thing not his own property, but the
property of the principal.
• The agent makes a contract on behalf of his principal, thereby, creating
privities of contract between the principal and the third party, whereas
when the trustee does the same thing, the contract is for him and only
for him.
• An agent represents and acts for his principal but a trustee represents
and acts for the beneficiary.
3.2 CREATION AND CLASSIFICATIONS OF AGENCIES
Creation: An agency may be appointed or formed in different ways. It is

not always expressed in writing. It may be created from the circumstances
and conduct of the parties. There are different ways of forming the same.
It can be by express agreement, or by implication of law, i.e., from conduct
of the parties or by necessity of the case. It may also be created by
ratification.
3.2.1. Agency by Express Agreement – A principal appoints an agent

either verbally or in writing to represent and act for him. When a person
gives power of attorney to another person, an express agency is created.
3.2.2. Agency by Implication – Agency can be formed by implication of

law. It can be inferred from the nature of business, from the circumstances
of the case, the conduct of principal or the course of dealing between the
two parties. Example – If person ‘A’ realizes rent from tenant ‘C’ and gives
it to the landlord ‘B’, the person ‘A’ acts as an agent for the landlord ‘B’.
Implied agency includes (a) Agency by estoppel, (b) Agency by holding out
(c) Agency by operation of law or (d) Agency by necessity.
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LAWS OF AGENCY
a. Agency by estoppel – In some cases where a principal knowingly

permits a person to act in a certain business in his name or on his
behalf, such a principal is estopped from denying the authority of the
supposed agent to bind him.
Rule of estoppels – “When one person has by his declaration, act or

omission intentionally caused or permitted another person to believe a
thing to be true and to act upon such belief, neither he nor his
representative shall be allowed in any suit or proceeding between
himself and such person or his representative to deny the truth of that
thing.”
Example – The shareholders and directors of a limited company

induced the people to believe that a certain firm was their permanent
agent and was authorized to raise money on their behalf. The manager
of that firm executed and signed hundis on behalf of the company, it was
held that the company was liable to the holder of such hundis in due
course, even though the agent’s firm was not legally authorized to
execute the instruments.
b. Agency by Holding-out – Where a person permits another to pledge

his credit for certain purposes for a longer period, he is bound by the
act of such person in pledging his credit for similar purposes, though in
some cases without the permission of his master. This is the case of
agency by ‘holding-out’. Similarly where a husband holds out his wife as
having his authority by words or conduct and a third party advances
money to the wife on the faith of such conduct, the husband is liable for
such debts. The difference between agency by estoppel and agency by
holding-out is that in case of ‘estoppel’ the principal is passive, keeps
quiet and allows another person to give himself out as an agent. In case
of ‘holding-out’, the principal himself holds out to the world that
somebody is his agent.
c. Agency by operation of Law – An agency can also arise by operation

of law. When a company is formed, its promoters act as its agents by
operation of law. A partner is the agent of the firm for the business
purpose, and his acts bind the firm. In this case, the agency is implied
by operation of law.
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d. Agency by Necessity – Sometimes the agency has to be implied

because of necessity in extraordinary circumstances. For Example – if
some perishable goods are sent by transport/rail and they are held up
in-between due to strike or any other extraordinary reason. In this case
the carrier of goods has to sell the perishable goods and he becomes
implied agent by necessity. However, before an agency of necessity can
be inferred, the following conditions should be fulfilled :
i. There should be absolute necessity for the creation of agency.
ii. It should be very difficult and time-consuming to obtain principal’s
instructions.
iii. The person acting as an agent should act in good faith in the interest
of parties concerned.
In the case of transporting perishable goods by railway, when the

consignment was in complete danger of becoming useless due to delay in
transit, and the Railway had to sell it at best affordable price, the sale was
held valid because there was no time to get the principal’s instructions. In
such cases or in case of transport of animals and nobody coming to take
delivery of the same, the actions taken by the transporter may be declared
as valid, depending on the situation.
This principle is applicable when a person accepts or pays a bill of

exchange which has been dishonoured whether by non acceptance or no
payment, to save the honour of the drawer or any of the endorsers. The
person accepting or paying becomes the agent of necessity and he can
subsequently recover from the person whose honour he has saved.
Similarly, a person may become an agent of necessity when he incurs
expenses on medical aid to an injured person.
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Agency of Husband and Wife
In the pursuit of Law of Agency, marriage plays an important role. There

exists a relationship of principal and agent between spouses so long as
they are staying together and so the wife has authority to pledge her
husband’s credit for the necessaries. The wife’s authority extends to
contract for things that are really necessary and suitable to the style in
which the husband chooses to live. The goods purchased by the wife must
fairly fall within the domestic department which is managed by her. The
authority of wife to bind her husband is to be exercised in a proper manner.
So, the following conditions are to be satisfied to establish the implied
authority of the wife to pledge her husband’s credit.
a. They are having a common domestic establishment and are living
together.
b. The wife is controlling the domestic arrangements, and
c. Husband is not paying any allowance to the wife to provide for the
necessities.
However, a husband can escape from the liability if he can prove that –
a. The wife is already getting the necessities in sufficient quantities, or
b. The wife was not authiorised to deal with the traders, and the traders
were informed expressly not to have any dealing with his wife, or
c. The wife is regularly receiving allowance for purchasing of articles of
need.
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If the wife is living apart because of the husband’s fault, she has a right to
pledge the credit of her husband for necessities. The husband cannot
escape the responsibility by asking the wife not to pledge his credit or even
by telling the traders not to supply her the necessities on credit. However
in such case, the wife should not be getting any regular maintenance
allowance by her husband.
In other case, when it is wife’s fault, i.e., the wife is living separately by
her own will without any justification, she is not an agent of her husband
and is debarred from pledging the credit of her husband.
A wife having custody of a child and legally separated from her husband,
has authority to pledge her husband’s credit for reasonable expenses of
providing for the child. If a married woman contract debts in connection
with her separate estate, independently of her husband, she will not be
considered to have acted as the agent of her husband, under any
circumstances.
Agency by Precedent and Subsequent Authority : Agency by Precedent

Authority is most ordinary method of creating agency, viz., by appointing
an agent either by words spoken or written as through power of attorney.
3.3 AGENCY BY RATIFICATION
Subsequent adoption of an activity is called ratification. Soon after

ratification, the person who has done the activity becomes agent and that
person who has given ratification becomes the principal.
Types of Ratification :
Ratification is of two types. Namely;
Express Ratification and Implied Ratification.
The ratification where there is wording and expression is called express

ratification. For example: Without person A`s direction, person B has
purchased goods for the sake of A from person C. Thereafter, A has given
his support to B`s activity, it is called ratification and now A is principal and
B is the agent.
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LAWS OF AGENCY
The ratification where there is no expression is called implied ratification.

Here the mode of behavior of the party indicates that support is given to
the activity concerned. For example: Person M has person N`s money
with him. Without person M`s direction person N has lent that amount to
person R. Thereafter, R pays interest directly to M and M has taken the
amount of interest. It indicates that M has given his support to N`s
activity.
Essentials of Valid Ratification:
The person, who is going to give ratification, must be in existence at the

time of activity. Let us consider pre-incorporation contracts made by
promoters. Company comes into existence on the date of incorporation.
Therefore company is not in existence at the time of pre-incorporation
contracts. If company gives ratification to pre-incorporation contracts, it is
not valid ratification. Hence to pre-incorporation contracts, promoters are
personally liable.
The person who is going to give ratification should have capacity to

contract, at the time of activity as well as at the time of ratification. In one
of the cases, the minor obtains loan from moneylender and executes a
deed. Before repayment of debt, he becomes a major and executes
another bond. Court decides that the second bond also is not valid because
the person who has given ratification has no capacity to contract at the
time of activity, i.e., at the time of getting loan.
Ratification should be given within reasonable period after the activity. The
concept of reasonable period depends upon nature of the situation.
Ratification must be absolute. Ratification is to be given to the entire
activity. Partial ratification carries no validity. The fact of ratification must
be communicated to all parties in connection with the activity. Ratification
attains validity only when it is given with full knowledge of facts relating to
the activity.
The activity which is going to be ratified must be a lawful activity. For

example: for the sake of A, B has murdered C. If A gives his support to B`s
activity, it is not valid ratification. Also, the person who is going to give
ratification should have right to do such activities. For example: If company
gives ratification to implant a virus, the activity is not valid. Ratification
relates back to date of activity. Though ratification takes place after the
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LAWS OF AGENCY
date of activity, it will be assumed that ratification is given on the date of

activity.
Ratification should not lead to breach of contract. In other words,

ratification should not be harmful to third party. For example: There is a
rental agreement between person A and person B according to which three
months notice is needed at the time of vacating house. On a give day,
person C, A`s son, has asked B to vacate the house on that day itself. A
has given his support to C`s activity. It is not valid ratification because it
leads to breach of rental agreement and at the same time it is harmful to
B. Ratification relates back to the date when the act was done by the
agent. So it is an authorization retrospectively. It is equivalent to previous
authority, or it is substitute for authorization.
Necessary Conditions to establish a Ratification –

The following conditions are necesary to establish a valid ratification –
1. Type of Act – The act which is done on behalf of the ratifier, can be
ratified. Also, he must ratify for the act which is done for him and not
for somebody else. So, the act done by a person on his own, cannot be
ratified.
2. Competency – The person on whose behalf the act was done should
have contractual capacity at the time both when the act was done and
also when it was ratified. A person who is incompetent to authorize an
act cannot give it validity by ratifying it.
3. Existence of the Principal – Nobody as an agent can bind by a
contract to a principal who does not exist on the date of contract.
So, a company cannot ratify a contract which was entered into by the
promoters on its behalf before its incorporation.
4. The Transaction – Before any act can be ratified, it must exist at the
date of ratification before the other party had withdrawn from it and
before the agreement has been terminated or discharged.
5. Acceptance of the Act – The principal must accept the act of the
agent completely.
6. Type of Ratification – Ratification may be expressed in words or in
writing and it can also be implied from the conduct of the person on
whose behalf the act was done.
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7. Full Knowledge of the Facts – Valid ratification involves knowledge of

all material facts on the part of the ratifier. It is the actual knowledge
and not only opportunity for acquiring actual knowledge which is
essential for valid ratification.
8. Scope of Transaction – A contract must be fully ratified. Even if a
part is accepted, it is implied acceptance of the whole, e.g., If an agent
purchases without authority 50 pieces, it is not open to the principal to
ratify 30 of them, without approving the other 20 pieces.
9. Ratification of Acts – Every act may be ratified if it is not void in its
inception, as long as it is capable of being done by the principal himself.
10.Time of Ratification – Once a contract is made, the ratification must
be done in a reasonable time. When a time is expressly limited, a
ratification after the expired time will not serve.
11.Legality of the Act – A contract which is illegal as per the prevailing
law, cannot be ratified. An act constituting a criminal offense is
incapable of ratification. However, a voidable contract can be ratified.
Payment of dividend by a company out of capital is void and cannot be
ratified. Or a forgery of signatures being a crime cannot be ratified.
12.Communication – There can be no valid ratification of an act unless it
is communicated to the other party. Ratifier cannot remain silent on his
intentions or acts of ratification.
13.Safety of a Third Person – When interests of third parties are likely to
be affected, the principle of ratification does not apply. Ratification
cannot relate back to the date of contract if third parties have in the
intervening time have acquired the rights.
14.Date of the Act of the Agent – Ratification has retrospective effect. It
relates back to the original date or making of the act or contract. It
places all the parties in exactly same position as they would have
occupied in the case of a precedent authority.
15.Ratification by Government – Acts done by public servant in the
name of the Government may be ratified by subsequent approval in the
same manner as private transaction.
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3.4 AUTHORITIES OF AN AGENT
Since most of the time the person from supply Chain Management has to
negotiate and interact with the agents of the manufacturers/suppliers, the
knowledge about the authorities of an agent is a must for effective
management of supply chain.
The authority of an agent is never unlimited as the agent is a different

person and not the principal. The authorities of an agent are classified in
three parts, viz., (i) Actual and Real (ii) Apparent and (iii) Emergency.
Actual (Real) Authority – This can be either express or implied. It is said

to be Express when it is given verbally or in written form. It is called as
Implied when it is inferred from the circumstances of the case, and things
spoken and written on the ordinary course of dealing may be accounted as
circumstances of the case, e.g., renting of a shop through a broker.
Extent of Authority – The example of such authority is appointing an

agent in another country for collection of debts from customers in that
country. Or doing some material purchases from suppliers from that
country. In such cases the agents in those countries may sometimes make
use of the extent of authority. An Agent having authority has to sometimes
do lawful things which are necessary for the purpose or usually done in the
course of conducting such business. This is called extent of authority of an
agent. It depends on nature of business. The things must be lawful and
necessary. Therefore an agent does not have unlimited authority or
discretionary powers. In this respect, the agents are further classified as
Special Agents and General Agents. The section says that if an Agent is
appointed to do a specific task, he can use his authority to do all necessary
and lawful things to achieve the purpose. So if he is appointed to sell a
property, he may describe the property, highlight its salient features, etc.,
to the proposed buyer. For a General Agent, he has been expressly
authorized and he may also do as to what is necessary for or is usually
done in carrying out such business.
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If an Agent is carrying out a mercantile business, he should note the

following points regarding his authority –
1. The agent is not authorised to draw, endorse or accept bills of exchange
in the name of the firm.
2. He should receive the payment from customers in cash on behalf of his
principal unless it is a custom or usage of business.
3. An authority to borrow must be expressly given, except in case of
nature of business like banking, where such an authority is implied. The
power to draw or endorse the bill of exchange or promissory notes does
not include the power to borrow.
4. A general authority to transact business and receive and discharge
debts does not confer on agent the power of accepting or endorsing bills
of exchange so as to bind his principal. (Section 27 of the Negotiable
Instruments Act, 1881)
Special Agents and Their Authorities :
The following are the various types of special agents, and their respective
authorities.
Factor – He is normally applied for sale and purchase activities. He has

authority to sell goods in his own name and to receive payments thereof in
his own name. He cannot delegate his authority to others, but he can offer
warranty of the goods, if it is normal to do in the trade.
Broker – The major difference is that a Broker cannot receive the

payments of the goods sold. He has authority to act under and in
accordance with the ‘rules and regulations of the market’ in which he deals.
He can also sell the goods in his own name and offer credit and receive
payment. He cannot delegate his authority.
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LAWS OF AGENCY
Auctioneer – He is appointed as an agent only to act in case of auctions.

An Auctioneer has implied authority to contract on behalf of the seller as
well as the buyer as regards goods sold by auction. He cannot sell on credit
or accept any payment other than cash. He has authority to warrant the
goods sold or to give delivery thereof except on payment of the price.
Estate Agent – He has to act for a disclosed principal. He finds purchaser

or seller of property on behalf of his employer. He is entitled to his
commission when he brings about a contract between the principal and the
buyer. He has no implied authority to finalise the contract with the third
person nor can he receive the price of the property sold. He also cannot
delegate his authority.
Apparent Authority
If the authority of an agent is understood as it appears to others, is known

as Apparent Authority, So, if the board of directors of a company appoint
one of their members as a Managing Director, they empower him not only
with implied authority but also with total authority to do all such things
that fall within the usual scope of that office. Other people dealing with him
in his capacity as a managing director are entitled to presume about these
implied and apparent authorities. Apparent authority sometimes exceeds
the actual authority. The contracts are binding on the principals. This type
of authority is most common in case of companies and firms.
Emergency Authority
This is used only in case of an emergency, e.g., if a person sells perishable

goods to second person through his agent, and instructs to send the
delivery to a city which is at a long distance, the agent may sell the goods
in the same city, if they will not bear the long journey. It is specifically
mentioned in the section that the agent can exercise this authority only for
protecting the principal from loss as if the loss is happening to the agent
himself. The act makes specific provisions for the effects when an agent
does any act exceeding his authority. (Ref. sections 227 and 228)
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Effects of Agent’s Authority
Many a times, the agent appoints a sub-agent or substituted agent to

carry out the work of the principal in time. It should be ensured by the
agent and the principal that the actions are done as if the contract has
been entered by the principal in person. So the acts done by an agent are
enforceable against the principal. Similarly, the principal is entitled to sue
third persons from enforcement of contracts entered on his behalf by his
agent, provided the acts fall within the authority of agents. The study of
sub-agent and substituted agent, therefore, is necessary. Section 191
explains the concept, authorities, appointments and effects of sub-agents
and substituted agents.
Sub-agent – A sub-agent is a person employed by and acting under the

control of the original agent in the business of the agency. The relation
between the sub-agent and the agent is the same as that between the
agent and the principal. An agent who employs a sub-agent has the same
duties and liabilities of a principal. Sub-agents act under the control of the
agent and the principal is not bound by his acts as there is no privity of
contract between sub-agent and the principal. The life of the sub-agency is
dependent on the period of the contract. As soon as the original contract is
over or cancelled, the sub-agency is automatically terminated.
Appointment of sub-agent and its effects – Generally, the agent

cannot recruit and delegate his authority to the sub agent without express
authority of the principal. The contract of agency is based on confidence
reposed by the principal in the agent. Due to the element of trust and
confidence, section 190 states that an agent cannot lawfully appoint a sub
agent to perform acts which he has expressly or impliedly undertaken to
perform personally. However, a few exceptions to this rule where an agent
can appoint a sub-agent, are to be considered.
i. Where the agent has express authority to appoint a sub-agent.
ii. Where it is necessary because of the agency.
iii. Where the principal knows that the agent intends to appoint a sub-
agent.
iv. Where the ordinary custom or usage of trade permits employment of
sub-agent.
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v. Where the act to be done is purely ministerial and does not require any
skill or confidence.
vi. Where some unforeseen emergencies arise which render it necessary to
appoint sub-agent.
vii.Where the authority of the agent to appoint a sub-agent can be inferred
from the conduct of the parties.
Effects of proper appointment of sub-agent –

a. The principal is liable to third parties for the acts of sub-agent.
b. The agent is responsible to the principal for the acts of sub-agent.
c. The sub-agent is not answerable to the principal except for willful
wrongs and frauds.
d. Sub-agent can exercise right of lien over the property of principal, in his
possession, for debts and claims arising in the course of sub-agency.
Effects of improper appointment of sub-agent –

a. The principal is not represented by such sub-agent, hence he is not
answerable.
b. The agent is responsible to the principal as well as to third parties for
sub-agent’s acts.
c. The sub-agent is not responsible to the principal at all. He will be
answerable only to the agent.
d. No right of lien over the property of principal, by the sub-agent.
Substituted Agent – A substituted agent is a person appointed by the

agent to act for the principal in the business of the agency with the
knowledge and consent of principal. Section 194 states that – “where an
agent holding an express or implied authority to name another person to
act for his principal, names another person accordingly, he is not a sub-
agent but a substituted agent for the principal.”
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LAWS OF AGENCY
For example, if a principal appoints one bank as his agent for purchase of
certain goods/property, and that branch instructs another branch of the
same bank to do the activity, the latter bank becomes a substituted agent.
A substituted agent is deemed to be the agent of the principal and not his
sub-agent. A privity of contract is established between the principal and
the substituted agent. The agent is not concerned about the work of the
substitute. However, it is his responsibility in selection of a proper
substitute. If he fails in making a proper selection, he becomes liable for
damages to the principal for his negligence.
Difference between sub-agent and substituted agent –

1. Though both are appointed by the agent, the agent delegates some of
his own duties to the sub-agent, however, not to the substituted agent.
2. A sub-agent does his work under the control of an agent but substituted
agent takes instructions from the principal.
3. Privity of contract exists between a substituted agent and principal, but
there is no such contract between sub-agent and principal.
4. The sub- agent is responsible to the agent alone, the substituted agent
is directly responsible to the principal.
5. The agent is responsible to the principal for the acts of his sub-agent,
but, after taking proper care in selection of a substituted agent, he is
not responsible to the principal for the acts of the substituted agent.
6. The agent’s duty towards the principal ends after appointment of a
proper substituted agent, but in case of a sub-agent, agents duty
continues till the contract is over.
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LAWS OF AGENCY
3.5 RIGHTS, DUTIES AND LIABILITIES OF AGENT
3.5.1 Rights of Agents :

i. Right of Retainer: Agent has right to deduct the amount which is due
to him by principal, from amount payable to principal.
ii. 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.
iii. Right to Claim Remuneration: As per the terms of agency contract,
agent has rights to claim remuneration.
iv. 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 losses.
v. 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.
3.5.2 Duties of Agents :
i. Agent should follow the instructions given by the principal.
ii. If agent comes across any complicated situation, he has to
communicate that situation to principal and his advice is to be obtained.
iii. Agent should behave in his capacity as agent, he should not run the
transaction in his own name.
iv. Agent should not make secret profits by utilizing reputation of the
principal.
v. Agent should safeguard property of principal particularly upon
happening of events like death of principal, insolvency of principal, etc.
vi. Agent should maintain proper accounting records of the transactions
done by him.
vii.Agent has to remit amounts to principal properly.
viii.Agent should not carry on delegation of his authority unless approved
by the principal.
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LAWS OF AGENCY
ix. Agent should not use agency information against principal – It is the
duty of the agent not to use information obtained in the course of
agency against the principal. If he does so, the principal can restrain
him from doing so by an injunction from the court.
x. When an agency is terminated by the principal’s death or becoming
unsound mind, the agent is bound to take, on behalf of the
representatives of his late principal, all reasonable steps for the
protection and preservation of the interest entrusted to him.
3.5.3 Liabilities of Agents :
Actually, the agent binds the over principal to his activities but there are
some situations where agent comes across personal liability. Those
situations are as follows;
i. Terms of contract of agency may create personal liability to the agent.
ii. The tradition which is in operation in that particular type of business
may also create personal liability to the agent.
iii. If agent does not behave in his capacity as agent and thus runs the
transaction in his own way, personal liability arises.
iv. When agent acts for foreign principal, agent is personally liable.
v. Pretending agent is personally liable.
vi. When agent acts for principal who has not come into existence, agent is
personally liable.
vii.In case where principal cannot be sued, customer sues agent and thus,
agent is personally liable.
viii.When agency is coupled with interest then also agent is personally
liable.
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LAWS OF AGENCY
3.6 AGENTS AND PRINCIPAL
There are three types of relationship between an agent and a principal (1)
an agent contracts as agent for a named principal, or (2) an agent
contracts for a principal whose name he does not disclose, or (3) an agent
contracts in his own name but in reality for a principal whose existence he
does not disclose. Let us examine all these three types.
3.6.1 Agent acting for a named principal –
Where an act is done by an agent within the scope of his authority, his acts
are binding on the principal, provided (i) the act is lawful and (ii) it is
within the scope of agent’s authority. Thus, when the agent is authorized to
receive payment on behalf of the principal, a payment to the agent
discharges the debtor from liability to the principal.
In a case where an agent has done more than what he is authorized to do,
and is separable, the principal is bound by that part which is within his
authority. If the agent does more than what he is authorized to do, and
such act cannot be separated from that which is within his authority, the
principal is not bound by the transaction. He is in such case entitled to
repudiate the whole transaction.
A notice given to agent is as effectual as that given to the principal. Thus,

the knowledge by manager of the bank is knowledge of the bank. Similarly,
knowledge of one partner of a firm is knowledge of all partners ob that
firm. The principal is bound to the notice given to the agent in course of
business. Knowledge of the agent is the knowledge of the principal.
However this rule will not apply if the agent had committed a fraud on the
principal. However, a principal is liable where he has induced a belief in the
contracting party that the act of the agent was within the scope of his
authority. The liability of the principal is not based on any real authority,
but is by estoppels, e.g., an owner of the house held out that the
auctioneer hand over the authority to sell the house. The auctioneer sold
the house to a third party for an amount less than the amount authorized
by the owner of the house. It was held that the purchaser is not affected
by the owner’s instruction to the auctioneer not to sell below a certain
price.
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LAWS OF AGENCY
The principal is liable for the fraud of his agent acting within the scope of
his authority whether the fraud is committed for the benefit of the principal
or that of the agent. To conclude, where the existence of the principal is
disclosed, the principal is bound by the acts of the agent. The agent can
neither sue nor be sued upon a contract made by him on behalf of the
principal. Thus, contract made by the agent is contract of the principal.
3.6.2 Agent acting for unnamed principal –
Where an agent disclosed the fact, that he is an agent, but at the same
time does not disclose his principal’s name, the contract made by the agent
is binding on the principal. But the unnamed principal should be in
existence at the time of the contract. Where the agent signed a contract as
a broker ‘to my principal’ but did not disclose the name of the principal, it
was held that broker was not personally liable.
3.6.3 Agent acting for an undisclosed principal –
Where the agent does not disclose the existence of his principal he is
personally liable for the contract. On such contracts, he can sue and be
sued in his own name because he is then in the eyes of law real contracting
party. But the agent’s right of action comes to an end with the intervention
of the undisclosed principal.
A principal though his existence was concealed at the time of the formation
of the contract, can intervene and require performance of the contract
from other party. This right of the undisclosed principal is protected by
section 231 of the Indian Contract Act. An undisclosed principal can sue on
a contract made in the name of another person with his authority.
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LAWS OF AGENCY
3.7 MISREPRESENTATION AND FRAUD BY AGENTS
Frauds by agents is a serious thing which directly affects the interests and
reputation of the principal. Misrepresentation made or frauds committed by
agents acting in the course of their business for their principals, have the
same effect on agreements made by such agents as if such representations
or frauds had been made or committed by the principals. But
misrepresentations made, or frauds committed by agents in matters which
do not fall within their authority do not affect the principal.
Torts of agents – Any tort committed by the agent while acting during the
regular course of business of his principal would make both the principal
and the agent jointly liable. For any tort committed by the agent outside
the scope of his authority, then the principal is liable.
A fraud or tort by an agent normally results into the termination of the

agent, So agent should be aware of the consequences and act accordingly
during his operations.
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LAWS OF AGENCY
3.8 TERMINATION OF AGENCY
The principal may terminate the agency in the same manner as that of the
contract, i.e., by the operation of law or by the act of parties. In certain
cases, the agency is irrevocable, i.e., it cannot be terminated. The Indian
Contracts Act describes the various modes of termination of agency. It says
: “An agency is terminated by (i) the principal revoking his authority or (ii)
the agent renouncing the business of the agency, or (iii) the business of
the agency being completed, or (iv) the principal being adjudicated an
insolvent under the provisions of any act for the time being in force for the
relief as insolvent debtors.” However, the section is not comprehensive. It
does not mention all the modes by which an agency gets terminated. The
various ways of termination of agency fall under two heads, (i) acts of
parties, and (ii) operation of law.
3.8.1 Termination of agency by the parties themselves –
The agency can be terminated at any time and at any stage by the mutual
agreement between the principal and the agent. By revocation of the
agent’s authority by the principal. An agency may be terminated by the
principal at any time by giving a notice to the agent. If an agent is
appointed to do a single act, the authority may be terminated at any time
before the act is actually begun. But if the act has begun, the authority can
only be terminated subject to any claim which the agent may have for
breach of contract. When the agency is a continuous one, notice of its
termination to the agent and also to the third parties is essential. It can
also be terminated by renunciation of business by the agent. After giving
reasonable notice to the principal, the agent may renounce the business of
agency. In case the contract of agency is entered into for a fixed period,
agent shall have to pay compensation to the principal for the earlier
renunciation of the business of agency.
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LAWS OF AGENCY
3.8.2 Termination of agency by operation of law –
By the operation of Law, the termination can happen in various ways. (a)
By performance of the contract of agency – Where the agency is one for a
single transaction, the agency terminates when the transaction is
completed. For example, the agency for a sale of property ends when the
sale is completed and does not continue until payment of the price. Or (b)
By expiry of time – When the agent is appointed for a fixed period of time,
the agency comes to an end after expiry of that time even if the work is
not completed. It can also happen by (c) By death or insanity of the agent
or principal – When the agent or principal dies or becomes of unsound
mind the agency is terminated. When the termination takes place by death
or insanity of the principal, the agent must take, on behalf of the
representative of the principal, reasonable steps for the protection and
preservation of the interests entrusted to him.
Also, (d) By the insolvency of the principal or the agent results into
termination. The insolvency of the principal puts an end to the agency. The
end of agency due to the insolvency of the agent is decided on case-to-
case basis. (e) By the destruction of the subject matter of agency – In
cases where the subject matter of the agency has been destroyed, the
agency comes to an end, e.g., if the agency is created for sale of a horse,
and if the horse dies, the agency comes to an end.(f) By dissolution of a
company – If a company has been incorporated by the agent or principal,
and if the company is dissolved, its powers given to principal or agent gets
terminated thereafter. (g) By the principal becoming an alien enemy –
When the war breaks out between two countries, and the principal and the
agent are from respective separate countries, the agency gets terminated.
Or by (h) By termination of sub-agents authority – In case of sub-agents,
the termination of an agent’s authority puts an end to the sub-agent’s
authority.
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LAWS OF AGENCY
3.8.3 Effect of termination
For the agent and the principal, the termination of agency is effective only
when the agent comes to know about it. But for the third parties, the
termination of agency takes place when it is known to them. So, if the
principal terminates the agency by revocation of agent’s authority, the
agency comes to an end when agent receives the revocation notice. Still,
the agent can bind the principal toward the third party, if the third party
does not know about the termination. It implies that the principal also
should give a public notice regarding the fact of termination of agency so
the termination would be effective to the third party as well. Even in case
of death of a principal, the agency comes to end when agent receives
knowledge of the death of the principal.
3.8.4 Irrevocable agency
When an agency cannot be terminated by any means, it is called as

irrevocable agency. This may happen in the following cases -
a. Where the agency is coupled with interest – An agency is said to be

coupled with an interest when the agency is created for the purpose of
securing some benefit over and above the agent’s remuneration. So,
when the agent has an interest in the authority granted to him or when
the agent has an interest in the subject matter with which he is
authorized to deal. Such an agency cannot be terminated to the
prejudice of such interest. Section 202 of the Indian Contracts Act
defines the law relating to such agency as follows – “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 the express
contract, be terminated to the prejudice of such interest.”
b. Where the agent has incurred a personal liability – When an agent has
incurred personal liability, the agency becomes irrevocable. The principal
is not permitted to withdraw, leaving the agent exposed to risk or
liability he has incurred.
c. Where the agent has partly exercised the authority – Section 204 of the
Indian Contracts Act lays down that the principal cannot revoke the
authority given to his agent after the authority has partly exercised so
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LAWS OF AGENCY
far as regards such as obligations that arise from acts already done in
the agency.”
• Assume that you are residing in U.K. as N.R.I. and you are appointing an
agent to sell you property at Pune. You want to appoint an agent at
Mumbai who will subsequently appoint a sub-agent at Pune. Write down
the agency terms and authorities you will be giving to the agent and the
period of agency.
• What authorities does the agent will pass on to his sub-agent in the
above case? Try to make a list with limitations of authority and time
frame.
• You want to enroll yourself as an estate agent from Delhi on the website
www.makaan.com. Find out from Google search the information to be
furnished.
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LAWS OF AGENCY
3.10 SUMMARY
• A Principal is a person who employs another person to deal with third
parties.
• An Agent is a person employed by a person (principal) to represent him
for dealings with third parties.
• In a contract of agency, consideration is not always necessary.
• An agent is required to work in the limits of authority given to him by the
principal.
• An agent can get his authority in express terms or by implication.
• The principal is responsible for the contracts entered by an agent with
the third parties, as if he himself has entered into the contract.
• Any loss or injury arising to the agent during the course of employment
has to be made good by the principal.
• It is the duty of the agent to work within the authority given to him by
the principal and follow the directions given to him, and also following
the laws of country.
• Misinterpretation or fraud committed by an agent, if falling in the
authority given to him, are supposed to be made by the principal.
However, if they do not fall in his authority, it does not affect the
principal.
• Termination of an agency can either be done by acts of the parties, or by
operation of law. The termination becomes effective only after it is known
to the agent.
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LAWS OF AGENCY

1. Give definition of the term ‘agency’.
2. Define the terms ‘principal’, ‘agent’ and ‘agency’.
3. State the basic principles of agency.
4. Briefly name the different models by which an agency can be created.
5. Mention the different kinds of agents and state and how they can be
classified.
6. Write notes on (a) Agency by ratification and (b) Agency by estoppels.
7. State briefly the duties and rights of agent.
8. What do you understand by a ‘substituted agent’? How is he different
from a sub-agent?
9. Discuss the liabilities of a principal when the agent exceeds his
authority.
10.List out the modes of termination of an agency by the act of the parties.
11.What do you understand by irrevocable agency? When does it becomes
irrevocable?
12.What is an agency coupled with interest? When can it be revoked?
13.Write short note on ‘Effects of termination of agency’.
14.What are the differences between Special power of attorney and
General power of attorney?
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LAWS OF AGENCY
1. An Agent is a person appointed by –

a. Government
b. Customer
c. Principal
d. Sub-agent
2. A person working as an agent is different from -

a. A servant
b. Trustee
c. Bailee
d. All of the above
3. An agent should follow the instructions from –

a. The principal
b. The third party
c. The sub-agent
d. The opposition party of government
4. An agency can be created by –

a. By express agreement
b. By implication of law
c. By ratification
d. All of the above
5. The substituted agent is a person appointed by –

a. The principal
b. The advocate
c. A third party
d. An agent
Answers : (1-c), (2-d), (3-a), (4-d), (5-d).
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LAWS OF AGENCY
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
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ARBITRATION LAW
Chapter 4
Arbitration Law
Learning objectives
At the end of the chapter, you will be able to define the Arbitration Law,
understand and check the general provisions regarding Domestic
Arbitration, know about the Modes of Arbitration, understand the
composition of Arbitration Tribunal and explain the Award and Conciliation.
Structure:
4.1 Arbitration Law
4.2 Domestic Arbitration
4.3 Types of Arbitration
4.4 Arbitration Tribunal
4.5 Award and Conciliation
4.7 Summary
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ARBITRATION LAW
4.1 ARBITRATION LAW
With respect to the latest international trends, the Government of India

has put into force the Arbitration and Conciliation Act, 1996 and repealed
the earlier enactments namely: The Arbitration (Protocol and Convention)
Act, 1937; The Arbitration Act, 1940; and The Foreign Award (Recognition
and Enforcement) Act, 1961.
The Indian Council of Arbitration recommends to all parties desirous of

making reference to arbitration by the Indian Council of Arbitration, the
use of the following arbitration clause in writing in their contracts:
"Any dispute or difference whatsoever arising between the parties out of or

relating to the construction, meaning, scope, operation or effect of this
contract or the validity or the breach thereof shall be settled by arbitration
in accordance with the Rules of Arbitration of the Indian Council of
Arbitration and the award made in pursuance thereof shall be binding on
the parties."
Definitions
i. These rules may be called the "Rules of Arbitration of the Indian Council
of Arbitration."
ii. These rules shall apply where parties have agreed in writing that (a) a
dispute has arisen or (b) a dispute which may arise between them in
respect of defined legal relationship whether contractual or not, shall be
settled under the Rules of Arbitration.
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ARBITRATION LAW
In these rules, the following words have the following meanings:

i. "Arbitral Tribunal" means an arbitrator or arbitrators appointed for
determining a particular dispute or difference.
ii. "Arbitral Award" includes an interim award.
iii. "Committee" means the Arbitration Committee of the Council as
provided for hereinafter.
iv. "Council" means the Indian Council of Arbitration.
v. "Governing Body" means the Governing Body of the Council.
vi. "Guidelines" means the guidelines for arbitrators and the parties to
arbitration for expeditious conduct of the arbitration proceedings, given
in the Annexure to these Rules.
vii."International Commercial Arbitration" means an arbitration relating to
disputes arising out of legal relationships, whether contractual or not,
considered as commercial under the law in force in India and where at
least one of the parties is (a) an individual who is a national of, or
habitually resident in, any country other than India; or (b) a body
corporate which is incorporated in any country other than India; or (c) a
company or an association or a body of individuals whose central
management and control is exercised in any country other than India,
or (d) the Government of a foreign country.
viii."Party" means a party to an arbitration agreement. It shall include any
individual, firm, company, Government, Government organisation or
Government Undertaking.
ix. "Panel" means the Panel of Arbitrators maintained by the Council.
x. "Registrar" means the Registrar for the time being appointed by the
Committee.
xi. "Rules" means the Rules of Arbitration of the Council.
xii."Rules of Conciliation" means the Rules of Conciliation of the Council.
xiii.Fast Track Arbitration" means arbitration in accordance with Rule 44.
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ARBITRATION LAW
Objectives of Arbitration Act

The main objectives of the Arbitration Act are as under –
• To mainly cover international commercial arbitration and conciliation.
• To also cover domestic arbitration and conciliation.
• To make provision for arbitration procedure which is fair, efficient and
capable of meeting the needs of specific arbitration.
• To provide that the arbitral tribunal gives reasons for its arbitral award.
• To ensure that the arbitral tribunal remains within the limit of jurisdiction.
• To minimize the supervisory role of courts in the arbitral process.
• To observe that every final arbitral reward is enforced in the same
manner as if it were a decree of a court.
• To provide that a settlement agreement reached by the parties as a
result of conciliation proceedings will have the same status and effect as
an arbitral award.
• To provide that, for a purpose of foreign awards, every arbitral award
made in the country to which one of the two International Conventions
relating to foreign arbitral award to which India is a party applies, will be
treated as a foreign award.
4.2 DOMESTIC ARBITRATION
‘Arbitration Agreement’ means an agreement by the parties to submit to

arbitration all or certain disputes which have arisen or which may arise
between them in respect of a defined legal relationship, whether
contractual or not.
A person appointed to adjudicate the differences and disputes between the

parties is called an Arbitrator or Arbitral Tribunal, and the proceedings
before him are called Arbitration Proceedings. The decision of the arbitrator
is called Award.
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ARBITRATION LAW
Arbitration Agreement Necessities :

• It must be in writing
• It must have all the essential elements of a valid contract
• The agreement must be to refer a dispute, present or future, between
the parties to arbitration.
• An arbitration agreement may be in the form of an arbitration clause in a
contract or in the form of a separate agreement.
Initiation of Arbitration
i. Any Party wishing to commence arbitration proceedings under these
rules (Claimant) shall give a notice of request for arbitration to the
Registrar of ICA and to the Respondent.
ii. The notice of request (application) for arbitration to the Registrar shall
be accompanied by:-
a. the names and full addresses of the parties to the dispute.
b. statement of the claim and facts supporting the claim, points at issue
and relief or remedies sought with other details of the claimant's
case.
c. original or duly certified copies of the arbitration agreement, any
contract or agreement out of or in connection with which the dispute
has arisen and such other documents and information relevant or
relied upon.
d. The Arbitration shall be deemed to have commenced on the day the
application for arbitration, registration fee and statement of claim are
received in the office of the Council.
4.3 TYPES OF ARBITRATION

There are mainly two types of Arbitration
a. Arbitration without intervention of court.
b. Arbitration with the intervention of court.
In the type b), there are further two types namely –
i. Intervention where no suit is pending, and
ii. Intervention where a suit is pending.
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ARBITRATION LAW
Judicial Authority Powers

A judicial authority before which an action is brought in a manner which is
the subject of an arbitration agreement shall refer the parties to arbitration
if a party so applies. The party must apply before submitting its first
statement on the substance of the dispute.
The application must accompany the original arbitration agreement or a
duly certified copy thereof. Notwithstanding that an application has been
made and that the issue is pending before the judicial authority, an
arbitration may be commenced or continued and an arbitral award made.
The following conditions must be satisfied to admit the case for arbitration.
1. A valid agreement between the parties is a must.
2. The matter should be within the scope of the arbitration agreement.
3. The stay must be asked before submitting his first statement on the
substance of the dispute.
4. The application must be made to the judicial authority before which the
proceedings are pending.
5. The original arbitration agreement or by a duly certified copy thereof
should be attached with the application.
6. The judicial authority must be satisfied regarding the reason of
reference.
The most important provision is that the arbitration proceedings can
continue or proceed further despite the fact that one of the parties has
moved a petition before the court.
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ARBITRATION LAW
Submission of Disputes to Arbitration

a. Any dispute relating to any commercial matter including shipping, sale,
purchase, banking, insurance, building construction, engineering,
technical assistance, know-how, patents, trademarks, management
consultancy, commercial agency, or labour, arising between two or more
parties in India or a party or parties in India and a party or parties in a
foreign country or between foreign parties who agree or have agreed for
arbitration by the Council, or under the Rules of Arbitration of the
Council, shall be determined and settled in accordance with these Rules.
b. The Council shall also be competent to administer the conduct of
arbitration in any dispute or difference relating to a commercial
transaction between parties as mentioned in subclause (a) where they
have agreed to have their dispute arbitrated under any other Rules of
Arbitration and have agreed to have such arbitration administered by
the Council, wholly or in respect of some matters.
c. In case the parties have provided different procedure for appointment of
arbitrator or schedule of cost including the arbitrator's fee, the Council
shall not be bound to process the case unless both the parties agree to
follow the entire procedure of arbitration under Rules of Arbitration.
d. The Council shall be competent to function as Appointing Authority as
contemplated under the Arbitration Rules of the United Nations
Commission on International Trade Law (UNCITRAL).
Persons who can refer to Arbitration
1. Partner – Any partner can refer the matter to arbitration, even without
taking consent of other partners. The implied authority of a partner
does not empower him to submit dispute relating to the business of the
firm to arbitration.
2. Agent – An agent who is duly authorized may enter into an arbitration
agreement. Such an agent on reference may bind his principal.
3. Joint Hindu Family – The manager in a joint Hindu Family has powers
to refer to arbitration disputes relating to family property provided the
reference is for the benefit of the family.
4. Minor – As a minor is not competent to enter into a contract there
cannot be a valid submission to arbitration by him. A guardian can refer
a dispute to arbitration only with the permission of the court for the
benefit of a minor in good faith.
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ARBITRATION LAW
5. Official Assignee – The official assignee or receiver is given the power

to refer any dispute to arbitration and compromise all debts, claims and
liabilities on such terms as may be agreed upon.
Subject which can be referred to Arbitration
The matters which are purely criminal and give rise to no civil remedy
cannot be referred to arbitration. Similarly, matters of public right cannot
be decided by arbitration. However, all matters which form the subject of
civil litigation affecting private rights may be referred to arbitration. So, all
disputes between the parties relating to private rights of which the civil
court may take cognizance may be referred to arbitration.
The matters which can be referred for arbitration, include disputes relating
to breach of promise by marriage; Disputes regarding compliment, dignity,
trespass; Disputes concerning movable property; Disputes arising out of
breaches of contract; Questions of title to immovable property; Questions
of law or fact; Time barred claims; Questions as to whether judgment has
been properly obtained or not; Questions relating to the past or future
maintenance of a widow.
The matters which are prevented from referring for arbitration include
questions relating to genuineness of a will; Matters of criminal nature;
Cases relating to public nuisance; Matters of public interest; A claim for
custody of wife, petition for restitution of conjugal rights, divorce etc.;
Insolvency proceedings; Claims arising out of illegal transactions;
Questions relating to public charities and charitable trusts; Execution
proceedings; Proceedings relating to appointment of a guardian to a minor;
Questions relating to offences affecting public at large.
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ARBITRATION LAW
4.4 ARBITRATION TRIBUNAL
A Panel of Arbitrators shall be appointed by the Committee from amongst

persons who are qualified and possesses knowledge and experience in their
respective field of profession and arbitration law and procedure and are
willing to serve as arbitrators generally or in specific fields and who are
from time to time recommended by the members of the Council or any
other person or organisation. All the members of the Panel will carry equal
status and parties will not have any right to challenge the appointment of
the arbitrator on the ground that its nominee arbitrator has higher status.
An arbitrator is a person selected by mutual consents of the parties to

settle the matters in controversy between them. A person appointed to
adjudicate the difference between two or more parties is called as an
arbitrator. An arbitrator is a tribunal chosen by the consent of the parties.
The person who is so appointed must also give his consent to act as an
arbitrator.
The Chairman of the Committee may include the name of any person in the
panel, in case it is required in any particular case. His continuance in the
Panel will be decided by the Committee. The Registrar shall prepare and
maintain an up-to-date Panel of Arbitrators together with adequate
information as to their qualifications and experience. Separate lists may be
kept and maintained of arbitrators included in the panel for disputes in
general and for each of the fields of international trade and/or business
transactions in which the governing body decides that the council will offer
arbitration facilities under the Rules.
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The parties to a dispute or the Registrar where he appoints the arbitrator

may choose any person from the panel with reference to any dispute. If
any party appoints a foreigner/person residing abroad, as arbitrator from
the panel, that party will have to meet the travel and stay expenses of the
person appointed as arbitrator at the venue of arbitration. The arbitral
tribunal may, however, make any order in regard thereto in the award. The
panel of Arbitrators shall be open to inspection by all.
The Registrar may delegate to any officer of the Council, Chambers of

Commerce or Trade Association at the premises of which the arbitration
proceedings are taking place, to discharge such of the functions and
administrative duties of the Registrar as are deemed proper and necessary
from time to time, with reference to a particular case or cases.
Number and Appointment of Arbitrators
The parties are free to determine the number of arbitrators provided that
such number shall not be an even number. If the parties fail to make the
determination the arbitral tribunal shall consist of a sole arbitrator. The
mode of appointment of the arbitrator and their number is left to the
agreement of the parties. The law envisages only odd number of the
arbitrators. Section 10 of the Act provides that there shall be only a sole
arbitrator, where the parties do not specify the number of arbitrators. A
person of any nationality may be an arbitrator, unless otherwise agreed by
the parties. The parties are free to agree on a procedure for appointing the
arbitrator or arbitrators.
Place of Arbitration
The parties are free to agree on the place of arbitration. Where parties
have not agreed on the place of arbitration the arbitral tribunal has to
determine the place of arbitration having regard to the circumstances of
the case, including the convenience of the parties. The arbitral tribunal
may, unless otherwise agreed by the parties, meet at any place it considers
appropriate for consultation among its members, for hearing witnesses,
experts or the parties, or for inspection of documents, goods or other
property.
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Place of arbitration in an arbitration other than international commercial

arbitration, i.e., in domestic arbitration place does not pose any problem.
Parties may agree on the place of arbitration anywhere In India. But in
International commercial arbitrations, place of arbitration has legal
implications in terms of law applicable to arbitration.
The settlement of the dispute may be suggested and recommended by the

Arbitration Tribunal, in spite of an arbitration agreement being done. It
may also, with the agreement of the parties, use mediation, conciliation or
other procedures at any time during the arbitral proceedings to encourage
settlement. So, out of court settlements are possible and also encouraged
by the panel. The claimant should state the facts supporting his claim, the
points at issue and the relief or remedies sought and the respondent
should state his defense in respect of these particulars. The parties have
the freedom to agree on required elements of the statements, and for the
period of time for submission of those statements. The arbitral tribunal has
power to determine the period of time for submission of these statements
where parties have not agreed on the same. The parties may submit with
their statements all documents they consider to be relevant or may add a
reference to documents or other evidence they will submit. The parties
may agree to amend or supplement their statements during the course of
arbitral proceedings. The arbitral tribunal has exclusive discretion to
restrict supplementary claim and defenses having regard to the delay in
making it.
If, during arbitral proceedings, the parties settle the dispute, the arbitral
tribunal shall terminate the proceedings and if requested by the parties and
not objected to by the arbitral tribunal, record the settlement in the form of
an arbitral award on agreed terms.
An arbitral award on agreed terms shall be made in accordance with

section 31 and shall state that it is an arbitral award. An arbitral award on
agreed terms shall have the same status and effect as any other arbitral
award on the substance of the dispute.
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Termination of Proceedings
The arbitral proceedings shall be terminated by the final arbitral award. It

may also be terminated by an order of the arbitral tribunal, if the claimant
withdraws his claim and the arbitral tribunal recognizes a legitimate
interest on his part in obtaining a final settlement of the dispute, or the
parties agree on the termination of the proceedings, or the arbitral tribunal
finds that the continuation of the proceedings has for any other reason
become unnecessary or impossible. The mandate of the arbitral tribunal
shall terminate the termination of the arbitral proceedings.
4.5 AWARD AND CONCILIATION
4.5.1 Award
Arbitral award is a final decision or judgment of the arbitral tribunal on all

matters referred to it. An award in order to be valid must be final, certain
and must decide all the matters referred to. An award by the arbitrator is
as binding in its nature as the judgment of a court.
There are two types of decisions to be made by the arbitral tribunal, i.e.,
decisions on the merit of the dispute and decision on the questions of
procedure. The former is to be made by the majority of members but the
latter can be decided by the presiding arbitrator, if authorized by the
parties and all members of the tribunal, in the absence of which, it can be
made by majority of members. The presiding arbitrator has not been given
any special powers and he acts like any other arbitrator. All arbitrators
have been given equal power irrespective of mode of appointment.
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Award Essentials :
The essential things to offer an award of arbitration are listed below
1. An arbitration agreement, reference to arbitration and award are
required to be in writing. The arbitral award essentially should be on a
stamp paper and never verbal.
2. The award is to be signed by majority of the members of tribunal.
Reason is to be stated for absenteeism of any member’s.
3. The arbitrator must give reasons for the award unless specified in the
agreement.
4. The award should mention the date of making the award..
5. The arbitral tribunal shall state the place of arbitration in the award.
6. The award may include the decisions and directions of the arbitrator
regarding the cost of the arbitration.
7. The arbitral tribunal may include the sum for which the award is made,
interest up to the date of award. (Interest rate is to be considered as
18% simple interest)
8. After making the award, a signed copy should be delivered to each party
for their appropriate actions.
9. The arbitral tribunal may, at any time during the proceedings, make an
interim arbitral award on any matter and refer the same in the final
award.
An arbitral award shall be final and binding on the parties and persons
claiming under them respectively. The award made by the arbitrator shall
be final and binding on the parties itself and shall be decree without being
made a decree by the court.
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4.5.2 Conciliation
Conciliation is optional at present in the Act. But if the parties agree to

resolve the disputes through Conciliation, they have to follow the
mandatory provisions contained in sections 61 to 81, which provide all the
procedures to follow the conciliation.
Conciliation is an informal process in which the conciliator (the third party)

tries to bring the disputants through an agreement. He does it
independently outside the court and can use mediation, conciliation or
other Alternative Dispute Resolution (ADR) procedure during the arbitral
proceedings to encourage settlement of disputes. It is done for lowering
tensions, improving communication, exploring potential solutions and
bringing about a negotiable settlement. The Act has added a new chapter
containing sections from 61 to 81 for conciliation. It is based on the
conciliation rules adapted by the UNCITRAL in 1980, which were primarily
conceived in the context of dispute resolution in international commercial
relations.
As far as possible, the conciliation is recommended instead of arbitration as

it is a faster process. The difference between Conciliation and Arbitration is
that the conciliation is a win-win situation while arbitration is win-loose
attitude. The Conciliator tries to bring the parties together, tells them to
solve the dispute through discussions while in arbitration, parties give their
own arguments. Also, the role of Conciliator is difficult than that of
Arbitrator. So the Conciliator should be a man of integrity, trust and
confidence and should try to resolve the dispute impartially.
Conciliation Proceedings
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The party initiating conciliation shall send the other party a written
invitation to conciliate under this part, briefly identifying the subject of
dispute. The other party can accept or reject the invitation. Conciliation
proceedings shall begin when the other party accepts in writing the
conciliation. If the other party rejects, there will be no conciliation. The
reply period is normally 30 days. There shall be one conciliator unless the
parties agree for any other number. In such case, all the conciliators will
act jointly.
In the case of one conciliator, both the parties have to agree on the name
of the conciliator. In case of two conciliators, each party may appoint one
conciliator. In case of three conciliators, each party may appoint one
conciliator and have to agree on the third conciliator who will act as
presiding conciliator.
The Conciliator’s, on appointment, may request each party to submit a

written statement describing the nature of dispute and points of issue.
Each party shall send a copy of statement to other party also.
When the conciliator feels that there exists elements of settlement, he shall
formulate terms of a possible settlement and submit to both the parties for
observations. He will then reformulate the matter and again refer to the
parties. If the parties reach on a agreement for settlement, he may draw
up and sign a written final settlement agreement. When the parties sign
the settlement agreement, it shall be final and binding on the parties and
persons claiming under them. The conciliator shall authenticate the
settlement agreement and furnish a copy thereof to each of the parties.
1. List down the Section numbers if you are appointing an arbitrator for
disputes between a purchaser in India and a seller in India.
2. If you are working as a conciliator in the dispute case of a common

purchaser of a mobile phone and a supplier doing e-commerce
business, what steps will you take along with time frame to settle the
dispute within 90 days of application?
3. Try to search and study a typical international award of arbitration case,

from Google search.
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4.7 SUMMARY
• An Arbitration covers international commercial arbitration and
conciliation, as also domestic arbitration and conciliation.
• Arbitration procedure should be fair, efficient and capable of meeting the
needs of the specific arbitration.
• Arbitral Tribunal gives valid reasons for its arbitral award, and remains in
the limits of jurisdiction.
• There must be a valid and subsisting agreement between the parties and
the matter of the suit filed should be within the scope of arbitration
agreement.
• The party asking for stay must apply so at the earliest opportunity.
• An Arbitration Agreement is required to be in writing. Similarly, a
reference to arbitration and award also are required to be made in
writing. The Arbitral Award is required to be made on Stamp paper of
prescribed value.
• The award is to be signed by the members of the Arbitration Tribunal.
• Unless otherwise mentioned, the agreement must give reasons for the
award. However, there are two exceptions where the award without
reasons is valid.
• A conciliator tries to bring the parties together so that they can discuss
their disputes and resolve. So there is no award from the conciliator,
however, in case of arbitrator, parties are required to give their own logic
and after hearing both the parties, arbitrator gives the award.
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1. Mention in brief the objectives of Arbitration and Conciliation Act, 1966.
2. Define Arbitration Agreement and explain the essentials of the same.
3. Which matters can be referred to arbitration and which matters cannot
be referred to it? Give examples of each.
4. Describe the procedure for appointment of the arbitrators.
5. List down in details and with a format the essentials of an Arbitral
Award.
6. What is conciliation procedure? When and how is it initiated?
7. Discuss the requirement, status and effects of a settlement agreement.
8. Explain in brief the difference between Arbitration and Conciliation
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1. Arbitration procedure is followed for –

a. Making a contract
b. Settlement of dispute
c. Collecting a final payment
d. Closing a business deal
2. Subject matter which cannot be referred to arbitration is –

a. Dispute regarding movable property
b. Breach of promise of marriage
c. Dispute regarding dignity
d. Matter of criminal nature
3. The number of arbitrator/s cannot be –

a. One
b. Three
c. An even number
d. All of the above
4. The essentials of the award are –

a. Date of the award
b. Signatures of all the members of the arbitration panel
c. Place of Arbitration
d. All of the above
5. Conciliator is a person/institution who is –

a. A third party
b. Member of the first party
c. Director of the second party
d. Chief Justice of India
Answers : (1-b), (2-d), (3-c), (4-d), (5-a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
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CONTRACTS IN SUPPLY CHAIN MANAGEMENT
Chapter 5
Contracts In Supply Chain Management
Learning objectives
At the end of the chapter, you will be able to understand about the
Mercantile Act, the commercial Act; about the offers and contracts; about
the communication regarding contracts; and about the Indian Contracts
Act,1872. You will also come to know about the discharge and performance
of the contracts; and about the validity and about the non-performance of
a contractor. Your knowledge about the validation of tenders and about the
liquidation and damages will be enhanced. Also you will come to know
about the bailment and pledge in detail after completing this chapter.
Structure:
5.1 The Indian Contract Act, 1872
5.2 Agreements, Offers and Acceptance
5.3 Consideration and Capacity
5.4 Mistakes, Misrepresentation and Fraud
5.5 Wagering Agreements and Quasi Contracts
5.6 Discharge, Performance and Breach of Contracts
5.7 Liquidated Damages and Penalty
5.8 Bailment and Pledge
5.9 Activities for Students
5.10 Summary
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5.1 THE INDIAN CONTRACT ACT, 1872
5.1.1 Preamble
The Law of Contract constitutes the most important branch of mercantile or

commercial law. It affects everybody, more so, trade, commerce and
industry. It may be said that the contract is the foundation of the civilized
world.
The law relating to contract is governed by the Indian Contract Act, 1872
(Act No. IX of 1872). The Preamble to the Act says that it is an Act "to
define and amend certain parts of the law relating to the contract". It
extends to the whole of India except the State of Jammu and Kashmir.
The Act mostly deals with the general principles and rules governing
contracts. The Act is divisible into two parts. The first part (sections 1-75)
deals with the general principles of the law of contract, and therefore
applies to all contracts irrespective of their nature. The second part
(sections 124-238) deals with certain special kinds of contracts, e.g.,
indemnity and guarantee, bailment, pledge, and agency.
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5.1.2 The Indian Contract Act, 1872

The law relating to contracts is codified in the form of Indian Contract Act,
1872. The purpose of the law of contract is establish definiteness in all the
business transactions.
1. The Act is divided into two main groups:
2. General principles of the Law of Contract (Sec. 1-75).
Specific kinds of contracts, viz.:
a. Contracts of Indemnity and Guarantee (Sec. 124-147).
b. Contracts of Bailment and Pledge (Sec. 148-181).
c. Contracts of Agency (Sec. 182-238).
The term contract has been defined by various authors in the following
manner:
"A contract is an agreement creating and defining obligations between the
parties".
-Salmond
"A contract is an agreement enforceable at law, made between two or
more persons, by which rights are acquired by one or more to acts or
forbearances on the part of the other or others".
-Anson
"Every agreement and promise enforceable at law is a contract".
- Sir Fredrick Pollock
These definitions resolve themselves into two distinct parts. First, there
must be an agreement. Secondly, such an agreement must be enforceable
by law. To be enforceable, an agreement must be coupled with an
obligation. A contract therefore, is a combination of the two elements: an
agreement and an obligation.
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Essential Elements of a Valid Contract

Section 10 of the Indian Contract Act, 1872 provides that "all agreements
are contracts if they are made by the free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and are not
hereby expressly declared to be void".
The essential elements of a valid contract are:
i. An offer or proposal by one party and acceptance of that offer by
another party.
ii. An intention to create legal relations or an intent to have legal
consequences.
iii. The agreement is supported by lawful consideration.
iv. The parties to contract are legally capable of contracting.
v. Genuine consent between !he parties.
vi. The object and consideration of the contract is legal and is not opposed
to public policy.
vii.The terms of the contract are certain.
Therefore, to form a valid contract there must be (1) an agreement, (2)
based on the genuine consent of the parties, (3) supported by
consideration, (4) made for a lawful object, and (iv) between competent
parties.
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5.2 AGREEMENTS, OFFERS AND ACCEPTANCE
5.2.1 Agreement
An agreement occurs when two minds meet upon a common purpose, i.e.,
they mean the same thing in the same sense at the same time. The
meeting of the minds is called consensus-ad-idem, i.e., consent to the
matter. Section 2(e) of the Indian Contract Act provides that "every
promise and every set of promises forming the consideration for each other
is an agreement.”
An obligation is the legal duty to do or abstain from doing what one has
promised to do or abstain from doing. A contractual obligation arises from
a bargain between the parties to the agreement who are called the
promisor and the promisee. Section 2(b) says that when the person to
whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted; and "a proposal when accepted becomes a promise."
In broad sense, therefore, a contract is an exchange of promises by two or
more persons, resulting in an obligation to do or abstain from doing a
particular act, where such obligation is recognised and enforced by law.
Where parties have made a binding contract, they have created rights and
obligations between themselves. The contractual rights and obligations are
correlative,
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Types of Agreements
1. Social Agreements: They are of social types like attending marriage
function, parties, events, etc.
2. Legal (Valid) Agreement: It is the combination of an agreement and
following its legalities, like entering into marriage, parenting children,
etc.
3. Void Agreement: An agreement not enforceable by law is said to be
void.
4. Unenforceable Agreement: Such an agreement is valid in the eyes of
law, but cannot be encored in the courts.
5. Illegal Agreement: As the name says, an illegal agreement is one which
is against the law.
6. Agreements to Agree in Future: This is sort of hypothetical agreement,
and can be called better as a contract instead of agreement.
Agreements which are not Contracts

Agreements in which the idea of bargain is absent and there is no intention
to create legal relations are not contracts. These are:
a. Agreements relating to social matters: An agreement between two
persons to go together to the cinema, or for a walk, does not create a
legal obligation on their part to abide by it. Similarly, if I promise to buy
you a dinner and break that promise I do not expect to be liable to legal
penalties. There cannot be any offer and acceptance to hospitality.
• To constitute a contract, the parties must intend to create legal
relationship.
• The law of contract is the law of those agreements which create
obligations and thoseobligations which have their source in agreement.
• Agreement is the genus of which contract. is the specie and, therefore,
all contracts are agreements but all agreements are not contracts.
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5.2.2 Offer
One of the early steps in the formation of a contract lies in arriving at an

agreement between the contracting parties by means of an offer and
acceptance. Thus, when one party (the offeror) makes a definite proposal
to another party (the offeree) and/ the offeree accepts it in its entirety and
without any qualification, there is a meeting of the minds of the parties,
and a contract comes into being, assuming that all other elements are also
present.
An Offer or a Proposal
An offer is a proposal by one person, whereby he expresses his willingness

to enter into a contractual obligation in return for a promise, act or
forbearance. Section 2(a) defines proposal or offer as "when one person
signifies to another his willingness to do or abstain from doing anything
with a view to obtaining the assent of that other to such act or abstinence,
he is said to make a proposal."
Revocation of Offer by the Offeror
An offer may be revoked by the offeror at any time before acceptance.
Like any offer, revocation must be communicated to the offeree, as it does

not take effect until it is actually communicated to the offeree. Before its
actual communication, the offeree, may accept the offer and create a
binding contract. The revocation must reach the offeree before he sends
out the acceptance.
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An offer to keep open for a specified time(option) is not binding unless it is

supported by consideration.
Standing Offers
Where a person offers to another to supply specific goods, up to a stated

quantity or in any quantity which may be required, at a certain rate, during
a fixed period, he makes a standing offer. Thus, a tender to supply goods
as and when required, amounts to a standing offer.
A standing offer or a tender is of the nature of a continuing offer. An

acceptance of such an offer merely amounts to an intimation that the offer
will be considered to remain open during the period specified and that it
will be accepted from time to time by placing order during the period
specified. Each successive order given, while the offer remains in force, is
an acceptance of the standing offer as to the quantity ordered, and creates
a separate contract. it does not bind either party unless and until such
orders are given.
5.2.3 Acceptance
A contract emerges from the acceptance of an offer. Acceptance is the act

of assenting by the offeree to an offer. Under Section 2(b) of the Contract
Act when a person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal, when accepted
becomes a promise.
Contracts over the Telephone
Contracts over the telephone are regarded the same in principle as those
negotiated by the parties in the actual presence of each other. In both
cases an oral offer is made and an oral acceptance is expected. It is
important that the acceptance must be audible, heard and understood by
the offeror. If during the conversation the telephone lines go, "dead" so
that the offeror does not hear the offeree's word of acceptance, there is no
contract at the moment. If the whole conversation is repeated and the
offeror hears and understands the words of acceptance, the contract is
complete.
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5.2.4 Difference between Offer and Acceptance

1. Offer constitutes the first stage in the formation of a contract, whereas
acceptance constitutes the second stage in the formation of a contract.
2. An offer is made by the offer or to the offered. But an acceptance is
given by the offered to the offer, or
3. An offer is not held to be made until it is brought to the knowledge of
the offered (e.g., communicated to the offered). On the other hand, an
acceptance may, in certain circumstances, be made, though it has not
come to the knowledge of the offeror (i.e., though it is not
communicated to the offeror).
5.2.5 Contract
Definition of Contract
According to Sec. 2 (h) of Indian Contract Act, 1872, ‘a contract is an
agreement enforceable by law’. An agreement may or may not follow all
lawful conditions. It may be a social agreement. Agreement is a very wide
term. But, contract is an agreement between two or more parties, and it is
abided by law.
A Contract in order to be enforceable by law. must have the following ten
essential elements:
1. There must be two or more persons or groups of persons to enter into a
contract.
2. There must be a legal proposal or offer with definite terms by one party
and a lawful acceptance of that proposal by the other party - thus,
resulting in an agreement.
3. There must be a legal relationship between the parties.
4. Consideration: The agreement must be supported by a real and definite
consideration.
5. The parties to the agreement must be capable of entering into a valid
contract, viz., age, sound mind, proper approval, etc.
6. It is essential to the creation of every contract that there must be a free
and genuine consent of the parties to the agreement.
7. The object of the agreement must be lawful, and it should never be
illegal or immoral.
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8. The agreement should not be earlier declared as void.

9. The performance parameters should be clear and not impossible.
10.When the agreements are done in writing, they must comply with the
necessary legal formalities as to writing, stamping, registration and
attestation.
11.Some of the contracts which must be in writing otherwise they will be
invalid are:
a. A promise to pay a time barred debt
b. An arbitration agreement
c. Lease agreement for a period of more than three years
d. Contracts of insurance
e. Negotiable instruments, e.g., bills of exchange, cheques, promissory
notes, etc.
f. Memorandum and Articles of Association of a company
g. Contracts relating to transfer of immovable property, and so on.
Some of the contracts which must be registered are -
i. A promise made without consideration on account of natural love and
affection between the parties.
ii. Documents of certain transactions which are compulsorily to be
registered under Sec. 17 of the Registration Act.
iii. Contracts relating to transfer of immovable property under the
Transfer of Property Act, 1882,
iv. Memorandum and Articles of Association, mortgages and charges
under the Companies Act, 1956 and so on.
According to the Indian Stamp Act, 1894, certain instruments are

chargeable with duty of stamp of the amount indicated in Schedule I of the
Act, e.g., Bills of Exchange, Promissory Note, Insurance Policy, Partition
Deed, Shares/Debenture Certificates, Pledge, Mortgage Deed, etc. If the
instrument is not duly stamped (i.e., unstamped or under-stamped or
improperly stamped) it shall not be admitted in evidence in a court of law.
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All the above essential elements must exist together in a contract. An

agreement with all the above elements is a legal or valid agreement or
simply called a contract and therefore, enforceable. But if any one of the
elements is missing, the contract is either voidable, void, illegal, or
unenforceable in the eyes of law.
Legal Relations
The second essential element of a valid contract is that there must be an

intention among the parties that the agreement should be attached by
legal consequences and create legal obligations. If there is no such
intention on the part of the parties, there is no contract between them.
Agreements of a social or domestic nature do not contemplate legal
relationship. As such they are not contracts.
A proposal or an offer is made with a view to obtain the assent to the other
party and when that other party expresses his willingness to the act or
abstinence proposed, he accepts the offer and a contract is made between
the two. But both offer and acceptance must be made with the intention of
creating legal relations between the parties. The test of intention is
objective. The Courts seek to give effect to the presumed intention of the
parties. Where necessary, the Court would look into the conduct of the
parties, for much can be inferred from the conduct. The Court is not
concerned with the mental intention of the parties, but rather with what a
reasonable man would say, was the intention of the parties, having regard
to all the circumstances of the case.
For example, if two persons agree to assist each other by rendering advice,
in the pursuit of virtue, science or art, it cannot be regarded as a contract.
In commercial and business agreements, the presumption is usually that
the parties intended to create legal relations. But this presumption is
rebuttable which means that it must be shown that the parties did not
intend to be legally bound.
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5.3 CONSIDERATION AND CAPACITY
5.3.1 Consideration
Need for Consideration

Consideration is one of the essential elements of a valid contract. The
requirement of consideration stems from the policy of extending the arm of
the law to the enforcement of mutual promises of parties. A mere promise
is not enforceable at law. For example, if A promises to make a gift of Rs.
500 to B, and subsequently changes his mind, B cannot succeed against A
for breach of promise, as B has not given anything in return. It is only
when a promise is made for something in return from the promisee, that
such promise can be enforced by law against the promisor. This something
in return is the consideration for the promise.
Definition of Consideration
Sir Fredrick Pollock has defined consideration "as an act or forbearance of

one party, or the promise thereof is the price for which the promise of the
other is bought.”
It is "some right, interest, profit, or benefit accruing to one party or some

forbearance, detriment, loss or responsibility, given, suffered or undertaken
by the other." Section 2(d) of the Indian Contract Act, 1872 defines
consideration thus: "when at the desire of the promisor, the promisee or
any other person has done or abstained from doing, or does or abstains
from doing, or promises to do or to abstain from doing, something, such
act or abstinence or promise is called a consideration for the promise”.
The fundamental principle that consideration is essential in every contract,

is laid down by both the definitions but there are some important points of
difference in respect of the nature and extent of consideration and parties
to it under the two systems of law:
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(a)Consideration at the desire of the promisor: Section 2(d) of the Act

begins with the statement that consideration must move at the desire or
request of the promisor. This means that whatever is done must have
been done at the desire of the promisor and not voluntarily or not at the
desire of a third party. If A rushes to B's help whose house is on fire,
there is no consideration but a voluntary act. But if A goes to B's help at
B's request, there is good consideration as B did not wish to do the act
gratuitously.
(b)Consideration may move from the promisee or any other person: In

English law, consideration must move from the promisee, so that a
stranger to the consideration cannot sue on the contract. A person
seeking to enforce a simple contract must prove in court that he himself
has given the consideration in return for the promise he is seeking to
enforce.
In Indian law, however, consideration may move from the promisee or any
other person, so that a stranger to the consideration may maintain a suit.
Privity of Contract
i. A stranger to a contract cannot sue both under the English and Indian
law for want of privity of contract. However, there is an exception to the
doctrine of privity of contract: Both the Indian law and the English law
recognize certain exceptions to the rule that a stranger to a contract
cannot sue on the contract. In the following cases, a person who is not
a party to a contract can enforce the contract:
a. A beneficiary under an agreement to create a trust can sue upon the

agreement, though not a party to it, for the enforcement of the trust
so as to get the trust executed for his benefit.
b. An assignee under an assignment made by the parties, or by the

operation of law (e.g., in case of death or insolvency), can sue upon
the contract for the enforcement of his rights, title and interest. But a
mere nominee (i.e., the person for whose benefit another has insured
his own life) cannot sue on the policy because the nominee is not an
assignee.
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ii. In cases of family arrangements or settlements between male members

of a Hindu family which provide for the maintenance or expenses for
marriages of female members, the latter though not parties to the
contract, possess an actual beneficial right which place them in the
position of beneficiaries under the contract, and can therefore, sue.
iii. In case of acknowledgement of liability, e.g., where A receives money

from B for paying to C, and admits to C the receipt of that amount, then
A constitutes himself as the agent of C.
iv. Whenever the promisor is by his own conduct estopped from denying
his liability to perform the promise, the person who is not a party to the
contract can sue upon it to make the promisor liable.
v. In cases where a person makes a promise to an individual for the

benefit of third party and creates a charge on certain immovable
property for the purpose, the third party can enforce the promise
"though, he is stranger to the contract.
Kinds of Consideration
Consideration may be:

a. Executory or future, which means that it makes the form of promise to
be performed in the future, e.g., an engagement to marry someone; or
b. Executed or present in which it is an act or forbearance made or
suffered for a promise. In other words, the act constituting
consideration is wholly or completely performed, e.g., if A pays today
Rs. 100 to a shopkeeper for goods which are promised to be supplied
the next day, A has executed his consideration but the shopkeeper is
giving executory consideration - a promise to be executed the following
day. If the price is paid by the buyer and the goods are delivered by the
seller at the same time, consideration is executed by both the parties.
c. Past which means a past act or forbearance, that is to say, an act
constituting consideration which took place and is complete (wholly
executed) before the promise is made.
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According to English law, a consideration may be executory or executed

but never past. The English law is that past consideration is no
consideration. The Indian law recognizes all the above three kinds of
consideration.
Rules Governing Consideration

a. Every simple contact must be supported by valuable consideration
otherwise it is formally void subject to some exceptions.
b. Consideration may be an act of abstinence or promise.
c. There must be mutuality, i.e., each party must do or agree to do
something. A gratuitous promise as in the case of subscription for
charity, is not enforceable. For example, where A promises to subscribe
Rs. 5,000 for the repair of a temple, and then refuses to pay, no action
can be taken against him.
d. Consideration must be real, and not vague, indefinite, or illusory, e.g., a
son's promise to "stop being a nuisance" to his father, being vague, is
no consideration.
e. Although consideration must have some value, it need not be adequate,
i.e., a full return for the promise. Section 25 (Exp. II) clearly provides
that "an agreement to which the consent of the promisor is freely given
is not void merely because the consideration is inadequate." It is upon
the parties to fix their own prices.
f. Consideration must be lawful, e.g., it must not be some illegal act such
as paying someone to commit a crime. If the consideration is unlawful,
the agreement is void.
g. Consideration must be something more than the promisee is already
bound to do for the promisor. Thus, an agreement to perform an
existing obligation made with the person to whom the obligation is
already owed, is not made for consideration. For example, if a seaman
deserts his ship so breaking his contract of service and is induced to
return to his duty by the promise for extra wages, he cannot later sue
for the extra wages since he has only done what he had already
contracted for.
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When Consideration is not Necessary
The general rule is that an agreement made without consideration is void.

But section 25 of the Indian Contract Act lays down certain exceptions
which make a promise without consideration valid and binding. Thus, an
agreement without consideration is valid:
1. If it is expressed in writing and registered and is made out of natural
love and affection between parties standing in a near relation to each
other; or
2. If it is made to compensate a person who has already done something
voluntarily for the promisor, or done something which the promisor was
legally compellable to do; or
3. If it is a promise in writing and signed by the person to be charged
therewith, or by his agent, to pay a debt barred by the law of limitation.
4. Besides, according to section 185, consideration is not required to
create an agency.
5. In the case of gift actually made, no consideration is necessary. There
need not be nearness of relation and even if it is, there need not be any
natural love and affection between them. .
The requirements in the above exceptions are noteworthy. The first one
requires written and registered promise. The second may be oral or in
writing and the third must be in writing.
Terms of Offer and Consideration
It follows from what has been explained in relation to offer, acceptance and
consideration that to be binding, an agreement must result in a contract.
That is to say, the parties must agree on the terms of their contract. They
must make their intentions clear in their contract. The Court will not
enforce a contract if the terms of which are uncertain. Thus, an agreement
to agree in the future (a contract to make a contract) will not constitute a
binding contract, e.g., a promise to pay an actress a salary to be "mutually
agreed between us" is not a contract since the salary is not yet agreed.
Similarly, where the terms of a final agreement are too vague, the contract
will fail for uncertainty. Hence, the terms must be definite or capable of
being made definite without further agreement of the parties.
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The legal maxim, therefore, is "a contract to contract is not a contract". If

you agree "subject to contract" or "subject to agreement", the contract
does not come into existence, for there is no definite or unqualified
acceptance.
Thus, a contract is always based upon:

a. Agreement and acceptance of a definite offer;
b. An intent to create legal obligations; and
c. Consideration.
5.3.2 Capacity
The most important condition for the enforceability of an agreement is

that the concerned parties must be competent to enter into an agreement.
An agreement is valid and enforceable only if the parties to it are
competent enough to enter into contract. So, there must be capability of
the parties to enter into a valid contract. The term ‘capacity to contract’ is
defined in section 11 of the Indian Contract Act, which reads as under.
“Every person is competent to contract who is of the age of the majority

according to the law to which he is subject and who is of sound mind and
is not disqualified from contracting by any law to which he is subject”.
(i) Flaw in Capacity - Capacity and Persons
In law, persons are either natural or artificial. Natural persons are human
beings and artificial persons are corporations. Contractual capacity or
incapacity is an incident of personality.
The general rule is that all natural persons have full capacity to make
binding contracts. But the Indian Contract Act, 1872 admits an exception in
the case of:
a. minors,
b. lunatics, and
c. persons disqualified from contracting by any law to which they are
subject.
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These persons are not competent to contract. Section 11 provides that

every "person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of sound mind, and
is not disqualified from contracting by any law to which he is subject. "A
valid agreement requires that both the parties should understand the legal
implications of their conduct. Thus, both must have a mature mind. The
legal yardstick to measure maturity, according to the law of contract is,
that both should be major and of sound mind and if not, the law would
presume that the maturity of their mind has not reached to the extent of
visualising the pros and cons of their acts, hence, a bar on minors and
lunatics competency to contract.
The contractual capacity of a corporation depends on the manner in which

it was created.
Contract of a Minor
According to the Indian Majority Act, 1875, a minor is a person, male or

female, who has not completed the age of 18 years. In case a guardian has
been appointed to the minor or where the minor is under the guardianship
of the Court of Wards, the person continues to be a minor until he
completes his age of 21 years. According to the Indian Contract Act, no
person is competent to enter into a contract who is not of the age of
majority. Indian Courts have applied this decision to those cases where the
minor has incurred any liability or where the liabilities on both sides are
outstanding. In such cases, the minor is not liable. But if the minor has
carried out his part of the contract, then, the Courts have held, that he can
proceed against the other party. The rationale is to protect minor's interest.
According to the Transfer of Property Act, a minor cannot transfer property
but he can be a transferee (person accepting a transfer). This statutory
provision is an illustration of the above principle.
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The following points must be kept in mind with respect to minor's contract:
a. A minor's contract is altogether void in law, and a minor cannot bind
himself by a contract. If the minor has obtained any benefit, such as
money on a mortgage, he cannot be asked to repay, nor can his
mortgaged property be made liable to pay.
b. Since the contract is void ab initio, it cannot be ratified by the minor on
attaining the age of majority.
c. Estoppel is an important principle of the law of evidence. To explain,
suppose X makes a statement to Y and intends that the latter should
believe and act upon it. Later on, X cannot deviate from this statement
and make a new one. In other words, X will be estopped from denying
his previous statement. But a minor can always plead minority and is
not estopped from doing so even where he had produced a loan or
entered into some other contract by falsely representing that he was of
full age, when in reality he was a minor.
But where the loan was obtained by fraudulent representation by the minor
or some property was sold by him and the transactions are set aside as
being void, the Court may direct the minor to restore the property to the
other party.
For example, a minor fraudulently overstates his age and takes delivery of
a motor car after executing a promissory note in favour of the trader for its
price. The minor cannot be compelled to pay the amount to the promissory
note, but the Court on equitable grounds may order the minor to return
the car to the trader, if it is still with the minor.
Thus, according to Section 33 of the Specific Relief Act, 1963 the Court
may, if the minor has received any benefit under the agreement from the
other party require him to restore, so far as may be such benefit to the
other party, to the extent to which he or his estate has been benefited
thereby.
a. A minor's estate is liable to pay a reasonable price for necessaries

supplied to him or to anyone whom the minor is bound to support
(section 68 of the Act).
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The necessaries supplied must be according to the position and status in

life of the minor and must be things which the minor actually needs. The
following have also been held as necessaries in India.
Costs incurred in successfully defending a suit on behalf of a minor in

which his property was in jeopardy; costs incurred in defending him in a
prosecution; and money advanced to a Hindu minor to meet his marriage
expenses have been held to be necessaries.
a. An agreement by a minor being void, the Court will never direct specific
performance of the contract.
b. A minor can be an agent, but he cannot be a principal nor can he be a
partner. He can, however, be admitted to the benefits of a partnership.
c. Since a minor is never personally liable, he cannot be adjudicated as an
insolvent.
d. An agreement by a parent or guardian entered into on behalf of the
minor is binding on him provided it is for his benefit or is for legal
necessity. For, the guardian of a minor, may enter into contract for
marriage on behalf of the minor, and such a contract would be good in
law and an action for its breach would lie, if the contract is for the
benefit of the minor, e.g., if the parties are of the community among
whom it is customary for parents to contract marriage for their children.
The contract of apprenticeship is also binding. However, it has been held
that an agreement for service, entered into by a father on behalf of his
daughter who is a minor, is not enforceable by law.
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Agreement of a Lunatic
A person of unsound mind is a lunatic. That is to say for the purposes of

making contract, a person is of unsound mind if at the time when he
makes the contract, he is incapable of understanding it and of forming
rational judgment as to its effect upon his interests.
A person unsound mind cannot enter into a contract. A lunatic's agreement

is therefore, void. But if he makes a contract when he is of sound mind,
i.e., during lucid intervals, he will be bound by it.
A sane man who is delirious from fever, or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgment as to its
effect on his interests cannot contract whilst such delirium or state of
drunkenness lasts. A person under the influence of hypnotism is
temporarily of unsound mind. Mental decay brought by old age or disease
also comes within the definition.
Agreement by persons of unsound mind are void. But for necessaries

supplied to a lunatic or to any member of his family, the lunatic's estate, if
any, will be liable. There is no personal liability incurred by the lunatic. If a
contract entered into by a lunatic or person of unsound mind is for his
benefit, it can be enforced (for the benefit) against the other party.
Alien Enemies
A person who is not an Indian citizen is an alien. An alien may be either an

alien friend or a foreigner whose sovereign or State is at peace with India,
has usually contractual capacity of an Indian citizen. On the declaration of
war between his country and India he becomes an alien enemy. A contract
with an alien enemy becomes unenforceable on the outbreak of war.
For the purposes of civil rights, an Indian citizen of the subject of a neutral
state who is voluntarily resident in hostile territory or is carrying on
business there is an alien enemy. Trading with an alien enemy is
considered illegal, being against public policy.
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Foreign Sovereigns and Ambassadors
Foreign sovereigns and accredited representatives of foreign states, i.e.,

Ambassadors, High Commissioners. enjoy a special privilege in that they
cannot be sued in Indian Courts, unless they voluntarily submit to the
jurisdiction of the Indian Courts. Foreign Sovereign Governments can enter
into contracts through agents residing in India. In such cases the agent
becomes personally responsible for the performance of 'the contracts.
Professional Persons
In England, barristers-at-law are prohibited by the etiquette of their

profession from suing for their fees. So also are the Fellow and Members of
the Royal College of Physicians and Surgeons. But they can sue and be
sued for all claims other than their professional fees. In India, there is no
such disability and a barrister, who is in the position of an advocate with
liberty both to act and plead, has a right to contract and to sue for his fees.
Corporations
A corporation is an artificial person created by law, e.g., a company

registered under the Companies Act, public bodies created by statute, such
as Municipal Corporation of Delhi. A corporation exists only in
contemplation of law and has no physical shape or form.
The Indian Contract Act does not speak about the capacity of a corporation
to enter into a contract. But if properly incorporated, it has a right to enter
into a contract. It can sue and can be sued in its own name. There are
some contracts into which a corporation cannot enter without its seal, and
others not at all. A company, for instance, cannot contract to marry.
Further, its capacity and powers to contract are limited by its charter or
memorandum of association. Any contract beyond such power in ultra vires
and void.
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Married Women
In India, there is no difference between a man and a woman regarding

contractual capacity. A woman married or single can enter into contracts in
the same ways as a man. She can deal with her property in any manner
she likes, provided, of course, she is a major and is of sound mind.
Under the English law, before the passing of the Law Reform (Married
Women) Act, 1935, a husband was responsible for his wife's contracts but
since 1935 this liability no longer arises unless the wife is acting as the
husband's agent. Now, therefore, even in England a married woman has
full contractual capacity, and can sue and be sued in her own name.
Consent
To make a contract valid not only the presence and consent of the other
party is necessary but this consent should be ‘free’ and ‘genuine’. Section
12 defines ‘consent’ as follows: Two or more persons are said to consent
when they agree upon the same thing in the same sense. If parties do not
consent, i.e., they do not understand the same thing in the same sense,
there can be no agreement, because consent is like the very roots of an
agreement. If there is no consent, the parties are not said to be ab idem,
i.e., of the same mind.
5.4 MISTAKES, MISREPRESENTATION AND FRAUD
Flaw in Consent
The basis of a contract is agreement, i.e., mutual consent. In other words,

the parties should mean the samething in the same sense and agree
voluntarily. It is when there is consent, that the parties are said to be
consensus ad idem, i.e., their minds have met. Not only consent is required
but it must be a free consent. Consent is not free when it has been caused
by coercion, undue influence, misrepresentation, fraud or mistake. These
elements if present, may vitiate the contract.
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When this consent is wanting, the contract may turn out to be void or
voidable according to the nature of the flaw in consent. Where there is no
consent, there can be no contract as in the case of mutual mistake. Where
there is consent, but it is not free, a contract is generally voidable at the
option of the party whose consent is not free. In the case of
misrepresentation, fraud, coercion, undue influence, the consent of one of
the parties is induced or caused by the supposed existence of a fact which
did not exist.
5.4.1 Mistake
The law believes that contracts are made to be performed. The whole
structure of business depends on this as the businessmen depend on the
validity of contracts. Accordingly, the law says that it will not aid anyone to
evade consequences on the plea that he was mistaken.
On the other hand, the law also realises that mistakes do occur, and that
these mistakes are so fundamental that there may be no contract at all. If
the law recognises mistake in contract, the mistake will render the contract
void.
Effect of Mistake
A mistake in the nature of miscalculation or error of judgement by one or
both the parties has no effect on the validity of the contract. For example,
if a person pays an excessive price for goods under a mistake as to their
true value, the contract is binding on him. Therefore, mistake must be
"vital operative mistake", i.e., it must be a mistake of fact which is
fundamental to contract.
To be operative so as to render the contract void, the mistake must be:

a. of fact, and not of law or opinion;
b. the fact must be essential to agreement, i.e., so fundamental as to
negate
c. the agreement; and
d. must be on the part of both the parties.
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Thus, where both the parties of an agreement are under a mistake as to a

matter of fact essential agreement, the agreement is void (Section 20).
Such a mistake prevents the formation of any contract at all and the Court
will declare it void. For example, A agrees to buy from B a certain horse. It
turns out that the horse was dead at the time of bargain though neither
party was aware of the fact. The agreement is void.
Mistake of Law and Mistake of Fact
Mistakes are of two kinds: (i) mistake of law, and (ii) mistake of fact. If
there is a mistake of law of the land, the contract is binding because
everyone is deemed to have knowledge of law of the land and ignorance of
law is no excuse.
But mistake of foreign law and mistake of private rights are treated as
mistakes of fact and are excusable. The law of a foreign country is to be
proved in Indian Courts as ordinary facts. So mistake of foreign law makes
the contract void. Similarly, if a contract is made in ignorance of private
right of a party, it would be void, e.g., where A buys property which
already belongs to him.
Mutual or Unilateral Mistake
Mistake must be mutual or bilateral, i.e., it must be on the part of both

parties. A unilateral mistake, i.e., mistake on the part of only one party, is
generally of no effect unless (i) it concerns some fundamental fact and (ii)
the other party is aware of the mistake. For this reason, error of judgment
on the part of one of the parties has no effect and the contract will be
valid.
Mutual or Common Mistake as to Subject Matter
A contract is void when the parties to it assume that a certain state of

things exist which does not actually exist or in their ignorance the contract
means one thing to one and another thing to the other, and they contract
subject to that assumption or under that ignorance. There is a mistake on
the part of both the parties. Such a mistake may relate to the existence of
the subject matter, its identity, quantity or quality.
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a. Mistake as to existence of the subject matter: Where both parties

believe the subject matter of the contract to be in existence but in fact,
it is not in existence at the time of making the contract, there is mistake
and the contract is void.
b. Mistake as to identity of the subject matter: Where the parties are not
in agreement to the identity of the subject matter, i.e., one means one
thing and the other means another thing, the contract is void; there is
no consensus ad idem.
c. Mistake as to quantity of the subject matter: There may be a mistake as
to quantity or extent of the subject matter which will render the
contract void even if the mistake was caused by the negligence of a
third-party.
d. Mistake as to quality of the subject matter or promise: Mistake as to
quality raises difficult questions. If the mistake is on the part of both the
parties the contract is void. But if the mistake is only on the part of one
party difficulty arises.
The general rule is that a party to a contract does not owe any duty to the
other party to disclose all the facts in his possession during negotiations.
Even if he knows that the other party is ignorant of or under some
misapprehension as to an important fact, he is under no obligation to
enlighten him. Each party must protect his own interests unaided. In
contract of sale of goods, this rule is summed up in the maxim caveat
emptor (Let the buyer beware.) The seller is under no duty to reveal the
defects of his goods to the buyer, subject to certain conditions.
Unilateral Mistake as to Nature of the Contract
The general rule is that a person who signs an instrument is bound by its
terms even if he has not read it. But a person who signs a document under
a fundamental mistake as to its nature (not merely as to its contents) may
have it voided provided the mistake was due to either
a. the blindness, illiteracy or senility of the person signing, or
b. a trick or fraudulent misrepresentation as to the nature of the
document.
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Unilateral Mistake as to the Identity of the Person Contracted With
It is a rule of law that if a person intends to contract with A, B cannot give

himself any right under it. Hence, when a contract is made in which
personalities of the contracting parties are or may be of importance, no
other person can interpose and adopt the contract. For example, where M
intends to contract only with A but enters into contract with B believing him
to be A, the contract is vitiated by mistake as there is no consensus ad
idem.
Mistake as to the identity of the person with whom the contract is made
will operate to nullify the contract only if:
a. the identity is of material importance to the contract; and
b. the mistake is known to the other person, i.e., he knows that it is not
intended that he should become a party to the contract.
5.4.2 Misrepresentation
The term "misrepresentation" is ordinarily used to connote both "innocent

misrepresentation" and "dishonest misrepresentation". Misrepresentation
may therefore, be either (i) Innocent misrepresentation, or (ii) Willful
misrepresentation with intent to deceive and is called fraud.
Innocent Misrepresentation
If a person makes a representation believing what he says is true he

commits innocent misrepresentation. Thus, any false representation, which
is made with an honest belief in its truth is innocent. The effect of innocent
misrepresentation is that the party misled by it can void the contract, but
cannot sue for damages in the normal circumstances.
But in order to void a contract on the ground of misrepresentation, it is

necessary to prove that:
i. there was a representation or assertion,
ii. such assertion induced the party aggrieved to enter into the contract.
iii. the assertion related to a matter of fact (and not of law as ignorance of
law is no excuse).
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iv. the statement was not a mere opinion or hearsay, or commendation

(i.e., reasonable praise). For example an advertisement saying, washes
whiter “than the whitest".
v. the statement which has become or turned out to be untrue, was made
with an honest belief in its truth.
Damages for Innocent Misrepresentation
Generally, the injured party can only void the contract and cannot get
damages for innocent misrepresentation. But in the following cases,
damages are obtainable:
i. From a promoter or director who makes innocent misrepresentation in a
company prospectus inviting the public to subscribe for the shares in the
company;
ii. Against an agent who commits a breach of warranty of authority:
iii. From a person who (at the Court's discretion) is estopped from denying
a statement he has made where he made a positive statement intending
that it should be relied upon and the innocent party did rely upon it and
thereby suffered damages;
iv. Negligent representation made by one person to another between whom
a confidential relationship, like that of a solicitor and client exists.
5.4.3 Willful Misrepresentation or Fraud
Fraud is an untrue statement made knowingly or without belief in its truth

or recklessly, carelessly, whether it be true or false with the intent to
deceive. The chief ingredients of a fraud are:
i. a false representation or assertion;
ii. of fact (and not a mere opinion),
iii. made with the intention that it should be acted upon,
iv. the representation must have actually induced the other party to enter
into the contract and so deceived him,
v. the party deceived must thereby be damnified, for there is no fraud
without damages, and
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vi. the statement must have been made either with the knowledge that it
was false or without belief in its truth or recklessly without caring
whether it was true or false.
It is immaterial whether the representation takes effect by false statement

or with concealment. The party defrauded can avoid the contract and also
claim damages.
Mere silence as to facts likely to affect the willingness of a person to enter

into a contract is not fraud, unless silence is in itself equivalent to speech,
or where it is the duty of the person keeping silent to speak as in the cases
of contracts uberrimae fidei (contracts requiring utmost good faith).
Contracts Uberrimae Fidei
There are contracts in which the law imposes a special clause to act with
the utmost good faith, i.e., to disclose all material information. Failure to
disclose such information will render the contract voidable at the option of
the other party.
Contracts uberrimae fidei are:
a. Contract of insurance of all kinds: The assured must disclose to the

insurer all material facts and whatever he states must be correct and
truthful.
b. Company prospectus: When a company invites the public to subscribe
for its shares, it is under statutory obligation to disclose truthfully the
various matters set out in the Companies Act. Any person responsible
for non-disclosure of any of these matters is liable to damages. Also, the
contract to buy shares is voidable where there is a material false
statement or non-disclosure in the prospectus.
c. Contract for the sale of land: The vendor is under a duty to the
purchaser to show good title.
d. Contracts of family arrangements: When the members of a family make
agreements or arrangements for the settlement of family property, each
member of the family must make full disclosure of every material fact
within his knowledge.
e. Contracts of marriage.
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5.4.4 Difference between Fraud and Innocent Misrepresentation

1. Fraud implies an intent to deceive, which is lacking if it is innocent
misrepresentation.
2. In case of misrepresentation and fraudulent silence, the defendant can
take a good plea that the plaintiff had the means of discovering the
truth with ordinary diligence. This argument is not available if there is
fraud (Section 19 exception).
3. Misrepresentation may lead to avoidable of contract. In fraud, the
plaintiff can claim damages as well.
4. If there is fraud, it may lead to prosecution for an offence of cheating
under the Indian Penal Code.
Essentials of Fraud
1. Making a false suggestion as to a fact.
2. Active concealment of a fact.
3. A promise without intention to perform.
4. Any act fitted to deceive or representation of fact to deceive.
5. The representation or assertion must have been made with a knowledge
of its falsity or without belief in its truth.
6. Fraud by a party or his agent to the contract.
7. The party, subjected to fraud, suffered loss.
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Effects of Fraud
a. A contract induced by fraud is voidable at the option of the party whose
consent was obtained by fraud.
b. The aggrieved party can sue for damages. Fraud is a civil wrong or tort;
hence, compensation is payable to the party affected.
c. In cases of fraudulent silence, the contract is not voidable if the party
whose consent was so caused that it had the means of discovering the
truth with ordinary diligence.
5.5 WAGERING AGREEMENTS AND QUASSI CONTRACTS
5.5.1 Legality of Object
One of the requisites of a valid contract is that the object should be lawful.
Section 10 of the Indian Contract Act, 1872, provides, "All agreements are
contracts if they are made by free consent of parties competent to contract
fur a lawful consideration and with a lawful object... " Therefore, it follows
that where the consideration or object for which an agreement is made is
unlawful, it is not a contract.
Section 23 of the Indian Contract Act, 1872 provides that the consideration
or object of an agreement is lawful unless it is
a. forbidden by law; or,
b. it is of such nature that if permitted it would defeat the provisions of
law; or is fraudulent; or
c. involves or implies injury to the person or property or another; or
d. the Court regards it as immoral or opposed to public policy.
In each of these cases the consideration or object of an agreement is said

to be unlawful. Every agreement of which the object or consideration is
unlawful is void.
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Void and Illegal Contracts
A void contract is one which is result of legal effects altogether. An illegal

contract too has no legal effect as between the immediate parties to the
contract, but has the further effect of tainting the collateral contracts also
with illegality. For instance A borrows from B Rs. 1,000 for lending it to C a
minor. The contract between A and C is void, but B can nevertheless
recover the money from A, On the other hand, if A had borrowed Rs. 1,000
from B to buy a pistol to shoot C, the question whether B can recover the
money hinges on whether B was aware of the purpose for which money
was borrowed. If B had knowledge of the illegal purpose, he cannot
recover. Therefore, it may be said that all illegal agreements are void but
all void agreements are not necessarily illegal.
Consequence of Illegal Agreements

i. an illegal agreement is entirely void;
ii. no action can be brought by a party to an illegal agreement. From an
evil cause, no action arises;
iii. money paid or property transferred under an illegal agreement cannot
be recovered. In cases of equal guilt, more powerful is the condition of
the defendant;
iv. where an agreement consist of two parts, one part legal and other
illegal, and the legal parts is separable from the illegal one, then the
Court will enforce the legal one. If the legal and the illegal parts cannot
be separated the whole agreement is illegal; and
v. any agreement which is collateral to an illegal agreement is also tainted
with illegality and is treated as being illegal, event though it, would have
been lawful by itself..
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Exception to General Rule of no Recovery of Money or Property
In the following cases, a party to an illegal agreement may sue to recover

money.
a. Where the transfer is not in pari delicto (equally guilty) with the
defendant, i.e., the transferee. For example, where A is induced to enter
into an illegal agreement by the fraud of B, A may recover the money
paid if he did not now that the contract was illegal.
b. If the plaintiff can frame a cause of action entirely dependent of the
contract.
c. Where a substantial part of the illegal transaction was not been carried
out and the plaintiff is truly and genuinely repentant.
Immoral Agreements
An agreement is illegal if its object is immoral or where its consideration is

an act of sexual immorality, e.g., an agreement for future illicit
cohabitation, the agreement is illegal and so unenforceable. Similarly,
where the purpose of the agreement is the furtherance of sexual
immorality and both the parties know this, it is illegal.
The following agreement are void as being against public policy but they
are not illegal:
a. Agreement in restrain of parental rights: An agreement by which a
party deprives himself of the custody of his child is void.
b. Agreement in restraint of marriage: An agreement not to marry at
all or not to marry any particular person or class of persons is void as it
is in restraint of marriage.
c. Marriage or brokerage agreements: An agreement to procure
marriage for reward is void. Where a purohit (priest) was promised Rs.
200 in consideration of procuring a wife for the defendant, the promise
was held void as opposed to public policy, and the purohit could not
recover the promise sum.
d. Agreements in restraint of personal freedom are void: Where a
man agreed with his moneylender not to change his residence, or his
employment or to part with any of his property or to incur any
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obligation on credit without the consent of the moneylender, it was held

that the agreement was void.
e. Agreement in restraint of trade: An agreement in restraint of trade
is one which seeks to restrict a person from freely exercising his trade
or profession.
5.5.2 Wagering Agreements
The literal meaning of the word wager is "bet". Wagering agreements are
nothing but ordinary betting agreements. For example, A and B enter into
an agreement that if Indian Team wins the world cup one day cricket
match, A will pay B Rs. 100 and if it looses, B will pay Rs. 100 to A. This is
a wagering agreement and nothing can be recovered by winning party
under the agreement.
The essence of gaming and wagering is that one party is to win and the
other to lose upon a future event which at the time of the contract is of an
uncertain nature that is to say, if the event turns out one way A will lose;
but if it turns out the other way he will win.
Wagering Agreements Void
In India, except Mumbai, wagering agreements are void. In Mumbai,

wagering agreements have been declared illegal by the Avoiding Wagers
(Amendment) Act, 1865. Therefore, in Mumbai a wagering agreement
being illegal, is void not only between the immediate parties, but taints and
renders void all collateral agreements to it.
Thus, A bets with B and losses, applies to C for a loan, who pays B in
settlement of A's losses. C cannot recover from A because this is money
paid "under" or "in respect of" a wagering transaction which is illegal in
Mumbai. But in respect of India such a transaction (i.e., betting) being only
void, C could recover from A. Of course, if A refused to pay B the amount
of the bet that he has lost, B can not sue A. Again, where an agent bets on
behalf of his principal and loses and pays over the money to the winner, he
cannot recover the money from his principal, if the transactions took place
in Mumbai, but elsewhere he can recover. But if the agent wins, he must
pay the winnings to the principal, as this money was received on behalf of
the principal.
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Sometimes, commercial transactions assume the form of wagering

contracts. The sample test to find out whether a particular transaction is a
wager or a genuine commercial transaction is: "Where delivery of the
goods sold is intended to be given and taken, it is valid contract, but where
only the differences are intended to be paid, it will be a wagering contract
and unenforceable.
In a wagering contract there must be mutuality in the sense that the gain
of one party should be loss of the other on the happening of an uncertain
event which is the subject matter of the contract.
Void Agreements
The following types of agreements are void under Indian Contract Act:
a. Agreement by or with a minor or a person of unsound mind or a person
disqualified to enter into a contract - Section 11;
b. Agreement made under a mistake of fact, material to the agreement on
the part of the both the parties - Section 20.
c. An agreement of which the consideration or object is unlawful - Section
23.
d. If any part of a single consideration for one or more objects, or anyone
or any part of anyone of several considerations for a single object, is
unlawful, the agreement is void - Section 24.
e. An agreement made without consideration subject to three exceptions
provided to Section 25.
f. An agreement in restraint of marriage - Section 26.
g. An agreement in restraint of trade - Section 27.
h. An agreement in restraint of legal proceedings - Section 28.
i. Agreements, the meaning of which is not certain, or capable of being
made certain - Section 29.
j. Agreement by way of wager - Section 30.
k. An agreement to enter into an agreement in the future.
l. An agreement to do an act impossible in itself - Section 56
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When contract becomes void

An agreement not enforceable by law is void ab initio - Section 2(g).
A contract which ceases to be enforceable by law becomes void when if
ceases to be enforceable - Section 20)
A contract becomes void when, by reason of some event which the
promisor could not prevent, the performance of the contract becomes
impossible, e.g., by destruction of the subject matter of the contract after
the formation of the contract.
A contract becomes void by reason of subsequent illegality. A in India
agrees to supply goods to B in Pakistan. After the formation of the contract
war breaks out between India and Pakistan and the supply of goods to
Pakistan is prohibited by legislation. The contract becomes void.
A contingent contract to do or not do to anything if an uncertain future
event happens becomes void if the event becomes impossible. Where a
contract is voidable at the option of the aggrieved party the contract
becomes void when the option is exercised by him.
Restitution
When a contract becomes void, it is not to be performed by either party.
But if any party has received any benefit under such a contract from the
other party he must restore it or make compensation for it to the other
party. A agrees to sell to B after 6 months a certain quantity of gold and
receives Rs 500 as advance. Soon after the agreement, private sales of
gold are prohibited by law. The contract becomes void and A must return
the sum of Rs. 500 to B.
Restitution is also provided for by Section 65 where an agreement is
discovered to be void.
But there is no resolution where the parties are wholly incompetent to
contract, e.g., where one of the parties is a minor. The minor cannot be
asked to restore the benefit
Contingent Contract
As per Section 31, a contingent contract is a contract to do or not to do
something, if some event collateral to such contract, does or does not
happen. Contract of insurance and contracts of indemnity and guarantee
are popular instances of contingent contracts.
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Rules regarding contingent contracts

The following rules are contained in Section 32-36:
a. Contracts contingent upon the happening of a future uncertain event
cannot be enforced by law unless and until that event has happened. If
the event becomes impossible, the contract becomes void - Section 32.
i. A makes a contract to buy 8's house if A survives C. This contract
cannot be enforced by law unless and until C dies in A’s lifetime.
ii. A contracts to, pay B a sum of money when B marries C, C dies
without being married to B. The contract becomes void.
b. Contracts contingent upon the non-happening of an uncertain future
event can be enforced when the happening of that event becomes
impossible and not before - Section 33.
A contracts to pay B a certain sum of money if a certain ship does not
return. The ship is sunk. The contract can be enforced when the ship
sinks.
c. If a contract is contingent upon how a person will act at an unspecified
time, the event shall be considered to become impossible when such
person does anything which renders it impossible that he should so act
within any definite time or otherwise than under further conginencies -
Section 34.
d. Contracts contingent on the happening of an event within a fixed time
become void if, at the expiration of the time, such event has not
happened, or if, before the time fixed, such event becomes impossible -
Section 35
e. Contracts contingent upon the non-happening of an event within a fixed
time may be enforced by law when the time fixed has expired and such
event has not happened or before the time fixed has expired, if it
becomes certain that such event will not happen - Section 35
f. Contingent agreements to do or not to do anything if an impossible
event happens, are void.
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5.5.3 Quasi-contracts
Nature of Quasi-contracts
A valid contract must contain certain essential elements, such as offer and
acceptance, capacity to contract, consideration and free consent. But
sometimes the law implies a promise imposing obligations on one party
and conferring right in favour of the other even when there is no offer, no
acceptance, no consensus ad idem, and in fact, there is neither agreement
nor promise. Such cases are not contracts in the strict sense, but the Court
recognises them as relations resembling those of contracts and enforces
them as if they were contracts, hence the term quasi-contracts.
A quasi-contract rests on the equitable principle that a person shall not be

allowed to enrich himself unjustly at the expense of another. In truth, it is
not a contract at all. It is an obligation which the law creates, in the
absence of any agreement, when any person is in the possession of one
person's money, or its equivalent, under such circumstances that in equity
and good conscience he ought not to retain it, and which in justice and
fairness belongs to another. It is the duty and not agreement or intention
which defines it. A very simple illustration is money paid under mistake.
Equity demands that such money must be paid back.
The following types of quasi-contracts have been dealt within the Indian
Contract Act-
a. Necessaries supplied to person incapable of contracting or to anyone
whom he is illegally bound to support - Section 68.
b. Suit for money had and received - Section 69 and 72.
c. Quantum Meruit
d. Obligations of a finder of goods - Section 71.
e. Obligation of person enjoying benefit of a non-gratuitous act. Section 70
Necessaries
Contracts by minors and persons of unsound mind are void. However,
Section 68 provides that their estates are liable to reimburse the trader,
who supplies them with necessaries of life.
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Suit for money had and received

The right to life a suit for the recovery of money may arise
a. Where the plaintiff paid money to the defendant (i) under a mistake, (ii)
in pursuance of a contract the consideration for which has failed, or (iii)
under coercion, oppression, extortion or other such means. A debtor
may recover, from a creditor the amount of an over-payment made to
him by mistake. The mistake may be mistake of fact or a mistake of
law.
b. Payment to third-party of money which another is bound to pay. For
example, where A's goods are wrongfully attached in order to realise
arrears of Government revenue due by B, and A pays the amount to
save his goods from being sold, he is entitled to recover the amount
from B.
c. Money obtained by defendant from third-parties. For example, where an
agent has obtained a secret commission or a fraudulent payment from a
third-party, the principle can recover the amount from the agent.
Quantum Meruit
The expression "Quantum Meruit" literally means "as much as earned" or

reasonable remuneration. It is used where a person claims reasonable
remuneration for the services rendered by him when there was no express
promise to pay the definite remuneration, Thus, the law implies reasonable
compensation for the services rendered by a party if there are
circumstances showing that these are to be paid for.
The general rule is that where a party to a contract has not fully performed
what the contract demands as a condition of payment, he cannot sue for
payment for that which he has done. The contract has to be indivisible and
the payment can be demanded only on the completion of the contract.
But where one party who has performed part of his contract is prevented
by the other from completing it, he may sue on a quantum meruit, for the
value of what he has done.
The claim on a quantum meruit arises when one party abandons the
contract, or accepts the work done by another under a void contract.
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The party in default may also sue on a "quantum meruit" for what he has
done if the contract is divisible and the other party has had the benefit of
the part which has been performed. But if the contract is not divisible, the
party at fault cannot claim the value of what he has done
Obligations of finder of lost goods
The liability of a finder of goods belonging to someone else is that of a

bailee. "This means that he must take as much care of the goods as a man
of ordinary prudence would take of his own goods of the same kind. So far
as the real owner of the goods is concerned, the finder is only a bailee and
must not appropriate the goods to his own use. If the owner is traced, he
must return the goods to him. The finder is entitled to get the reward that
may have been offered by the owner and also any expenses he may have
incurred in protecting and preserving the property.
Obligation of a person enjoying benefit of non-gratuitous act
Section 70 of the Indian Contract Act provides that where a person lawfully
does something for another person or delivers anything to him without any
intention of doing so gratuitously and the other person accepts and enjoys
the benefit thereof, the latter must compensate the former or restore to
him the thing so delivered. For example, when one of the two joint tenants
pays the whole rent to the landlord, he is entitled to compensation from his
co-tenant, or if A, a tradesmen, leaves goods at B's house by mistake and
B treats the goods as his own, he is bound to pay A for them.
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5.6 DISCHARGE, PERFORMANCE AND BREACH OF

CONTRACTS
A contract is said to be discharged or terminated when the rights and

obligations arising out of a contract are extinguished.
Contracts may be discharged or terminated by any of the following modes:

a. performance, i.e., by fulfilment of the duties undertaken by parties or,
by tender.
b. mutual consent or agreement.
c. lapse of time;
d. operation of law;
e. impossibility of performance; and
f. breach of contract.
Performance of Contracts
Section 37 of the Act provides that 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 provision of the Indian
Contract Act, or any other law. In case of death of the promisor before
performance, the representatives of the promisor is bound to perform the
promise unless a contrary intention appears from the contract.
Tender of Performance
In cases of some contracts, it is sometimes sufficient if the promisor

performs his side of the contract. Then, if the performance is rejected, the
promisor is discharged from further liability and may sue for the breach of
contract if he so wishes. This is called discharge by tender.
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To be valid, a tender must fulfil the following conditions

a. it must be unconditional;
b. if must be made at a proper time and place;
c. it must be made under circumstances enabling the other party to
ascertain that the party by whom it is made is able and willing then and
there to do the whole of what he is bound, to do by his promise.
d. if the tender relates to delivery of goods, the promisee must have a
reasonable opportunity of seeing that the thing offered is the thing
which the promisor is bound by his promise to deliver:
e. tender made to one of several joint promisees has the same effect as a
tender to all of them:
Who can Demand Performance?
Generally speaking, a stranger to contract cannot sue and the person who
can demand performance is the party to whom the promise is made. But
an assignee of the rights and benefits under a contract may demand
performance by the promiser, in the same way as the assignor, (i.e the
promisee) could have demanded.
Effect of Refusal of Party to Perform Wholly
Section 39 provides that when a party to a contract has refused to perform

or disabled himself from performing his promise in its entirety the the
promisee may put an end to the contract unless he had signified by words
or conduct his acquiescence in its continuance.
By whom Contract must be Performed
Under section 40 of the Act, if it appears from the nature of the case that it
was the intention of the parties to a contract that it should be performed
by the promisor himself such promise must be performed by the promisor
himself. In other cases the promisor or his representative may employ a
competent person to perform it.
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Devolution of Joint Liabilities
Under section 42 of the Indian Contract Act, where. two or more persons
have made a joint promise then, unless a contrary intention appears from
the contract all such persons should perform the promise. If anyone of
them dies, his representatives jointly with the survivor or survivors should
perform. After the death of the last survivor, the representatives of all
jointly must fulfil the promise.
Under section 43 of the Indian Contract Act when two or more persons
made a joint promise, the promisee may, in the absence of an express
agreement to the contrary compel anyone or more of such joint promisors
to perform the whole of the promise. Each of two or more joint promisors
may compel every other joint promisor to contribute equally with himself
to the performance of the promise unless a contrary intention appears from
the contract. If anyone of two ore more promisors make default in such
contribution, the remaining join promisors should bear the loss arising from
such default in equal share.
Under section 44 of the Act, where two or more persons have made a joint
promise, a release of one of such joint promisor by the promisees does not
discharge the other joint promisor(s): neither does it free the joint
promisor so released from responsibility to the other joint promisor or joint
promisors.
If a promise is made to two or more persons, the promise is called joint

promise.
Assignment
The promisee may assign rights and benefits of contract and the assignee
will be entitled to demand performance by the promisor. But the
assignment to be complete and effectual, must be made by an instrument
in writing.
An obligation or liability under a contract cannot be assigned. This is

technically called novation.
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Discharge by Mutual Consent

A contract may be discharged by an agreement of all parties to the
contract, or by waiver or release by the partly entitled to perfrom.
The method stipulated under section 62 and 63 for discharging a contract
by mutual consent are:
Novation – When a new contract is substituted for existing contract either
between the same parties or between different parties, the consideration
mutually being the discharge of the old contract.
Alteration – Change in one or more of the material terms of a contract.
Rescission – By agreement between the parties at any time before it is
discharged by performance or in some other way.
Remission – Acceptance of a lesser sum than what was contracted for or
a lesser fulfilment of the promise made.
Waiver – Deliberate abandonment or giving up of a right which a party is
entitled to under a contract, where upon the other party to the contract is
released from his obligation.
Discharge by Lapse of Time
The Limitation Act, in certain circumstance, affords a good defence to suits

for breach of contract, and in fact terminates the contract by depriving the
party of his remedy to law. For example, where a debtor has failed to repay
the loan on the stipulated date the creditor must file the suit against him
within three years of the default. If the limitation period of three years
expires and he takes no action he will be barred from his remedy and the
other party is discharged of his liability to perform.
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Discharge by Operation of the Law

Discharge under this head may take place as follows:
a. By merger: When the parties embody the inferior contract in a superior
contract.
b. By the unauthorised alteration of items of a written document: Where a
party to a written contract makes any material alteration without
knowledge and consent of the other, the contract can be avoided by the
other party.
c. By insolvency: The Insolvency Act provides for discharge of contracts
under particular circumstances. For example, where the Court passes an
order discharging the insolvent, this order exonerates or discharges him
from liabilities on all debts incurred previous to his adjudication.
Discharge by Impossibility or Frustration
A contract which is entered into to perform something that is clearly

impossible is void. For instance, A agrees with B to discover gold by magic.
The agreement is void by virtue of section 56 para 1 which lays down the
principle that an agreement to do an act impossible in itself is void.
Sometimes subsequent impossibility (i.e., where the impossibility

supervenes after the contract has been made) renders the performance of
a contract unlawful and stands discharged; as for example, where a
musician contracts to perform at a concert and becomes too ill to do so,
the contract becomes void. In this connection, para 2 of section 56
provides that a contract to do an act, which after the contract is made
becomes impossible or by reason of some event which the promisor could
not prevent unlawful becomes void when the act become impossible or
unlawful.
If the impossibility is the not obvious and the promisor alone knows of the
impossibility or illegally then existing or the promisor might have known as
such after using reasonable diligence, such promisor is bound to
compensate the promisee for any loss he may suffer through the non-
performance of the promise inspite of the agreement being void ab-initio
(section 56, para 3).
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Discharge by Supervening Impossibility

A contract will be discharged by subsequent or supervening impossibility in
any of the following ways:
a. Where the subject matter of the contract is destroyed without the fault
of the parties, the contract is discharged.
b. When a contract is entered into on the basis of the continued existence
of a certain state of affairs the contract is discharged if the state of
things changes or ceases to exist.
c. Where the personal qualifications of a party is the basis of the contract,
the contract is discharged by the death or physical disablement of that
party.
Discharge by Supervening Illegality
A contract which is contrary to law at the time of its formation is void. But
if, after the making of the contract, owing to alteration of the law or the act
of some person armed with statutory authority the performance of the
contract becomes impossible, the contract is discharged. This is so because
the performance of the promise is prevented or prohibited by a subsequent
change in the law.
Cases in Which there is no Supervening Impossibility

In the following cases contracts are not discharged on the ground of
supervening impossibility
a. Difficulty of performance: The mere fact that performance is more
difficult or expensive than the parties anticipated does not discharge the
duty to perform.
b. Commercial impossibilities do not discharge the contract. A contract
does not become expectation of higher profits is not realised.
c. Strikes, lockouts and civil disturbance like riots do not terminate
contracts unless there is a clause in the contract providing for non-
performance in such cases.
Supervening Impossibility or illegality is known as "frustration" under
English Law.
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Discharge by Breach
Where the promisor neither performs his contract nor does he tender
performance, or where the performance is defective, there is a breach of
contract. The breach of contract may be (i) actual or, (ii) anticipatory. The
actual breach may take place either at the time the performance is due, or
when actually performing the contract. The anticipatory breach, i.e., a
breach before the time for the performance has arrived. This may also take
place in two ways, by the promisor doing an act which makes the
performance of his promise impossible or by the promisor in some other
way showing his intention not to perform it
Anticipatory Breach of Contract
Breach of contract may occur, before the time for performance is due. This
may happen where one of the parties definitely renounces the contract and
shows his intention not to perform it or does some act which makes
performance impossible. The other party, on such a breach being
committed, has a right of action for damages.
He may either sue for breach of contract immediately after repudiation or

wait till the actual date when performance is due and then sue for breach.
If the promisee adopts the latter course, i.e., waits till the date when
performance is due he keeps the contract alive for the benefit of the
promisor as well as for his own. He remains liable under it and enables the
promisor not only to complete the contract in spite of previous repudiation,
but also to avail himself of any excuse for non-performance which may
have come into existence before the time fixed for performance.
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Remedies For Breach
Where a contract is broken, the injured party has several courses of action
open to him. The appropriate remedy in any case Will depend upon the
subject-matter of the contract and the nature of the breach.
(i) Remedies for Breach of Contract

In case of breach of contract, the injured party may:
a. Rescind the contract and refuse further performance of the contract;
b. Sue for damages;
c. Sue for specific performance;
d. Sue for an injunction to restrain the breach of a negative term; and
e. Sue on quantum meruit
When a party to a contract has broken the contract, the other party may
treat the contract as rescinded and he is absolved from all his obligations
under the contract. Under section 65, when a party treats the contract as
rescinded, he makes himself liable to restore any benefits he has received
under the contract to the party from whom such benefits were received.
Under section 75 of the Indian Contract Act, if a person rightfully rescinds a
contract he is entitled to a compensation for any damage which he has
sustained through the non-fulfilment of the contract by the other party.
Section 64 deals with consequences of rescission ofcvoidable contracts,
i.e., where there is flaw in the consent of one party to the contract. Under
this section when a person at whose option a contract is voidable rescinds,
the other party thereto need not perform any promise therein contained in
which he is the promisor. The party rescinding a voidable contract shall, if
he has received any benefit there under, from another party to such
contract, restore such benefit so far as may be, to the person from whom it
was received.
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(ii) Damages for Breach of Contract
Under section 73 of the Indian Contract Act, when a contract has been
broken, a party who suffers by such breach is entitled to receive, from the
party who has broken the contract, compensation for any loss or damage,
caused to him thereby, which naturally arose in the usual course of things
from such breach or which the parties knew, when they made the contract
to be likely to result from the breach of it. Such compensation is not to be
given for any remote and indirect loss or damage sustained by reason of
the breach.
5.7 LIQUIDATED DAMAGES AND PENALTY
Liquidated Damages
Where the contracting parties agree in advance the amount payable in the
event of breach, the sum payable is called liquidated damages.
Unliquidated Damages
Where the amount of compensation claimed for a breach of contract is left
to be assessed by the Court, damages claimed are called unliquidated
damages.
Types of Unliquidated Damages
Those are of the following kinds:
a. General or ordinary damages, (b) Special damages (c) Exemplary or
punitive damages, and (d) Nominal damages
Ordinary Damages
These are restricted to pecuniary compensation to put the injured party in
the position he would have been had the contract been performed. It is the
estimated amount of loss actually incurred. Thus, it applies only to the
proximate consequences of the breach of the contract and the remote
consequences are not generally regarded. For example, in a contract for
the sale of goods, the damages payable would be the difference between
the contract price and the price at which the goods are available on the
date of the breach.
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Special Damages
Special damages are those resulting from a breach of contract under some
peculiar circumstances. If at the time of entering into the contract the
party has notice of special circumstances which makes special loss the
likely result of the breach in the ordinary course of things, then upon his-
breaking the contract and the special loss following this breach, he will be
required to make good the special loss. For example, A delivered goods to
the Railway Administration to be carried to a place where an exhibition was
being held and told the goods clerk that if the goods did not reach the
destination on the stipulated date he would suffer a special loss. The goods
reached late. He was entitled to claim special damages
Exemplary Damages
These damages are awarded to punish the defendant and are not, as a
rule, granted in case of breach of contract. In two cases, however, the
court may award such damages, viz.,
i. breach of promise to marry; and
ii. wrongful dishonour of a customer's cheque by the banker.
In a breach of promise to marry, the amount of the damages will depend

upon the extent of injury to the party's feelings. In the banker's case, the
smaller the amount of the cheque dishonoured, larger will be damages as
the credit of the customer would be injured in a far greater measure, if a
cheque for a small amount is wrongfully dishonoured.
Nominal Damages
Nominal damages consist of a small token award, e.g., a rupee of even 25

paise, where there has been an infringement of contractual rights, but no
actual loss has been suffered. These damages are awarded to establish the
right to decree for breach of contract.
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Liquidated Damages and Penalty
Where the contracting parties fix at the time of contract the amount of
damages that would be payable in case of breach, in English law, the
question may arise whether the term amounts to "liquidated damages" or a
"penalty"? The Courts in England usually give effect to liquidated damages,
but they always relieve against penalty.
The test of the two is that where the amount fixed is a genuine pre-
estimate of the loss in case of breach, it is liquidated damages and will be
allowed. If the amount fixed is without any regard to probable loss, but is
intended to frighten the party and to prevent him from committing breach,
it is a penalty and will not be allowed.
In Indian law, there is no such difference between liquidated damages and

penalty, section 74 provides for “reasonable compensation" upto the
stipulated amount whether it is by way of liquidated damages or penalty.
Specific Performance
It means the actual carrying out by the parties of their contract, and in
proper cases the Court will insist upon the parties carrying out this
agreement. Where a party fails to perform the contract, the Court may, at
its discretion, order the defendant to carry out his undertaking according to
the terms of the contract. A decree for specific performance may be
granted in addition to or instead of damages.
Specific performance is usually granted in contracts connected with land,

e.g., purchase of a particular plot or house, or to take debentures in a
company. In case of a sale of goods, it will only be granted if the goods are
unique and cannot be purchased in the market, e.g., a particular race
horse, or one of special value to the party suing by reason of personal or
family association, e.g., an heirloom.
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Specific performance will not be ordered:

a. where monetary compensation is an adequate remedy;
b. where the Court cannot supervise the execution of the contract, e.g., a
building contract;
c. where the contract is for personal service; and
d. where one of the parties is a minor.
Injunction
An injunction, is an order of a Court restraining a person from doing a
particular act. It is a mode of securing the specific performance of a
negative term of the contract, (i.e., where he is doing something which he
promises not to do), the Court may in its discretion issue an order to the
defendant restraining him from doing what he promised not to do.
Injunction may be prohibitory or mandatory. In prohibitory it is the order of
the Court restraining the commission of a wrongful act whereas in
mandatory, it restrains continuance of wrongful commission.
5.8 BAILMENT AND PLEDGE
5.8.1 Bailment
A bailment is a transaction whereby one person delivers goods to another

person for some purpose, upon a contract that they are, when the purpose
is accomplished to be returned or otherwise disposed of according to the
directions of the person delivering them (Section 148).
The person who delivers the goods is called the Bailor and the person to
whom they are delivered is called the Bailee. The transaction, is called a
Bailment (Section 148).
Bailment is a ‘voluntary delivery of goods for a temporary purpose 'on the

understanding that they are to be returned in the same of altered form.
The ownership of the goods remains with the bailor, the bailee getting only
the possession. Delivery of goods may be actual or constructive, e.g.,
where the key of a godown is handed over to another person, it amounts
to delivery of goods in the godown.
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Gratuitous Bailment
A gratuitous bailment is one in which neither the bailor nor the bailee is
entitled to any remuneration. Such a bailment may be for the exclusive
benefit of the bailor, e.g., when A leaves his dog with a neighbour to be
looked after in A's absence on holiday. It may again to be for exclusive
benefit of the bailee, e.g., where you lend your book to a friend or yours
for a week. In neither case any charge is made.
A gratuitous bailment terminates by the death of either the bailor or the

bailee (Section 162).
Under section 159 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 faith 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 loss exceeding the
benefit actually derived by him from the loan, the lender must, if he
compels the return, indemnify the borrower the amount in which the loss
so occasioned exceeds the benefit so derived.
Bailment for Reward
This is for the mutual benefit of both the bailor the bailee. For example, A
lets out a motor-car for hire to B. A is the bailor and receives the hire
charges and B is the bailee and gets the use of the car. Where, A hands
over his goods to B, a carrier for carriage at a price. A is the bailor who
enjoys the benefit of carriage and B is the bailee who receives a
remuneration for carrying the goods.
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Duties of Bailee
The bailee owes the following duties in respect of the goods bailed to him:
a. The bailee must take as much care of the goods bailed to him as a man
of ordinary prudence would take under similar circumstances of his own
goods of the same bulk, quality and value as the goods bailed (Section
151). If he takes this much care he will not be liable for any loss,
destruction, or deterioration of the goods bailed (Section 152). The
degree of care required from the bailee is the same whether the
bailment is for reward or gratuitous. Of course, the bailee may agree to
take special care of the goods, e.g., he may agree to keep the property
safe from all perils and answers for accidents or thefts. But even such a
bailee will not be liable for loss happening by an act of God or by public
enemies.
b. The bailee is under a duty not to use the goods in an unauthorised

manner or for unauthorised purpose (Section 153). If he does so, the
bailor can terminate the bailment, and claim damages for any loss or
damage caused by the unauthorised used (Section 154).
c. He must keep the goods bailed to him separate from his own goods
(Sections 155-157). If the bailee without the consent of the bailor,
mixes the goods of the bailor with his own goods, the bailor and the
bailee shall have an interest, in production to their respective shares, in
the mixture thus produced. 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 bear the expenses of
separation, and any damages arising from the mixture. If the bailee
without the consent of the bailor mixes, the goods of the bailor with his
own goods, in such a manner that it is impossible to separate the goods
bailed from the other goods and deliver them back, the bailor is entitled
to be compensated by the bailee for the loss of goods.
d. He must not set up an adverse title to the goods.
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e. It is the duty of the bailee to return the goods without demand at the
time fixed or when the purpose is accomplished (Section 160). If he
fails to return them, he shall be liable for any loss, destruction or
deterioration of the goods even without negligence on his part (Section
161)
f. In the absence of any contract to the contrary, the baliee must return to
the bailor any increase, accretion, or profits which have accrued from
the goods bailed; for example, when A leaves a cow in the custody of B
to be taken care of and the cow gets a calf, B is bound is deliver the cow
as well as the calf to A.
Duties of bailor
The bailor has the following duties:
a. The bailor must disclose all the known faults in the goods; and if he fails
to do what, he will be liable for any damage resulting directly from the
faults (Section 150). For example, A delivers to B a carrier, some
explosive in a case, but does not warn B. The case is handled without
extraordinary care necessary for such articles and it explodes. A is liable
for all the resulting damage to men and other goods.
In the case of bailment for hire, a still greater responsibility is placed on

the bailor. He will be liable even if he did not know of the defects
(Section 150). A hires a carriage of B. The carriage is unsafe though B
does not know this. A is injured. B is responsible to A for the injury.
b. It is the duty of the bailor to pay any extraordinary expenses incurred

by the bailee. For example, if a horse is lent for a journey, the expense
of feeding the house would, of course, subject to any special agreement
be borne by the bailee. If however the horse becomes ill and expenses
have been incurred on its treatment, the bailor shall have to pay these
expenses (Section 158).
c. The bailor is bound to indemnify the bailee for any cost or costs which
the bailee may incur because of the defective title of the bailor of the
goods bailed.(Section 164).
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Bailee's Particular Lien (Section 170)
Where the goods are bailed for a particular purpose and the bailee in due
performance of bailment, extends his skill and labour, he has in the
absence of an agreement of the contrary a lien on the goods, i.e., the
bailee can retain the goods until his charges in respect of labour and skill
used on the goods are paid by the bailor. A gives a piece of cloth to B, a
tailor, for making it into a suit, B promises to have the suit ready for
delivery within a fortnight, B has the suit ready for delivery. He has a right
to retain the suit until he is paid his dues. The section expresses the
common law principle that if a man has an article delivered to him on the
improvement of which he has to bestow trouble and expenses, he has a
right to detain it until his demand is met.
The right of lien arises only where labour and skill have been used so as to
confer an additional value on the article.
Particular and General Lien
Liens are of two kinds: Particular lien and General lien. A particular lien is
one which is available only against that property of which the skill and
labour have been exercised. A bailee's lien is a particular lien.
A general lien is a right to detain any property belonging to the other and
is in possession of the person trying to exercise the lien in respect of any
payment lawfully due to him.
Thus, a general lien is the right retain the property of another for a general
balance of accounts but a particular lien is a right to retain only for a
charge on account of labour employed or expenses bestowed upon the
identical property detained.
The right of general lien is expressly given by section 171 of the Indian
Contract Act to bankers, factors, wharfingers, attorneys of High Court and
policy-brokers, provided there is no agreement to the contrary.
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Termination of bailment
Where the bailee wrongfully uses or disposes of the goods bailed, the bailor
may determine the bailment (Section 153).
As soon as the period of bailment expires or the object of the bailment has.
been achieved, the bailment comes to an end, and the bailee must return
the goods to the bailor (Section 160). Bailment is terminated when the
subject matter of bailment is destroyed or by reason of change in its
nature, becomes incapable of use for the purpose of bailment.
A gratuitous bailment can be terminated by the bailor at any time, even

before the agreed time, subject to the limitation that where termination
before the agreed period causes loss in excess of benefit, the bailor must
compensate the bailee (Section 159).
A gratuitous bailment terminates by the death of either the bailor or the

bailee (Section 162).
Finder of Lost Goods
The position of a finder of lost goods is exactly that of a bailee. The rights
of a finder are that he can sue the owner for any reward that might have
been offered, and may retain the goods until he receives the reward and
may sue for the reward. But where the owner has offered no reward, the
finder has only a particular lien and can detain the goods until he receives
compensation for the troubles and expenses incurred in preserving the
property for finding out the true owner. But he cannot file a suit for the
recovery of the compensation [Section 168].
Thus, as against the true owner, the finder of goods in a public or quasi
public place is only a bailee; he keeps the article in trust for the real owner.
As against everyone else, the property in the goods vests in the finder on
his taking possession of it
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The finder has a right to sell the property
a. where the owner cannot with reasonable diligence be found, or
b. when found, he refuses to pay the lawful charges of the finder and (i) if
the thing is in danger of perishing or losing greater part of its value, or
(ii) when the lawful charges of the finder for the preservation of goods
and the finding out of the owner amounts to two-thirds of the value of
the thing (Section 169).
Carrier as Bailee
A common carrier undertakes to carry goods of all persons who are willing
to pay his usual or reasonable rates. He further undertakes to carry them
safely, and make good all loses, unless they are caused by act of God or
public enemies. Carriers by land, including railways, and carriers by inland
navigation, are common carriers. Carriers by Sea for hire are not common
carriers and they can limit their liability. Railways in India are now common
carriers.
Innkeeper: The liability of a innkeeper is governed by sections 151 and 152

of the Contract Act and is that of an ordinary bailee with regard to the
property of the guests..
C stayed in a room in a hotel: The innkeeper knew that the room was in an
insecure condition. While C was dining in the dining room, some articles
were stolen from his room. It was held that the innkeeper was liable as he
should have taken reasonable steps to rectify the in-secure condition of the
rooms.
5.8.2 Pledge
Pledge or pawn is a contract whereby an article is deposited with a lender

of 'money or promisee as security’ for the repayment of a loan or
performance of a promise. The bailor or depositor is called the "Pawnor"
and the bailee or depositee the "Pawnee" (Section 172). Since pledge is a
branch of bailment, the pawnee is bound to take reasonable care of the
goods pledged with him. Any kind of goods, valuables, documents or
securities may be pledged. The Government securities, e.g., promissory
notes must, however, be pledged by endorsement and delivery.
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The following are the essential ingredients of a pledge:'

i. The property pledged should be delivered to the pawnee.
ii. Delivery should be in pursuance of contract.
iii. Delivery should be for the purpose of security.
iv. Delivery should be upon a condition to return.
Rights of the Pawnee
No property in goods pawned passes to the pawnee, but the pawnee gets a
"special property to retain possession even against the true owner until the
payment of the debt, interest on the debt, and any other expense incurred
in respect of the possession or for preservation of the goods" (Section
173). The pawnee must return the goods to the pawnor on the tender of all
that is due to him. The pawnee cannot confer a good title upon a bona fide
purchaser for value.
Should the pawnor make a default in payment of the debt or performance

of the promise, at the stipulated time, the pawnee may
a. file a suit for the recovery of the amount due to him while retaining the
goods pledged as collateral security; or
b. sue for the sale of the goods and the realisation of money due to him;
or
c. himself sell the goods pawned, after giving reasonable notice to the
pawnor, sue for the deficiency, if any, after the sale.
If the sale is made in execution of a decree, the pawnee may buy the
goods at the sale. But he cannot sell them to himself in a sale made by
himself under (iii) above. If after sale of the goods, there is surplus, the
pawnee must pay it to the pawnor (Section 176).
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Rights of Pawnor
On default by pawnor to repay on the stipulated date, the pawnee may sell
the goods after giving reasonable notice to the pawnor. If the pawnee
makes an unauthorised sale without giving notice to the pawnor, the
pawnor has the following rights
a. to file a suit for redemption of goods by depositing the money treating
the sale as if it had never taken place; or
b. to ask for damages on the ground of conversion.
Pledge by Non-owners
Ordinarily, the owner of the goods would pledge them to secure a loan but
the law permits under certain circumstances a pledge by a person who is
not the owner but is in possession of the goods. Thus, a valid pledge may
be created by the following non-owners.
a. A mercantile agent: Who with the consent of the owner, in possession of
goods or documents of title to goods may, in the ordinary course of his
business as mercantile agent, pledge the goods, such a pledge will bind
the owner (Section 178).
b. Seller or buyer in possession after sale: A seller, left in possession of
goods sold, is no more the owner, but pledge by him will be valid,
provided the pawnee acted in good faith and had no notice of the sale of
goods to the buyer (Section 30 of The Sale of Goods Act 1930).
c. Pledge having limited interest: When the pawnor is not the owner of the
goods but has a limited interest in the goods which he pawns, e.g., he is
a mortgagee or he has a lien with respect of these goods, the pledge
will be valid to the extent of such interest.
d. Pledge. by co-owner: One of the joint-owners in sole possession of
goods, with consent of the others can make a valid pledge
e. Pledge by person in possession under a voidable contract.- A person
may obtain possession under a contract which is voidable at the option
of the lawful owner on the ground of misrepresentation, fraud, etc. The
person in possession may pledge the goods before the contract is
avoided by the other party.(Section 178A)
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1. Search on Google ‘Amendments in Indian Contract Act,1872’ and note

down the amendments done in section 28 of the Act.
2. Identify the offer, acceptance and invitation to offer of the activity of a

person withdrawing cash from ATM of a Nationalised Bank.
3. The book you have borrowed from a public library is lost. Write down in
sequence the actions you will take in this situation.
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5.10 SUMMARY
• Only after acceptance of an offer, an agreement is created.
• Agreements with considerations are called contracts.
• The suffering party is awarded damages in the case where the party to a
contract does not meet its obligations.
• An offer must be firm, unambiguous and clear.
• In a tender, the persons submitting tenders offer and the person inviting
tenders accepts or rejects it.
• Acceptance is to be communicated to a person making the offer.
• Agreements without consideration are not enforceable.
• If the consent is caused by mistake of both the parties then the
agreement is void.
• Void agreements are those which are taken not to have come in
existence at all. These are not enforceable.
• Quasi-contracts create certain relations resembling those created by
contract and are enforceable.
• Offer to perform is called tender of performance.
• A contract is discharged by new agreement or by operation of law.
• Supervening impossibility or frustration also discharges a contract.
• The amounts provided to compensate the damages in case of breach of a
contract is called liquidated damages.
• Normally, the mental suffering due to breach of contract is not awarded
by the courts.
• 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
direction of the person delivering them.
• The person delivering the goods is called the ‘bailor’ and the person to
whom they are delivered is called ‘bailee’.
• Lien means right to retain possession of goods until some debt or claim is
settled. A lien may be a ‘particular lien’ or a ‘general lien’.
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1. Give brief definition of ‘Agreement’ and of ‘Contract’.
2. Write short notes on (i) Valid Contract, (ii) Void Contract, (iii) Illegal
Contract, (iv) Unilateral Contract, and (v) Bilateral Contract
3. Define an offer and state essentials of a valid offer.
4. State the similarities and differences between an offer and an invitation
to offer.
5. When the offer is complete and when can it be revoked?
6. Define acceptance and state the legal rules governing valid acceptance.
7. What are the effects of mistakes on contract?
8. What are the major heads of a public policy?
9. Define ‘quasi contracts’.
10.What is ‘discharge of a contract’? State the different ways in which it
can be discharged.
11.What is ‘performance of a contract’? What is ‘breach of contract’?
12.Give the definition of bailment and write its characteristic features.
13.Discuss the various types of bailment.
14.Discuss the rights and duties of bailor and bailee.
15.Define a pledge and discuss the rights of pledgee and pledgor.
16.State the differences between Mortgage and Pledge.
17.State the circumstances in which the contract of bailment stands
terminated.
18.Distinguish between Bailment and Sale.
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1. Agreements with considerations are called as –

a. Documents
b. Files
c. Contracts
d. Amendments
2. The amounts provided to compensate the damages in case of breach of

a contract is called ____.
a. Compensation
b. Liquidated damages
c. Penalty
d. All of the above
3. In cases of Contracts and Agreements, the Indian Contract Act of

______ is referred in India.
a. 1872
b. 1956
c. 1947
d. 1950
4. In case of a contract, change in one or more terms of a contract is

known as –
a. Novation
b. Rescission
c. Alteration
d. Remission
5. In case of bailment, the person delivering the goods is called as –

a. Courier
b. Carrier
c. Bailee
d. Bailor
Answers : (1-c), (2-b), (3-a), (4-c), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
142
CONTRACTS OF INDEMNITY AND GUARANTEE
Chapter 6
Contracts Of Indemnity And Guarantee
Learning objectives
After completing the chapter, you will be able to understand the definition
and details of contract of indemnity, meaning and detailing of contract of
guarantee, and the differences between continued and specific guarantee.
You will also understand the rights and liabilities of surety, creditor and
main debtor, and the difference between contract of indemnity and contract
of guarantee.
Structure:
6.1 Contract of Indemnity
6.2 Essentials of Contract of Indemnity
6.3 Contract of Guarantee
6.4 Essentials of Contract of Guarantee
6.5 Types of Guarantee
6.6 Right of Surety
6.7 Discharge of Surety
6.8 Distinction Between Indemnity and Guarantee
6.9 Activities
6.10 Summary
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6.1 CONTRACT OF INDEMNITY
A contract of indemnity is a contract by which one party promises to save

the other party from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person (Section 124). For example,
A contracts to indemnify B against the consequence of any proceedings
which C may take against B in respect of a certain sum of 10,000 rupees.
This is a contract of indemnity. The contract of indemnity may be express
or implied, and the later may be inferred from the circumstances of a
particular case, e.g., an act done by A at the request of B. If A incurs any
expenses, he can recover the same from B.
The person who promises to indemnify or make good the loss is called the
indemnifier and the person whose loss is made good is called the
indemnified or the indemnity holder. A contract of insurance: is an example
of a contract of indemnity according to English Law. In consideration of
premium the insurer promises to make good and loss suffered by the
assured account of the destruction by fire of his property insured against
fire.
Under the Indian Contract Act, the contract of indemnity is restricted to

such cases only where the loss, promised to be reimbursed, is caused by
the conduct of the promisor or of any other person. The loss caused by
events or accidents which do not depend on the conduct of any person, it
seems, cannot be, sought to be reimbursed under a contract of indemnity,
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6.2 ESSENTIALS OF CONTRACT OF INDEMNITY

The following conditions are necessary for a contract of Indemnity -
a. The number of parties should be two - Indemnifier and Indemnified.
b. The contract of Indemnity has to follow all the rules of contract.
c. The Contract of Indemnity may be express or implied.
d. If and only if the indemnity holder suffers the loss against which the
indemnity holder was promised to be protected, can enforce the
contract.
e. For compensation of the claim, consideration is essential in case of
Indemnity contract.
f. Commencement of indemnifier’s liability has to be established.
Therefore, ‘to indemnify does not only mean to reimburse in respect of

money paid, but to save from loss in respect of liability against which the
indemnity has been given, if it be held that payment is the condition,
precedent to recovery, the contract may be of little value to the person to
be indemnified who may be unable to meet the claim in the first instance.’
If the indemnified had incurred a liability and that liability is absolute, he is
entitled to call upon the indemnifier to save him from that liability and pay
it off.
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Rights of Indemnity Holder

Under Section 125, the promisee, in a contract of indemnity, acting within
the scope of his authority, is entitled to recover from the promisor the
following -
1. all damages which he may be compelled to pay in any suit in respect of
any matter to which the promise to indemnity applies;
2. all costs which he may be compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the
promisor, and acted as if it would have been prudent for him to act in
the absence of any contract of indemnity, or if the promisor authorised
him to bring or defend the suit; and
3. all sums which he may have paid under the terms of any compromise of
any such suit, if the compromise was not contrary to the orders of the
promisor, and was one which it would have been prudent for the
promisee to make in the absence of any contract of indemnity, or if the
promisor authorised him to compromise the suit.
6.3 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 default. The person who gives the
guarantee is called the Surety, the person for whom the guarantee is given
is called the Principal Debtor; and the person to whom the guarantee is
given is called the Creditor (Section 126). A guarantee may be either oral
or written, although in the English law, it must be in writing.
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llustration
M advances a loan of Rs. 15,000 to N and X promises to M that if N does

not repay the loan, X will do so. This is a contract of guarantee. Here N is
the principal debtor, M is the creditor and X is the surety or guarantor.
Like a contract of indemnity, a guarantee must also satisfy all the essential
elements of a valid contract. There is, however, a special feature with
regard to consideration in a contract of guarantee. The consideration
received by the principal debtor is sufficient for surety. Section 127
provides that 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
N requests M to sell and deliver to him goods on credit. M agrees to do so,

provided X will guarantee the payment of the price of the goods. X
promises to guarantee the payment in consideration of M's promise to
deliver the goods. This is sufficient consideration for X's promise.
6.4 CONTRACT OF GUARANTEE – ESSENTIALS
The following conditions are necessary for a Contract of Guarantee -
a. Agreement between Three Parties – Every contract of guarantee

includes three agreements between (i) The creditor and the principal
debtor, (ii) The surety and the creditor, and (iii) the surety and the
principal debtor. These three parties are necessary to form a Contract of
Guarantee. The guarantee or surety is the most essential person of the
contract.
b. Contract type – The contract may be in writing or oral. Also, the
conditions of party’s competency, free consent, consideration, etc.,
should be passed in order to make the contract legal in the eyes of
law. Again, it should be seen that the consideration should not be a
benefit to the surety himself. It may be a benefit to the principal debtor.
The lawful consideration must also be there to make the contract valid.
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c. Secondary Liability – If debtor requests the obligation, it is contract of

guarantee. And if it is undertaken without request of the debtor, it is
contract of indemnity. It should be clearly understood that in case of a
contract of guarantee, the primary liability is always with the principle
debtor.
d. Existing Liability – It is not necessary that the principal contract must
be in existence at the time the contract of guarantee is made, the
original contract by which the principal debtor undertakes to repay the
money to the creditor may be about to come into existence.
e. Consideration – The Contract of Guarantee follows all rules of a valid
contract. The things done for the benefits of the principal debtor is
considered as ‘consideration’ of the guarantee to make the contract
valid. The legal intention confirmed by the promisee at the promisor’s
request is sufficient to establish the element of consideration.
f. Competency – All of the parties, i.e. the principle debtor, surety and
the creditor must be competent to make a contract. In some cases,
however, the surety is liable, though the principal debtor is not liable.
So, the original contract is void as is the case of a contract with a minor,
the surety is liable not only as surety, but also as a principal debtor. A
person of unsound mind can not give a valid guarantee.
g. Consent – Generally a contract of guarantee is not a contract of the
utmost good faith. Mere non-disclosure will not affect the contract of
surety, unless there is an intentional concealment. When the guarantee
is taken for good behavior of an employee, the employer must disclose
any misconduct of the principal debtor in his office of which he is aware.
Normally, concurrence of all parties must be there for a valid contract of
guarantee
h. The Promise to Pay must be Conditional – There must be a
conditional promise to be liable on the default of the principal debtor.
The liability of the surety should arise only when the principal debtor
makes a default. Any liability, which is incurred independently of the
default of the principal debtor, is out of scope of guarantee.
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6.5 TYPES OF GUARANTEE
A contract of guarantee may be for an existing debt, or for a future debt. It

may be a specific guarantee, or it may be continuing guarantee. A specific
guarantee is given for a single debt and comes to an end when the debt
guaranteed has been paid.
Apart from the above types, a few more types of guarantee can be
considered – viz. part guarantee, absolute guarantee, conditional
guarantee, limited guarantee, unlimited guarantee, etc. Of all these types,
continuing guarantee is most widely in use.
Continuing Guarantee – As per section 129, a continuing guarantee is one

which extends to a series of transactions.
Illustration: It is a continuing guarantee where M, in consideration of N's

discounting, at M's request, bills of exchange of X, guarantees to N for 12
months, the due payment of all such bills to the extent of Rs. 50,000, or M
becomes answerable to X for N's purchases from X for 6 months to the
extent of Rs. 50,000.
Revocation of Continuing Guarantee
A continuing guarantee is revoked in the following circumstances:
a. By notice of revocation by the surety (Section 130) : The notice

operates to revoke the surety's liability as regards future transactions.
He continues to be liable for transactions entered into prior to the
notice.
b. By the death of the surety: The death of the surety operates, in the
absence of contract, as a revocation of a continuing guarantee, so far
as regards future transactions (Section 131). But for all the transactions
made before his death, the surety's estate will be liable.
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6.6 RIGHTS OF SURETY
A surety has certain rights against the creditor, (Section 141) the principal
debtor (Sections 140 and 145) and the co-securities (Sections 146 and
147) these are as under -
a. Surety's rights against the creditor: Under section 141 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 is entered
into whether the surety knows of the existence of such security or not;
and, if the creditor losses or, without the consent of the surety parts
with such security, the surety is discharged to the extent of the value of
the security.
b. Rights against the principal debtor: After discharging the debt, the
surety steps into the shoes of the creditor or is subrogated to all the
rights of the creditor against the principal debtor. He can then sue the
principal debtor for the amount paid by him to the creditor on the
debtor's default; he becomes a creditor of the principal debtor for what
he has paid.
In some circumstances, the surety may get certain rights even before
payment. The surety has remedies against the principal debtor before
payment and after payment. The surety can compel the debtor, after
debt has become due to exonerate him from his liability by paying the
debt.
c. Surety's rights against co-sureties: When a surety has paid more than
his share of debt to the creditor, he has a right of contribution from the
co-securities who are equally bound to pay with him. A, B and C are
sureties to D for the sum of Rs. 30,000 lent to E who makes default in
payment. A, B and C are liable, as between themselves to pay Rs.
10,000 each. If anyone of them has to pay more than Rs. 10,000 he can
claim contribution from the other two to reduce his payment to only Rs.
10,000. If one of them becomes insolvent, the other two shall have to
contribute the unpaid amount equally.
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Rights of Creditor:
a. Demand due payment – Even though the debt is time barred against
the principal debtor, or the principal debtor has been adjudged as
bankrupt or the principal debtor’s contract has become void, if the
liability of the surety arises, the creditor is entitled to demand payment
from the surety. He can file a suit against the surety without suing the
principal debtor, even if the principal debtor is solvent. The liability of
the surety is immediate and not to be deferred until the creditor has
exhausted his remedies against the principal debtor.
b. Proceed against surety before resorting to debtor – A creditor can

directly proceed against the surety before resorting to the securities
deposited by the principal debtor, although the liability of the surety
becomes primary one along with the principal debtor.
c. Claim for legal expenses – A creditor can claim the cost of fruitless
legal suit against the principal debtor sued at the request of the surety.
The creditor has the right of general lien either on the balance of the
surety’s account or on surety’es securities in his possession.
d. Provide against the official receiver in case of surety’s

insolvency – If the surety becomes insolvent, the creditor has the right
to recover the dues from the estate of the insolvent party.
e. Proceed against any one surety in the case of co-sureties – In

case of co-sureties, the creditor will be at liberty to proceed against any
one of the sureties for the whole debt.
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f. Concurrent Remedy – A creditor can also pursue his remedy

concurrently against both the principal debtor and the surety, and obtain
a decree against both in the same suit.
6.7 DISCHARGE OF SURETY
A surety may be discharged from liability under the following

circumstances:
a. By notice of revocation in case of a continuing guarantee as regards
future transaction. (Section 130.)
b. By the death of the surety as regards future transactions, in a
continuing guarantee in the absence of a contract to the contrary
(Section 131).
c. Any variation in the terms of the contract between the creditor and the
principal debtor, without the consent of the surety, discharges the
surety as regards all transactions taking place after the variation
(Section 133).
d. A surety will be discharged if the creditor releases the principal debtor,
or acts or makes on omission which results' in the discharge of the
principal debtor (Section 134). But where the creditor fails to sue the
principal debtor within the limitation period, the surety is not
discharged.
e. Where the creditor, without the consent of the surety, makes an
arrangement with the principal debtor for composition, or promises it
give him time or not to sue him, the surety will be discharged (Section
135).
f. If the creditor does any act which is against the rights of the surety, or
omits to do an act which his duty to surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is
hereby impaired,the surety is discharged (Section 139).
g. If the creditor loses or parts with any security which at the time of the
contract the debtor had given in favour of the creditor, the surety is
discharged to the extent of the value of the security, unless the surety
consented to the release of such security by creditor in favour of the
debtor. It is immaterial whether the surety was or is aware of such
security or not (Section 141).
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Illustrations
1. X guarantees to Y to the extent of Rs. 10,000 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 (Section 130).
2. A becomes surety to C for B's conduct as a manager in C's bank.
Afterwards B and C contracts 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 overdraw and the bank loses a sum
of money. A is discharged from his suretyship by the variance made
without his consent, and is not liable to make good this loss (Section
133).
3. C contracts to lend B Rs. 5,000 on 1st March, A guarantees repayment.
C pays the money to B on 1 st of January. A is discharged from his
liability. A is discharged from his liability, as the contract has been
varied in as much as C might sue B for the money before 1 st of March,
(Section 133).
4. X contracts with B to build a house for a fixed price within a stipulated
time, Y supplying the necessary timber. Z guarantees X's performance.
Y omits to supply the timber. Z is discharged from liability (Section
134).
5. B contracts to build a ship for C for a given sum, to be paid by
instalments as the work reaches certain stages. A becomes surety to C
for B's due performance of the contract, without the knowledge of A, C
prepays to B the last two instalments. A is discharged by this
prepayment (Section 139).
Extent of Surety's liability
The liability of the surety is co-extensive with that of the principal debtor
unless the contract otherwise provides (Section 128). A creditor is not
found to proceed against the principal debtor. He can sue the surety
without suing the principal debtor. As soon as the debtor has made default
in payment of the debt, the surety is immediately liable. But until default
the creditor cannot call upon the surety to pay. In this sense, the nature of
the surety's liability is secondary.
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Illustration
A guarantees to B the payment of a bill exchange by C, the acceptor. The

bill is dishonoured by C. A is liable not only for the amount of the bill but
also for any interest and charges which may have become due on it.
Section 128 only explains the quantum of a surety's obligation when terms
of the contract do not limit it. Conversely, it doesn't follow that the surety
can never be liable when the principal debtor cannot be held liable. Thus, a
surety is not discharged from liability by the mere fact that the contract
between the principal debtor and creditor was voidable at the option of the
former, and was avoided by the former. Where the agreement between the
principal debtor and creditor is void as for example in the case of minority
of principal debtor, the surety is liable as a principal debtor; for in such
cases the contract of the so-called surety is not collateral, but a principal
contract.
6.8 DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

A contract of indemnity differs from a contract of guarantee in the following
ways:
a. In a contract of indemnity, there are only two parties: the indemnifier
and the indemnified. In a contract of guarantee, these are three parties;
the surety, the principal debtor and the creditor.
b. In a contract of indemnity, the liability of the indemnifier is primary. In a
contract of guarantee, the liability of the surety is secondary. The surety
is liable only if the principal debtor makes a default, the primary liability
being that of the principal debtor.
c. The indemnifier need not necessarily act at the request of the debtor;
the surety gives guarantee only at the request of the principal debtor.
d. In the case of a guarantee there is an existing debt or duty, the
performance of which is guaranteed by the surety, whereas in the case
of indemnity the possibility of any loss happening is the only
contingency against which the indemnifier undertakes to indemnify.
e. The surety, on payment of the debt when the principal debtor has failed
to pay is entitled to proceed against the principal debtor in his own
right, but the indemnifier cannot sue third-parties in his own name,
unless there is an assignment. He must sue in the name of the
indemnified.
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Your friend had sent you your 2 wheeler vehicle through Railway carriage
from Delhi to Pune, which has to be cleared on production of receipt sent
by him to you through courier. However, you have lost the receipt and the
two-wheeler is to be retrieved urgently. Prepare a draft of the Indemnity
Bond required, mentioning all the essentials of the Contract of Indemnity.
6.11 SUMMARY
• Indemnity is an undertaking to compensate a person from the losses
from the conduct of any other person.
• A contract of indemnity is a contract and therefore is subject to all the
rules of a contract.
• A contract of indemnity comes into force only when the promisee suffers
a loss.
• A contract of guarantee is applicable where a person stands surety for
payment of a loan advanced to another person. The person who is
guaranteeing is called as surety.
• A contract of guarantee does not necessarily need a consideration.
• The liability of surety is co-extensive with the debtor, unless provided/
mentioned otherwise. The creditor can move against either in the default
of payment.
• If the principal debtor is released, the surety is also released, whatever
may be the reason.
• There are two parties in case of indemnity, while there are three parties
in case of a guarantee.
• The risk in case of indemnity is contingent, while that in case of
guarantee it is absolute.
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1. List the essentials and legal rules for a valid contract of indemnity.
2. State the different rights of the indemnity holder when he is sued.
3. Define a contract of indemnity.
4. Write down the definition of a contract of guarantee and mention its
essentials.
5. What are the legal necessities for a valid contract of guarantee?
6. If the principal debtor is a minor, what is the position of the surety?
7. What are the various types of guarantee?
8. Define a continuing guarantee and state how it can be revoked?
9. Explain how the surety is a favored debtor in case of a guarantee.
10.Write short note on ‘Performance Guarantee’
11.Distinguish between a contract of indemnity and a contract of
guarantee.
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1. The number of parties to make a contract of indemnity are –

a. Three
b. Four
c. Two
d. Any number
2. To compensate the indemnity holder’s claim in case of an indemnity,

_______ is essential.
a. Pleading of the indemnifier
b. Consideration
c. Stamped and signed contract
d. Faith of the indemnifier
3. The guarantee in which a series of transactions are guaranteed is known

as -
a. Specific guarantee
b. Conditional guarantee
c. Continuing guarantee
d. All of the above
4. In case of guarantee, the person who gives the guarantee is known as –

a. Surety
b. Creditor
c. Principal debtor
d. Indemnifier
5. The person to whom the guarantee is given is called as -

a. The debtor
b. The guarantor
c. The surety
d. The creditor
Answers : (1-c), (2-b), (3-c), (4-a), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
158
SALE OF GOODS AND CONTRACTS
Chapter 7
Sale Of Goods And Contracts
Learning objectives
After completion of this chapter, you will be able to know in detail about
the characteristics of a contract of sale and agreement to sell; about the
express and implied conditions and warranties in a contract of sale; about
the rules of delivery of goods; about the transfer of property possession of
risk; about the rights and duties of a buyer and a seller in a contract of
sale; and the rights of the unpaid seller against the goods sold and against
the buyer.
Structure:
7.1 The Sale of Goods Act,1930
7.2 Contract of Sale of Goods Format
7.3 Terms, Conditions and Warranties
7.4 Implied Conditions of Contract
7.5 Performance of the Contract
7.6 Transfer of Property
7.7 Rights and Duties of Buyer
7.8 Rights of Unpaid Seller
7.9 Actions for Breach of Contract
7.10 Incoterms F.O.R., F.O.R., C.&.F. and C.I.F. Contracts
7.11 Activities for Students
7.12 Summary
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7.1 THE SALE OF GOODS ACT, 1930

7.1.1 The Act
Section 4(1) of the Sale of Goods Act, 1930 defines “A contract of sale of
goods is a contract whereby the seller transfers of agrees to transfer the
property in goods to the buyer for a price”.
Title, Extent and Commencement

This Act may be called the Sale of Goods Act,1930.
It extends to the whole of India (except the State of Jammu and Kashmir).
It came into force on the 1st day of July, 1930.
Definitions: In this Act, unless there is anything repugnant in the subject
of content—
‘buyer’ means a person who buys or agrees to buy goods,
‘delivery’ means voluntary transfer of possession from one person to
another.
Applications of provisions
The unrepealed provisions of the Indian Contract Act, 1872 save insofar as
they are inconsistent with the express provisions of this Act, shall continue
to apply to contracts for sale of goods.
7.1.2 Sale and Agreement to Sell
The ‘Sale’ and ‘Agreement to Sale’ differ in the following ways –
• A contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a price. There
may be a contract of sale between one part-owner and another.
• A contract of sale may be absolute or conditional.
• Where under a contract of sale the property in the goods in transferred
from the seller to the buyer, the contract is called a sale, but where the
transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called
an agreement to sell.
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• An agreement to sell becomes a sale when the time elapses or the

conditions are fulfilled subject to which the property in the goods is to be
transferred.
7.1.3 Sale and Hire Purchase Agreement
The ‘Sale’ and ‘Hire-Purchase Agreement differs in the following terms –
• In a sale, the property in the goods is transferred from the seller to the
buyer immediately on the date of contract of sale. But in a hire purchase
agreement, the property in the goods passes from the seller to the hire
purchaser only when he pays the last installment.
• In a sale, if the buyer becomes insolvent, the seller cannot recover the
goods from the official assignee or official receiver. However, in a hire
purchase, the hire purchaser cannot pass any title even to a bona fide
purchaser.
• The tax in levied at the time of the contract of sale in case of a ‘sale’,
whereas in a ‘hire purchase’, sales tax is not levied till the hire purchase
ripens into a sale.
• A sale is a completed contract in which the ownership of the goods in
transferred from the seller to the buyer as soon as the contract is
entered into. But a transfer from the seller to the hire purchaser is
completed only when the last installment is paid.
• In a sale, the buyer cannot terminate the contract of sale and return the
goods at any time he likes. But, in a hire purchase, the hire purchaser
has an option to terminate the contract and return the goods at any time
he likes.
• In a sale, where the payment is made by the buyer in installments, the
installments paid by the buyer are regarded as part payments made by
the buyer towards the price of the goods. But, in a hire purchase, if the
hire purchase is terminated, the installments already paid are just
regarded as hire charges.
• A sale is governed by the Sale of Goods Act, 1930. Whereas a hire
purchase is governed by the Hire Purchase Act, 1972.
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7.1.4 How is Contract of Sale Made?

1. A contract of sale is made by an offer to buy or sell goods for a price
and the acceptance of such offer. The contract may provide for the
immediate delivery of the goods or immediate payment of the price or
both, or for the delivery or payment by instalments, or that the delivery
or payment or both shall be postponed.
2. Subject to the provisions of any law for the time being in force, a
contract of sale may be made in writing or by word of mouth, or partly
in writing and partly by word of mouth or may be implied from the
conduct of the parties.
7.1.5 Existing or Future Goods
1. 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.
2. There may be a contract for the sale of goods the acquisition of which
by the seller depends upon a contingency which may or may not
happen.
3. Where by a contract of sale the seller purports to effect a present sale
of future goods, the contract operates as an agreement to sell the
goods.
7.1.6 Perishable Goods
(a) Goods perishing before making of contract
Where there is a contract for the sale of specific goods, the contract is void
if the goods without the knowledge of the seller have, at the time when the
contract was made, perished or become so damaged as no longer able to
answer to their description in the contract.
(b) Goods perishing before sale but after agreement to sell
Where there is an agreement to sell specific goods, and subsequently, the
goods without any fault on the part of the seller or buyer perish or become
so damaged as no longer able to answer to their description in the
agreement before the risk passes to the buyer, the agreement is thereby
void.
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7.1.7 Ascertainment of Price

1. The price in a contract of sale may be fixed by the contract or may be
left to be fixed in manner thereby agreed or may be determined by the
course of dealing between the parties.
2. Where the price is not determined in accordance with the foregoing
provisions, the buyer shall pay the seller a reasonable price. What is a
reasonable price is a question of fact dependent on the circumstances of
each particular case.
Agreement to sell at valuation
1. Where there is an agreement to sell goods on the terms that the price is
to be fixed by the valuation of a third party and such third party cannot
or does not make such valuation, the agreement is thereby void.
Provided that, if the goods or any part thereof have been delivered to,
and appropriated by, the buyer, he shall pay a reasonable price therefor.
2. Where such third party is prevented from making the valuation by the
fault of the seller or buyer, the party not in fault may maintain a suit for
damages against the party in fault.
7.1.8 Stipulations as to Time
Unless a different intention appears from the terms of the contract,
stipulations as to time of payment are not deemed to be of the essence of
a contract of sale.
Whether any other stipulations as to time is of the essence of the contract
or not depends on the terms of the contract.
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7.2 CONTRACT OF SALE OF GOODS - FORMAT
Following is a typical format for Contract of Sale of Goods or what is

normally called as Purchase Order in business transactions :
Contract for Sale of Goods
This Contract for Sale of Goods is made this ______ day of _______, 20__
by and between _________, a [STATE OF ORGANIZATION OR RESIDENCE]
[CORPORATION/PARTNERSHIP/SOLE PROPRIETORSHIP/RESIDENT], with
its principal place of business at [COMPLETE ADDRESS], (“Seller”) and
_ _ _ _ _ _ _ _ _ _ _ , a [ S TAT E O F O R G A N I Z AT I O N O R R E S I D E N C E ]
[CORPORATION/PARTNERSHIP/SOLE PROPRIETORSHIP/RESIDENT], with
its principal place of business at [COMPLETE ADDRESS] (Buyer) For the
purchase of Goods described below -
Qty. Item Description Price Total
1. Terms. This Contract shall begin on __________, 20__________, and

end upon the last delivery, which shall be shipped, with or without
requisition for the balance of goods then unshipped, by___________,
20__________, unless the parties agree otherwise. However, if as of
such date, Buyer is in arrears on the account, Seller may then cancel
this Contract and sue for its damages, including lost profits, offsetting
the deposit there against, and further recover its cost of suit including
attorney fees.
2. Delivery. Buyer will give Seller _____________ days’ advance notice
regarding the quantity requested for delivery. Upon receipt of the
request for delivery, Seller will arrange for delivery through a carrier
chosen by Seller, the costs of which shall be F.O.B.___________.
164
3. Risk Of Loss. The risk of loss from any casualty to the Goods, regardless
of the cause, will be the responsibility of the Seller until the Goods have
been received by the Buyer.
4. Acceptance. Buyer will have the right to inspect the goods upon receipt,
and within _____________ business days after delivery, Buyer must
give notice to Seller of any claim for damages on account of condition,
quality, or grade of the goods, and Buyer must specify the basis of the
claim in detail. Failure of Buyer to comply with these conditions will
constitute irrevocable acceptance of the goods by Buyer. All notices
between the parties must be in writing and delivered by courier or by
certified mail, return receipt requested.
5. Charges. Seller shall invoice Buyer upon and for each shipment. Buyer
shall pay all charges on terms of ___________. Any late payment shall
bear a late charge of __________%. Overdue invoices shall also bear
interest at the rate of __________% per ____________. If Seller
undertakes collection or enforcement efforts, Buyer shall be liable for all
costs thereof, including attorney fees. If Buyer is in arrears on any
invoice, Seller may, on notice to Buyer, apply the deposit thereto and
withhold further delivery until the deposit and all arrears are brought
current.
6. Deposit. Upon signing this Contract, Buyer shall pay Seller a deposit of
`____________ towards the total price as a precondition for Seller's
performance, which deposit is to be credited to the last shipment.
7. Warranty. Seller warrants that the goods sold hereunder are new and
free from substantive defects in workmanship and materials. Seller's
liability under the foregoing warranty is limited to replacement of goods
or repair of defects or refund of the purchase price at Seller's sole
option. No other warranty, express or implied, is made by Seller, and
none shall be imputed or presumed.
8. Taxes. All sales taxes, tariffs, and other governmental charges shall be
paid by Buyer and are Buyer's responsibility except as limited by Law.
9. Governing Law. This Contract shall be governed by the laws of the State
of ____________. Any disputes hereunder will be heard in the
appropriate federal and state courts located in [STATE], [NAME OF
COUNTRY].
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10.Force Majeure. Seller may, without liability, delay performance or cancel

this Contract on account of force majeure events or other circumstances
beyond its control, including, but not limited to, strikes, acts of God,
political unrest, embargo, failure of source of supply, or casualty.
11.Miscellaneous. This Contract contains the entire agreement between the
parties and supersedes and replaces all such prior agreements with
respect to matters expressly set forth herein. No modification shall be
made to this Contract except in writing and signed by both parties. This
Contract shall be binding upon the parties and their respective heirs,
executors, administrators, successors, assigns and personal
representatives.
Buyer Seller
Date: Date :
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7.3 TERMS, CONDITIONS AND WARRANTIES

7.3.1 Conditions and Warranties
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. 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. 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 a warranty in the contract.
7.3.2 When condition to be treated as warranty

1. Where a contract of sale is subject to any condition to the fulfilled by the
seller, the buyer may waive the condition or elect to treat the breach of
the condition as a breach of warranty and not as a ground for relating
the contract as repudiated.
2. Where a contract of sale is not severable and the buyer has accepted
the goods or part thereof, the breach of any condition to be fulfilled by
the seller can only be treated as a breach of warranty and not as a
ground for rejecting the goods and treating the contract as repudiated,
unless there is a term of the contract, express or implied, to that effect.
3. Nothing in this section shall affect the case of any condition or warranty
fulfilment of which is excused by law by reason of impossibility or
otherwise.
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7.3.3 Implied Undertaking

In a contract of sale, unless the circumstances of the contract are such as
to show a different intention there is
a. an implied condition on the part of the seller that, in the case of a sale,
he has a right to sell the goods and that, in the case of an agreement to
sell, he will have a right to sell the goods at the time when the property
is to pass.
b. an implied warranty that the buyer shall have and enjoy quiet
possession of the goods.
c. an implied warranty that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to the
buyer before or at the time when the contract is made.
7.3.4 Implied condition as to quality or fitness

Subject to the provisions of this Act and of any other law for the time being
in force, there is no implied warranty or condition as to the quality or
fitness for any particular purpose of goods supplied under a contract of
sale, excepts as follows:-
1. Where the buyer, expressly or by implication, makes known to the seller
the particular purpose for which the goods are required, so as to show
that the buyer relies on the seller’s skill or judgement, and the goods
are of a description which it is in the course of the seller’s business to
supply (whether he is the manufacturer or producer or not), there is an
implied condition that the goods shall be reasonably fit for such
purpose.
Provided that, in the case of a contract for the sale of a specified article
under its patent or other trade name, there is no implied conditions to
its fitness for any particular purpose.
2. Where goods are bought by description from a seller who deals in goods
of that description (whether he is the manufacturer or producer or not),
there is an implied condition that the goods shall be of merchantable
quality.
Provided that, if the buyer has examined the goods, there shall be no
implied conditions as regards defects which such examination ought to
have revealed.
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3. An implied warranty or condition as to quality or fitness for a particular

purpose may be annexed by the usage of trade.
4. An express warranty or conditions does not negative a warranty or
condition implied by this Act unless inconsistent therewith.
7.3.5 Sale by Description
Where there is a contract for the sale of goods by description, there is an

implied condition that the goods shall correspond with the description, and,
if the sale is by sample as well as by description, it is not sufficient that the
bulk of the goods corresponds with the sample if the goods do not also
correspond with the description.
7.3.6 Sale by Sample

1. A contract of sale is a contract for sale by sample where there is a term
in the contract, express or implied, to that effect.
2. In the case of a contract for sale by sample there is an implied condition
–
a. that the bulk shall corresponded with the sample in quality.
b. that the buyer shall have a reasonable opportunity of comparing the
bulk with the sample.
c. that the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent on reasonable
examination of the goods.
169
7.3.7 Sample Format for Terms and Conditions of Sale in a Typical

Contract of Sale
SALE OF GOODS CONTRACT
Terms and Conditions of Sale
THIS IS A LEGAL DOCUMENT (“SALES CONTRACT”) BETWEEN YOU
(“BUYER”) AND ABC LTD. (“SELLER”). PLEASE READ THIS AGREEMENT
CAREFULLY. BY USING AND ACCESSING THE COMPANY WEB SITE YOU
INDICATE THAT YOU HAVE READ AND UNDERSTAND THIS AGREEMENT
AND AGREE TO BE BOUND BY THIS
AGREEMENT. IF YOU DO NOT ACCEPT THIS AGREEMENT, DO NOT ACCESS

AND USE THE COMPANY WEB SITE. PLEASE NOTE THAT THE TERMS AND
CONDITIONS MAY BE PERIODICALLY UPDATED AND MODIFIED, SO PLEASE
BE SURE TO RECHECK THEM. BY ACCESSING AND USING THE SITE, YOU
ACCEPT, WITHOUT LIMITATION OR QUALIFICATION, THE PRESENT TERMS
AND CONDITIONS. YOU ALSO AGREE TO SO ACCEPT FUTURE UPDATES
AND MODIFICATIONS OF THE TERMS AND CONDITIONS.
1. Payment Terms: Payment terms are net thirty (30) days from date of
invoice. If payment is not received by the due date, invoices are
considered past due. Past due payments will be subject to a service
charge of one and one-half-percent (1 ½%) per month or the maximum
amount allowed by law, whichever is less.
Visa, Mastercard, American Express, Discover, Money Orders, Certified
Checks, Company Checks and Personal Checks.
All payments (checks) should be sent to: The Company Corporate
Address.
Your name must be bank imprinted on the check with the correct
address and telephone number. Buyer agrees to pay a delay charge for
each returned check and all collection costs, including legal fees, if
applicable.
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If Buyer is delinquent in paying any amount owed to Seller by more than

ten (10) days, then without limiting any other rights and remedies
available to Seller under the law, in equity, or under the contract, Seller
may (i) suspend production, shipment and/or deliveries of any or all
products purchased by Buyer, or (ii) by notice to Buyer, treat such
delinquency as a repudiation by Buyer of the portion of the contract not
then fully performed, whereupon Seller may cancel all further deliveries
and any amounts unpaid hereunder shall immediately become due and
payable. If Seller retains a collection agency and/or attorney to collect
overdue amounts, all collection costs, including attorney's fees, shall be
payable by Buyer. Buyer hereby represents to Seller that Buyer is now
solvent and agrees that each acceptance of delivery of the Products sold
hereunder shall constitute reaffirmation of this representation at such
time.
2. Prices: All prices quoted are subject to change, without notice, at any
time prior to Seller’s acceptance of Buyer’s order, to such prices
prevailing at the time of acceptance.
3. Shipments: All shipments F.O.B. to company office and are exclusive of
all taxes, and freight charges, which shall be paid by the Buyer. Delivery
to carrier constitute delivery to Buyer.
4. Risk of Loss: It is the Buyer’s responsibility to seek compensation from
the carrier for damaged or missing freight. Seller shall not be
responsible for any claims or damages resulting from a delay in delivery
or failure to perform which results from: governmental regulations,
strike, lockouts, accident, fire, delays in manufacturing, transportation,
acts of God, or any other causes beyond the Seller’s control. In case of
partial or complete destruction of goods, Seller is excused unless
destruction is due to Seller’s own negligence.
5. Cancellation, Modification or Alteration of Sales
6. Contract: Due to the short life of seasonal related goods, no returns
will be accepted beyond 14-days from the execution of this Sales
Contract. In no event shall any cancellation, modification, or alteration
of winter AND/OR spring/summer related goods be accepted beyond or
out of the proper time of the usual or pre-appointed time for the chosen
particular season.
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7. Right of Inspection: Buyer shall have the right to inspect the goods on
arrival and, within 14 days after delivery. Any rights of Buyer with
respect to inspection shall be deferred until after payment of the
purchase price.
8. Returns of Goods: No cash refund will be issued. For return of goods
tendered under this Sales Contract to be effective, the Seller must
receive written notice of that return at its headquarters within 14 days
after delivery. Returns are allowed only if nonconformity is substantial
and non-curable. A “RETURN AUTHORIZATION” form obtained from
Seller must be accompanied by Invoice Number and description of all
defects of the goods on which the Buyer intends to rely. The failure of
Buyer to comply with these conditions shall constitute irrevocable
acceptance of the goods by Buyer and Buyer is barred from any remedy.
All returns must be shipped back to Seller’s headquarters. All goods
returned must be clean, free of price tags, and packed neatly. Seller has
the right to refuse any returned goods or to credit the Buyer with the
lesser amount paid, if the goods are damaged through improper packing
or improper display methods at Buyer’s locations.
9. Evaluations Return Policy: A 15% restocking fee will be charged if
the goods are not rejected within the 14-days evaluation period.
10.Warranty: Seller gives 14 days limited warranty unless otherwise
specified, from the date of delivery. The warranty will not apply to those
goods that are damaged due to misuse, abuse, negligence or
notification by any party other than Seller.
11.Assignability: This Sales Contract shall not be assignable by the Buyer
without the Seller's written consent.
12.Limitation of Damages: In no event shall Seller by liable for (i)
special, indirect, consequential, or punitive damages including but not
limited to labor costs incurred by the Buyer or (ii) any damages
whatsoever resulting from loss of use or profits arising out of or in
connection with the goods sold hereunder. In no event shall Seller’s
liability exceed the purchase price of the goods in question.
13.Waiver: No waiver of any claim or right arising under this Sales
Contract will be effective unless the waiver is in writing and signed by
the waiving party.
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14.Entire Agreement: The parties intend this writing to be the final

expression of the terms of their agreement and further intend that this
writing be the complete and exclusive statement of all the terms of their
agreement.
15.Attorney Fee Provision: In any litigation, arbitration, or other
proceeding by which one party either seeks to enforce its rights under
this Sales Contract or seeks a declaration of any rights or obligations
under this Sales Contract, the prevailing party shall be awarded
reasonable attorney fees, together with any costs and expenses, to
resolve the dispute and to enforce the final judgment.
16.Choice of Law and Forum: This Agreement, and any dispute arising
from the relationship between the parties to this Agreement, shall be
governed by the State law. Any dispute that arises under or relates to
this Agreement shall be resolved in Superior Court.
7.4 IMPLIED CONDITIONS OF CONTRACT

7.4.1 Implied Conditions
Implied conditions are the conditions which are implied by the law, though
not expressly written in a contract. These conditions are listed below:
1. In a contract of sale, there is an implied condition on the part of the
seller that the seller has a right to sell the goods, and in the case of an
agreement to sell, he will have a right to sell the goods at the time
when actual sale takes place.
2. If a contract for the sale of goods is by description, there is an implied
condition that the goods shall correspond with the description.
3. If the Sale has been done by sample, there is an implied condition that
the bulk shall correspond with the sample in quality, the buyer shall
have an opportunity of comparing the bulk with the sample, and the
goods shall be free from any defect which may not be apparent on
reasonable examination of the sample.
4. In the case of a contract for the sale of a patented good, the implied
condition as to its fitness for any particular purpose. Because the buyer
is not relying on the skill and judgment of the seller but relies on the
goods reputation of the trade name.
5. If the goods are purchased for personal use, they must be reasonably fit
for the purpose for which they are generally used.
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6. In the case of eatables and provisions, in addition to the condition of the

merchantable quality, there is an added obligation on the part of the
seller that the goods shall be free from any dirt, insects and it should be
reasonably fresh.
7. An implied warranty or condition as to quality or fitness a particular
purpose may be annexed by custom or usage of trade. If a well
recognized usage exists, it may be taken for granted instead of
expressing its intention of use.
7.4.2 Implied Warranties
The following are the warranties which are implied in every contract of the
sale of goods.
1. There is an important implied warranty in every contract of sale of
goods that the buyer shall have and enjoy quiet and peaceful possession
of the goods. This is specifically mentioned in case of contract of sale of
a property.
2. Also, it is important to note that there is an implied warranty that the
goods shall be free from any charge or encumbrance, in favor of any
third party other than the buyer of the contract, before or at the time
when the contract was made.
3. In case, the goods sold which are inherently dangerous or they are
likely to be dangerous to the buyer, the seller must warn the buyer
about the probable danger. If there is a breach of his warranty, the
seller will be liable in damages, e.g., Statutory warning on cigarettes
and liquor.
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7.5 PERFORMANCE OF CONTRACT
For achieving smooth and trouble free performance of a contract of sale,

the following points should be known to the buyer as well as the seller:
7.5.1. Duties of Seller and Buyer
It is the duty of the seller to deliver the goods and of the buyer to accept
and pay for them, in accordance with the terms of the contract of sale.
Payment and delivery are concurrent conditions: Unless otherwise

agreed, delivery of the goods and payment of the price are concurrent
conditions, that is to say, the seller shall be ready and willing to give
possession of the goods to the buyer in exchange for the price, and the
buyer shall be ready and willing to pay the price in exchange for possession
of the goods.
7.5.2 Delivery
Delivery of goods sold may be made by doing anything which the parties
agree shall be treated as delivery or which has the effect of putting the
goods in the possession of the buyer or of any person authorised to hold
them on his behalf.
Effect of part delivery- A delivery of part of goods, in progress 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, but a delivery of part of
the gods, with an intention of severing it from the whole, does not operate
as a delivery of the remainder.
Buyer to apply for delivery- Apart from any express contract, the seller
of goods is not bound to deliver them until the buyer applies for delivery.
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Rules Regarding Delivery

1. Whether it is for the buyer to take possession of the goods or for the
seller to send them to the buyer is a question depending in each case on
the contract, express or implied, between the parties. Apart from any
such contract, goods sold are to be delivered at the place at which they
are the time of the sale, and goods agreed to be sold are to be delivered
at the place at which they are at the time of the agreement to sell, if
not then in existence, at the place at which they are manufactured or
produced.
2. Where under the contract of sale the seller is bound to send the goods
to the buyer, but no time for sending them is fixed, the seller is bound
to send them within a reasonable time.
3. Where the goods at the time of sale are in the possession of a third
person, there is no delivery by seller to buyer unless and until such third
person acknowledges to the buyer that he holds the goods on his behalf.
Provided that nothing in this section shall affect the operation of the
issue or transfer of any document of title to goods.
4. Demand or tender of delivery may be treated as ineffectual unless made
at a reasonable hour. What is a reasonable hour is a question of fact.
5. Unless otherwise agreed, the expense of and incidental to putting the
goods into a deliverable state shall be borne by the seller.
Delivery of wrong quantity -

1. Where the seller delivers to the buyer a quantity of good less than he
contracted to sell, the buyer may reject them, but if the buyer accepts
the goods so delivered he shall pay for them at the contract rate.
2. Where the seller delivers to the buyer a quantity of goods larger than he
contracted to sell the buyer may accept the goods included in the
contact and reject the rest, or he may reject the whole. If the buyer
accepts the whole of the goods so delivered, he shall pay for them at
the contract rate.
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.
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4. The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.
Instalment deliveries
1. Unless otherwise agreed, the buyer of goods is not bound to accept

delivery thereof by installments.
2. Where there is a contract for the sale of goods to be delivered by stated

installments which are to be separately paid for, and the seller makes no
delivery or defective delivery in respect of one or more installments, or
the buyer neglects or refuses to take delivery of or pay for one or more
installments, it is a question in each cased depending on the terms of
the contract and the circumstances of the case, whether the breach of
contract is a repudiation of the whole contract, or whether it is a
severable breach giving rise to a claim for compensation, but not a right
to treat the whole contract as repudiated.
Delivery to carrier or wharfinger

1. Where, in pursuance of a contract of sale, the seller is authorised or
required to send the goods to he buyer, delivery of the goods to a
carrier, whether named by the buyer or not, for the purpose of
transmission to the buyer, or delivery of the goods to a wharfinger for
safe custody, is prima facie deemed to be a delivery of the goods to the
buyer.
2. Unless otherwise authorised by the buyer, the seller shall makes such
contract with the carrier or wharfinger on behalf of the buyer as may be
reasonable having regard to the nature of the goods and the other
circumstances of the case. If the seller omits so to do, and the goods
are lost or damaged in course of transit or whilst in the custody of the
wharfinger, the buyer may decline to treat the delivery to the carrier or
wharfinger as a delivery to himself, or may hold the seller responsible
for damages.
3. Unless otherwise agreed, where goods are sent by the seller to the
buyer by a route involving sea transit, in circumstances in which it is
usual to insure, the seller shall give such notice to the buyer as may
enable him to insure them during their sea transit and if the seller fails
to do so, the goods shall be deemed to be at his risk during such sea
transit.
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Risk where goods are delivered at distant place. Where the seller of
goods agrees to deliver them at his own risk at place other than that where
they are when sold, the buyer shall, nevertheless, unless otherwise agreed,
take any risk of deterioration in the goods necessarily incident to the
course of transit.
7.6 TRANSFER OF PROPERTY
The transfer of property has to be considered in three ways. (a) the

transfer of property of the goods, (b) the delivery of the goods
(possession) and (c) the passing of the guarantee and warrantee to take
care of the risk.
7.6.1 Transfer of Ownership/Property
To understand the transfer of ownership of the property, we should

understand the journey of the goods and possession of the goods in each
stage of journey. The seller sends the goods to the buyer, and the goods
belong to the buyer in all sense at the time when he pays to the seller for
the goods, and seller receives the payment in total of the goods supplied.
So unless otherwise agreed, risk follows ownership whether delivery has
been made or not and whether price has been paid or not. Thus the risk of
loss as a rule lies on the owner. But if delivery has been delayed through
the fault of either the buyer or the seller, the goods are at the risk of the
party at fault.
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7.6.2 Transfer of Property
In case of the Specific Goods (Sections 20 to 22), The rules relating to

transfer of property are–
Passing of property at the time of contract: 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. Deliverable state
means such a state that the buyer would under the contract be bound to
take delivery of them.
However, if the Goods are not in a deliverable state, i.e., the seller has to
do something to the goods to put them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice of
it.
Another case is 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 (Sec. 22).
Or, where there is contract for the sale of unascertained goods, the
property in the goods does not pass to the buyer until goods are
ascertained (Sec. 18). Till goods are ascertained, there is merely an
agreement to sell.
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7.6.3 Delivery to Carrier
A seller is deemed to have unconditionally appropriated the goods to the

contract where he delivers them to buyer or to a carrier or other bailee for
the purpose of transmission to the buyer, and does not reserve the right of
disposal. The delivery to the carrier may be absolutely for the buyer or
seller.
a. The ownership passes from the seller to the buyer whenever the bill of
lading or railway receipt is made out in the name of the buyer and is
sent to him,
b. If the bill of lading or railway receipt is taken in the seller’s or his

agent’s name and is sent to the agent of the seller to be delivered to the
buyer on the fulfillment of certain conditions, the seller is deemed to
have reserved the right of disposal of the goods. In such a case the
ownership does not pass to the buyer until the necessary conditions are
fulfilled and the documents of title are delivered to the buyer.
c. Where goods are delivered to the buyer on approval or ‘on sale or

return’ or other similar term, the property therein passes to the buyer:
i. When he signifies his approval or acceptance to the seller:
ii. When he does any other act adopting the transaction. If the seller
delivers the goods to the buyer ‘on sale or return’ on the terms that
the goods were to remain his property until settled or paid for, the
property would not pass to the buyer until these terms are complied
with.
iii. If he does not signify his approval or acceptance to the seller, but
retain the goods without giving notice of rejection, beyond the time
fixed for the return of the goods, or if no time has been fixed, beyond
a reasonable time.
7.6.7 Transfer of Title
The general rules as to transfer of title is that only the owner of goods can
transfer a goods title. i.e., in normal conditions, the transfer of title is
deemed to take place along with the transfer of goods to the buyer, unless
otherwise specifically mentioned in the contract.
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7.7 RIGHTS AND DUTIES OF THE BUYER

7.7.1 Rights of the Buyer
a. Examination of the goods.
1. Where goods are delivered to the buyer which he has not previously
examined, he is not deemed to have accepted them unless and until
he has a reasonable opportunity of examining them for the purpose of
ascertaining whether they are in conformity with the contract.
2. Unless otherwise agreed, when the seller tenders delivery of goods to
the buyer, he is bound on request, to afford the buyer a reasonable
opportunity of examining the goods for the purpose of ascertaining
whether they are in conformity with the contract,
b. Return of rejected goods. Unless otherwise agreed, where goods are
delivered to the buyer and he refuses to accept them, having the right
so to do, he is not bound to return them to the seller, but it is sufficient
that he intimates the seller his refusal to accept them.
c. Refusing to take the delivery of goods. When the seller is ready and
willing to deliver the goods and requests the buyer to take delivery, and
the buyer does not within a reasonable time after such request take
delivery of the goods, he is liable to the seller for any loss occasioned by
his neglect or refusal to take delivery and also for a reasonable charge
for the care and custody of the goods. Provided that nothing in this
section shall affect the rights of the seller where the neglect or refusal
of the buyer to take delivery amounts to a repudiation of the contract.
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7.7.2 Duties of the Buyer

a. To apply for delivery at appropriate time as per the contract.
b. To make payment as per the contract terms and to take delivery of the
goods.
c. To accept part delivery, if demanded, and pay for it.
d. To intimate the seller when he rejects the goods.
e. To pay the damages/late delivery charges in case of non-acceptance.
f. To examine the goods delivered.
g. To accept the goods when delivered.
h. To reject the delivery, but to pay for losses for the care and custody of
the goods.
7.8 RIGHTS OF UNPAID-SELLER

"Unpaid seller" is defined as —
1. The seller of goods is deemed to be an "unpaid seller" within the
meaning of this Act —
a. When the whole of the price has not been paid or tendered.
b. When a bill of exchange or other negotiable instrument has been
received as conditional payment, and the conditions on which it was
received has not been fulfilled by reason of the dishonour of the
instrument or otherwise.
2. In this Chapter, the term "seller" includes any person who is in the
position of a seller, as, for instance, an agent of the seller to whom the
bill of lading has been endorsed, or a consignor or agent who has
himself paid, or is directly responsible for, the price.
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Rights of the Unpaid Seller

1. Subject to the provisions of this Act and of any law for the for the time
being in force, notwithstanding that the property in the goods may have
passed to the buyer, the unpaid seller of goods, as such, has by
implication of law.
a. a lien on the goods for the period while he is in possession of them,
b. in case of the insolvency of the buyer a right of stopping the goods in
transit after he has parted with the possession of them.
c. a right of re-sale as limited by this Act.
2. Where the property in goods has not passed to the buyer, the unpaid
seller has, in addition to his other remedies, a right of withholding
delivery similar to and co-extensive with his rights of lien and stoppage
in transit where the property has passed to the buyer.
Seller’s Lien
1. Subject to the provisions of this Act, the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until
payment or tender of the price in the following cases namely:
a. where the goods have been sold without any stipulations as to credit.
b. where the goods have been sold on credit, but the term of credit has
expired.
c. where the buyer becomes insolvent.
2. The seller may exercise his right of lien notwithstanding that he is in
possession of the goods as agent or bailee for the buyer.
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Part delivery. Where an unpaid seller has made part delivery of the
goods, he may exercise his right of lien on the remainder, unless such part
delivery has been made under such circumstances as to show an
agreement to waive the lien.
Termination of Lien
1. The unpaid seller of goods loses his lien thereon –
a. when he delivers the goods to a carrier or other bailee for the
purpose of transmission to the buyer without reserving the right of
disposal of the goods.
b. when the buyer or his agent lawfully obtains possession of the goods,
c. by waiver thereof.
2. The unpaid seller of goods, having a lien thereon, not lose his lien by
reason only that he has obtained a decree for the price of the goods.
Right of stoppage in transit. Subject to the provisions of this Act, when
the buyer of goods becomes insolvent, the unpaid seller who has parted
with the possession of the goods has the right of stopping them in transit,
that is to say, he may resume possession of the goods as long as they are
in the course of transit, and may retain them until payment or tender of
the price.
Duration of transit
1. Goods are deemed to be in course of transit from the time when they
are delivered to a carrier or other bailee for the purpose of transmission
to the buyer, until the buyer or his agent in that behalf takes delivery of
them from such carrier or other bailee.
2. If the buyer or his agent in that behalf obtains delivery of the goods
before their arrival at the appointed destination, the transit is at an end.
3. If, after the arrival of the goods at the appointed destination, the carrier
or other bailee acknowledges to the buyer or his agent that he holds the
goods on his behalf and continues in possession of them as bailee for
the buyer or his agent, the transit is at an end and it is immaterial that
a further destination for the goods may have been indicated by the
buyer.
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4. If the goods are rejected by the buyer and the carrier or other bailee
continues in possession of them, the transit is not deemed to be at an
end, even if the seller has refused to receive them back.
5. When goods are delivered to a ship chartered by the buyer, it is a
question depending on the circumstances of the particular case,
whether they are in the possession of the master of a carrier or as
agent of the buyer.
6. Where the carrier or other bailee wrongfully refuses to deliver the goods
to the buyer or his agent in that behalf, the transit is deemed to be at
an end.
7. Where part delivery of the goods has been made to the buyer or his
agent in that behalf, the remainder of the goods may be stopped in
transit, unless such part delivery has been given in such circumstances
as to show an agreement to give up possession of the whole of the
goods.
How Stoppage in Transit Is Effected?
1. The unpaid seller may exercise his right to stoppage in transit either by
taking actual possession of the goods, or by giving notice of his claim to
the carrier or other bailee in whose possession the goods are. Such
notice may be given either to the person in actual possession of the
goods or to his principal. In the latter case the notice, to be effectual,
shall be given at such time and in such circumstances, that the
principal, by the exercise of reasonable diligence, may communicate it
to his servant or agent in time to prevent a delivery to the buyer.
2. Whether notice of stoppage in transit is given by the seller to the carrier
or other bailee in possession of the goods, he shall re-deliver the goods
to, or according to the directions of the seller. The expenses of such re-
delivery shall be borne by the seller.
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Effect to Sub-sale or Pledge By Buyer

1. Subject to the provisions of this Act, the unpaid seller’s right of lien or
stoppage in transit is not affected by any sale or other disposition of the
gods which the buyer may have made, unless the seller has assented
thereto.
Provided that where a document of title to goods has been issued or
lawfully transferred to any person as buyer or owner of the goods, and
that person transfers the document to a person who takes the document
in good faith and for consideration, then, if such last mentioned transfer
was by way of sale, the unpaid seller’s right of lien of stoppage in transit
is defeated, and, if such last mentioned transfer was by way of pledge or
other disposition for value, the unpaid seller’s right of lien or stoppage in
transit can only be exercised subject to the rights of the transferee.
2. Where the transfer is by way of pledge, the unpaid seller may require
the pledge to have the amount secured by the pledge satisfied in the
first instance, as far as possible, out of any other goods or securities of
the buyer in the hands of the pledge and available against the buyer.
Sale Not Generally Rescinded by Lien or Stoppage in Transit
1. Subject to the provisions of this section, a contract of sale is not
rescinded by the mere exercise by an unpaid seller of his right of lien or
stoppage in transit.
2. Where the goods are of a perishable nature, or where the unpaid seller
who has exercised his right of lien or stoppage in transit gives notices to
the buyer of his intentions to re-sell, the unpaid seller may, if the buyer
does not within a reasonable time pay or tender the price, re-sell the
goods within a reasonable time and recover from the original buyer
damages for any loss occasioned by his breach of contract, but the
buyer shall not be entitled to any profit which may occur on the re-sale.
If such notices is not given, the unpaid seller shall not be entitled to
recover such damages and the buyer shall be entitled to the profit, if
any, on the re-sale.
3. Where an unpaid seller who has exercised his right of lien or stoppage in
transit re-sells the goods, the buyer acquires a good title thereto as
against the original buyer, notwithstanding that no notice of the re-sale
has been given to the original buyer.
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4. Where the seller expressly reserves a right of re-sale in case the buyer
should make default, and on, the buyer making default, re-sells the
goods, the original contract of sale is thereby rescinded, but without
prejudice to any claim which the seller may have for damages.
7.9 ACTIONS FOR BREACH OF CONTRACT

Suit for Price
1. Where under a contract of sale the property in the goods has passed to
the buyer and the buyer wrongfully neglects or refuses to pay for the
goods according to the terms of the contract, the seller may sue him for
the price of the goods.
2. Where under a contract of sale the price is payable on a day certain
irrespective of delivery and the buyer wrongfully neglects or refuses to
pay such price, the seller may sue him for the price although the
property in the goods has not passed and the goods have not been
appropriated to the contract.
Damages for Non-acceptance
Where the buyer wrongfully neglects or refuses to accept and pay for the
goods, the seller may sue him for damages for non-acceptance.
Damages for Non-delivery
Where the seller wrongfully neglects or refuses to deliver the goods to the
buyer, the buyer may sue the seller for damages for non-delivery.
Specific Performance
Subject to the provisions of Chapter II of the Specific Relief Act, 1877, in
any suit for breach of contract to deliver specific or ascertained goods, the
Court may, if it thinks fit, one the application of the plaintiff, by its decree
direct that the contract shall be performed specifically, without giving the
defendant the option of retaining the goods on payment of damages. The
decree may be unconditional, or upon such terms and conditions as to
damages, payment of the price or otherwise, as the Court may deem just,
and the application of the plaintiff may be made at any time before the
decree.
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Remedy for Breach of Warranty

1. Where there is a breach of warranty by the seller, or where the buyer
elects or is compelled to treat any breach of a condition on the part of
the seller as a breach of warranty, the buyer is not by reason only of
such breach of warranty entitled to reject the goods; but he may –
a. Set up against the seller the breach of warranty in diminution or
extinction of the price; or
b. Sue the seller for damages for breach of warranty.
2. The fact that a buyer has set up a breach of warranty in diminution or
extinction of the price does not prevent him from suing for the same
breach of warranty if he has suffered further damage.
Repudiation of Contract before Due Date
Where either party to a contract of sale repudiates the contract before the
date of delivery, the other may either treat the contracts as subsisting and
wait till the date of delivery, or he may treat the contract as rescinded and
sue for damages for the breach.
Interest by way Of Damages and Special Damages
1. Nothing in this Act shall affect the right of the seller or the buyer to
recover interest or special damages in any case whereby law interest or
special damages may be recoverable, or to recover the money paid
where the consideration for the payment of it has failed.
2. In the absence of a contract to the contrary, the Court may award
interest at such rate a it think fit one the amount of the price –
a. to the seller in a suit by him for the amount of the price from the
date of the tender of the goods or from the date on which the price
was payable.
b. to the buyer in a suit by him for the refund of the price in a case of a
breach of the contract on the part of the seller from the date on
which the payment was made.
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7.10 INCO TERMS – F.O.B., F.O.R. , C.&.F. AND C.I.F.

CONTRACTS
Global trade has increased in the past two decades. Accordingly, the
international commerce, which involves transportation of goods from far
away countries, is largely dependent on Sea carriage. So the questions of
ownership and risk have arisen quite often.
Incoterms® are the selling terms that the buyer and seller of goods both
agrees to. The Incoterms® clearly states which tasks, costs and risks are
associated with the buyer and the seller. The Incoterms® is agreed
between the buyer and seller, and states when the seller’s costs and risks
are then transferred onto the buyer.
Differences in trading practices and legal interpretations between traders of
different countries necessitated a need for a common set of rules. These
rules needed to be easy to understand by all of the participants in order to
prevent misunderstandings, disputes and litigation. Incoterms were first
created in 1936 and were designated Incoterms 1936. Since then,
Incoterms have evolved into a codified worldwide contractual standard.
They are periodically updated as events in international trade occur and
require attention. Amendments and additions were made in 1953, 1967,
1976, 1980, 2000, 2010 and 2020.
189
Incoterms 2020 rules are the official terms published by the International
Chamber of Commerce (ICC). They are a voluntary, authoritative, globally-
accepted, and adhered-to text for determining the responsibilities of buyers
and sellers for the delivery of goods under sales contracts for international
trade. Incoterms closely correspond to the UN Convention on Contracts for
the International Sales of Goods. Incoterms are known and implemented
by all major trading nations. Incoterms are only part of the whole export
contract. They do not say anything about the price to be paid or the
method of payment that is used in the transaction. Furthermore, Incoterms
2020 rules do not deal with the transfer of ownership of the goods, breach
of contract, or product liability; all of these issues need to be considered in
the contract of sale. Also, Incoterms 2020 rules can’t override any
mandatory laws.
The most current revision of the terms, Incoterms 2020, went into effect
on January 1, 2020, and consists of 11 Incoterms.
The changes from the Incoterms 2010 rules include the following:
• The most obvious change is renaming the term Delivered at Terminal
(DAT) to Delivered at Place Unloaded (DPU).
• The most significant change relates to the term Free Carrier (FCA). Under
this term, the buyer can now instruct its carrier to issue a bill of lading
with an onboard notation to the seller so that they may satisfy the terms
of a letter of credit.
• Under the revised term CIP, the seller is now responsible for purchasing a
higher level of insurance coverage—at least 110% of the value of the
goods as detailed in Clause A of the Institute Cargo Clauses. The
insurance requirement has not changed for CIF.
• Incoterms 2020 rules recognize sellers who may use their own transport
to deliver the goods. The terms now expressly state that sellers can
make a contract for carriage or simply arrange for the necessary
transportation.
• Incoterms 2020 rules now specifically call out the import and export
security requirements and identify whether the buyer or seller is
responsible for meeting those requirements.
190
Because each of the different Incoterms identify the responsibilities of the

seller and the buyer in the transaction at different points in the shipping
journey, certain Incoterms work better for certain modes of transportation.
Please refer to following chart.
(Courtesy: M/s Shipping Solution)
An overview of Incoterms® 2020 for 11 Terms, 7 for any mode of

transport
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7.10.1 EXW – Ex-Works or Ex-Warehouse

• Ex-Works is when the seller places the goods at the disposal of the buyer
at the seller’s premises or at another named place (i.e., works, factory,
warehouse, etc.).
• The seller does not need to load the goods on any collecting vehicle. Nor
does it need to clear them for export, where such clearance is applicable.
7.10.2 FCA – Free Carrier
• The seller delivers the goods to the carrier or another person nominated
by the buyer at the seller’s premises or another named place.
• The parties are well advised to specify as explicitly as possible the point
within the named place of delivery, as the risk passes to the buyer at
that point.
7.10.3 FAS – Free Alongside Ship
• The seller delivers when the goods are placed alongside the vessel (e.g.,
on a quay or a barge) nominated by the buyer at the named port of
shipment.
• The risk of loss of or damage to the goods passes when the products are
alongside the ship. The buyer bears all costs from that moment
onwards.
7.10.4 FOB – Free On Board
• The seller delivers the goods on board the vessel nominated by the buyer
at the named port of shipment or procures the goods already so
delivered.
on board the vessel. The buyer bears all costs from that moment
onwards.
7.10.5 CFR – Cost and Freight
• The seller delivers the goods on board the vessel or procures the goods
already so delivered.
on board the vessel.
• The seller must contract for and pay the costs and freight necessary to
bring the goods to the named port of destination.
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7.10.6 CIF – Cost, Insurance and Freight

• The seller delivers the goods on board the vessel or procures the goods
already so delivered. The risk of loss of or damage to the goods passes
when the products are on the ship.
• The seller must contract for and pay the costs and freight necessary to
bring the goods to the named port of destination.
• The seller also contracts for insurance cover against the buyer’s risk of
loss of or damage to the goods during the carriage.
• The buyer should note that under CIF the seller is required to obtain
insurance only on minimum cover. Should the buyer wish to have more
insurance protection, it will need either to agree as much expressly with
the seller or to make its own extra insurance arrangements.
7.10.7 CPT – Carriage Paid To
• The seller delivers the goods to the carrier or another person nominated
by the seller at an agreed place (if any such site is agreed between
parties).
• The seller must contract for and pay the costs of carriage necessary to
bring the goods to the named place of destination.
7.10.8 CIP – Carriage And Insurance Paid To
• The seller has the same responsibilities as CPT, but they also contract for
insurance cover against the buyer’s risk of loss of or damage to the
goods during the carriage.
• The buyer should note that under CIP the seller is required to obtain
insurance only on minimum cover. Should the buyer wish to have more
insurance protection, it will need either to agree as much expressly with
the seller or to make its own extra insurance arrangements.
7.10.9 DAP – Delivered At Place
• The seller delivers when the goods are placed at the disposal of the
buyer on the arriving means of transport ready for unloading at the
named place of destination.
• The seller bears all risks involved in bringing the goods to the named
place.
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7.10.10 DPU – Delivered At Place Unloaded (Replaces

Incoterms® 2010 DAT)
• DPU replaces the former Incoterms® DAT (Delivered At Terminal). The
seller delivers when the goods, once unloaded are placed at the disposal
of the buyer at a named place of destination.
• The seller bears all risks involved in bringing the goods to, and unloading
them at the named place of destination.
7.10.11 DDP – Delivered Duty Paid
• The seller delivers the goods when the goods are placed at the disposal
of the buyer, cleared for import on the arriving means of transport ready
for unloading at the named place of destination.
• The seller bears all the costs and risks involved in bringing the goods to
the place of destination. They must clear the products not only for export
but also for import, to pay any duty for both export and import and to
carry out all customs formalities.
7.10.12 References/Acknowledgements/Credits
Students are encouraged to go through a PowerPoint presentation attached
and reference links given below for more information:
• https://www.shippingsolutions.com/introduction-to-incoterms
• https://www.shippingsolutions.com/incoterms-chart-of-responsibilities
• https://iccwbo.org/media-wall/news-speeches/icc-releases-
incoterms-2020/
• https://incodocs.com/blog/wp-content/uploads/2020/06/IncoDocs-Trade-
Guide-2020-J.pdf
7.11 ACTIVITIES FOR STUDENTS

1. You are working with a mineral water plant in your district. Find out and
list down the implied terms and conditions applicable to the plant. If
necessary, search from the State/ Government website.
2. You are a supplier of dry fruits to 3 star restaurants in your city. You
remain as unpaid seller from one of your customers in the month of
March. List down the options open to you to take action against your
customer where your due amount is blocked.
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7.12 SUMMARY
• Condition is the essential part of a contract.
• Warranty is the subsidiary part of the contract.
• No one can sell a thing which he/she does not own.
• Goods sold should correspond with the description.
• A product sold by its general name should be fit for the basic purpose for
which it is used. This is called as the product being of merchantable
quality.
• In the case of a sale by sample, bulk should correspond with the sample
and the goods must be of merchantable quality.
• In general, the risk passes with ownership.
• Parties can provide for passing of right in property in express or implied
terms. Ownership passes as agreed by the parties.
• For ownership to pass, goods must be specific. It is immaterial whether
the price has been paid or not.
• If specific goods are not ready for delivery when a contract is made,
ownership will pass only if the seller puts it in a deliverable state and
informs the buyer of it.
• Ownership in goods cannot pass till the goods are ascertained.
195

1. Give description of the term ‘Contract of Sale’.
2. Write short notes on (a) Goods, (b) Price and (c) Document of title to
goods.
3. Write down the necessary and sufficient formalities of contract of sale.
4. Define the term ‘condition’ and explain the implied conditions in a
contract of sale.
5. Define ‘warranty’ as related to contract of sale with examples of implied
warranties.
6. Write the differences between: (a) Sale and Hire Purchase and (b)
Condition and Warranty.
7. What is a Performance of a contract of sale?
8. What is meant by ‘Delivery of Goods’ in relation with contract of sale?
9. What are the rights and duties of a buyer in a contract of sale?
10.Write short notes on (a) C.I.F. Contract (b) F.O.B. Contract.
196
1. The two parties to a ‘Contract of Sale’ are __________.

(a) Government and Approved supplier
(b) Service Provider and User
(c) Buyer and Seller
(d) All of the above
2. If the sale happens at a future date in case of a contract of sale, the

contract is called as __________.
(a) Valid Contract
(b) Agreement to Sale
(c) Registered Sale
(d) Invalid Contract
3. The example of ‘Document of Title of Goods’ can be __________.

(a) Bill of Lading
(b) Railway Receipt
(c) Delivery Order
(d) All of the above
4. In the C.I.F. contracts, ‘C.I.F’. stands for __________.

(a) Cost, Insurance, Freight
(b) Commercial, International, Freight
(c) Cost, India, Foreign
(d) Commerce, Indian, Freight
5. In case of F.O.R. contracts, the term ‘F.O.R.’ means __________.

(a) Future On Reliable
(b) Free On Rumor
(c) Free On Return
(d) Free On Rail
Answers: 1. (c), 2. (b), 3. (d), 4. (a), 5. (d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
198
CARRIAGE CONTRACTS
Chapter 8
Carriage Contracts
Learning objectives
After completing the chapter, you will be able to understand (a) the
carriage of goods by land by road or by rail and their classification of
goods; (b) the carriage by air and the documentation required for the
same; (c) the carriage by sea and its rules and regulations; (d) charter
party and bill of lading; and (e) duties, liabilities and rights of carriage of
goods; (f) Common carrier and private carrier.
Structure:
8.1 Contracts of Carriage - Definition and Types
8.2 Carriage of Goods by Land – Road
8.3 Railways – Common Carrier
8.4 Classification of Goods
8.5 Air Carriage
8.6 Documents of Air Carriage
8.7 Sea Carriage
8.8 Contract of Affreightment
8.9 Responsibilities, Liabilities and Rights of Carrier by Sea
8.11 Summary
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CARRIAGE CONTRACTS
8.1 CONTRACTS OF CARRIAGE - DEFINITION AND TYPES
In the commercial activities of any country, the need for carrying goods
from one place to another cannot be overemphasised. Also, goods are to
be moved from one country to another. For these purposes, a contract of
carriage is to be entered into. The persons, organisations or associations
which carry goods are known as carriers. Goods may be carried by land
(including inland waterways), sea or air. Accordingly, the law relating to
carrying of goods is contained in the following acts :
Land (a) The Carriers Act, 1865.

(b) The Railways Act, 1890.
Sea (a) The (Indian) Bills of Lading Act, 1856.
(b) The Carriage of Goods by Sea Act, 1925.
(c) The Merchant Shipping Act, 1958.
(d) The Marine Insurance Act, 1963.
Air (a) The Carriage by Air Act, 1972.
8.1.1 Definition of a Contract of Carriage

A contract of carriage of goods is a contract of bailment for reward.
However, the contract of bailment is modified by the different statutes
mentioned above in the case of carriage of goods by land,
8.1.2 Classification of Carriers

Generally speaking, carriers are classified into (i) common carriers, (ii)
private carriers and (iii) gratuitous carriers.
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CARRIAGE CONTRACTS
Common Carriers
The Carriers Act, 1865 defines a common carrier as any individual, firm or
company (other than the government, who or which transports goods as a
business, for money, from place to place, over land or inland waterways,
for all persons (consignors) without any discrimination between them. A
carrier must carry goods of the consignor for hire and not free of charge in
order to be called a common carrier. Further, he must be engaged in the
business of carrying goods for others for money from one place to another.
A person who carries goods occasionally or free of charge is not a common
carrier. Furthermore he is bound to carry goods for all persons without any
discrimination provided:
a. The freight chargeable by him is paid to him.
b. There is accommodation on his conveyance, and
c. There is nothing objectionable or illegal about the carrying of goods
of a particular consigner.
If, in spite of the above conditions being satisfied, a carrier reserves to

himself the right to accept or reject an offer, he is not a common carrier. It
is worth noting that the Carriers Act, 1865 covers only common carriers of
goods and not passengers.
Private Carriers
A private carrier is one who does not transport goods from one place to
another regularly; he may engage in some casual jobs of carrying goods
for certain selected persons between certain terminals. In fact, he carries
his own goods and that’s why he is known as a private carrier and not a
common carrier. Also, he does not make a general offer to carry goods for
anyone from one place to another for hire. However, he may enter into a
contract with someone to carry goods on the terms agreed upon between
them. In such a situation, it is a contract of bailment. Therefore, such
transactions are not covered by the Common Carriers Act,1865.
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CARRIAGE CONTRACTS
Gratuitous Carrier
When a person carries goods of another free of charge, he is a gratuitous
carrier. Similarly, a person may give lift in his transport to another person
voluntarily without any compensation. Thus, a gratuitous carrier may carry
not only goods but persons also free of charge.
Responsibility of Common Carrier and Bailee:

We know that a bailee is responsible only when the goods entrusted to him
are lost or damaged due to his fault or negligence. But the responsibility of
a common carrier is more onerous; he is to deliver the goods safely.
Therefore, in the case of a common carrier, it is immaterial whether the
loss or damage to the goods is due to his or someone else’s negligence.
The distinction between a common carrier and a public carrier is -
a. A common carrier publicly undertakes to carry from place to place the
goods of any person who chooses to employ him. A private carrier does
not carry regularly from place to place but is an occasional carrier.
b. A common carrier is bound to carry the goods of any person provided
certain conditions are satisfied. A private carrier is free to accept or
reject the goods for carriage.
c. The liabilities of a common carrier are determined by the Common
Carriers Act, 1865. A private carrier’s liability is not determined by the
Common Carriers Act, 1865. He is liable as a bailee as given in the
Indian Contract Act, 1872.
8.2 CARRIAGE OF GOODS BY LAND – ROAD
As mentioned above, the following two statutes govern the carriage of

goods by land:
a. The Carriers Act, 1865.
b. The Railways Act, 1989.
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CARRIAGE CONTRACTS
The Carriers Act, 1865. This Act defines the term “common carrier” and
provides for his rights, duties and liabilities. As regards matters not
covered by this Act, the rules of English Common Law will apply.
Rights of a Common Carrier.

The rights of a common carrier, as specified in the Act, are:
i. He is entitled to the settled remuneration and in case no
remuneration was settled, to a reasonable remuneration.
ii. He has a right to refuse to carry goods under certain circumstances (as
enumerated under the duties of a common carrier).
iii. He has a lien on the goods for his remuneration. He can refuse to
deliver them until his charges are paid.
iv. If the consignee refuses to take delivery of the goods, when tendered,
the common carrier has a right, to deal with the goods as he thinks
reasonable and prudent under the circumstances.
v. He has a right to recover reasonable expenses incurred by him as a
result of the consignee’s refusal to take delivery. After giving notice to
the consignee, the common carrier may even sell perishable goods.
vi. He can recover damages from the consignor if the goods are dangerous
or are loosely packed and the carrier suffers injury therefrom.
vii.He can limit his liability subject to the provisions of the Carriers Act.
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CARRIAGE CONTRACTS
Duties of a Common Carrier.

The duties of a common Carrier are:
1. A common carrier is bound to carry goods of all persons who choose to
employ him. He can, however, refuse to carry goods under the following
circumstances:
a. if there is no accommodation in the carriage;
b. if the person employing him is not willing to pay reasonable charges
for the carriage of goods;
c. if the goods are such which he is not accustomed to carry;
d. if the goods are to be carried over a route which is not his regular
route;
e. if the goods are-dangerous and as such subjecting him to
extraordinary risk;
f. if the consignor refuses to disclose the nature of the goods to be
carried; and
g. if the goods are not properly packed.
If a carrier refuses to carry the goods of a person for any reason other
than those mentioned above, he may be held liable for damages.
2. He must carry the goods over the usual and customary route and take
all reasonable precautions for their safe carriage. He must not deviate
from the usual route unless rendered necessary by exceptional
circumstances.
3. He must deliver the goods at the agreed time and if no time had been
fixed, within a reasonable time.
4. By Common Law, he is an insurer of the goods in the sense that he
warrants to carry the goods safely and securely.
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CARRIAGE CONTRACTS
Liabilities of a Common Carrier :

The liability of a common carrier of goods is laid down in the Carriers
Act, 1865. For this purpose, the Act has classified the goods into two
categories:
a. Scheduled goods and
b. non-scheduled goods.
The scheduled goods are those which are enumerated in a Schedule to the
Act. They are valuable articles like gold, silver, precious stones and pearls,
bills and hundis, currency and bank notes, glass, china silk, articles of
ivory, time pieces, musical and scientific instruments, etc. All other goods
are non-scheduled.
For scheduled articles exceeding Rs. 100 in value, the carrier is liable for
loss and damage only:
a. if the value and the description of the goods are disclosed by the
consignor to the carrier; or
b. if the loss or damage is due to a criminal act of the carrier, his agent or
servant.
The carrier can charge extra for carrying scheduled articles, but he cannot
limit his statutory liability by any special agreement.
As regards non-scheduled articles, a common carrier can limit his liability
by special agreement with the consignor. But even in this case he will be
liable under Section 8 of the Act (explained below).
In case of loss or damage, the claimant must notify the carrier within six
months of the date of knowledge of the loss or damage.
Post-Office is not a Common Carrier
The post office is not a common carrier. It is not an agent of the sender to
deliver a postal article to the addressee. It is really a branch of the Public
Service providing postal services subject to the provisions of Post Office
Act and the rules made thereunder. If a resident of India sends value-
payable article to an addressee in Nepal and the Nepal Government,
though realised the value of the article, did not pay to the Government of
India. Here, the Government of India is not liable, as per the Act.
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CARRIAGE CONTRACTS
8.3 RAILWAYS - COMMON CARRIERS
Carriage by rail in India is governed under Indian Railways Act, 1889, and
subsequently, amended in the years 1961, 1971,1975 and 1999.
Some of the more important provisions contained in the Act are

summarised below:
1. Maintenance of rate books, etc., for carriage of goods (Section 61).
Every railway administration shall maintain, at each station and to such
other places where goods are received for carriage, the rate books or
other documents which shall contain the rate authorised for the carriage
of goods from one station to another and make them available for the
reference of any person during all reasonable hours without payment of
any fee.
2. Provision of rate risks (Section 63). Where any goods are entrusted to a
railway administration for carriage, such carriage shall, except where
owner’s risk rate is applicable in respect of such goods, be at railway
risk rate.
Any goods, for which owner’s risk rate and railway risk rate are in force,
may be entrusted for carriage at either of the rates and if no rate is
opted, the goods shall be deemed to have been entrusted at owner’s risk
rate.
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CARRIAGE CONTRACTS
3. Forwarding note (Section 64). Every person entrusting any goods to a

railway administration for carriage shall execute a forwarding note in
such form as may be specified by the Central Government.
The consignor shall be responsible for the correctness of the particulars
furnished by him in the forwarding note. He shall indemnify the railway
administration against any damage suffered by it for reason of the
incorrectness or incompleteness of the particulars in the forwarding
note.
4. Railway receipt (Section 65). A railway administration shall issue a
railway receipt in such form as may be specified by the Central
Government:
a. in a case where the goods are to be loaded by a person entrusting
such goods, on the completion of such loading; or
b. in any other case, on the acceptance of the goods by it.
A railway receipt shall be prima facie evidence of the weight and the
number of packages stated therein.
5. Carriage of dangerous or offensive goods (Section 67). No person shall
take with him on a railway or require a railway administration to carry
such dangerous or offensive goods, unless (i) he gives a notice in
writing of their dangerous or offensive nature to the railway servant
authorised in this behalf; and (ii) he distinctly marks on the outside of
the package containing such goods of their dangerous or offensive
nature.
6. Liability of railway administration for wrong delivery (Section 80). Where
a railway administration delivers the consignment to the person who
produces the railway receipt, it shall not be responsible for any wrong
delivery on the ground that such person is not entitled thereto or that
endorsement on the railway receipt is forged or otherwise defective
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CARRIAGE CONTRACTS
Responsibility of a Railway Administration as a Carrier of Goods. Sections

93 to 112 of the Railways Act, 1989 contain provisions on this subject.
These provisions are summarised below.
1. General responsibility of a railway administration as carrier of goods

(Section 93). A railway administration shall be responsible for the loss,
destruction, damage or deterioration in transit, or non-delivery of any
consignment (goods entrusted to a railway administration for carriage),
arising from any cause except the following, namely:
i. an act of God;
ii. an act of war;
iii. an act of public enemies;
iv. arrest, restraint or seizure under legal process;
v. orders of restrictions imposed by the Central Government or a State
Government or by an officer or authority subordinate to the Central
Government or a State Government authorised by it in this behalf;
vi. act of omission or negligence of the consignor or consignee endorsee
or the agent or servant of the consignor or the consignee or the
endorsee;
vii.natural deterioration or wastage in bulk or weight due to inherent
defect, quality or vice of the goods;
viii.latent defects;
ix. fire, explosion or any unforeseen risks.
Liability of a common carrier vis-a-vis the liability of a railway

administration. The liability of a railway administration is the same as that
of a common carrier. In other words, even where any loss, destruction,
damage, deterioration or non-delivery is proved to have arisen from
anyone or more of the aforesaid nine cases, a railway administration shall
not be relieved of its responsibility unless it further proves that it had used
reasonable foresight and care in the carriage of the good. Railway
administration, like a common carrier, is bound to carry the goods of every
person who is willing to pay the freight and comply with other
requirements.
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CARRIAGE CONTRACTS
2. Delay or retention in transit (Section 95). A railway administration shall

be responsible for the loss, destruction, damage or deterioration of any
consignment proved by the owner to have been caused by the delay or
detention in their carriage. The railway administration can, however,
avoid liability if it proves that the delay or detention arose for reasons
beyond its control or without negligence or misconduct on its part or on
the part of any of its employees.
3. Owner’s risk rate or railway risk rate (Section 97). A consignment may
be carried by a railway administration either at owner’s risk rate or
railway risk rate. Owner’s risk rate is a special reduced rate whereas
railway risk rate is an ordinary tariff rate. Owner’s risk rate is lower than
the railway risk rate for the simple reason that the goods in this case
are carried at the owner’s risk. In case of owner’s risk rate, the railway
administration is not responsible unless it is proved that any loss,
destruction, damage or deterioration or non-delivery of goods arose
from negligence or misconduct on the part of the railway administration
or its employees.
4. Liability for damage to goods in defective condition or defectively
packed (Section 98). Goods tendered to a railway administration to be
carried by railway may be (a) in a defective condition or (b) defectively
packed. As a result of these, goods are liable to damage, deterioration,
leakage or wastage. If the fact of such condition or defective or
improper packing has been recorded by the sender or his agent in the
forwarding note, the railway administration is not responsible for any
damage, deterioration, leakage or wastage unless negligence or
misconduct on the part of the railway administration or of its employees
is proved.
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CARRIAGE CONTRACTS
5. Liability after termination of transit (Section 99). Whether the goods are
carried at owner’s risk rate or railway risk rate, the liability of the
railway administration for any loss of goods within a period of seven
days after the termination of transit is that of a bailee under Sections
151, 152 and 161 of the Indian Contract Act, 1872. But where the
goods are carried at owner’s risk rate the railway administration is not
liable for such loss, destruction, damage, deterioration or non-delivery
of goods except on proof of negligence or misconduct on the part of the
railway administration or any of its employees.
After seven days from the date of termination of transit the railway
administration is not liable in any case for any loss of such goods.
Notwithstanding this provision, the railway administration is not
responsible after the termination of transit for the loss, destruction,
damage, deterioration or non-delivery of articles of perishable goods,
animals, explosives and other dangerous goods.
6. Responsibility as carrier of luggage (Section 100). A railway
administration shall not be responsible for the loss, destruction,
damage, deterioration or non-delivery of any luggage unless a railway
servant has booked the luggage and given a receipt therefor. Also it is to
be proved that the loss, etc., was due to the negligence or misconduct
on the part of the railway administration or on the part of any of its
employees.
In the case of luggage which is carried by the passenger in his own
charge, the railway administration shall not be responsible for the loss,
etc., unless it is proved that the loss, etc., was due to the negligence or
misconduct on the part of the railway administration or on the part of
any of its employees.
7. Responsibility as a carrier of animals (Section 101). A railway
administration shall not be responsible for any loss or destruction of, or
injuries to, any animal carried by railway arising from fright or
restiveness of the animal or from overloading of wagons by the
consignor.
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CARRIAGE CONTRACTS
8. Exoneration from liability in certain cases (Section 102). A railway

administration shall not be responsible for the loss, destruction, damage
or deterioration or non delivery of any consignment (i) when such loss,
etc., is due to the fact that a materially false description of the
consignment is given; or,(ii) where a fraud has been practised by the
consignor or the endorsee, or by an agent of the consignor, consignee or
the endorsee; or (iii) where it is proved by the railway administration to
have been caused by, or to have arisen from –
a. improper loading or unloading by the consignor, or the consignee or
the endorsee, or by an agent of the consignor, consignee or the
endorsee;
b. riot, civil commotion, strike, lock-out, stoppage or restraint of labour
from whatever cause arising whether partial or general; or (iv) for
any indirect or consequential loss or damage or for loss of particular
market.
8.4 CLASSIFICATION OF GOODS

The Act classifies goods to be transported by Railway as (i) articles which
are carried at owners risk rates, (ii) perishable goods, (iii) articles which
are of special value and insured) (iv) defectively packed goods, and (v)
explosives or dangerous goods.
As per the Railways Act, Railway administration is not liable for any
damages in the following cases-
• an act of God,
• an act of war,
• act of public enemies,
• arrest, restraint or seizure of under legal process,
• legal restriction by State or Central Govt,
• act or negligence or omission by consignor or his agent or servant,
• natural deterioration due to inherent defect,
• latent defects, and
• fire explosion or any unforeseen risk.
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Owner’s Risk and Railway’s Risk
If the goods are carried by the railways as the common carrier, it may
agree to transport the goods either at owners risk or at railways risk. The
tariff rate of carrying the goods at owners risk would be comparatively
lower as the railway administration will not bear any kind of risk. In such a
situation railways are liable when the loss is due to negligence on the part
of servants of the railways or misconduct of the employee; misconduct
would be viewed more seriously as it is worse than negligence.
If the goods are transported at normal rates where in the railway

administration would agree to indemnify the loss is called as railway risk
rate. It is not liable when it proves that the loss was not due to negligence
or not due to willful misconduct of staff or employees.
Losses because of delay or detention in transit: As per Sec. 76 of the

Act a railway administration would be liable for any loss damage or
destruction or deterioration in the condition of the goods or animals due to
delay in transit or detention in transit. As per Sec. 76A of the Act, when
even there is a deviation in the route regarding transit than the usual
customary route railways would not be held responsible for any breach of
contract provided the deviation is due to the operational reasons.
Losses due to wrong delivery: As per Sec. 76B of the Act, Railway
administration will not be held liable for any act of wrong delivery to a
person, done in good faith without any negligence on the part of railways.
Railway administration will not be held responsible for any defective or
forged endorsements.
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As per the provisions of Sec. 78 of the Act, the Railway administration is

not liable to pay damages which may be incidental or consequential in
nature. It is also not responsible or any loss or damage, in the following
cases-
a. when the consignor has given false description of the goods sent.
b. where fraud is practised by the consignor or the consignee or an agent
of the consignor or consignee.
c. animals or goods due to improper loading or unloading by the consignor
or consignee or an agent.
d. riot, civil commotion, strike, lockout, stoppage or restraint of labour
form whatever cause general or partial.
e. for any indirect or direct consequence loss or damage or for loss of
particular market.
With regard to the passenger's death due to negligence on the part of
railway employees, compensation payable should not exceed Rs. one lakh.
But if it is contributory negligence no compensation is payable.
Losses in case of articles of special value: With regards to goods or

articles of special value like gold, silver, coins, etc., mentioned in the
Second Schedule of the Act, Sec. 77(B) would operate as the value of the
goods will have to be declared and it should be the true value. The person
claiming for damage need not give the reason for delay, damage,
destruction of the goods. Railway administration is responsible to pay
damages only when a notice is served on them as per Sec. 78(b). The
claim may be forwarded to the originating station authorities from where
the animal or goods started their journey to the station where the loss or
damage has taken place.
Time to Claim: The application will have to be filed within six months from
the date of delivery of the goods or animals by the railway. The claim
should be in writing by providing all the relevant facts supporting the claim
of the claimant.
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Right of Railways: The Act gives certain privileges to the railway

administration. Bye-laws may be framed regarding the mode of carriage of
goods and passengers. No person is allowed to carry dangerous or
offensive goods. Violation of the provision of the Railways Act and of the
bye-laws are punishable by the court .
Notice of Claim: In case of loss, destruction, damage, deterioration or

non-delivery of animals or goods, there-must be notice in writing within six
months of the date of delivery. The claim must be submitted to the railway
administration (a) to whom goods were delivered for carriage, or (b) to the
station (destination) lies or the loss, destruction, damage or deterioration
occurs.
Disposal of non-claimed goods: The Indian Railways Act was amended

in 1976 providing that essential goods booked to certain notified stations
must be removed within seven days from the termination of transit.
'Essential goods' means food stuffs, sugar, etc. 'Station' means certain
prescribed stations. If the goods are not removed within seven days, the
goods are to be confiscated and to be sold by public action. The sale is to
be notified in local newspapers or any other prescribed manner. The goods
may be sold to cooperatives.
8.5 AIR CARRIAGE
The Carriage by Air Act, 1972 governs the carriage of goods by air. The
provisions of this Act apply to domestic flights in the same manner, as they
are applicable to international flights carrying cargo.
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The documents of carriage are now simplified and the liability of the air
carrier has been substantially increased. The Act is applicable to whole of
India. Also, India being a signatory to the Warsaw convention of 1929, it is
named as High Contracting Party as per international rules and regulations.
As per the International Act, all International Carriages are regarded as a
single operation and all the High Contracting Parties are equally responsible
for the shipments.
8.6 DOCUMENTS OF AIR CARRIAGE

The various documents relating to carriage by air are briefly described
hereunder.
8.6.1 Passenger Ticket
The Passenger Ticket issued by a carrier must show the following –
i. the place and date of issue,
ii. the place of departure and destination,
iii. the agreed stopping place,
iv. the name and address of the carrier, and
v. the statement that the carriage is subject to the liabilities mentioned
therein.
vi. The absence or loss of passenger ticket does not affect the validity of
the contract of carriage, but if the carrier accepts a passenger without a
ticket, he cannot enjoy the benefit of limiting his liability.
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CARRIAGE CONTRACTS
8.6.2 Baggage Check

For the carriage of baggage, the baggage check, made out in duplicate
must contain the following particulars:
1. The place and date of issue
2. Places of departure and destination,
3. Name and address of the carrier or carriers,
4. The number of passenger tickets,
5. A statement that the baggage will be delivered to the bearer of baggage
check,
6. The number and weight of the package,
7. The amount of the value declared in accordance with Rule 22 (2), and
8. A statement that the carriage is subject to rules relating to liability
stated therein.
If the baggage check does not contain the particulars set out in (4), (6)
and (8) above, the carrier shall not be entitled to the benefit of rules
limiting liability.
8.6.3 Air Way Bill
This is a document handed over by the consignor to the carrier along with
the goods. The Air Way Bill is prepared in triplicate, the first copy being for
the carrier, the second which must accompany the goods, is for the
consignee and the third is to be retained by the consignor, after the carrier
has signed it in token of acceptance of goods.
The Air Way Bill must contain the specified particulars for the correctness
of which the consignor is responsible and he will be liable for all damages
suffered due to the incompleteness of the particulars.
The Air Way Bill is the prima facie evidence of the conclusion of contract of
carriage, of the receipt of goods as well s the statement relating to the
weight, dimensions, packing of the goods and the number of package.
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CARRIAGE CONTRACTS
8.6.4 Limitation of Carrier's Liability

In India the liability of internal or domestic carriers (e.g., Indian Airlines)
for passengers and their baggage has been fixed as follows:
1. In the case of passengers 2,50,000/- francs* per passenger;
2. For registered baggage and cargo 250* francs per kilogram, and
3. For articles in the charge of the passenger himself 5000* francs per
passenger.
*As per international regulations and for the purpose of ascertaining
liability the prevailing exchange rate is used by courts.
A carrier cannot reduce his liability but may undertake a higher liability by
a special agreement. In the case of damage, the person entitled to delivery
must complain to the career forthwith after discover of damage and at the
latest within 3 days from the date of receipt of luggage. In case of delay in
delivery of goods the complaint must be lodged within 14 days from the
date on which the goods have been actually delivered.
8.6.5 Delivery Time:
The parties are at liberty to enter into a contract fixing a time within which
the delivery is to be made by the carrier. In the absence of such contract,
the goods are to be delivered within a reasonable time. The carrier is liable
for damage occasioned by delay in the carriage by air of passengers,
luggage or cargo. The carrier is not liable to pay damage if it proves that -
i. carrier and their agents had taken necessary measure to avoid
damages;
ii. or it was impossible for them to take such measures;
iii. there was contributory negligence on the part of the injured persons. In
this case the court may in accordance with the provisions of its own law
exonerate the carrier wholly or partly from liability.
Following are the time limits within which the complaints must be made
a. Damage to baggage within 7 days of receipt
b. Damage of cargo within 14 days of receipt
c. Delay in delivery within 21 days of the date of actual delivery.
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CARRIAGE CONTRACTS
8.7 SEA CARRIAGE
Goods transported by sea are governed by the Carriage of Goods by Sea

Act, 1925 and the (Indian) Bills of Lading Act, 1856. Besides, the Merchant
Shipping Act, 1958 and the Marine Insurance Act, 1963 are also applicable.
Here, we shall confine our discussion to the first two of the above
mentioned Act.
A contract of carriage of goods by sea is called a contract of affreightment
and the consideration for carriage is called the freight. A contact of
affreightment may take the form of a Charter Party where an entire ship is
hired, or a Bill of Lading, where the goods are to be carried in a general
ship which can be used for this purpose by any person. In both these
contracts, the ship owner as the carrier undertakes the responsibility of
carrying the goods of the consignor safely and securely to the destination.
In a contract for carriage of goods by sea, the following conditions are
implied:
1. Seaworthiness - This means that the ship is reasonably fit to encounter
the 'perils of the sea'. This is an absolute undertaking warranted by the
shipowner. Seaworthiness is a relative term meaning that the ship is fit
to undertake the particular voyage and to carry the particular cargo.
2. Commencement of Voyage - The ship shall be ready to load the cargo
and commence the voyage agreed on the date without undue delay and
shall also complete the voyage with all reasonable dispatch.
3. Non-deviation of Voyage - It means that if the ship does not carry out
the voyage by the prescribed or usual route in the customary manner,
the contract becomes void from the beginning of the voyage, no matter
when and where the deviation from the usual route took place.
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CARRIAGE CONTRACTS
4. Dangerous Goods not to be Shipped - If the shipper ships dangerous

goods and if on account of this, the charterer suffers any damage, he
can recover the same from the shipper.
Charter Party
A charter party is a contract providing for a hiring of a whole ship. Its
terms may amount to a leasing of the ship, when the master and the crew
of the ship become the servants of the charterer. A charter party may be
for a particular period, or for a particular voyage. In the former case it is
called a time charter party and in the latter case, a voyage charter party
has no specific form; the form varies from trade to trade depending on the
customs of the trade.
Bill of Lading
A bill of lading is issued when goods are delivered for carriage to a general
ship, which offers to carry them. The position of the owner of a general
ship is that of a common carrier. A bill of lading may be used even when a
ship is chartered. A bill of lading acknowledges the receipt of goods, is a
document of title to the goods and is also a contract of carriage of goods.
A bill of lading, as a document of title to the goods, can be transferred to
another person by endorsement and delivery. This characteristic of a bill of
lading resembles that of a negotiable instrument, but in the strict legal and
technical sense it is not a negotiable instrument. It may be said that it is
negotiable only in the popular sense.
Bill of Lading - Contents
The contents of the a bill of lading under the Indian Carriage of Goods by
Sea Act, 1925 are :
1. The name of the ship,
2. The port of shipment and port of delivery
3. The name of shipper and the person to whom delivery is to be made.
4. Loading marks for the identification of the goods, number of packages
or quantity or weight, statement regarding the conditions of the goods.
5. Excepted perils clause
6. Amount of freight.
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CARRIAGE CONTRACTS
7. An express statement that the bill of lading is subject to the rules laid
down in the Act.
8. The bill of lading should be signed by the master of the ship, and should
be stamped.
Bill of Lading - Types
The types of bills of lading are :
a. Clean bill of lading
b. Qualified, foul, or dirty bill of lading
c. Thorough bill of lading
d. Received bill of lading
e. On board bill of lading
Delivery of Goods
The prime duty and obligation of a carrier by sea is to deliver the goods to
the holder of the bill of lading, provided proper payment of freight has
been made. Bill of lading is commonly drawn in a set of three copies, one
of which is sent to the consignee, the second is for the ship's master and
the consignor retains the third.
Shipowner's Lien
In the event of non-payment of freight and other charges, the shipowner
has a right of lien on the cargo. He is thus entitled to retain the goods in
his possession until the dues are paid. His lien exists independently of any
express agreement in this regards, but ceases upon the delivery of goods.
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CARRIAGE CONTRACTS
8.8 CONTRACT OF AFFREIGHTMENT

A contract of affreightment is defined as a contract by which the owner of
the ship undertakes to carry goods of other party called as consignor by
water, or to furnish a ship for the purpose of carrying the goods to the
destination in return for a payment of freight.
Contract of affreightments are contracts of charter parties including the
bills of lading. However, charter party and bills of lading are not the same.
Where the charter party is ‘the’ contract in essence, bills of lading is
considered to be the document evidencing that particular contract.
There are distinct differences between the charter party and the bills of
lading.
A charter party is used for full shipload of goods, whereas a bill of lading is
used for less than full shipload. The services used are also different like a
‘tramp service’ for charter party and ‘liner service’ for Bill of Lading. For
charter party common law applies, but Bill of Lading is governed by
international rules like the ‘Hague-Visby Rules’. Charter party is the
contract for carriage of goods which governs the commercial relationship
between the charterer and the ship owner and the Bill of Lading is issued
under that contract as per the terms of the contract.
Some of the Implied Conditions of the Contract of Affreightment are – (a)
Seaworthiness of the ship; (b) Fitness for commencement of voyage and
cover the distance of the destination in a reasonable time ; (c) Non-
Deviation from the specified route; and (d) Shipper not supposed to ship
dangerous goods.
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8.9 RESPONSIBILITIES, LIABILITIES AND RIGHTS OF

CARRIER BY SEA
8.9.1 Responsibilities
Following are the responsibilities of the carrier for every contract of
carriage of goods by sea, as per the Carriage of Goods by Sea Act, 1925.
1. The carrier, i.e., the ship-owner shall be bound, before and at the
beginning of the voyage, to exercise due diligence to: (a) make the ship
seaworthy, (b) properly make, equip and supply the ship, and (c) make
the holds, refrigerating and cool chambers, and all other parts of the
ship in which goods arc carried, fit and safe for their reception, carriage
and preservation.
2. The carrier must properly and carefully load, handle, stow, carry, keep
care for and discharge the goods carried.
3. After receiving the goods into his charge, the carrier or the master or
agent of the carrier must, on demand of the shipper, issue to the
shipper a bill of lading containing the prescribed particulars.
8.9.2 Liabilities
The Act specifies the following liabilities
Liability for loss or damage arising or resulting front his negligence, fault
or failure in the duties and obligations provided in the Act, and not
otherwise. He is not an insurer of goods carried by the ship. Separate
marine insurance policy is required to be taken for sea perils.
If the goods of inflammable, explosive or dangerous nature, that may
become a danger to the ship or cargo, are shipped with knowledge and
consent of the ship owner, they may be landed at any place or destroyed or
rendered innocuous by the carrier without liability on the part of the carrier
except to general average, if any. Also, the carrier shall be discharged from
all liability for loss or damage unless suit is brought within one year after
delivery of the goods or the date when the goods should have been
delivered.
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8.9.3 Rights
A carrier of goods by sea has the following rights:
1. Right to claim freight - A carrier of goods by sea is entitled to claim
from the shipper the freight agreed upon.
2. Right of lien - In the event of nonpayment of freight and other
charges incurred upon the goods in his possession, a carrier of goods by
sea has been on those goods until the freight and other charges are
paid by the shipper.
3. Right to claim damages for breach of contract - A carrier of goods
by sea can claim damages from the shipper of goods for breach of any
of the terms of contract of carriage.
4. Right to repudiate the contract - When there is a breach of contract
by the shipper, and if the breach comes to the knowledge of the carrier
before the commencement of the voyage, the carrier can repudiate the
contract of carriage, and can also claim damages for the breach.

1. You are exporting a consignment of cashew nuts from Mumbai to
London. Make a list of documents required to send the goods by a) Sea
through a common carrier and b) By air. Search from Google if required.
2. You had ordered a consignment from Jaipur to Pune containing delicate
glass items to be transported by Railway. There is a breakage of 40%
items during transit. Search from Government/Railway websites under
which Act you can claim the damages from the Railways.
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8.11 SUMMARY
• The act of carrying the goods from one place to another place would
resemble a bailment as the bailor (owner) would handover the goods to
the bailee (carrier) for specific 'purpose' in the form of transporting
goods for which he would be remunerated. Here the relation is that of a
principal and an agent.
• A carrier of goods is either a Common Carrier or Private Carrier. Some of
these can carry goods and passengers, or only passengers or only goods.
• The Carriage by Air Act, 1972 lays down that certain documents are to
be issued when goods and passengers are carried by air.
• Under the Act of 1972, the carrier of goods has a right to request the
consignor to make out and hand over to him a document called an air
way bill.
• A contract of affreightment is defined as a contract by which a ship
owner undertakes to carry goods of another called as shipper or
consignor by water, or to furnish a ship for the purpose of carrying the
goods to the destination in return for a price called freight. A shipper can
engage the entire ship to carry his goods from one destination to
another, then such agreement is called as Charter Party.
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CARRIAGE CONTRACTS

1. Explain in details a common carrier.
2. Who is a private carrier? Explain.
3. What is a contract of carriage?
4. What do you mean by a common carrier? State the essential features of
a common carrier?
5. Write notes on : (a) Common Carrier, (b) Private Carrier, (c) Gratuitous
Carrier.
6. Explain (a) Forwarding Note (b) Railway Receipt.
7. What does the term "International Carriage" mean?
8. When passengers and goods arc carried by air, what document are
issued?
9. What particulars must a passenger ticket issued by an air carrier
contain?
10.What is an air consignment note?
11.What are the documents of carriage by air?
12.What is a contract of afreightment?
13.What is a bill of lading?
14.What is the difference between a bill of lading and a charter party?
15.What is a 'clear' and a 'dirty' bill of lading?
16.What is a mate's receipt?
17.Define a contract of afreightment.
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CARRIAGE CONTRACTS
1. The term ‘common carrier’ is applied to carrier of _______ by land and

inland waters.
a. Passengers
b. Money
c. Goods
d. Documents
2. In India, post office service is considered as ____________

a. Common Carrier
b. Private carrier
c. Inland carrier
d. Branch of Public Service
3. Railways are considered as ___________.

a. Private carriers
b. Common carriers
c. Inland carriers
d. Risky carriers
4. The contract of carriage by sea is known as –

a. Contract of affreightment
b. Sea way bill
c. Luggage ticket
d. Baggage check list
5. The document issued for carriage of goods by air is known as -

a. The check-in receipt
b. The goods sales memo
c. The goods quality check list
d. The air way bill
Answers : (1-c), (2-d), (3-b), (4-a), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
227
NEGOTIABLE INSTRUMENTS ACT
Chapter 9
Negotiable Instruments Act
Learning objectives
After completing this chapter, you will be able to understand the meaning
and features of negotiable instruments and explain its definition. You will
also understand the meaning and features of bill of exchange, and identify
its different modes. You will understand various types of negotiable
instruments and their uses. Regarding the cheques, you will come to know
its essentials, crossing and endorsement on cheques and the risks involved
in its collection and payments. The legal consequences of wrongful
dishonour of a cheque will be understood, and the difference between bank
draft and a cheque will be known. Lastly, the various ways of discharge of
negotiable instruments will be understood by you.
Structure:
9.1 Negotiable Instruments – Introduction and History.
9.2 Negotiable Instruments and Non-negotiable Instruments.
9.3 Definitions of Terms Used.
9.4 Negotiations
9.5 Maturity of Negotiable Instruments
9.6 Promissory Note and Bill of Exchange
9.7 Presentment, Honour and Dishonour of N.I.
9.8 Hundi, Cheques and Demand Drafts
9.10 Summary
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9.1 NEGOTIABLE INSTRUMENTS – INTRODUCTION AND

HISTORY
The Negotiable Instruments Act is an Act to define and Law relating to

Promissory Notes, Bills of Exchange and cheques. For the Act to define and
amend the law relating to promissory notes, bills of exchange and
cheques.It is hereby enacted as follows:
This Act may be called the Negotiable Instruments Act, 1881. The local
extent, Saving of usage relating to hundis, etc., extends to the whole of
India, but nothing herein contained affects the Indian Paper Currency Act,
1871, section 2, or affects any local usage relating to any instrument in an
oriental language; Provided that such usages may be excluded by any
words in the body of the instrument, which indicate and intented that the
legal relations of the parties thereto shall be governed by this Act; and it
shall come into force on the first day of March, 1882.
The Act has been extended to Goa, Daman, and Diu by Regulation 12 of
1962, sec. 3 and Sch. 1 (w.e.f. 1-12-1965) and to Dadra and Nagar Haveli
by Regulation 6 of 1963, sec. 5 and Sch. 1 (w.e.f. 1-11-1956).
9.1.1 Introduction
In India, there is reason to believe that instrument to exchange were in

use from early times and we find that papers representing money were
introduced into the country by one of the Mohammedan sovereigns of Delhi
in the early part of the fourtheenth century. The word ‘hundi’, a generic
term used to denote instruments of exchange in vernacular is derived from
the Sanskrit root ‘hund’ meaning ‘to collect’ and well expresses the
purpose to which instruments were utilised in their origin. With the advent
of British rule in India commercial activities increased to a great extent.
The growing demands for money could not be met be mere supply of
coins; and the instrument of credit took the function of money which they
represented.
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Before the enactment of the Negotiable Instruments Act, 1881, the law of
negotiable instruments as prevalent in England was applied by the Courts
in India when any question relating to such instruments arose between
Europeans. When then parties were Hindus or Mohammedans, their
personal law was applied. Though neither the law books of Hindus nor
those of Mohammedans contain any reference to negotiable instruments as
such, the customs prevailing among the merchants of the respective
community were recognised by the courts and applied to the transactions
among them. During the course of time, there had developed in the
country a strong body of usage relating to hundis, which even the
Legislature could not without hardship to Indian bankers and merchants
ignore. In fact, the Legislature felt the strength of such local usages and
though fit to exempt them from the operation of the Act with a proviso that
such usage may be excluded altogether by appropriate words. In the
absence of any such customary law, the principles derived from English law
were applied to the Indians as rules of equity justice and good conscience.
9.1.2 History
The history of the present Act is a long one. The Act was originally drafted
in 1866 by the India Law Commission and introduced in December, 1867 in
the Council and it was referred to a Select Committee. Objections were
raised by the mercantile community to the numerous deviations from the
English Law which it contained. The Bill had to be redrafted in 1877. After
the lapse of a sufficient period for criticism by the Local Governments, the
High Courts and the chambers of commerce, the Bill was revised by a
Select Committee. In spite of this, the Bill could not reach the final stage.
In 1880 by the Order of the Secretary of State, the Bill had to be referred
to a new Law Commission. On the recommendation of the new Law
Commission the Bill was re-drafted and again it was sent to a Select
Committee which adopted most of the additions recommended by the new
Law Commission. The draft thus, prepared for the fourth time was
introduced in the Council and was passed into law in 1881 being the
Negotiable Instruments Act, 1881 (26 of 1881)
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9.2 NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE

INSTRUMENTS
9.2.1 Examples of Negotiable Instruments
The various types of the Negotiable Instruments are : (i) Bills of Exchange,
(ii) Promissory Note, (iii) Cheque.(iv) Hundis (v) Share warrents, (vi)
Dividend warrants, (vii) Banker’s drafts, (viii) Circular notes, (ix) Bearer
debentures, (x) Railway receipts, (xi) Delivery orders.
The list is subject to update and modifications and changes with the growth
of commerce.
Examples of non-negotiable instruments: (i) Money orders, (ii) Deposit

receipts, (iii) share certificates (iv) Postal orders, etc.
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9.2.1 Necessities of the Negotiable Instruments

It is necessary that the following features are present in the Negotiable
Instruments :
(a) Easy transferability: Easy change of ownership; (b) Valid and complete
title; (c) Right to file suit by the transferee; (d) Notice of transfer; (e)
Presumption of consideration; (f) Easy Exchange; (g) Number of transfers
possible; (h) Rule of evidence.
9.2.3 Types of Negotiable Instruments and Their Features :
Promissory note
A “promissory note” is an instrument in writing (not being a bank-note or a
currency-note) 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
A “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.
A promise or order to pay is not “conditional”, within the meaning of this
section and section 4, by reason of the time for payment of the amount or
any installment thereof, being expressed to be on the lapse of certain
period after the occurrence of a specified event which, according to the
ordinary expectation of mankind, is certain to happen, although the time of
its happening may be uncertain.
The sum payable may be “certain”, within the meaning of this section and
section 4, although it includes future indicated rate of change, or is
according to the course of exchange, or is according to the course of
exchange, and although the instrument provides that, on default of
payment of an installment, the balance unpaid shall become due. The
person to whom it is clear that the direction is given or that payment is to
be made may be a “certain person,” within the meaning of this section and
section 4, although he is misnamed or designated by description only
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Cheque
A ”cheque” is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand and it includes the
electronic image of a truncated cheque and a cheque in the electronic
form.
(a) “A cheque in the electronic form” means a cheque which contains the
exact mirror image of a paper cheque, and is generated, written and
signed in a secure system ensuring the minimum safety standards with the
use of digital signature (with or without biometric signature) and
asymmetric crypto system;
(b) “A truncated cheque” means a cheque which is truncated during the
course of a clearing cycle, either by the clearing house or by the bank
whether paying or receiving payment, immediately on generation of an
electronic image for transmission, substituting the further physical
movement of the cheque in writing.
The expression “clearing house” means the clearing house managed by the
Reserve Bank of India or a clearing house recognised as such by the
Reserve Bank of India.
Note - Substituted for section 6 Act No. 55 of 2002, sec. 2 for “A “cheque”
is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand” (w.e.f. 6-2-2003).
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9.3 DEFINITIONS OF TERMS USED

Drawer, Drawee
The maker of a bill of exchange or Cheque is called the “drawer”; the
person thereby directed to pay is called the “drawee”.
“Drawee in case of need“: When the bill or in any endorsement thereon the
name of any person is given in addition to the drawee to be resorted to in
case of need, such person is called a “drawee in case of need”.
Acceptor
After the drawee of a bill has signed his assent upon the bill, or, if there are
more parts thereof than one, upon one of such part, and delivered the
same, or given notice of such signing to the holder or to some person on
his behalf, he is called the “acceptor”.
“Acceptor for honour”: When a bill of exchange has been noted or
protested for non-acceptance or for better security], and any person
accepts it supra protest for honour of the drawer or of any one of the
endorser, such person is called an “acceptor for honour”.
Payee
The person named in the instrument, to whom or to whose order the
money is by the instrument directed to be paid, is called the “payee”.
Holder
The “holder” of a promissory note, bill of exchange or cheque means any
person entitled in his own name to the possession thereof and to receive or
recover the amount due thereon from the parties thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person
so entitled at the time of such loss or destruction.
Holder in due course
“Holder in due course” means any person who for consideration became
the possessor of a promissory note, bill of exchange or cheque if payable to
bearer, or the payee or indorse thereof, if payable to order before the
amount mentioned in it became payable, and without having sufficient
cause to believe that any defect existed in the title of the person from
whom he derived his title.
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Payment in due course

“Payment in due course” means payment in accordance with the apparent
tenor of the instrument in good faith and without negligence to any person
in possession thereof under circumstances which do not afford a
reasonable ground for believing that he is not entitled to receive payment
of the amount therein mentioned.
Inland instrument
A promissory note, bill of exchange or cheque drawn or made in India and
made payable in, or drawn upon any person resident in, [Indian] shall be
deemed to be an inland instrument.
Foreign instrument
Any such instrument not so drawn, made or made payable shall be deemed
to be a foreign instrument.
Negotiable instrument
(1) A “negotiable instrument” means a promissory note, bill of exchange or
cheque payable either to order or to bearer.
Explanation (i).- A promissory note, bill of exchange or cheque is payable
to order which is expressed to be so payable to a particular person, and
does not contain words prohibiting transfer or indicating an intention that it
shall not be transferable.
Explanation (ii).- A promissory note, bill of exchange or cheque is payable
to bearer which is expressed to be so payable or on which the only or last
endorsements is an endorsement is an endorsement in blank.
Explanation (iii) Where a promissory note, bill of exchange or cheque,
either originally or by endorsement, is expressed to be payable to the
order of a specified person, and not to him or his order, it is nevertheless
payable to him or his order at his option.
(2) 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.
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9.4 NEGOTIATIONS
When a promissory note, bill of exchange or cheque is transferred to any
person, so as to continue the person the holder thereof, the instrument is
said to be negotiated.
In case of bearer instruments, the negotiation can be made by simple
delivery of the instrument. In case of an order instrument, the negotiation
can be made only by endorsement on the instrument and its delivery. In
other words, a negotiable instrument payable to a particular person or his
order can be transferred by making an endorsement on it and then
delivering the same.
Endorsement
When the marker or holder of an negotiable instrument signs the same,
otherwise than as such maker, for the purpose of negotiation, one the back
or face thereof or on a slip of paper annexed thereto, or so signs for the
same purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to indorse the same, and is called the endorser.
Endorsement in blank and in full-endorsee
1. If the endorser signs his name only, the endorsement is said to be “in
blank”, and if he adds a direction to pay the amount mentioned in the
instrument to, or to the order of, a specified person, the endorsement is
said to be “in full”, and the person so specified is called the “endorsee”
of the instrument.
2. The provisions of this Act relating to a payee shall apply with the
necessary modifications to an endorsee.
Ambiguous instruments
Where an instrument may be construed either as a promissory note or bill
of exchange, the holder may at his election treat it as either and the
instrument shall be thenceforward treated accordingly.
Where amount is stated differently in figures and words
If the amount undertaken or ordered to be paid is stated differently in
figures and in words, the amount stated in words shall be the amount
undertaken or ordered to be paid.
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Instruments payable on demand

A promissory note or bill of exchange, in which no time for payment is
specified, and, a cheque, are payable on demand.
Inchoate stamped instruments
Where one person signs and delivers to another a paper stamped in
accordance with the law relating to negotiable instruments then in force in
India, and either wholly blank or having written thereon an incomplete
negotiable instrument, he thereby gives prima facie authority to the holder
thereof to make or complete, as then case may be, upon it a negotiable
instrument, instrument, for any amount specified therein and not
exceeding the amount covered by the stamp. The person so signing shall
be liable upon such instrument, in the capacity in which he signed the
same, to any holder in due course for such amount, provided that no
person other than a holder in due course shall recover from the person
delivering the instrument anything in excess of the amount intended by
him to be paid thereunder.
At sight, on presentment, after sight
In a promissory note or bill of exchange the expressions “at sight” and “on
presentment” means on demand. The expression “after sight” means, in a
promissory note, after presentment for sight, and, in a bill of exchange
after acceptance, or noting for non-acceptance, or nothing for non-
acceptance, or protest for non-acceptance.
9.5 MATURITY OF NEGOTIABLE INSTRUMENTS

The maturity of a promissory note or bill of exchange is the date at which it
falls due.
Days of grace – Every promissory note or bill of exchange which is not
expressed to be payable on demand, at sight or on presentment is at
maturity on the third day after the day on which it is expressed to be
payable.
Calculating maturity of bill or note payable so many months after date or
sight
In calculating the date at which a promissory note or bill of exchange,
made payable at stated number of months after date or after sight, or after
a certain event, is at maturity, the period stated shall be held to terminate
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on the day of the month, which corresponds with the day on which the
instrument is dated, or presented for acceptance or sight, or noted for non-
acceptance, or protested for non-acceptance, or the event happens or,
where the instrument is a bill of exchange made payable at a stated
number of months after sight and has been accepted for honour, with the
day on which it was so accepted. If the month in which the period would
terminate has no corresponding day, the period shall be held to terminate
on the last day of such month.
Illustrations
a. A negotiable instrument dated 29th January, 1878, is made payable at
one month after date. The instrument is at maturity on the third day
after the 28th February, 1878.
b. A negotiable instrument, dated 30th August, 1878, is made payable
three months after date. The instrument is at maturity on the 3rd
December, 1878.
c. A promissory note or bill of exchange, dated 31st August, 1878, is made
payable three months after date. The instrument is at maturity on the
3rd December, 1878.
Calculating maturity of bill or note payable so many days after date
of sight
In calculating the date at which a promissory note or bill of exchange made
payable a certain number of days after date of sight or after a certain
event is at maturity, the day of the date, or of presentment for acceptance
or sight, or of protest for non-acceptance, or on which the event happens,
shall be excluded.
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9.6 PROMISSORY NOTE AND BILL OF EXCHANGE

9.6.1 Promissory Note
Section 4 of the N.I Act defines; A promissory note is an instrument in
writing containing an unconditional undertaking signed by the maker, to
pay a certain sum of money to, or the order of a certain person or to the
bearer of the instrument. The parties to promissory note include the
promissory, drawer or maker, the payee, promise or the holder, and the
endorser.
9.6.2 Requirements of a Promissory Note

The following are the requirements of a promissory note :
(a) The Promissory Note must be in writing: Only verbal promise or oral
undertaking are not entertained in a promissory note. (b) The promissory
note must contain an express promise or clear undertaking to pay. It
cannot be implied or inferred. (c) It should clearly mention the
requirements of the receipt of money. (d) A promise to pay contained in
the note must be unconditional. If the promise to pay is coupled with a
condition it is not a promissory note. (e) The instrument should show on
the fact of it as to who exactly is liable to pay. The name of the promissory
or maker should be written clearly and ascertainable on seeing the
document. (f) The person who promises to pay must sign the instrument
even though it might have been written by the promissory himself. (g) The
amount undertaken to be paid must be definite or certain and not vague.
That is, it must not be capable of contingent additions or deletions or
subtractions.
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Also, the promissory note should contain a promise to pay money and
money only, i.e., legal tender money. In India, one rupee and above
denominations are unlimited legal tender and fifty paisa coin is limited legal
tender, up to ten rupees and all other subsidiary coins are up to one rupee
only. The promise cannot be extended to payments in the form of goods,
shares, bonds, foreign exchange, etc.
Thirdly, the money must be payable to definite person or according to his
order. The payee may be ascertained by name or by designation. But it
cannot be made payable either to bearer or to the maker himself. It may
be payable on demand or after certain definite period of time.
Lastly, a promissory note should, necessarily, bear sufficient stamp as
required by the Indian Stamp Act, 1889.; It should be dated, and the rate
of interest per annum must be clearly mentioned.
9.6.3 Bill of Exchange
According to section 5 of the N.I. Act, a 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.
There are usually three parties to a bill of exchange. The maker of a bill of
exchange is called the drawer (creditor). The person who is directed to pay
is called the drawee (debtor): the person who is entitled to receive the
money is called the payee (receiver); when the payee gets the possession
of the bill, he is called the holder. It is the holder’s duty to present the bill
for acceptance to the drawee. The drawee signifies his acceptance by
signing on the bill. After such a signature, the drawee becomes the
acceptor. It is not, however, necessary that three separate persons should
answer to the description of drawer, drawee and payee. Sometimes, the
drawer and the payee may be one and the same person in which case the
drawer directs the drawee to make payment of the sum specified in the bill
to himself. Besides the above parties to a bill of exchange, there may be
the endorser, the endorsee, drawer in case of need, acceptor for Honor,
etc.
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Acceptance of a bill of exchange

A bill of exchange should be accepted by the drawee before payment can
be claimed. When the drawee of a bill signifies his assent to the drawer by
signing his name across the face of the bill with or without the word
“Accepted”, it is called the acceptance of the bill, Then the drawee becomes
the “acceptor” of the bill. An acceptance is complete when it is given in
writing on the bill, signed by the drawee or his agent and it is delivered to
the holder.
Conditions for valid acceptance of a bill of exchange
The following conditions should be fulfilled for acceptance of the Bill of
Exchange –
(a) The acceptance must be in writing. (b) It must be signed by the
drawee, even bare signature is sufficient to suggest his acceptance. The
word “accepted” may or may not be there, but signature is a must. (c)
Acceptance must be completed by delivery of the bill to the holder or
giving notice of acceptance to him or his agent. (d) A bill can only by
accepted by the drawee or all or some of the several drawee, or by a
drawer in case of need or by any other acceptor for honor. (e) An
acceptance must be absolute and unconditional.
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Payment on bill of exchange

A bill of exchange may be payable on demand or at a specified date or
after a specified period of time. If no time of payment is mentioned, the
instrument is payable on demand. The maturity of a bill of exchange is the
date at which it falls due. A Grace period of three days may be allocated to
take care of scheduled or unscheduled holidays. A cheque or a promissory
note or bill payable at sight or demand is not entitled to days of grace.
9.7 PRESENTMENT, HONOUR AND DISHONOUR OF

NEGOTIABLE INSTRUMENTS
9.7.1 Presentment
Presentment for acceptance
A bill of exchange payable after sight must, if no time or place is specified
therein for presentment, be presented to the draweee thereof for
acceptance, if he can, after reasonable search, be found, by a person
entitled to demand acceptance, within a reasonable time after it is drawn,
and in business hours on a business day, in default of such presentment,
on party thereto is liable thereon to the person making such default. If the
drawee cannot, after reasonable search, be found, the bill is dishonoured.
If the bill is directed to the drawee at a particular place, it must be
presented at that place, and if after the due date for presentment he
cannot, after reasonable search, be found thereon, the bill is dishonoured.
Presentment of promissory note for sight
A promissory note, payable at a certain period after sight must be
presented to the maker thereof for sight (if he can after reasonable search
be found) by a person entitled to demand payment, within a reasonable
time after it is made and in business hours on a business day. In default of
such presentment, no party thereto is liable thereon to the person making
such default.
Drawee’s time for deliberation
The holder must, if so required by the drawee of a bill of exchange
presented to him for acceptance, allow the drawee fortyeight hours
(exclusive of public holidays ) to consider whether he will accept it.
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Presentment for payment

Promissory notes, bill of exchange and cheques must be presented for
payment to the maker, acceptor or drawee thereof respectively, by or on
behalf or the holder as hereinafter provided. In default of such
presentment, the other parties thereto are not liable thereon to such
holder.
Notwithstanding anything contained in section 6, where an electronic
image of a truncated cheque is presented for payment, the drawee bank is
entitled to demand any further information regarding the truncated cheque
from the bank holding the truncated cheque in case of any reasonable
suspicion about the genuineness of the apparent tenor of instrument, and
if the suspicion is that of any fraud, forgery, tampering or destruction of
the instrument, it is entitled to further demand the presentment of the
truncated cheque itself for verification – Provided that the truncated
cheque so demanded by the drawee bank shall be retained by it, if the
payment is made accordingly.
Honours for presentment
Presentment for payment must be made during the usual hours of business
and, if at a banker’s, within banking hours.
Presentment for payment of instrument payable after date or sight
A promissory note or bill of exchange, made payable at a specified period
after date or sight thereof, must be presented for payment at maturity.
Presentment for payment of promissory note payable by
instalments
A promissory note payable by instalments must be presented for payment
on the third day after the date fixed for payment of each instalment; and
non-payment on such presentment has the same effect as non-payment of
a note at maturity.
Presentment for payment of instrument payable at specified place
and not elsewhere
A promissory note, bill of exchange or cheque made, drawn or accepted
payable at a specified place and not elsewhere must, in order to charge
any party thereto, be presented for payment at that place.
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Instrument payable at specified place

A promissory note or bill of exchange made, drawn or accepted payable at
a specified place must, in order to charge the maker or drawer thereof, be
presented at the place.
Presentment where no exclusive place specified
A promissory note or bill of exchange, not made payable as mentioned in
section 68 and 69, must be presented for payment at the place of business
(if any), or at the usual residence, of the maker, drawee or acceptor
thereof, as the case may be.
Presentment when maker, etc., has no known place of business or
residence
If the maker, drawee or acceptor of a negotiable instrument has no known
place of business or fixed residence, and no place is specified in the
instrument for presentment for acceptance or payment such presentment
may be made to him in person wherever he can be found.
Presentment of cheque to charge drawer
A cheque must, in order to charge the drawer, be presented at the bank
upon which it is drawn before the relation between the drawer and his
banker has been altered to the prejudice of the drawer.
Presentment of cheque to charge any other person
A cheque must, in order to charge any person except the drawer, be
presented within a reasonable time after delivery thereof by such person.
Presentment of instrument payable on demand
Subject to the provisions of section 31, a negotiable instrument payable on
demand must be presented for payment within a reasonable time after it is
received by the holder.
Presentment by or to agent, representative of deceased, or
assignee of insolvent.
Presentment for acceptance or payment may be made to the duly
authorized agent of the drawee, maker or acceptor, as the case may be, or,
where the drawee, maker or acceptor has died, to his legal representative,
or, where he has been declared an insolvent, to his assignee.
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Excuse for delay in presentment for acceptance or payment

Delay in presentment for acceptance of payment is excused if the delay is
caused by circumstances beyond the control of the holder, and not
imputable to his default, misconduct or negligence. When the cause of the
delay ceases to operate, presentment must be made within a reasonable
time.
When presentment unnecessary
No presentment for payment is necessary, and the instrument is
dishonoured at the due date for presentment, in any of the following
cases:-
a. if the maker, drawee or acceptor intentionally prevents the presentment
of the instrument, or if the instrument being payable at his place of
business, he closes such place on a business day during the usual
business hours, or if the instrument being payable at some other
specified place, neither he nor any person authorized to pay it attends
at such place during the usual business hours, or if the instrument not
being payable at any specified place, he cannot after due search be
found;
b. as against any party sought to be charged therewith, if he has engaged
to pay notwithstanding non-presentment ;
c. as against any party if, after maturity, with knowledge that the
instrument has not been presented – he makes a part payment on
account of the amount due on the instrument, or promises to pay the
amount due therein whole or in part, or otherwise waives his right to
take advantage of any default in presentment for payment;
d. as against the drawer, if the drawer could not suffer damage from the
want of such presentment.
Liability of banker for negligently dealing with bill presented for
payment
When a bill of exchange, accepted payable at a specified bank, has been
duly presented there for payment and dishonoured, if the banker so
negligently or improperly keeps, deals with or delivers back such bill as to
cause loss to the holder, he must compensate the holder for such loss.
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9.7.2 Honouring the Instrument by Payment

To whom payment should be made
Subject to the provisions of section 82, clause (c), payment of the amount
due on a promissory note, bill of exchange or cheque must, in order to
discharge the maker or acceptor, be made to the holder of the instrument.
Interest when rate specified
When interest at a specified rate is expressly made payable on a
promissory note or bill of exchange, interest shall be calculated at the rate
specified, on the amount of the principal money due thereon, from the date
of the instrument, until tender or realization of such amount, or until such
date after the institution of a suit to recover such amount as the Court
directs.
Interest when no rate specified
When no rate of interest is specified in the instrument, interest on the
amount due thereon shall, notwithstanding any agreement relating to
interest between any parties to the instrument, be calculated at the rate of
eighteen per cent per annum, from the date at which the same ought to
have been paid by the party charged, until tender or realization of the
amount due thereon, or until such date after the institution of a suit to
recover such amount as the Court directs.
Explanation- When the party charged is the endorser of an instrument
dishonoured by non-payment, he his liable to pay interest only from the
time he receives notice of the dishonour.
Delivery of instrument on payment or indemnity in case of loss
Any person liable to pay, and called upon by the holder thereof to pay, the
amount due on a promissory note, but of exchange or cheque is before
payment entitled to have it shown, is on payment entitled to have it
delivered up to him, or, if the instrument is lost or cannot be produced, to
be indemnified against any further claim thereon against him.
Where the cheque is an electronic image of a truncated cheque, even after
the payment the banker who received the payment shall be entitled to
retain the truncated cheque.
A certificate issued on the foot of the printout of the electronic image of a
truncated cheque by the banker who paid the instrument, shall be prima
facie proof of such payment.
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9.7.3 Discharge From Liability

The maker, acceptor or indorser respectively of a negotiable instrument is
discharged from liability thereon-
a. By cancellation – to a holder thereof who cancels such acceptor’s or
endorser’s name with intent to discharge him, and to all parties claiming
under such holder;
b. By release – to a holder thereof who otherwise discharges such maker,
acceptor or endorser, and to all parties deriving title under such holder
after notice of such discharge;
c. By payment to all parties thereto, if the instrument is payable to bearer,
or has been indorsed in blank, and such maker, acceptor or endorser
makes payment in due course of the amount due thereon.
Discharge by allowing drawee more than forty-eight hours to
accept
If the holder of a bill of exchange allows the drawee more than forty-eight
hours, exclusive of public holidays, to consider whether he will accept the
same, all previous parties not consenting to such allowance are thereby
discharged from liability to such holder.
When cheque is not duly presented and drawer is damaged thereby
1. Where a cheque is not presented for payment within a reasonable time
of its issue, and the drawer or person on whose account it is drawn had
the right, at the time when presentment ought to have been made, as
between himself and the banker, to have the cheque paid and suffers
actual damage through the delay, he is discharged to the extent of such
damage, that is to say, to the extent to which such drawer or person is
a creditor of the banker to a large amount than he would have been if
such cheque had been paid.
2. In determining what is a reasonable time, regard shall be had to the
nature of the instrument, the usage of trade and of bankers, and the
facts of the particular case.
3. The holder of the cheque as to which such drawer or person is so
discharged shall be a creditor, in lieu of such drawer or person, of such
banker to the extent of such discharge and entitled to recover the
amount from him.
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Illustrations
a. A draws a cheque for Rs. 1,000, and, when the cheque ought to be
presented, has funds at the bank to meet it. The bank fails before the
cheque is presented. The drawer is discharged, but the holder can prove
against the bank for the amount of the cheque.
b. A draws a cheque at Pune on a bank in Calcutta. The bank fails before
the cheque could be presented in ordinary course. A is not discharged,
for he has not suffered actual damage through any delay in presenting
the cheque.
Cheque payable to order
Where a cheque payable to order purports to be endorsed by or on behalf
of he payee, the drawee is discharged by payment in due course.
Where a cheque is originally expressed to be payable to the 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, and notwithstanding that any such endorsement purports to
restrict or exclude further negotiation.
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 behalf of the payee, the
bank is discharged by payment in due course.
Parties not consenting discharged by qualified or limited
acceptance
If the holder of a bill of exchange acquiesces in qualified acceptance, or
one limited to part of the sum mentioned in the bill, or which substituted a
different place or time for payment or which, where the drawees are not
partners, is not signed by all the drawees, all previous parties whose
consent is not obtained to such acceptance are discharged as against the
holder and those claiming under him, unless on notice given by the holder
they assent to such acceptance.
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Explanation- An acceptance is qualified

a. where it is conditional, declaring the payment to be dependent or the
happening of an event therein stated;
b. where it undertakes the payment of part only of the sum ordered to be
paid;
c. where, no place of payment being specified on the order, it undertakes
the payment at a specified place, and not otherwise or elsewhere, or
where a place of payment being specified in the order, it undertakes the
payment at some other place and not otherwise or elsewhere;
d. where it undertakes the payment at a time other than that at which
under the order or would be legally due.
Affect of material alteration.
Any material alteration of a negotiable instrument renders the same void
as against anyone who is a party thereto at the time of making such
alteration and does not consent thereto, unless it was made in order to
carry out the common intention of the original parties;
Alteration by endorsee: Any such alteration, if made by an endorsee,
discharges his endorser from all liability to him in respect of the
consideration thereof.
Acceptor or endorser bound notwithstanding previous alteration
An acceptor or endorser of a negotiable instrument is bound by the
acceptance or endorsement notwithstanding any previous alteration of the
instrument.
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 reasons of
the instrument having been altered, or the cheque crossed.
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Where the cheque is an electronic image of a truncated cheque, any

difference in apparent tenor of such electronic image and the truncated
cheque shall be a material alteration and it shall be the duty of the bank or
the clearing house, as the case may be, to ensure the exactness of the
apparent tenor of electronic image of the truncated cheque while
truncating and transmitting the image.
Any bank or a clearing house which receives a transmitted electronic image
of a truncated cheque, shall verify from the party who transmitted the
image to it, that the image so transmitted to it and received by it, is
exactly the same.
Extinguishments of rights of action on bill in acceptor’s hands
If a bill of exchange which has been negotiated is, at or after maturity, held
by the acceptor in his own right, all rights of action thereon are
extinguished.
9.7.4 Dishonor of Negotiable Instruments
Dishonour by non-acceptance
A bill of exchange is said to be dishonoured by non-acceptance when the
drawee, or one of several drawee not being partners, makes default in
acceptance upon being duly required to accept the bill, or where
presentment is excused and the bill is not accepted. Where the drawee is
incompetent to contract, or the acceptance is qualified the bill may be
treated as dishonored.
Dishonours by non-payment
A promissory note, bill of exchange or cheque is said to be dishonoured by
non-payment when the maker of the note, acceptor of the bill or drawee of
the cheque makes default in payment upon being duly required to pay the
same.
By and to whom notice should be given
When a promissory note, bill of exchange or cheque is dishonoured by non-
payment, the holder thereof, or some party thereto who remains liable
thereon, must be given notice that the instrument has been so
dishonoured to all other parties whom the holder seeks to make severally
liable thereon, and to some one of several parties whom he seeks to make
jointly liable thereon.
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Nothing in this section renders it necessary to give notice to the maker of

the dishonoured promissory note, or acceptor of the dishonoured bill of
exchange or cheque.
Mode in which notice may be given
Notice of dishonor may be given to a duly authorized agent of the person
to whom it is required to be given, or, where he has died, to his legal
representative, or, where he has been declared an insolvent, to his
assignee, maybe oral or written, may, if written, be sent by post, and may
be in any form, but it must inform the party to whom it is given, either in
express terms or by reasonable intendment that the instrument has been
dishonored, and in what way, and that he will be held liable thereon, and it
must be given within a reasonable time after dishonour, at the place of
business or in case such party has no place of business at the residence of
the party for whom it is intended.
If the notice is duly directed and sent by post and miscarries, such
miscarriage does not render the notice invalid.
Party receiving must transmit notice of dishonour
Any party receiving notice of dishonour must in order to render any prior
party liable to himself, give notice of dishonour to such party within a
reasonable time, unless such party otherwise receives due notice as
provided by section 93.
Agent for presentment
When the instrument is deposited with an agent for presentment, the
agent is entitled to the same time to give notice to his principal as if he
were the holder giving notice of dishonour, and the principal is entitled to a
further like period to give notice of dishonour.
When party to whom notice given is dead
When the party to whom notice of dishonour is dispatched is dead, but the
party dispatching the notice is ignorant of his death, the notice is sufficient.
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When notice of dishonour is unnecessary

a. Notice of dishonour is necessary -
b. when it is dispensed with by the party entitled thereto.
c. in order to charge the drawer, when he has countermanded payment.
d. when the party charged could not suffer damage for want of notice.
e. when the party entitled to notice cannot after due search be found, or
the party bound to give notice is, for any other reason, unable without
any fault of his own to give it.
f. to charge the drawers, when the acceptors is also a drawer.
g. in the case of a promissory note which is not negotiable.
h. when the party entitled to notice, knowing the facts, promise
unconditionally to pay the amount due on the instrument.
9.8 HUNDIS, CHEQUES AND DEMAND DRAFTS

9.8.1 Hundis
The word ‘hundi’, a generic term used to denote instruments of exchange
in vernacular is derived from the Sanskrit root ‘hund’ meaning ‘to collect’
and well expresses the purpose to which instruments were utilised in their
origin. With the advent of British rule in India commercial activities
increased to a great extent. The growing demands for money could not be
met be mere supply of coins; and the instrument of credit took the function
of money which they represented.
During the course of time there had developed in the country a strong
body of usage relating to hundis, which even the Legislature could
not without hardship to Indian bankers and merchants ignore. In fact,
the Legislature felt the strength of such local usages and though fit to
exempt them from the operation of the Act with a provison that such
usage may be excluded altogether by appropriate words. The Negotiable
Instruments Act does not apply to Hundis. Hundis are governed by the
custom and usages of the locality in which they are intended to be used. In
case, there is no customary rule known as to a certain point, the court can
apply the rules of the Negotiable Instruments Act. It is also open to the
parties to exclude expressly the applicability of any custom relating to
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hundis by agreement and include the provisions of the Negotiable

Instruments Act.
9.8.2 Cheques
Crossing of cheques
Where a cheque bears across its face an addition of the words “and
company” or any abbreviation thereof, between two parallel transverse
lines, or of two parallel transverse lines simply, either with or without the
words “not negotiable”. That addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed generally.
Cheque crossed specially
Where a cheque bears across its face an addition of the name of a banker,
either with or without the words “not negotiable”, that addition shall be
deemed a crossing, and the cheque shall be deemed to be crossed
specially, and to be crossed to that banker.
Crossing after issue
Where a cheque is uncrossed, the holder may cross it generally or
specially.
Where a cheque is crossed generally, the holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add the
words “not negotiable”.
Where a cheque is crossed specially, the banker to whom it is crossed may
again cross it specially to another banker, his agent, for collection.
Payment of cheque crossed generally
Where a cheque is crossed generally, the banker on whom it is drawn shall
not pay it otherwise than to a banker. Payment of cheque crossed specially
– Where a cheque is crossed specially, the banker on whom it is drawn
shall not pay it otherwise than to the banker to whom it is crossed, or his
agent for collection.
Payment of cheque crossed generally or specially more than once
Where a cheque is crossed specially to more than one banker, except when
crossed to an agent for the purpose of collection, the banker on whom it is
drawn shall refuse payment thereof.
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Payment in due course of crossed cheque

Where the banker on whom a crossed cheque is drawn has paid the same
in due course, the banker paying the cheque, and (in case such cheque has
come to the hands of the payee) the drawer thereof, shall respectively be
entitled to the same rights, and be placed in the same position in all
respects, as they would respectively be entitled to and placed in if the
amount of the cheque had been paid to and received by the true owner
thereof.
Payment of cheque crossed specially more than once
Any banker paying a cheque crossed generally otherwise than to a banker
or a cheque crossed specially otherwise than to the banker to whom the
same is crossed, or his agent for collection, being a banker, shall be liable
to the true owner of the cheque for any loss he may sustain owing to the
cheque having been so paid.
Cheque bearing “not negotiable”
A person taking a cheque crossed generally or specially, bearing in either
case the words “not negotiable”, shall not have and shall not be capable of
giving, a better title to the cheque than that which the person from whom
he took it had.
Payment of bearer cheques
An instrument may be made payable to (i) bearer, or (ii) a specified person
or his order. An instrument is payable to bearer which is expressed to be so
payable on which is expressed thus “Pay to Manoj Shinde or bearer”. It is
also payable to bearer when the only or last endorsement on it is endorse.
Where a cheque is originally expressed by the drawer himself to be payable
to the bearer, the paying banker is fully protected if he makes the payment
to the bearer or even if there is any forged or restrictive endorsement on
the cheque. But the payment must be made in due course. Hence, the
rule, ‘once a bearer cheque always a bearer cheque’. In other words, the
original character of the cheque is not altered so far as the paying banker
is concerned, provided the payment is made in due course.
An instrument is payable to order, (1) when it is payable to the order of a
specified person or (2) when it is payable to a specified person or his order
or, (3) when it is payable to a specified person without the addition of the
words “or his order” and does not contain words prohibiting transfer or
indicating an intention that it should not be transferable. When an
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instrument, either originally or by endorsement, is made payable to the

order of a specified person and not to him or his order, it is payable to his
order, at his option.
Non-liability of banker receiving payment of cheque
A banker who has in good faith and without negligence received payment
for a customer of a cheque crossed generally or specially to himself shall
not, in case the title to the cheque proves defective, incur any liability to
the true owner of the cheque by reason only of having received such
payment.
New Format of a Cheque
The Amendment Act 2002 has substituted new definition for Section 6. It
provides that a ‘cheque’ is a bill of exchange drawn on a specified banker
and not expressed to be payable otherwise than on demand and it includes
the electronic image of truncated cheque and a cheque in the electronic
from.
‘A cheque in the electronic form’ means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and signed in a
secure system ensuring the minimum safety standards with the use of
digital signature (with or without biometric signature) and asymmetric
crypto system.
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‘A truncated cheque’ means a cheque which is truncated during the course

of a clearing cycle, either by the clearing house or by the bank whether
paying or receiving payment, immediately on generation of an electronic
image for transmission, substituting the further physical movement of the
cheque in writing.
Amendment in the Act of 2002
The Negotiable Instruments Act, 1881 was amended by the Banking, Public
Financial Institutions and Negotiable Instruments Laws (Amendment) Act,
1988 wherein a new Chapter XVII was incorporated for penalties in case of
dishonour of cheques due fo insufficiency of funds in the account of the
drawer of the cheque. These provisions were incorporated with a view to
encourage the culture of use of cheques and enhancing the credibility of
the instrument. The existing provisions in the Negotiable Instruments Act,
1881, namely, sections 138 to 142 in Chapter XVII have been found
deficient in dealing with dishonour of cheques, Not only the punishment
provided in the Act has proved to be inadequate, the procedure prescribed
for the Courts to deal with such matters has been found to be
cumbersome. The Courts are unable to dispose of such cases expeditiously
in a time bound manner in view of the procedure contained in the Act-
(Para 1)
Keeping in view the recommendations of the Standing Committee on
Finance and other representations, it has been decided to bring out, inter
alia, the following amendments in the Negotiable Instruments, Act, 1881,
namely:-
a. to increase the punishment as prescribed under the Act from one year
to two years;
b. to increase the period for issue of notice by the payee to the drawer
from 15 days to 30 days.
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Dishonour of cheque for insufficiency of funds in the accounts

Where any cheque drawn by a person on an account maintained by him
with a banker for payment of any amount of money to another person from
out of that account for the discharge, in whole or in part, of any debt or
other liability, is returned by the bank unpaid, either because of the
amount of money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be paid from
that account by an agreement made with that bank, such person shall be
deemed to have committed an offence and shall without prejudice to any
other provisions of this Act, be punished with imprisonment for “a term
which may extend to two years”, or with fine which may extend to twice
the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless-
a. The cheque has been presented to the bank within a period of six
months from the date on which it is drawn or within the period of its
validity, whichever is earlier.
b. The payee or the holder induce course of the cheque, as the case may
be, makes a demand for the payment of the said amount of money by
giving a notice, in writing, to the drawer, of the cheque, within 30 days
of the receipt of information by him from the bank regarding the return
of the cheques as unpaid, and
c. The drawer of such cheque fails to make the payment of the said
amount of money to the payee or, as the case may be, to the holder in
due course of the cheque, within fifteen days of the receipt of the said
notice.
Paying banker and statutory protection
The banker on whom the cheque is drawn, viz., the drawer or otherwise
known as the paying banker has a contractual duty to pay money to the
right person according to the customer’s mandate. If he pays, by mistake,
to a wrong person he would be committing actual breach of his duty
towards his customers. The Negotiable Instruments Act gives legal
protection to a paying banker, provided the payment is a payment in due
course (payment according to an established custom and practice of
bankers in the country).
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Cheque return memo

In order to render the drawer of dishonoured cheque liable for prosecution
a statutory notice demanding payment of the value of dishonoured cheque
within 15 days of receipt of notice should be given by the payee. Such a
notice should be given within 15 days of receipt of intimation from the
Bank that the said cheque is dishonoured. Such an intimation is called as
“Cheque Return Memo”.
Check bouncing
If banker dishonours a cheque without proper reasoning, he becomes liable
to compensate the customer for any loss or damage caused to the
customer by such dishonour. When a cheque is dishonoured, the payee or
the holder may have a right or action against the drawer, but not against
the banker, even if the dishonour was not justified.
Penal action for dishonour of the cheque :
Under section 138 of the Negotiable Instruments Act, introduced by the
(Amendment) Act 66 of 1988, has inserted a new chapter XVII in the
Negotiable Instruments Act in the year 1988. The Amendment came into
force w.e.f., April, 1989; a drawer of a cheque is liable to penalties in case
of dishonor of the cheque for insufficiency of funds in the account. If a
person issues a cheque in payment of any debt or liability and it is
dishonoured for lack of funds or if it exceeds the arrangement with the
bank, he or she will be deemed to have committed an offence and will be
punished with imprisonment for a term which may extend to one year, or
with fine which may go upto twice the amount of the cheque or both.
9.8.3 Demand Draft
The demand draft, or the bank draft is kind of bill of exchange drawn by
one office of a bank upon another office of the same bank. It is similar to a
cheque. It is an order to pay money. It cannot be made payable to bearer
on demand. Its payment cannot usually be stopped or countermanded. The
drawer who pays the draft is discharged by payment in due course as long
as it purports to be endorsed by or on behalf of the payee
To avail legal protection under the section, the paying banker should fulfill
two conditions: (i) the payment must have been a payment in due course,
and (ii) the draft must have been endorsed by or on behalf of the payee. If
the banker pays a demand draft being an irregular endorsement, he would
have acted negligently and the payment is not a payment in due course.
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Format of demand draft

Normally, the following format is followed by most of the banks in India.

1. Consider you are a banker, and one of your customers has deposited a
cheque in his account with your bank, and the cheque has been
returned because of shortage of funds. Write a short letter to your
customer.
2. You are a businessman at Pune and you want to collect certain amount
from your customer from Delhi. Send him an email explaining the
procedure of drawing a demand draft from any nationalized bank for the
due amount.
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9.10 SUMMARY
• A negotiable instrument is prepared by a person/company and
presented for a payment.
• A promissory note is an instrument which gives undertaking in writing to
pay a certain amount to a person on his demand.
• A bill of exchange is an instrument in writing, directing a person to pay a
certain amount of money to a person or the bearer of the instrument.
• The act of transferring a negotiable instrument from person to person by
suitable endorsements is called negotiation.
• The person who draws up a cheque is called the drawer of the
instrument.
• When a cheque is presented, and when there are sufficient funds in the
drawer’s amount, the bank must pass the cheque under all normal
circumstances.
• If a bank dishonours a cheque without reason, it has to compensate the
drawer.
• The bouncing of a cheque is not an offence, if a person has been given a
cheque towards the settlement of the liability.
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1. What is a negotiable instrument? How did it originate?
2. Write down the differences between a bill of exchange and a promissory
note.
3. Who is ‘payer for honour’? State the essential conditions for valid
payment for honour.
4. What is a protest? What are the contents of a protest?
5. What is a cheque? What are its requisites?
6. Why is the ‘crossing’ of a cheque done? What are the different types of
crossings?
7. What are the rights of ‘holder’ of a negotiable instrument?
8. State the legal effects of ‘material alteration’ and ‘forgery’.
9. What are the conditions under which the bank can refuse the payment
of a cheque?
10.Distinguish between ‘General crossing’ and ‘Special crossing’.
11.Distinguish between ‘Cheque’ and ‘Bill of exchange’.
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1. A negotiable instrument is a _________ contract.

a. Promissed
b. Oral
c. Written
d. Written or Verbal
2. The maker of a negotiable instrument is called as a _________ .

a. Writer
b. Drawer
c. Receiver
d. Holder
3. The person to whom the sum stated in the instrument is payable is -

a. Drawee
b. Banker
c. Payee
d. Customer
4. The promissory note must be_________ .

a. in writing
b. promissed
c. preserved forever
d. known to all banks
5. The stamping as per Indian Stamp Act is a must to be done on

a_________ .
a. Cheque
b. Demand Draft
c. Hundi
d. Promissory note
Answers : (1-c), (2-b), (3-c), (4-a), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
263
THE ACT OF ENVIRONMENTAL PROTECTION
Chapter 10
The Act Of Environmental Protection
Learning objectives
After completing the chapter, you will be able to understand about
environment protection and prevention; know about the objectives,
definitions, functions of central and state boards of pollution control;
understand the AIR(Prevention and Control of Pollution) Act; Examine the
powers and functions of the central and state board, prevention and control
of air pollution and air laboratory; Define the powers of the central
government under the Act, know more about the Environmental
laboratories, offences and penalties, and understand the environment
protection Act.
Structure:
10.1 The Water (Prevention and Control of Pollution) Act, 1974
10.2 Definitions
10.3 Central Board and State Boards
10.4 Functions of Central and State Boards
10.5 Penalties for Water Pollution
10.6 The AIR (Prevention and Control of Pollution) Act, 1981
10.7 Central and State Boards – Functions
10.8 Prevention and Control of Air Pollution and Penalties
10.9 Air Laboratory
10.10 The Environment Protection Act, 1986
10.11 Powers of Central Government under the Act
10.12 Rules to Regulate Environmental Pollution
10.13 Environmental Laboratories
10.14 Offences and Penalties under Environmental Protection Act
10.16 Summary
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10.1 THE WATER (PREVENTION AND CONTROL OF

POLLUTION) ACT, 1974
The Act was formed by Parliament in the Twenty-fifth Year of the Republic
of India as follows :-
1. This Act may be called the Water (Prevention and Control of Pollution)
Act, 1974.
2. It applies in the first instance to the whole of the States of Assam, Bihar,
Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir, Karnataka,
Kerala, Madhya Pradesh, Rajasthan, Tripura and West Bengal and the
Union territories; and it shall apply to such other State which adopts
this Act by resolution passed in that behalf under clause (1) of Article
252 of the Constitution.
3. It shall come into force, at once in the State of Assam, Bihar, Gujarat,
Haryana, Himachal Pradesh, Jammu and Kashmir, Karnataka, Kerala,
Madhya Pradesh, Rajasthan, Tripura and West Bengal and in the Union
territories, and in any other State which adopts this Act under clause (1)
of Article 252 of the Constitution on the date of such adoption and any
reference in this Act to the commencement of this Act shall, in relation
to any State or Union territory mean the date on which this Act comes
into force in such State or Union territory.
An Act to provide for the prevention and control of water pollution and the
maintaining or restoring of wholesomeness of water, for the establishment,
with a view to carrying out the purposes aforesaid, of Boards for the
prevention and control of water pollution, for conferring on and assigning
to such Boards powers and functions relating thereto and for matters
connected therewith.
An Act to provide for the prevention and control of water pollution and the
maintaining or restoring of wholesomeness of water, for the establishment,
with a view to carrying out the purposes aforesaid, of Boards for the
prevention and control of water pollution, for conferring on and assigning
to such Boards powers and functions relating thereto and for matters
connected therewith.
It was also decided that the Parliament has no power to make laws for the
States with respect to any of the matters aforesaid except as provided in
Articles 249 and 250 of the Constitution;
265
10.2 DEFINITIONS
In this Act, unless the context otherwise requires,—
a. “Board” means the Central Board or a State Board;
b. “Central Board” means the Central Pollution Control Board constituted
under section 3;
c. “member” means a member of a Board and includes the chairman
thereof;
d. “occupier”, in relation to any factory or premises, means the person who
has control over the affairs of the factory or the premises, and includes,
in relation to any substance, the person in possession of the substance;
(d-a) “outlet” includes any conduit pipe or channel, open or closed,
carrying sewage or trade effluent or any other holding arrangement
which causes, or is likely to cause, pollution;
e. “pollution” means such contamination of water or such alteration of the
physical, chemical or biological properties of water or such discharge of
any sewage or trade effluent or of any other liquid, gaseous or solid
substance into water (whether directly or indirectly) as may, or is likely
to, create a nuisance or render such water harmful or injurious to public
health or safety, or to domestic, commercial, industrial, agricultural or
266
other legitimate uses, or to the life and health of animals or plants or of

aquatic organisms;
f. “prescribed” means prescribed by rules made under this Act by the
Central Government or, as the case may be, the State Government;
g. “sewage effluent” means effluent from any sewerage system or sewage
disposal works and includes sullage from open drains;
(g-a) “sewer” means any conduit pipe or channel, open or closed,
carrying sewage or trade effluent;
h. “State Board” means a State Pollution Control Board constituted under
section 4;
i. “State Government” in relation to a Union territory means the
Administrator thereof appointed under article 239 of the Constitution;
j. “stream” includes—
i. river;
ii. water course (whether flowing or for the time being dry);
iii. inland water (whether natural or artificial);
iv. sub-terranean waters;
v. sea or tidal waters to such extent or, as the case may be, to such
point as the State Government may, by notification in the Official
Gazette, specify in this behalf;
k. “trade effluent” includes any liquid, gaseous or solid substance which is
discharged from any premises used for carrying on any 5 [industry,
operation or process, or treatment and disposal system], other than
domestic sewage.
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10.3 CENTRAL BOARD AND STATE BOARDS

10.3.1 Constitution – Central Board
1. The Central Government shall, with effect from such date (being a date
not later than six months of the commencement of this Act in the States
of Assam, Bihar, Gujarat, Haryana, Himachal Pradesh, Jammu and
Kashmir, Karnataka, Kerala, Madhya Pradesh, Rajasthan, Tripura and
West Bengal and in the Union territories) as it may, by notification in the
Official Gazette, appoint, constitute a Central Board to be called
the Central Pollution Control Board to exercise the powers conferred on
and perform the functions assigned to that Board under this Act.
2. The Central Board shall consist of the following members, namely:—
a. a full-time chairman, being a person having special knowledge or
practical experience in respect of matters relating to environmental
protection or a person having knowledge and experience in
administering institutions dealing with the matters aforesaid, to be
nominated by the Central Government;
b. such number of officials, not exceeding five, to be nominated by the
Central Government to represent that Government;
c. such number of persons, not exceeding five to be nominated by the
Central Government, from amongst the members of the State
Boards, of whom not exceeding two shall be from those referred to in
clause (c) of subsection (2) of section 4;
d. such number of non-officials, not exceeding three, to be nominated
by the Central Government, to represent the interests of agriculture,
fishery or industry or trade or any other interest which, in the opinion
of the Central Government, ought to be represented;
e. two persons to represent the companies or corporations owned,
controlled or managed by the Central Government, to be nominated
by that Government;
f. a full-time member-secretary, possessing qualifications, knowledge
and experience of scientific, engineering or management aspects of
pollution control, to be appointed by the Central Government.
268
3. The Central Board shall be a body corporate with 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 and
to contract, and may, by the aforesaid name, sue or be sued.
10.3.2 Constitution - State Boards
1. The State Government shall, with effect from such date as it may, by
notification in the Official Gazette, appoint, constitute a State Pollution
Control Board , under such name as may be specified in the notification,
to exercise the powers conferred on and perform the functions assigned
to that Board under this Act.
2. A State Board shall consist of the following members, namely:—
a. A chairman, being a person having special knowledge or practical
experience in respect of the matters relating to environmental
protection] or a person having knowledge and experience in
administering institutions dealing with the matters aforesaid, to be
nominated by the State Government:
b. Provided that the chairman may be either whole-time or part-time as
the State Government may think fit;
c. such number of officials, not exceeding five, to be nominated by the
State Government to represent that Government;
d. such number of persons, not exceeding five, to be nominated by the
State Government from amongst the members of the local authorities
functioning within the State;
e. such number of non-officials, not exceeding three, to be nominated
by the State Government to represent the interests of agriculture,
fishery or industry or trade or any other interest which, in the opinion
of the State Government, ought to be represented;
f. two persons to represent the companies or corporations owned,
controlled or managed by the State Government, to be nominated by
that Government;
g. a full-time member-secretary, possessing qualifications, knowledge
pollution control, to be appointed by the State Government.
269
3. Every State Board shall be a body corporate with the name specified by
the State Government in the notification under subsection (1), having
perpetual succession and a common seal with power, subject to the
provisions of this Act, to acquire, hold and dispose of property and to
contract, and may, by the said name, sue or be sued.
4. Notwithstanding anything contained in this section, no State Board shall
be constituted for a Union territory and in relation to a Union territory,
the Central Board shall exercise the powers and perform the functions of
a State Board for that Union territory:
Provided that in relation to any Union territory the Central Board may
delegate all or any of its powers and functions under this subsection to
such person or body of persons as the Central Government may specify.
10.4 FUNCTIONS OF CENTRAL AND STATE BOARDS

10.4.1 Functions of Central Board
1. Subject to the provisions of this Act, the main function of the Central
Board shall be to promote cleanliness of streams and wells in different
areas of the States.
2. In particular and without prejudice to the generality of the foregoing
function, the Central Board may perform all or any of the following
functions, namely:—
a. advise the Central Government on any matter concerning the
prevention and control of water pollution;
b. coordinate the activities of the State Boards and resolve disputes
among them;
c. provide technical assistance and guidance to the State Boards, carry
out and sponsor investigations and research relating to problems of
water pollution and prevention, control or abatement of water
pollution;
d. plan and organise the training of persons engaged or to be engaged
in programmes for the prevention, control or abatement of water
pollution on such terms and conditions as the Central Board may
specify;
e. organise through mass media a comprehensive programme regarding
the prevention and control of water pollution;
270
(e-a) perform such of the functions of any State Board as may be

specified in an order made under subsection (2) of section 18;
f. collect, compile and publish technical and statistical data relating to
water pollution and the measures devised for its effective prevention
and control and prepare manuals, codes or guides relating to
treatment and disposal of sewage and trade effluents and
disseminate information connected therewith;
g. lay down, modify or annul, in consultation with the State Government
concerned, the standards for a stream or well:
Provided that different standards may be laid down for the same stream or
well or for different streams or wells, having regard to the quality of water,
flow characteristics of the stream or well and the nature of the use of the
water in such stream or well or streams or wells;
a. plan and cause to be executed a nation-wide programme for the
prevention, control or abatement of water pollution;
b. perform such other functions as may be prescribed.
3. The Board may establish or recognize a laboratory or laboratories to
enable the Board to perform its functions under this section efficiently,
including the analysis of samples of water from any stream or will or of
samples of any sewage or trade effluents.
NOTE : The main functions of the Central Board shall be to promote
cleanliness of streams and wells in different areas of the States. It may
perform all or any of the functions mentioned in clauses (a) to (i) of
subsection (2), and it may establish or recognise a laboratory or
laboratories for the purpose mentioned in subsection (3).
271
10.4.2 Functions of State Board

1. Subject to the provisions of this Act, the functions of a State Board shall
be—
a. to plan a comprehensive program for the prevention, control or
abatement of pollution of streams and wells in the State and to secure
the execution thereof;
b. to advise the State Government on any matter concerning the
prevention, control or abatement of water pollution;
c. to collect and disseminate information relating to water pollution and
the prevention, control or abatement thereof;
d. to encourage, conduct and participate investigations and research
relating to problems of water pollution and prevention, control or
abatement of water pollution;
e. to collaborate with the Central Board in organizing the training of
persons engaged or to be engaged in programs relating to prevention,
control or abatement of water pollution and to organise mass education
programs relating thereto;
f. to inspect sewage or trade effluents, works and plants for the treatment
of sewage and trade effluents and to review plans, specifications or
other data relating to plants set up for the treatment of water, works for
the purification thereof and the system for the disposal of sewage or
trade effluents or in connection with the grant of any consent as
required by this Act;
g. to lay down, modify or annul effluent standards for the sewage and
trade effluents and for the quality of receiving waters (not being water
in an inter-State stream) resulting from the discharge of effluents and
to classify waters of the State;
h. to evolve economical and reliable methods of treatment of sewage and
trade effluents, having regard to the peculiar conditions of soils, climate
and water resources of different regions and more especially the
prevailing flow characteristics of water in streams and wells which
render it impossible to attain even the minimum degree of dilution;
i. to evolve methods of utilisation of sewage and suitable trade effluents in
agriculture;
272
j. to evolve efficient methods of disposal of sewage and trade effluents on

land, as are necessary on account of the predominant conditions of
scant stream flows that do not provide for major part of the year the
minimum degree of dilution;
k. to lay down standards of treatment of sewage and trade effluents to be
discharged into any particular stream taking into account the minimum
fair weather dilution available in that stream and the tolerance limits of
pollution permissible in the water of the stream, after the discharge of
such effluents;
l. to make, vary or revoke any order—
i. for the prevention, control or abatement of discharges of waste into
streams or wells;
ii. requiring any person concerned to construct new systems for the
disposal of sewage and trade effluents or to modify, alter or extend
any such existing system or to adopt such remedial measures as are
necessary to prevent, control or abate water pollution;
m. to lay down effluent standards to be complied with by persons while
causing discharge of sewage or sullage or both and to lay down, modify
or annul effluent standards for the sewage and trade effluents;
n. to advise the State Government with respect to the location of any
industry the carrying on of which is likely to pollute a stream or well;
o. to perform such other functions as may be prescribed or as may, from
time to time, be entrusted to it by the Central Board or the State
Government.
2. The Board may establish or recognise a laboratory or laboratories to
enable the Board to perform its functions under this section efficiently,
including the analysis of samples of water from any stream or well or of
samples of any sewage or trade effluents.
273
10.4.3 Powers of Central and State Boards

1. In the performance of its functions under this Act—
a. the Central Board shall be bound by such directions in writing as the
Central Government may give to it; and
b. every State Board shall be bound by such directions in writing as the
Central Board or the State Government may give to it:
Provided that where a direction given by the State Government is
inconsistent with the direction given by the Central Board, the matter
shall be referred to the Central Government for its decision.
2. Where the Central Government is of the opinion that any State Board
has defaulted in complying with any directions given by the Central
Board under subsection (1) and as a result of such default a grave
emergency has arisen and it is necessary or expedient so to do in the
public interest, it may, by order, direct the Central Board to perform any
of the functions of the State Board in relation to such area for such
period and for such purposes, as may be specified in the order.
3. Where the Central Board performs any of the functions of the State
Board in pursuance of a direction under subsection (2), the expenses, if
any, incurred by the Central Board with respect to the performance of
such functions may, if the State Board is empowered to recover such
expenses, be recovered by the Central Board with interest (at such
reasonable rate as the Central Government may, by order, fix) from the
date when a demand for such expenses is made until it is paid from the
person or persons concerned as arrears of land revenue or of public
demand.
4. For the removal of doubts, it is hereby declared that any directions to
perform the functions of any State Board given under subsection (2) in
respect of any area would not preclude the State Board from performing
such functions in any other area in the State or any of its other
functions in that area.
NOTE - In the performance of its functions (i) the Central Board shall be
bound by directions of the Central Government; (ii) a State Board shall be
bound by directions of the State Government, subject to certain
contingencies mentioned as below -
274
1. Notwithstanding anything contained in this Act, if the State

Government, after consultation with, or on the recommendation of, the
State Board, is of opinion that the provisions of this Act need not apply
to entire State, it may, by notification in the Official Gazette, restrict the
application of this Act to such area or areas as may be declared therein
as water pollution, prevention and control area or areas and thereupon
the provisions of this Act shall apply only to such area or areas.
2. Each water pollution, prevention and control area may be declared
either by reference to a map or by reference to the line of any
watershed or the boundary of any district or partly by one method and
partly by another.
3. The State Government may, by notification in the Official Gazette,—
a. alter any water pollution, prevention and control area whether by
way of extension or reduction; or
b. define a new water pollution, prevention and control area in which
may be merged one or more water pollution, prevention and control
areas, or any part or parts thereof.
4. If the State Government is of the opinion that the provisions of this Act
need not apply to the entire State, it may restrict the application of this
Act to such area or areas as may be declared as water pollution,
prevention and control area or areas. The State Government is also
empowered to alter any area or define a new area.
275
Power to obtain information -

1. For the purpose of enabling a State Board to perform the functions
conferred on it by or under this Act, the State Board or any officer
empowered by it in that behalf, may make surveys of any area and
gauge and keep records of the flow or volume and other characteristics
of any stream or well in such area, and may take steps for the
measurement and recording of the rainfall in such area or any part
thereof and for the installation and maintenance for those purposes of
gauges or other apparatus and works connected therewith, and carry
out stream surveys and may take such other steps as may be necessary
in order to obtain any information required for the purposes aforesaid.
2. A State Board may give directions requiring any person who in its
opinion is abstracting water from any such stream or well in the area in
quantities which are substantial in relation to the flow or volume of that
stream or well or is discharging sewage or trade effluent into any such
stream or well, to give such information as to the abstraction or the
discharge at such times and in such form as may be specified in the
directions.
3. Without prejudice to the provisions of subsection (2), a State Board
may, with a view to preventing or controlling pollution of water, give
directions requiring any person in charge of any establishment where
any industry, operation or process, or treatment and disposal system is
carried on, to furnish to it information regarding the construction,
installation or operation of such establishment or of any disposal system
or of any extension or addition thereto in such establishment and such
other particulars as may be prescribed.
276
Power to take samples of effluents -

1. A State Board or any officer empowered by it in this behalf shall have
power to take for the purpose of analysis samples of water from any
stream or well or samples of any sewage or trade effluent which is
passing from any plant or vessel or from or over any place into any such
stream or well.
2. The result of any analysis of a sample of any sewage or trade effluent
taken under sub-section (1) shall not be admissible in evidence in any
legal proceeding unless the provisions of subsections (3), (4) and (5)
are complied with.
3. Subject to the provisions of subsections (4) and (5), when a sample
(composite or otherwise as may be warranted by the process used) of
any sewage or trade effluent is taken for analysis under subsection (1),
the person taking the sample shall—
a. serve on the person in charge of, or having control over, the plant or
vessel or in occupation of the place (which person is hereinafter
referred to as the occupier) or any agent of such occupier, a notice,
then and there in such form as may be prescribed of his intention to
have it so analysed;
b. in the presence of the occupier or his agent, divide the sample into
two parts;
c. cause each part to be placed in a container which shall be marked
and sealed and shall also be signed both by the person taking the
sample and the occupier or his agent;
d. send one container forthwith, -
i. in a case where such sample is taken from any area situated in a
Union territory, to the laboratory established or recognised by the
Central Board under section 16; and
ii. in any other case, to the laboratory established or recognised by
the State Board under section 17;
e. on the request of the occupier or his agent, send the second
container,—
i. in a case where such sample is taken from any area situated in a
Union territory, to the laboratory established or specified under
subsection (1) of section 51; and
277
ii. in any other case, to the laboratory established or specified under

subsection (1) of section 52.
4. When a sample of any sewage or trade affluent is taken for analysis
under subsection (1) and the person taking the sample serves on the
occupier or his agent, a notice under clause (a) of subsection (3) and
the occupier or his agent wilfully absents himself, then,—
a. the sample so taken shall be placed in a container which shall be
marked and sealed and shall also be signed by the person taking the
sample and the same shall be sent forthwith by such person for
analysis to the laboratory referred to in subclause (i) or subclause
(ii), as the case may be, of clause (e) of subsection (3) and such
person shall inform the Government analyst appointed under
subsection (1) or sub-section (2), as the case may be, of section 53,
in writing about the wilful absence of the occupier or his agent; and
b. the cost incurred in getting such sample analysed shall be payable by
the occupier or his agent and in case of default of such payment, the
same shall be recoverable from the occupier or his agent, as the case
may be, as an arrear of land revenue or of public demand:
Provided that no such recovery shall be made unless the occupier or, as
the case may be, his agent has been given a reasonable opportunity of
being heard in the matter.
5. When a sample of any sewage or trade effluent is taken for analysis
under subsection (1) and the person taking the sample serves on the
occupier or his agent a notice under clause (a) of subsection (3) and the
occupier or his agent who is present at the time of taking the sample
does not make a request for dividing the sample into two parts as
provided in clause (b) of subsection (3), then, the sample so taken shall
be placed in a container which shall be marked and sealed and shall also
be signed by the person taking the sample and the same shall be sent
forthwith by such person for analysis to the laboratory referred to in
subclause (i) or subclause (ii), as the case may be, of clause (d) of
subsection (3).
278
Admissibility of sample
The sample must be lifted in accordance with the provisions of section 21
of the Act when only its analysis could be admissible in evidence; Delhi
Bottling Co. Pvt. Ltd. v. C.P.C. Board, AIR 1986.
Power of entry and inspection
1. Subject to the provisions of this section, any person empowered by a
State Board in this behalf shall have a right at any time to enter, with
such assistance as he considers necessary, any place -
a. for the purpose of performing any of the functions of the Board
entrusted to him;
b. for the purpose of determining whether and if so in what manner, any
such functions are to be performed or whether any provisions of this
Act or the rules made there under or any notice, order, direction or
authorisation served, made, given, or granted under this Act is being
or has been complied with;
c. for the purpose of examining any plant, record, register, document or
any other material object or for conducting a search of any place in
which he has reason to believe that an offence under this Act or the
rules made thereunder has been or is being or is about to be
committed and for seizing any such plant, record, register, document
or other material object, if he has reason to believe that it may
furnish evidence of the commission of an offence punishable under
this Act or the rules made thereunder:
Provided that the right to enter under this subsection for the
inspection of a well shall be exercised only at reasonable hours in a
case where such well is situated in any premises used for residential
purposes and the water thereof is used exclusively for domestic
purposes.
2. The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), or,
in relation to the State of Jammu and Kashmir, the provisions of any
corresponding law in force in that State, shall, so far as may be, apply
to any search or seizure under this section as they apply to any search
or seizure made under the authority of a warrant issued under section
94 of the said Code, or, as the case may be, under the corresponding
provisions of the said law.
279
10.5 CONTROL OF WATER POLLUTION

Provision regarding existing sewage or effluent discharge
Where immediately before the commencement of this Act any person was
discharging any sewage or trade effluent into a stream or well or sewer or
on land, the provisions of section 25 shall, so far as may be, apply in
relation to such person as they apply in relation to the person referred to in
that section subject to the modification that the application for consent to
be made under sub-section (2) of that section shall be made on or before
such date as may be specified by the State Government by notification in
this behalf in the Official Gazette.
Emergency measures in case of pollution of stream or well

1. Where it appears to the State Board that any poisonous, noxious or
polluting matter is present in any stream or well or on land by reason of
the discharge of such matter in such stream or well or on such land or
has entered into that stream or well due to any accident or other
unforeseen act or event, and if the Board is of opinion that it is
necessary or expedient to take immediate action, it may for reasons to
be recorded in writing, carry out such operations, as it may consider
necessary for all or any of the following purposes, that is to say,
a. removing that matter from the stream or well or on land and
disposing it of in such manner as the Board considers appropriate;
b. remedying or mitigating any pollution caused by its presence in the
stream or well;
280
c. issuing orders immediately restraining or prohibiting the person

concerned from discharging any poisonous, noxious or polluting
matter into the stream or well or on land] or from making insanitary
use of the stream or well.
2. The power conferred by subsection (1) does not include the power to
construct any works other than works of a temporary character which
are removed on or before the completion of the operations.
10.5 PENALTIES FOR WATER POLLUTION

10.5.1 Penalty for Certain Acts -
1. Whoever—
a. destroys, pulls down, removes, injures or defaces any pillar, post
or stake fixed in the ground or any notice or other matter put up,
inscribed or placed, by or under the authority of the Board, or
b. obstructs any person acting under the orders or directions of the
Board from exercising his powers and performing his functions
under this Act, or
c. damages any works or property belonging to the Board, or
d. fails to furnish to any officer or other employee of the Board any
information required by him for the purpose of this Act, or
e. fails to intimate the occurrence of any accident or other
unforeseen act or event under section 31 to the Board and other
authorities or agencies as required by that section, or
f. in giving any information which he is required to give under this
Act, knowingly or wilfully makes a statement which is false in any
material particular, or
g. for the purpose of obtaining any consent under section 25 or
section 26, knowingly or wilfully makes a statement which is false
in any material particular, shall be punishable with imprisonment
for a term which may extend to three months or with fine which
may extend to ten thousand rupees or with both.
281
2. Where for the grant of a consent in pursuance of the provisions of

section 25 or section 26 the use of meter or gauge or other measure or
monitoring device is required and such device is used for the purposes
of those provisions, any person who knowingly or wilfully alters or
interferes with that device so as to prevent it from monitoring or
measuring correctly shall be punishable with imprisonment for a term
which may extend to three months or with fine which may extend to
ten thousand rupees or with both.
10.5.2 Penalty for contravention of provisions of section 24
Whoever contravenes the provisions of section 24 shall be punishable with
imprisonment for a term which shall not be less than one year and six
months but which may extend to six years and with fine.
10.5.3 Penalty for contravention of section 25 or section 26
Whoever contravenes the provisions of section 25 or section 26 shall be
punishable with imprisonment for a term which shall not be less than 1[one
year and six months] but which may extend to six years and with fine.
10.5.4 Enhanced penalty after previous conviction
If any person who has been convicted of any offence under section 24 or
section 25 or section 26 is again found guilty of an offence involving a
contravention of the same provision, he shall, on the second and on every
subsequent conviction, be punishable with imprisonment for a term which
shall not be less than two years but which may extend to seven years and
with fine:
Provided that for the purpose of this section no cognizance shall be taken
of any conviction made more than two years before the commission of the
offence which is being punished.
10.5.5 Penalty for contravention of certain provisions of the Act
Whoever contravenes any of the provisions of this Act or fails to comply
with any order or direction given under this Act, for which no penalty has
been elsewhere provided in this Act, shall be punishable with imprisonment
which may extend to three months or with fine which may extend to ten
thousand rupees or with both, and in the case of a continuing
contravention or failure, with an additional fine which may extend to five
thousand rupees for every day during which such contravention or failure
continues after conviction for the first such contravention or failure.
282
10.5.6 Publication of names of offenders

If any person convicted of an offence under this Act commits a like offence
afterwards it shall be lawful for the court before which the second or
subsequent conviction takes place to cause the offender’s name and place
of residence, the offence and the penalty imposed to be published at the
offender’s expense in such newspapers or in such other manner as the
court may direct and the expenses of such publication shall be deemed to
be part of the cost attending the conviction and shall be recoverable in the
same manner as a fine.
10.5.7 Offences by companies
1. Where an offence under this Act has been committed by a company,
every person who at the time the offence was committed was in charge
of, and was responsible to the company for the conduct of, the business
of the company, as well as the company, shall be deemed to be guilty of
the offence and shall be liable to be proceeded against and punished
accordingly:
Provided that nothing contained in this subsection shall render any such
person liable to any punishment provided in this Act if he proves that the
offence was committed without his knowledge or that he exercised all
due diligence to prevent the commission of such offence.
2. Notwithstanding anything contained in subsection (1), where an offence
under this Act has been committed by a company and it is proved that
the offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director, manager,
secretary or other officer of the company, such director, manager,
secretary or other officer shall also be deemed to be guilty of that
offence and shall be liable to be proceeded against and punished
accordingly.
Explanation.—For the purposes of this section,—
a. “company” means any body corporate, and includes a firm or other
association of individuals; and
b. “director” in relation to a firm means a partner in the firm.
283
10.5.8 Offences by Government Departments

Where an offence under this Act has been committed by any Department
of Government, the Head of the Department shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished
accordingly:
Provided that nothing contained in this section shall render such Head of
the Department liable to any punishment if he proves that the offence was
committed without his knowledge or that he exercised all due diligence to
prevent the commission of such offence.
10.5.9 Cognizance of offences
1. No court shall take cognizance of any offence under this Act except on a
complaint made by -
a. a Board or any officer authorised in this behalf by it; or
b. any person who has given notice of not less than sixty days, in the
manner prescribed, of the alleged offence and of his intention to
make a complaint, to the Board or officer authorised as aforesaid,
and no court inferior to that of a Metropolitan Magistrate or a Judicial
Magistrate of the first class shall try any offence punishable under
this Act.
2. Where a complaint has been made under clause (b) of subsection (1),
the Board shall, on demand by such person, make available the relevant
reports in its possession to that person:
Provided that the Board may refuse to make any such report available to
such person if the same is, in its opinion, against the public interest.
3. Notwithstanding anything contained in section 29 of the Code of
Criminal Procedure, 1973 it shall be lawful for any Judicial Magistrate of
the first class or for any Metropolitan Magistrate to pass a sentence of
imprisonment for a term exceeding two years or of fine exceeding two
thousand rupees on any person convicted of an offence punishable
under this Act.
284
10.6 THE AIR (PREVENTION AND CONTROL OF

POLLUTION) ACT, 1981
Of all the threats of recent times to the mankind and to the whole world,
‘Pollution’ is considered as the most serious threat. Pollution is presence of
unwanted matter in unwanted quantity at the unwanted place. Out of the
day to day serious pollutions, environmental pollution by air and noise are
increasing day by day and must be controlled by all to avoid future serious
threats. Therefore, it is necessary to ensure that there is sufficient check
against pollution of the air.
Environmental protection has received pointed attention of the planners,
especially after the Bhopal gas tragedy in late 1984. The Government has
identified certain categories of industries as highly polluting in nature and
has stipulated a condition to the effect that the Letters of Intent issued to
these industries would not be converted into Industrial License unless
adequate pollution control measures have been undertaken by them. For
the purpose of the preservation of the quality of air and control of air
pollution, the Central Government enacted the Air (Prevention and Control
of Pollution) Act, in 1981.
285
10.6.1 The Act and Definitions -

1. This Act may be called the Air (Prevention and Control of Pollution) Act,
1981.
2. It extends to the whole of India.
3. It shall come into force on such date 1 as the Central Government may,
by notification in the Official Gazette, appoint.
Definitions -
a. “air pollution” means any solid, liquid or gaseous substance including
noise present in the atmosphere in such concentration as may be or
tend to be injurious to human beings or other living creatures or plants
or property or environment;
b. “air pollution” means the presence in the atmosphere of any air
pollutant;
c. “approved appliance” means any equipment or gadget used for the
burning of any combustible material or for generating or consuming any
fume, gas or particulate matter and approved by the State Board for the
purposes of this Act;
d. “approved fuel” means any fuel approved by the State Board for the
purposes of this Act;
e. “automobile” means any vehicle powered either by internal combustion
engine or by any method of generating power to drive such vehicle by
burning fuel;
f. “Board” means the Central Board or a State Board;
g. “Central Board” means the Central Pollution Control Board constituted
under Section 3 of the Water (Prevention and Control of Pollution) Act,
1974 (6 of 1974);
h. “Chimney” includes any structure with an opening or outlet from or
through which any air pollutant may be emitted;
i. “Control equipment” means any apparatus, device, equipment or
system to control the quality and manner of emission of any air
pollutant and includes any device used for securing the efficient
operation of any industrial plant;
286
j. “Emission” means any solid or liquid or gaseous substance coming out

of any chimney, duct or flue or any other outlet;
k. “Industrial plant” means any plant used for any industrial or trade
purposes and emitting any air pollutant into the atmosphere;
l. “Member” means a member of the Central Board or a State Board, as
the case may be, and includes the Chairman thereof;
m. “Occupier”, in relation to any factory or premises, means the person
who has control over the affairs of the factory or the premises, and
includes, in relation to any substance, the person in possession of the
substance;
n. “Prescribed” means prescribed by rules made under this Act by the
Central Government or, as the case may be, the State Government;
o. “State Board” means, -
i. In relation to a State in which the Water (Prevention and Control of
Pollution) Act, 1974 (6 of 1974), is in force and the State
Government has constituted for that State Pollution Control Board
under section 4 of that Act, the said State Board; and
ii. In relation to any other State, the State Board for the Prevention and
Control of Air Pollution constituted by the State Government under
section 5 of this Act.
287
10.7 CENTRAL AND STATE BOARDS – FUNCTIONS AND

POWERS
10.7.1 Central Pollution Control Board
The Central Pollution Control Board constituted under section 3 of the
Water (Prevention and Control of Pollution) Act, 1974 (6 of 1974), shall,
without prejudice to the exercise and performance of its powers and
functions under that Act, exercise the powers and perform the functions of
the Central Pollution Control Board for the prevention and control of air
pollution under this Act.
Central Board for the prevention and control of Air pollution.—The Central
Board for the Prevention and control of Water Pollution constituted under
section 3 of the Water (Prevention and Control Pollution) Act, 1974, shall,
without prejudice to the exercise and performance of its powers and
functions under that Act, exercise the powers and perform the functions of
the Central Board for the Prevention and Control of Air Pollution under this
Act.
State Boards for the Prevention and Control of Water Pollution to be State
Boards for the Prevention and Control of Air Pollution.—In any State in
which the Water (Prevention and Control of Pollution) Act, 1974, is in force
and the State Government has constituted for that State a State Board for
the Prevention and Control of Water Pollution under section 4 of that Act,
such State Board shall be deemed to be the State Board for the Prevention
and Control of Air Pollution constituted under section 5 of this Act and
accordingly that State Board for the Prevention and Control of Water
Pollution shall, without prejudice to the exercise and performance of its
powers and functions under that Act, exercise the powers and perform the
functions of the State Board for the Prevention and Control of Air Pollution
under this Act.
288
10.7.2 Functions Of Central Board

1. Subject to the provisions of this Act, and without prejudice to the
performance of its functions under the Water (Prevention and Control of
Pollution) Act, 1974 (6 of 1974), the main functions of the Central Board
shall be to improve the quality of air and to prevent, control or abate air
pollution in the country.
2. In particular and without prejudice to the generality of the foregoing
functions, Central Board may -
a. Advise the Central Government on any matter concerning the
improvement of the quality of air and the prevention, control or
abatement of air pollution;
b. Plan and cause to be executed a nationwide program for the
prevention, control or abatement of air pollution;
c. Coordinate the activities of the State Boards and resolve disputes
among them;
d. Provide technical assistance and guidance to the State Boards, carry
out and sponsor investigations and research relating to problems of
air-pollution and prevention, control or abatement of air pollution;
(d-a) Perform such of the functions of any State Board as may be
specified in an order made under subsection (2) of Section 18;
e. Plan and organise the training of persons engaged or to be engaged
in programs for the prevention, control or abatement of air pollution
on such terms and conditions as the Central Board may specify;
f. Organise through mass media a comprehensive program regarding
the prevention, control or abatement of air pollution;
g. Collect, compile and publish technical and statistical data relating to
air pollution and the measures devised for its effective prevention,
control or abatement and prepare manuals, codes or guides relating
to prevention, control or abatement of air pollution;
h. Lay down standards for the quality of air;
i. Collect and disseminate information is respect of matters relating to
air pollution;
j. Perform such other functions as may be prescribed.
289
3. The Central Board may establish or recognise a laboratory or

laboratories to enable the Central Board to perform its functions under
this section efficiently.
4. The Central Board may -
a. Delegate any of its functions under this Act generally or specially to
any of the committees appointed by it;
b. Do such other things and perform such other acts as it may think
necessary for the proper discharge of its functions and generally for
the purpose of carrying into effect the purposes of this Act.
10.7.3 State Pollution Control Board
In any State in which the Water (Prevention and Control of Pollution) Act,
1974, is in force and the State Government has constituted for that State a
State Pollution Control Board under section 4 of that Act such State Board
shall be deemed to be the State Board for the Prevention and Control of Air
Pollution constituted under Section 5 of this Act, and accordingly that State
Pollution Control Board shall, without prejudice to the exercise and
performance of its powers and functions under that Act, exercise the
powers and perform the functions of the State Board for the prevention
and control of air pollution under this Act.
10.7.4 Constitution of State Boards
1. In any State in which the Water (Prevention and Control of Pollution)
Act, 1974 (6 of 1974), is not in force, or that Act is in force but the
State Government has not constituted a 1State Pollution Control Board
under that Act, the State Government shall, with effect from such date
as it may, by notification in the Official Gazette, appoint, constitute a
State Board for the Prevention and Control of Air Pollution under such
name as may be specified in the notification, to exercise the powers
conferred on, and perform the functions assigned to, that Board under
this Act.
290
2. A State Board constituted under this Act shall consist of the following
members, namely :-
a. a Chairman, being a person having special knowledge or practical
experience in respect of matters relating to environmental protection,
to be nominated by the State Government :
Provided that the Chairman may be either whole-time or part-time as
the State Government may think fit;
b. such number of officials, not exceeding five, as the State Government
may think fit, to be nominated by the State Government to represent
that Government;
c. such number of persons, not exceeding five, as the State
Government may think fit, to be nominated by the State Government
from amongst the members of the local authorities functioning within
the State;
d. such number of non-official, not exceeding three, as the State
Government may think fit, to be nominated by the State Government
to represent the interests of agriculture, fishery or industry or trade
or labour or any other interest which, in the opinion of that
Government, ought to be represented;
e. two persons to represent the companies or corporations owned,
controlled or managed by the State Government, to be nominated by
that Government;
f. a full-time member-secretary having such qualifications, knowledge
pollution control as may be prescribed, to be appointed by the State
Government :
Provided that the State Government shall ensure that not less than
two of the members are persons having special knowledge or
practical experience in respect of matters relating to the
improvement of the quality of air or the prevention, control or
abatement of air pollution.
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3. Every State Board constituted under this Act shall be a body corporate
with the name specified by the State Government in the notification
issued under subsection (1), having perpetual succession and a common
seal with power, subject to the provisions of this Act, to acquire and
dispose of property and to contract, and may by the said name sue or
be sued.
10.7.5 Functions Of State Boards
1. Subject to the provisions of this Act, and without prejudice to the
performance of its functions, if any, under the Water (Prevention and
Control of Pollution) Act, 1974 (6 of 1974), the functions of a State
Board shall be -
a. To plan a comprehensive programme for the prevention, control or
abatement of air pollution and to secure the execution thereof;
b. To advise the State Government on any matter concerning the
c. To collect and disseminate information relating to air pollution;
d. To collaborate with the Central Board in organising the training of
persons engaged or to be engaged in programs relating to
prevention, control or abatement of air pollution and to organise
mass-education program relating thereto;
e. To inspect, at all reasonable times, any control equipment, industrial
plant or manufacturing process and to give, by order, such directions
to such persons as it may consider necessary to take steps for the
f. To inspect air pollution control areas at such intervals as it may think
necessary, assess the qualify of air therein and take steps for the
prevention, control or abatement of air pollution in such areas;
g. To lay down, in consultation with the Central Board and having regard
to the standards for the quality of air laid down by the Central Board,
standards for emission of air pollutants into the atmosphere from
industrial plants and automobiles or for the discharge of any air
pollutant into the atmosphere from any other source whatsoever not
being a ship or an aircraft :
Provided that different standards for emission may be laid down
under this clause for different industrial plants having regard to the
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quantity and composition of emission of air pollutants into the

atmosphere from such industrial plants;
h. To advise the State Government with respect to the suitability of any
premises or location for carrying on any industry which is likely to
cause air pollution;
i. To perform such other functions as may be prescribed or as may,
from time to time, be entrusted to it by the Central Board or the
State Government;
j. To do such other things and to perform such other acts as its may
think necessary for the proper discharge of its functions and
generally for the purpose of carrying into effect the purposes of this
Act.
2. A State Board may establish or recognise a laboratory or laboratories to
enable the State Board to perform its functions under this Section
efficiently.
10.8 PREVENTION AND CONTROL OF AIR POLLUTION AND

PENALTIES
10.8.1 Power To Give Directions
1. In the performance of its functions under this Act -
a. the Central Board shall be bound by such directions in writing as the
Central Government may give to it; and
b. every State Board shall be bound by such directions in writing as the
Central Board or the State Government may give to it :
Provided that where a direction given by the State Government is
inconsistent with the direction given by the Central Board, the matter
shall be referred to the Central Government for its decision.
2. Where the Central Government is of the opinion that any State Board
has defaulted in complying with any directions given by the Central
Board under subsection (1) and as a result of such default a grave
emergency has arisen and it is necessary or expedient so to do in the
public interest, it may, by order, direct the Central Board to perform any
of the functions of the State Board in relation to such area, for such
period and for such purposes, as may be specified in the order.
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3. Where the Central Board performs any of the functions of the State
Board in pursuance of a direction under sub-section (2), the expresses,
if any, incurred by the Central Board with respect to the performance of
such functions may, if the State Board is empowered to recover such
expenses, be recovered by the Central Board with interest (at such
reasonable rate as the Central Government may, by order, fix) from the
date when a demand for such expenses is made until it is paid from the
person or persons concerned as arrears of land revenue or of public
demand.
4. For the removal of doubts, it is hereby declared that any direction to
perform the functions of any State Board given under subsection (2) in
respect of any area would not preclude the State Board from performing
such functions in any other area in the State or any of its other
functions in that area.
10.8.2 Power To Declare Air Pollution Control Areas
1. The State Government may, after consultation with the State Board, by
notification in the Official Gazette, declare in such manner as may be
prescribed, any area or areas within the State as air pollution control
area or areas for the purposes of this Act.
notification in the Official Gazette, -
a. alter any air pollution control area whether by way of extension or
reduction;
b. declare a new air pollution control area in which may be merged one
or more existing air pollution control areas or any part or parts
thereof.
3. If the State Government, after consultation with the State Board, is of
opinion that the use of any fuel, other than an approved fuel, in any air
pollution control area or part thereof, may cause or is likely to cause air
pollution, it may by notification in the Official Gazette, prohibit the use
of such fuel in such area or part thereof with effect from such date
(being not less than three months from the date of publication of the
notification) as may be specified in the notification.
notification in the Official Gazette, direct that with effect from such date
as may be specified therein, no appliance, other than an approved
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appliance, shall be used in the premises situated in an air pollution

control area ; Provided that different dates may be specified for
different parts of an air pollution control area or for the use of different
appliances.
5. If the State Government, after consultation with the State Board, is of
opinion that the burning of any material (not being fuel) in any air
pollution control area or part thereof may cause or is likely to cause air
pollution, it may, by notification in the Official Gazette, prohibit the
burning of such material in such area or part thereof.
10.8.3 Power to give Instructions
With a view to ensuring that the standards for emission of air pollutants
from automobiles laid down by the State Board under clause (g) of
subsection (1) of section 17 are compiled with, the State Government
shall, in consultation with the State Board, give such instructions as may
be deemed necessary to the concerned authority in charge of registration
of motor vehicles under the Motor Vehicles Act, 1939 (4 of 1939), and such
authority shall, notwithstanding anything contained in that Act or the rules
made there under be found to comply with such instructions.
10.8.4 Power of Board to Make Application to Court
1. Where it is apprehended by a Board that emission of any air pollutant,
in excess of the standards laid down by the State Board under clause
(g) of subsection (1) of section 17, is likely to occur by reason of any
person operating an industrial plant or otherwise in any air pollution
control area, the Board may make an application to a court, not inferior
to that of a Metropolitan Magistrate or a Judicial Magistrate of the first
class for restraining such person from emitting such air pollutant.
2. On receipt of the application under subsection (1), the court may make
such order as it deems fit.
3. Where under subsection (2), the court makes an order restraining any
person from discharging or causing or permitting to be discharged the
emission of any air pollutant, it may, in that order, -
a. Direct such person to desist from taking such action as is likely to
cause emission;
b. Authorise the Board, if the direction under clause (a) is not complied
with by the person to whom such direction is issued, to implement
the direction in such manner as may be specified by the court.
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4. All expenses incurred by the Board in implementing the directions of the

court under clause (b) of subsection (3) shall be recoverable from the
person concerned as arrears of land revenue or of public demand.
10.8.5 Power Of Entry And Inspection
1. Subject to the provisions of this section, any person empowered by a
State Board in this behalf shall have a right to enter, at all reasonable
times with such assistance as he considers necessary, any place -
a. for the purpose of performing any of the functions of the State Board
entrusted to him;
b. for the purpose of determining whether and if so in what manner, any
authorisation served, made, given or granted under this Act is being
c. for the purpose of examining and testing any control equipment,
industrial plant, record, register, document or any other material
object or for conducting a search of any place in which he has reason
to believe that an offence under this Act or the rules made there
under has been or is about to be committed and for seizing any such
control equipment, industrial plant, record, register, document or
other material object if he has reasons to believe that it may furnish
evidence of the commission of an offence punishable under this Act
or the rules made thereunder.
2. Every person of operating any control equipment or any industrial plant,
in an air pollution control area shall be bound to render all assistance to
the person empowered by the State Board under sub-section (1) for
carrying out the functions under that subsection and if he fails to do so
without any reasonable cause or excuse, he shall be guilty of an offence
under this Act.
3. If any person willfully delays or obstructs any person empowered by the
State Board under subsection (1) in the discharge of his duties, he shall
be guilty of an offence under this Act.
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in relation to the State of Jammu and Kashmir, or any area in which that
Code is not in force, the provisions of any corresponding law in force in
that State or area, shall, so far as may be, apply to any search or
seizure under this section as they apply to any search or seizure made
under the authority of a warrant issued under section 94 of the said
Code or, as the case may be, under the corresponding provisions of the
said law.
10.8.6 Power To Obtain Information
For the purposes of carrying out the functions entrusted to it, the State
Board or any officer empowered by it in that behalf may call for any
information (including information regarding the types of air pollutants
emitted into the atmosphere and the level of the emission of such air
pollutants) from the occupier or any other person carrying on any industry
or operating any control equipment or industrial plant and for the purpose
of verifying the correctness of such information, the State Board or such
officer shall have the right to inspect the premises where such industry,
control equipment or industrial plant is being carried on or operated.
10.8.7 Power to take Samples of Air or Emission
1. A State Board or any officer empowered by it in this behalf shall have

power to take, for the purpose of analysis, samples of air or emission
from any chimney, flue or duct or any other outlet in such manner as
may be prescribed.
2. The result of any analysis of a sample of emission taken under
subsection (1) shall be admissible in evidence in any legal proceeding
unless the provisions of subsections (3) and (4) are complied with.
297
3. Subject to the provisions of sub-section (4), when a sample of emission

is taken for analysis under subsection (1), the person taking the sample
shall -
a. Serve on the occupier or his agent, a notice, then and there, in such
form as may be prescribed, of his intention to have it so analyzed;
b. In the presence of the occupier or his agent, collect a sample of
emission for analysis;
c. Cause the sample to be placed in a container or containers which
shall be marked and sealed and shall also be singed both by the
person taking the sample and the occupier or his agent;
d. Send, without delay, the container or containers to the laboratory
established or recognised by the State Board under section 17 or, if a
request in that behalf is made by the occupier or his agent when the
notice is served on him under clause (a), to the laboratory
established or specified under subsection (1) of section 28.
4. When a sample of emission is taken for analysis under sub-section (1)
and the person taking the sample serves on the occupier or his agent, a
notice under clause (a) of sub-section (3), then -
a. In a case where the occupier or his agent willfully absents himself,
the person taking the sample shall collect the sample of emission for
analysis to be placed in a container or containers which shall be
marked and sealed and shall also be signed by the person taking the
sample, and
b. In a case where the occupier or his agent is present at the time of
taking the sample but refuses to sign the marked and sealed
container or containers of the sample of emission as required under
clause (c) of subsection (3), the marked and sealed container or
containers shall be signed by the person taking the sample, and the
container or containers shall be sent without delay by the person
taking the sample for analysis to the laboratory established or
specified under subsection (1) of section 28.
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10.8.8 Central Board to Exercise The Powers of a State Board in

the Union Territories
No State Board shall be constituted for a Union territory and in relation to a
union territory, the Central Board shall exercise the powers and perform
the functions of a State Board under this Act for that Union Territory;
Provided that in relation to any Union territory the Central Board may
delegate all or any of its powers and functions under this section to such
person or body of persons as the Central Government may specify.
10.8.9 Penalties
Failure To Comply With The Provisions
1. Whoever fails to comply with the provisions of section 21 or section 22
or directions issued under Section 31-A, shall, in respect of each such
failure, be punishable with imprisonment for a term which shall not be
less than one year and six months but which may extend to six years
and with fine, and in case the failure continues, with an additional fine
which may extend to five thousand rupees for every day during which
such failure continues after the conviction for the first such failure.
2. If the failure referred to in subsection (1) continues beyond a period of
one year after the date of conviction, the offender shall be punishable
with imprisonment for a term which shall not be less than two years but
which may extend to seven years and with fine.
Penalties for Certain Acts
Whoever -
a. Destroys, pulls down, removes, injures or defaces any pillar, post or
stake fixed in the ground or any notice or other matter put up, inscribed
or placed, by or under the authority of the Board, or
b. Obstructs any person acting under the orders or directions of the Board
from exercising his powers and performing his functions under this Act,
or
c. Damages any works or property belonging to the Board, or
d. Fails to furnish to the Board or any officer or other employee of the
Board any information required by the Board or such officer or other
employee for the purpose of this Act, or
299
e. Fails to intimate the occurrence of the emission of air pollutants into the
atmosphere in excess of the standards laid down by the State Board or
the apprehension of such occurrence, to the State Board and other
prescribed authorities or agencies as required under subsection (1) of
Section 23, or
f. In giving any information which he is required to give under this Act,
makes a statement which is false in any material particular, or
g. For the purpose of obtaining any consent under section 21, makes a
statement which is false in any material particular.
Shall be punishable with imprisonment for a term which may extend to
three months or with fine which may extend to Ten Thousand rupees or
with both.
Penalty for Contravention of Certain Provisions of the Act
Whoever contravenes any of the provisions of this Act or any order or
direction issued there under, for which no penalty has been elsewhere
provided in this Act, shall be punishable with imprisonment for a term
which may extend to three months or with fine which may extend to ten
thousand rupees or with both, and in the case of continuing contravention,
with an additional fine which may extend to five thousand rupees for every
day during which such contravention continues after conviction for the first
such contravention.
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Offences by Companies
1. Where an offence under this Act has been committed by a company,
every person who, at the time the offence was committed, was directly
in charge of, and was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and
punished accordingly :
Provided that nothing contained in this subsection shall render any such
person liable to any punishment provided in this Act, if he proves that
the offence was committed without his knowledge or that he exercised
all due diligence to prevent the commission of such offence.
attributable to any neglect on the part of any director, manager,
secretary or other officer shall be deemed to be guilty of that offence
and shall be liable to be proceeded against and published accordingly.
Explanation : For the purposes of this section, -
a. “Company” means any body corporate, and includes a firm or other
association of individuals; and
b. “Director”, in relation to a firm, means a partner in the firm.
301
Offences by Government Departments

1. Where an offence under this Act has been committed by any
Department of Government, the Head of the Department shall be
deemed to be guilty of the offence shall be liable to be proceeded
against and punished accordingly :
the Department liable to any punishment if he proves that the offence
was committed without his knowledge or that he exercised all due
diligence to prevent the commission of such offence.
under this Act has been committed by a Department of Government and
it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any neglect on the part of, any
officer, other than the Head of the Department, such officer shall also be
deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly.
No suit, prosecution or other legal proceeding shall lie against the
Government or any officer of the Government or any member or any
officer or other employee of the Board in respect of anything which is
done or intended to be done in good faith in pursuance of this Act or the
rules made there under.
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Cognizance Of Offences
1. No Court shall take cognizance of any offence under this Act except on a
complaint made by -
a. A Board or any officer authorised in this behalf by it; or
b. Any person who has given notice of not less than sixty days, in the
manner prescribed, of the alleged offence and of his intention to
make a complaint to the Board or officer authorised as aforesaid and
no court inferior to that of a Metropolitan Magistrate or a Judicial
Magistrate of the first class shall try any offence punishable under
this Act.
2. Were a complaint has been made under clause (b) of sub-section (1),
the Board shall, on demand by such person, make available the relevant
reports in its possession to that person :
Provided that the Board may refuse to make any such report available to
such person if the same is, in its opinion, against the public interest.
10.9 AIR LABORATORY

State Air Laboratory
1. The State Government may, by notification in the Official Gazette, -
a. Establish one or more State Air Laboratories; or
b. Specify one or more laboratories or institutes as State Air
Laboratories to carry out the functions entrusted to the State Air
Laboratory under this Act.
2. The State Government may, after consultation with the State Board,
make rules prescribing -
a. The functions of the State Air Laboratory;
b. The procedure for the submission to the said Laboratory of samples
of air or emission for analysis or tests, the form of the Laboratory’s
report thereon and the fees payable in respect of such report;
c. Such other matters as may be necessary or expedient to enable that
Laboratory to carry out its functions.
303
Analysts
1. The State Government may, by notification in the Official Gazette,
appoint such persons as it thinks fit and having the prescribed
qualifications to be Government analysts for the purpose of analysis of
samples of air or emission sent for analysis to any laboratory
established or specified under subsection (1) of section 28.
2. Without prejudice to the provisions of section 14, the State Board may,
by notification in the Official Gazette, and with the approval of the State
Government, appoint such persons as it thinks fit and having the
prescribed qualifications to be Board analysts for the purpose of analysis
of samples of air or emission set for analysis to any laboratory
established or recognised under section 17.
Report Of Analysts
Any document purporting to be a report signed by a Government analyst
or, as the case may be, a State Board analyst may be used as evidence of
the facts stated therein in any proceeding under this Act.
Appeals
1. Any person aggrieved by an order made by the State Board under this
Act may, within thirty days from the date on which the order is
communicated to him, prefer an appeal to such authority (hereinafter
referred to as the Appellate Authority) as the State Government may
think fit to constitute :
Provided that the Appellate Authority may entertain the appeal after the
expiry of the said period of thirty days if such authority is satisfied that
the appellant was prevented by sufficient cause from filling the appeal in
time.
2. The Appellate Authority shall consist of a single person or three persons
as the State Government may think fit to be appointed by the State
Government.
3. The form and the manner in which an appeal may be preferred under
sub-section (1), the fees payable for such appeal and the procedure to
be followed by the Appellate Authority shall be such as may be
prescribed.
304
4. On receipt of an appeal preferred under subsection (1), the Appellate

Authority shall, after giving the appellant and the State Board an
opportunity of being heard, dispose of the appeal as expeditiously as
possible.
10.10 THE ENVIRONMENT PROTECTION ACT, 1986

Environmental protection is the topmost need of every country in the
current era. Earlier it was neglected mostly by the developing countries,
but the environmental disasters like the Bhopal Gas Tragedy has forced
India to bring it on topmost agenda. Environment consists of water, air,
land including forests and surrounding atmosphere also. So, in the year
1986, the Environmental protection Act was formed and put into immediate
practice, to take care of all aspects of environmental protection. The basics
of the act and its scope in India was formulated as -
(1) This Act may be called the Environment (Protection) Act, 1986.
(2) It extends to the whole of India.
To make the act most powerful, it was decided that every rule made under
this Act shall be laid, as soon as may be after it is made, before each
House of Parliament, while it is in session, for a total period of thirty days
which may be comprised in one session or in two or more successive
sessions, and if, before the expiry of the session immediately following the
session or the successive sessions aforesaid, both Houses agree in making
any modification in the rule; however, that any such modification or
annulment shall be without prejudice to the validity of anything previously
done under that rule.
305
Definitions
In this Act, unless the context otherwise requires, –
a. “environment” includes water, air and land and the inter-relationship
which exists among and between water, air and land, and human
beings, other living creatures, plants, micro-organism and property;
b. “environmental pollutant” means any solid, liquid or gaseous substance
present in such concentration as may be, or tend to be, injurious to
environment;
c. “environmental pollution” means the presence in the environment of
any environmental pollutant;
d. “handling”, in relation to any substance, means the manufacture,
processing, treatment, package, storage, transportation, use, collection,
destruction, conversion, offering for sale, transfer or the like of such
substance;
e. “hazardous substance” means any substance or preparation which, by
reason of its chemical or physico-chemical properties or handling, is
liable to cause harm to human beings, other living creatures, plants,
microorganism, property or the environment;
f. “occupier”, in relation to any factory or premises, means a person who
has control over the affairs of the factory or the premises and includes
in relation to any substance, the person in possession of the substance;
g. “prescribed” means prescribed by rules made under this Act.
306
10.11 POWER OF CENTRAL GOVERNMENT UNDER THE ACT

1. Subject to the provisions of this Act, the Central Government shall have
the power to take all such measures as it deems necessary or expedient
for the purpose of protecting and improving the quality of the
environment and preventing, controlling and abating environmental
pollution.
2. In particular, and without prejudice to the generality of the provisions of
subsection (1), such measures may include measures with respect to all
or any of the following matters, namely :
i. co-ordination of actions by the State Governments, officers and other
authorities -
a. under this Act, or the rules made there under; or
b. under any other law for the time being in force which is relatable
to the objects of this Act;
ii. planning and execution of a nation-wide program for the prevention,
control and abatement of environmental pollution;
iii. laying down standards for the quality of environment in its various
aspects;
iv. laying down standards for emission or discharge of environmental
pollutants from various sources whatsoever :
Provided that different standards for emission or discharge may be
laid down under this clause from different sources having regard to
the quality or composition of the emission or discharge of
environmental pollutants from such sources;
v. restriction of areas in which any industries, operations or processes,
or class of industries, operations or processes shall not be carried out
or shall be carried out subject to certain safeguards;
vi. laying down procedures and safeguards for the prevention of
accidents which may cause environmental pollution and remedial
measures for such accidents;
vii.laying down procedures and safeguards for the handling of hazardous
substances;
viii.examination of such manufacturing processes, materials and
substances as are likely to cause environmental pollution;
307
ix. carrying out and sponsoring investigations and research relating to

problems of environmental pollution;
x. inspection of any premises, plant, equipment, machinery,
manufacturing or other processes, materials or substances and
giving, by order, of such directions to such authorities, officers or
persons as it may consider necessary to take steps for the
prevention, control and abatement of environmental pollution;
xi. establishment or recognition of environmental laboratories and
institutes to carry out the functions entrusted to such environmental
laboratories and institutes under this Act;
xii.collection and dissemination of information in respect of matters
relating to environmental pollution;
xiii.preparation of manuals, codes or guides relating to the prevention,
control and abatement of environmental pollution;
xiv.such other matters as the Central Government deems necessary or
expedient for the purpose of securing the effective implementation of
the provisions of this Act.
3. The Central Government may, if it considers it necessary or expedient
so to do for the purposes of this Act, by order, published in the Official
Gazette, constitute an authority or authorities by such name or names
as may be specified in the order for the purpose of exercising and
performing such of the powers and functions (including the power to
issue directions under section 5) of the Central Government under this
Act and for taking measures with respect to such of the matters referred
to in subsection (2) as may be mentioned in the order and subject to
the supervision and control of the Central Government and the
provisions of such order, such authority or authorities may exercise the
powers or perform the functions or take the measures so mentioned in
the order as if such authority or authorities had been empowered by this
Act to exercise those powers or perform those functions or take such
measures.
308
The Authority shall exercise the following powers and functions:—

I. to exercise powers under section 5 of the said Act for issuing directions
and for taking measures with respect to matters referred to in clauses
(ix), (xi), (xii) and (xiii) of sub-section (2) of section 3 of the Act;
II. to direct the agencies (government/local bodies/non-governmental) for
the following:
a. to standardise method(s) for water quality monitoring and to ensure
quality of data generation for utilization thereof;
b. to take measures so as to ensure proper treatment of wastewater
with a view to restoring the water quality of the river/water bodies to
meet the designated-best-uses;
c. to take up research and development activities in the area of water
quality management;
d. to promote recycling/re-use of treated sewage/trade effluent for
irrigation in development of agriculture;
e. to draw action plans for quality improvement in water bodies, and
monitor and review/assess implementation of the schemes launched/
to be launched to that effect;
f. to draw schemes(s) for imposition of restriction in water abstraction
and discharge of treated sewage/trade effluent on land, rivers and
other water bodies with a view to mitigating crisis of water quality;
g. to maintain minimum discharge for sustenance of aequactic life forms
in riverine system;
h. to promote rain water harvesting;
i. to utilize self-assimilation capacities at the critical river stretches to
minimise cost of effluent treatment;
j. to provide information to pollution control authorities to facilitate
allocation of waste load;
k. to review the status of quality of national water resources (both
surface water and groundwater) and identify “Hot Spots” for taking
necessary actions for improvement in water quality;
309
l. to interact with the authorities/committees constituted or to be

constituted under the provisions of the said Act for matters relating
to management of water resources;
m. to constitute/set-up State level Water Quality Review Committees
(WQRC) to coordinate the work to be assigned to such committees;
and
n. to deal with any environmental issue concerning surface and
groundwater quality which may be referred to it by the Central
Government or the State Government relating to the respective
areas, for maintenance and/or restoration of quality to sustain
designated-best-uses.
III.The Authority shall exercise the powers under section 19 of the said
Act.
IV. The Authority may appoint domain experts for facilitating the work
assigned to it.
V. The Ministry of Water Resources shall create a cell to assist the
Authority to carry out the assigned functions.
VI.The Authority shall furnish report about its activity at least once in three
months to the Ministry of Environment and Forests.
310
10.12 RULES TO REGULATE ENVIRONMENTAL POLLUTION.

1. The Central Government may, by notification in the Official Gazette,
make rules in respect of all or any of the matters referred to in section
3.
2. In particular, and without prejudice to the generality of the foregoing
power, such rules may provide for all or any of the following matters,
namely :-
a. the standards of quality of air, water or soil for various areas and
purposes;
b. the maximum allowable limits of concentration of various
environmental pollutants (including noise) for different areas;
c. the procedures and safeguards for the handling of hazardous
substances;
d. the prohibition and restrictions on the handling of hazardous
substances in different areas;
e. the prohibition and restrictions on the location of industries and the
carrying on of processes and operations in different areas;
f. the procedures and safeguards for the prevention of accidents which
may cause environmental pollution and for providing for remedial
measures for such accidents.
No person carrying on any industry, operation or process shall discharge or
emit or permit to be discharged or emitted any environmental pollutant in
excess of such standards as may be prescribed.
No person shall handle or cause to be handled any hazardous substance
except in accordance with such procedure and after complying with such
safeguards as may be prescribed.
311
Sustainable development
i. To ensure sustainable development is one of the goals of Environmental
Protection Act, 1986, and this is quiet necessary to guarantee ’right to
life’ under Article 21. If the Act is not armed with the powers to ensure
sustainable development, it will become a barren shell. In other words,
sustainable development is one of the means to achieve the object and
purpose of the Act as well as the protection of ’life’ under Article 21.
ii. It is necessary that green areas and the parks in all the towns and cities
of Rajasthan are maintained to protect environment and ecology, but it
is seen they are allowed to be encroached upon due to commercial and
other pressures. They are converted from green areas to commercial
areas and residential areas. Concrete jungles are swallowing green
areas. That trend needs to be halted to protect and preserve ecology.
iii. The harmonisation of the two namely, the issue of ecology and
developmental project cannot but be termed to be the order of the day
and the need of the hour
iv. There is need for creating general awareness towards the hazardous
effects of noise pollution. Similar awareness need to be created in Police
and Civil administration as well. Not only the use of loudspeakers and
playing of hi-fi amplifier systems has to be regulated, even the playing
of high sound instruments which create noise beyond tolerable limit
need to be regulated.
It has been held that to ensure the attainment of the constitutional goal of
the protection and improvement of the natural wealth and environment
and of the safeguarding of the forests, lakes, rivers and wildlife and to
protect the people inhabiting the vulnerable areas from the hazardous
consequences of the arbitrary exercise of granting mining leases and of
indiscriminate operation of the mines on the strength of such leases
without property, the court will be left with effectively by issuing
appropriate writs, orders and directions including the direction as to the
closure of the mines the operation whereof is proving to be hazardous and
the total prohibition of the grant or renewal of mining leases till the
Government evolves a long-term plan based on a scientific study with a
view to regulating the exploitation of the minerals in the State without
detriments to the environment, ecology, the natural wealth and resources
and the local population.
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Furnishing of Information to Authorities

1. Where the discharge of any environmental pollutant in excess of the
prescribed standards occurs or is apprehended to occur due to any
accident or other unforeseen act or event, the person responsible for
such discharge and the person in charge of the place at which such
discharge occurs, or is apprehended to occur shall be bound to prevent
or mitigate the environmental pollution caused as a result of such
discharge and shall also forthwith -
a. intimate the fact of such occurrence or apprehension of such
occurrence; and
b. be bound, if called upon, to render all assistance, to such authorities
or agencies as may be prescribed.
2. On receipt of information with respect to the fact or apprehension of any
occurrence of the nature referred to in subsection (1), whether through
intimation under that sub-section or otherwise, the authorities or
agencies referred to in subsection (1) shall, as early as practicable,
cause such remedial measures to be taken as are necessary to prevent
or mitigate the environmental pollution.
3. The expenses, if any, incurred by any authority or agency with respect
to the remedial measures referred to in subsection (2), together with
interest (at such reasonable rate as the Government may, by order, fix)
from the date when a demand for the expenses is made until it is paid
may be recovered by such authority or agency from the person
concerned as arrears of land revenue or of public demand.
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Power of Entry and Inspection

1. Subject to the provisions of this section, any person empowered by the
Central Government in this behalf shall have a right to enter, at all
reasonable times with such assistance as he considers necessary, any
place -
a. for the purpose of performing any of the functions of the Central
Government entrusted to him;
b. for the purpose of determining whether and if so in what manner any
authorisation served, made, given or granted under this Act is being
c. for the purpose of examining and testing any equipment, industrial
plant, record, register, document or any other material object or for
conducting a search of any building in which he has reason to believe
that an offence under this Act or the rules made there under has
been or is being or is about to be committed and for seizing any such
equipment, industrial plant, record, register, document or other
material object if he has reasons to believe that it may furnish
evidence of the commission of an offence punishable under this Act
or the rules made there under or that such seizure is necessary to
prevent or mitigate environmental pollution.
2. Every person carrying on any industry, operation or process or handling
any hazardous substance shall be bound to render all assistance to the
person empowered by the Central Government under subsection (1) for
carrying out the functions under that sub-section and if he fails to do so
without any reasonable cause or excuse, he shall be guilty of an offence
under this Act.
3. If any person willfully delays or obstructs any person empowered by the
Central Government under subsection (1) in the performance of his
functions, he shall be guilty of an offence under this Act.
in relation to the State of Jammu and Kashmir, or any area in which that
Code is not in force, the provisions of any corresponding law in force in
that State or area shall, so far as may be, apply to any search or seizure
under this section as they apply to any search or seizure made under
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the authority of a warrant issued under section 94 of the said Code or,
as the case may be, under the corresponding provisions of the said law.
Inspection of factory premises - It is open to the authority empowerd by
the Central Government, to inspect the premises of the factory, call for
documents from the parties or any other body or authority or from the
State Government or Union Government and to examine witnesses, if
needed.
10.13 ENVIRONMENTAL LABORATORIES

1. The Central Government may, by notification in the Official Gazette, -
a. establish one or more environmental laboratories;
b. recognise one or more laboratories or institutes as environmental
laboratories to carry out the functions entrusted to an environmental
laboratory under this Act.
make rules specifying -
a. the functions of the environmental laboratory;
b. the procedure for the submission to the said laboratory of samples of
air, water, soil or other substance for analysis or tests, the form of
the laboratory report thereon the fees payable for such report;
c. such other matters as may be necessary or expedient to enable that
laboratory to carry out its functions.
Government Analysts
The Central Government may, by notification in the Official Gazette,
appoint or recognise such persons as it thinks fit and having the prescribed
qualifications to be Government Analysts for the purpose of analysis of
sample of air, water, soil or other substance sent for analysis to any
environmental laboratory established or recognised under subsection (1) of
section 12.
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Power to take Sample

1. The Central Government or any officer empowered by it in this behalf,
shall have power to take, for the purpose of analysis, samples of air,
water, soil or other substance from any factory, premises or other place
in such manner as may be prescribed.
2. The result of any analysis of a sample taken under subsection (1) shall
not be admissible in evidence in any legal proceeding unless the
provisions of subsections (3) and (4) are complied with.
3. Subject to the provisions of subsection (4), the person taking the
sample under sub-section (1) shall -
a. serve on the occupier or his agent or person in charge of the place, a
notice, then and there, in such form as may be prescribed, of his
intention to have it so analysed;
b. in the presence of the occupier or his agent or person, collect a
sample for analysis;
c. cause the sample to be placed in a container or containers which
shall be marked and sealed and shall also be signed both by the
person taking the sample and the occupier or his agent or person;
d. send without delay, the container or the containers to the laboratory
established or recognised by the Central Government under section
12.
4. When a sample is taken for analysis under subsection (1) and the
person taking the sample serves on the occupier or his agent or person,
a notice under clause (a) of sub-section (3), then, -
(a) in a case where the occupier, his agent or person willfully absents
himself, the person taking the sample shall collect the sample for
analysis to be placed in a container or containers which shall be marked
and sealed and shall also be signed by the person taking the sample, and
(b) in a case where the occupier or his agent or person present at the
time of taking the sample refuses to sign the marked and sealed
container or containers of the sample as required under clause (c) of
subsection (3), the marked and sealed container or containers shall be
signed by the person taking the samples, and the container or containers
shall be sent without delay by the person taking the sample for analysis
to the laboratory established or recognised under section 12 and such
person shall inform the Government Analyst appointed or recognised
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under section 13 in writing, about the willful absence of the occupier or

his agent or person, or, as the case may be, his refusal to sign the
container or containers.
Reports Of Government Analysts
Any document purporting to be a report signed by a Government analyst
may be used as evidence of the facts stated therein in any proceeding
under this Act.
10.14 OFFENCES AND PENALTIES UNDER

ENVIRONMENTAL PROTECTION ACT
10.14.1 Penalty For Contravention Of The Provisions Of The Act
1. Whoever fails to comply with or contravenes any of the provisions of
this Act, or the rules made or orders or directions issued there under,
shall, in respect of each such failure or contravention, be punishable
with imprisonment for a term which may extend to five years or with
fine which may extend to one lakh rupees, or with both, and in case the
failure or contravention continues, with additional fine which may
extend to five thousand rupees for every day during which such failure
or contravention continues after the conviction for the first such failure
or contravention.
2. If the failure or contravention referred to in sub-section (1) continues
beyond a period of one year after the date of conviction, the offender
shall be punishable with imprisonment for a term which may extend to
seven years.
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10.14.2 Information, Reports or Returns

The Central Government may, in relation to its functions under this Act,
from time to time, require any person, officer, State Government or other
authority to furnish to it or any prescribed authority or officer any reports,
returns, statistics, accounts and other information and such person, officer,
State Government or other authority shall be bound to do so.
No Civil Court shall have jurisdiction to entertain any suit or proceeding in
respect of anything done, action taken or order or direction issued by the
Central Government or any authority or officer in pursuance of any power
conferred by or in relation to its or his functions under this Act.
All the members of the authority, constituted, if any, under section 3 and
all officers and other employees of such authority when acting or
purporting to act in pursuance of any provisions of this Act, or the rules
made, or orders or directions issued there under, shall be deemed to be
public servants within the meaning of section 21 of the Indian Penal Code.
10.14.3 Effect of Other Laws
1. Subject to the provisions of subsection (2), the provisions of this Act
and the rules or orders made therein shall have effect notwithstanding
anything inconsistent therewith contained in any enactment other than
this Act.
2. Where any act or omission constitutes an offence punishable under this
Act and also under any other Act then the offender found guilty of such
offence shall be liable to be punished under the other Act and not under
this Act.
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10.14.4 Power to Make Rules

make rules for carrying out the purposes of this Act.
2. In particular, and without prejudice to the generality of the foregoing
power, such rules may provide for all or any of the following matters,
namely :
a. the standards in excess of which environmental pollutants shall not
be discharged or emitted under section 7;
b. the procedure in accordance with and the safeguards in compliance
with which hazardous substances shall be handled or caused to be
handled under section 8;
c. the authorities or agencies to which intimation of the fact of
occurrence or apprehension of occurrence of the discharge of any
environmental pollutant in excess of the prescribed standards shall
be given and to whom all assistance shall be bound to be rendered
under sub-section (1) of section 9;
d. the manner in which samples of air, water, soil or other substance for
the purpose of analysis shall be taken under subsection (1) of section
11;
e. the form in which notice of intention to have a sample analysed shall
be served under clause (a) of subsection (3) of section 11;
f. the functions of the environmental laboratories, the procedure for the
submission to such laboratories of samples of air, water, soil and
other substances for analysis or test; the form of laboratory report;
the fees payable for such report and other matters to enable such
laboratories to carry out their functions under subsection (2) of
section 12;
g. the qualifications of Government Analyst, appointed or recognised for
the purpose of analysis of samples of air, water, soil or other
substances under section 13;
h. the manner in which notice of the offence and of the intention to
make a complaint to the Central Government shall be given under
clause (b) of section 19;
i. the authority or officer to whom any reports, returns, statistics,
accounts and other information shall be furnished under section 20;
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j. any other matter which is required to be, or may be, prescribed.
10.14.5 Offences by Companies

1. Where any offence under this Act has been committed by a company,
every person who, at the time the offence was committed, was directly
in charge of, and was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and
punished accordingly :
Provided that nothing contained in this sub-section shall render any such
person liable to any punishment provide in this Act, if he proves that the
offence was committed without his knowledge or that he exercised all
due diligence to prevent the commission of such offence.
attributable to any neglect on the part of, any director, manager,
secretary or other officer shall also deemed to be guilty of that offence
and shall be liable to be proceeded against and punished accordingly.
NOTE : For the purposes of this section - (a) “company” means any body
corporate and includes a firm or other association of individuals; (b)
“director”, in relation to a firm, means a partner in the firm.
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10.14.6 Offences by Government Departments

1. Where an offence under this Act has been committed by the
Department of Government, the Head of the Department shall be
deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly :
the Department liable to any punishment if he proves that the offence
was committed without his knowledge or that he exercised all due
diligence to prevent the commission of such offence.
under this Act has been committed by a Department of Government and
it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any neglect on the part of, any
officer, other than the Head of the Department, such officer shall also be
deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly.
10.14.7 Protection of Action Taken in Good Faith
No suit, prosecution or other legal proceeding shall lie against the
Government or any officer or other employee of the Government or any
authority constituted under this Act or any member, officer or other
employee of such authority in respect of anything which is done or
intended to be done in good faith in pursuance of this Act or the rules
made or orders or directions issued there under.
10.14.8 Cognizance of Offences
No Court shall take cognizance of any offence under this Act except on a
complaint made by -
a. The Central Government or any authority or officer authorised in this
behalf by that Government; or
b. Any person who has given notice of not less than sixty days, in the
manner prescribed, of the alleged offence and of his intention to make a
complaint, to the Central Government or the authority or officer
authorised as aforesaid.
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1. Search on Google the details of the Bhopal Tragedy of Union Carbide,
and list down the details of safety measures neglected by the
company.
2. Search on Internet the allowable limits of air pollution in India, and find
out the average air pollutions in Metro Cities of India in the year 2014.
3. Find out the details of water pollution in major rivers of India in the year
2014.
4. Search the pollution control norms to be followed by companies in India
who wish to start a factory in SEZ.
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10.16 SUMMARY
• State Water and Air Pollution Control Board and Central Water and Air
Pollution Control Board are the Government bodies which are doing work
in pollution control.
• The Water (Prevention and Control of Pollution) Act,1974; The Air
(Prevention and Control of Pollution) Act, 1981, are the basic laws to
control pollution in water and air respectively, in India.
• Environment Protection Act, 1986 is the fatherly law for environment
protection. It gives wide powers to the Central government to make rules
for the protection of environment from pollution.
• The Environment (Protection) Rules, 1986 also provide the standards for
automobile exhaust and specifies standards for the manufacture of
automobiles.
• The Central Board and the State Boards have their respective specified
powers to effectively control the pollution in India.
• Violation of the Act and rules will offer the offender penalty, including
imprisonment.
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1. Write short note on the Water (Prevention and Control of Pollution) Act,
1974.
2. Explain the role of Water Pollution Control Act,1974 in controlling the
water pollution.
3. How is the panel of the Central Board of the Water (Prevention and
Control of Pollution) Act, 1974 constituted?
4. List down the functions of Central Board to control the water pollution.
5. What are the functions of a State Board in controlling the water
pollution.
6. For the new outlets or new discharges, what are the restrictions for
pollution control?
7. What are the powers of Board in sampling?
8. What are the provisions of penalty for certain acts done under the Air
Pollution Control Act?
9. List down the aims and objects of the Air (Prevention and Control of
Pollution) Act, 1981.
10.Name the authority which controls air pollution and explain its
functions.
11.What are the powers of State Board in controlling air pollution?
12.What are the provisions of the Air (Prevention and Control of Pollution)
Act, 1981 as regards prevention and control of air pollution?
13.What are the functions of a State Air Laboratory?
14.Write a note on the need and objectives of the Environment Protection
Act, 1986.
15.What are the general powers of the Government under the Environment
Protection Act, 1986?
16.Write a short notes on :
a) Environmental audit; b) Environment laboratory.
17.Write a note on penalties and offences under the Environment
Protection Act, 1986.
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1. The consent for new outlets and discharges for sewage of a factory is to
be obtained from_________ .
a. Local Municipal Board
b. State Board
c. District Board
d. Central Board
2. The Bhopal tragedy of 1984 happened due to pollution of _________ .

a. Water
b. Steam
c. Chemical
d. Air
3. On the matter of improvement of quality of air, the Central Board should

advise the_________ .
a. World Bank Chairman
b. President of India
c. Central Government
d. All of the above
4. The samples of air or emissions are to be sublitted for tests and analysis
to the_________ .
a. Factors Inspector
b. Excise Inspector
c. Labor Commissioner Office
d. Air Laboratory
5. The term ‘Environment’ includes_________ .

a. Water
b. Air
c. Land
d. All of the above
Answers : (1-b), (2-d), (3-c), (4-d), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
326
INSURANCE LAW AND CONTRACTS
Chapter 11
Insurance Law and Contracts
Learning objectives
After completing this chapter, you will be able to define the principles of
insurance; examine the fundamental principles and types of insurance;
understand about the premium; know about the fire insurance and its
details; understand the types of marine insurance; define the express and
implied warranties; examine the marine losses; know about the need of
IRDA along with its objectives and functions; also the powers and duties of
IRDA; examine the role of insurance advisory committee and insurance
ombudsman.
Structure:
11.1 Law of Insurance
11.2 The Insurance Act, 1938
11.3 Risk and Compensation
11.4 Reinsurance
11.5 Fire Insurance
11.6 Miscellaneous Insurance
11.7 Marine Insurance
11.8 The Marine Insurance Act, 1963
11.9 Warranty
11.10 Marine Losses
11.11 IRDA
11.12 The Insurance Ombudsman
11.13 Activity for the Students
11.14 Summary
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11.1 LAW OF INSURANCE

The business of Insurance in India, is governed by a number of Acts as
listed below. The Insurance is treated just like as a contract, where rights
and duties of both the parties are created. The Insurance Act, 1938 (as
amended uptodate), is the father of all insurance business in India, and
there are three major subcategories of insurance business, governed by
different acts, as follows -
1. The Life Insurance Corporation Act, 1956. (For Human Life Insurance)
2. The Marine Insurance Act, 1963. (For Marine Insurance)
3. The General Insurance Business (Nationalisation) Act, 1972. (For fire
and other insurances)
There are three types of major insurances - Life, Fire and Marine and
further, the insurance contracts are classified in the following four types -
i. Life Insurance : This is the major type of insurance, which includes life,
accident, health and sickness insurance. The exact time of death of a
human being can never be predicted, and so his sickness/health
downfalls/injuries/non-functioning of any organ, etc., cannot be
predicted, and hence this is the most complicated type of insurance for
premium calculations and compensation amounts.
ii. Property Insurance - This type of insurance takes care of fire, marine,
motor and miscellaneous risk of property – fixed or movable. The
premium is fixed on the purchase cost of the property, its age and types
of predicted damages like burglary, flood, riots, etc.
iii. Insurance against Liability - Third party insurance in case of motor
vehicles, or workers compensation liability for industries, etc., come
under this type of insurance. The insurance covers only the liability part
for which the premium has been paid.
iv. Guarantee Insurance: Credit Insurance is a type of Guarantee
Insurance. The insurer agrees to give compensation of a fixed decided
amount against loss arising through dishonesty or fraud or a breach of
contract.
Let us gather more knowledge on each of the above Acts, in detail.
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11.2 THE INSURANCE ACT, 1938

‘The Insurance Act, 1938’ As amended by Insurance (Amendment)
Act, 2002’.
An Act to consolidate and amend the law relating to the business of
insurance
Whereas it is expedient to consolidate and amend the law relating to the
business of insurance; it is hereby enacted as follows: -
(1) This Act may be called Insurance Act, 1938
(2) It extends to the whole of India.
Definitions
In this Act, unless there is anything repugnant in the subject or context, -
(1) “actuary” means an actuary possessing such qualifications as may be
specified by the regulations made by the Authority.
(1A) “Authority” means the Insurance Regulatory and Development
Authority, established under sub-section (1) of section 3 of the Insurance
Regulatory and Development Authority Act, 1999;
(1AA)“policy-holder” includes a person to whom the whole of the interest
of the policyholder in the policy is assigned once and for all, but does not
include an assignee thereof whose interest in the policy is defeasible or is
for the time being subject to any condition;
(2) “approved securities,” means-
i. Government securities and other securities charged on the revenue of
the Central Government or of the Government of a State or guaranteed
fully as regards principal and interest by the Central Government or the
Government of any State;
ii. debentures or other securities for money issued under the authority of
any Central Act or Act of a State Legislature by or on behalf of a port
trust or municipal corporation or city improvement trust in any
Presidency-town;
iii. shares of a corporation established by law and guaranteed fully by the
Central Government or the Government of a State as to the repayment
of the principal and the payment of the divided;
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iv. securities issued or guaranteed fully as regards principal and interest by

the Government of any ‘Part B’ State, and specified as approved
securities for the purposes of this Act by the Central Government by
notification in the Official Gazette; and
(3)“Auditor" means a person qualified under the Chartered Accountants
Act, 1949 (38 of 1949), to act as an auditor of companies ;
(4A) "banking company" and "company" shall have the meanings
respectively assigned in them in clauses (c) and (d) of subsection (1) of
Section 5 of the Banking Companies Act, 1949 (10 of 1949);
(5) "certified" in relation to any copy or translation of a document required
to be furnished by or on behalf of an insurer or a provident society as
defined in Part III means certified by a principal officer of such insurer or
provident society to be a true copy or a correct translation, as the case
may be;
(5A) "chief agent" means a person who, not being a salaried employee of
an insurer, in consideration of any commission-
i. performs any administrative and organising functions for the insurer,
and
ii. procures life insurance business for the insurer by employing or causing
to be employed insurance agents on behalf of the insurer;
(5B) "Controller of Insurance" means the officer appointed by the Central
Government under section 2B to exercise all the powers, discharge the
functions and performs the duties of the Authority under this Act or the Life
Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance
Business (Nationalisation) Act, 1972 (57 of 1972) or the Insurance
Regulatory and Development Authority Act, 1999;
(6) "Court" means the principal Civil Court of original jurisdiction in a
district and includes the High Court in exercise of its ordinary original civil
jurisdiction;
(6A) "fire insurance business" means the business of effecting, otherwise
than incidentally to some other class of insurance business, contracts of
insurance against loss by or incidental to fire or other occurrence
customarily included among the risks insured against in fire insurance
Policies;
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(6B)"general insurance business" means fire, marine or miscellaneous

insurance business, whether carried on singly or in combination with one or
more of them;
(7) "Government security" means a Government security as defined in the
Public Debt Act, 1944 (18);
(7A) “Indian insurance company” means any insurer being a company-
- which is formed and registered under the Companies Act, 1956 (1 of
1956);
- in which the aggregate holdings of equity shares by a foreign company,
either by itself or through its subsidiary companies or its nominees, do not
exceed twenty-six percent paid-up equity capital of such Indian insurance
company; whose sole purpose is to carry on life insurance business or
general insurance business or re-insurance business.
(8) "insurance company" means any insurer being a company, association
or partnership which may be wound up under the Indian Companies Act,
1913 (7 of 1913), or to which the Indian Partnership Act, 1932 (9 of
1932), applies;
(8A) “insurance co-operative society” means any insurer being a co-
operative society,
a. which is registered on or after the commencement of the Insurance
(Amendment) Act, 2002, as a co-operative society under the Co-
operative Societies Act, 1912 (2 of 1912) or under any other law for the
time being in force in any State relating to Co-operative Societies or
under the Multi-State Co-operative Societies Act, 1984 (51 or 1984);
b. having a minimum paid-up capital, (excluding the deposits required to
be made under section 7), of rupees one hundred crores;
c. in which no body corporate, whether incorporated or not, formed or
registered outside India, either by itself or through its subsidiaries or
nominees, at any time, holds more than twenty-six per cent of the
capital of such Co-operative Society;
d. whose sole purpose is to carry on life insurance business or general
insurance business in India:
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(9) "Insurer" means-

a. any individual or unincorporated body of individuals or body corporate
incorporated under the law of any country other than India, carrying on
insurance business not being a person specified in subclause (c) of this
clause which- (i) carries on that business in India, or (ii) has his or its
principal place of business or is domiciled in India, or (iii) with the
object of obtaining insurance business, employs a representative, or
maintains a place of business, in India;
b. any body corporate not being a person specified in subclause (c) of this
clause carrying on the business of insurance, which is a body corporate
incorporated under any law for the time being in force in India; or
stands to any such body corporate in the relation of a subsidiary
company within the meaning of the Indian Companies Act, 1913 (7 of
1913), as defined by sub section (2) of section 2 of that Act, and
c. any person who in India has a standing contract with underwriters who
are members of the Society of Lloyd's whereby such person is
authorised within the terms of such contract to issue protection notes,
cover notes, or other documents granting insurance cover to others on
behalf of the underwriters, but does not include a principal agent chief
agent, special agent or an insurance agent or a provident society as
defined in Part III;
(10) "insurance agent" means an insurance agent licensed under Sec. 42
who receives agrees to receive payment by way of commission or other
remuneration in consideration of his soliciting or procuring insurance
business including business relating to the continuance, renewal or revival
of policies of insurance;
(10A) "investment company" means a company whose principal business is
the acquisition of shares, stocks debentures or other securities;
(10B) “intermediary or insurance intermediary” shall have the meaning
assigned to it in clause (f) of subsection 2 of the Insurance Regularoty and
Development Authority Act, 1999 (41 of 1999)
(11) “life insurance business" means the business of effecting contracts of
insurance upon human life, including any contract whereby the payment of
money is assured on death (except death by accident only) or the
happening of any ;
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‑
(12) "Manager" and "officer" have the meanings assigned to those

expressions in clauses (9) and (11), respectively of Section 2 of the Indian
Companies Act, 1913
(13) "Managing agent" means a person, firm or company entitled to the
management of the whole affairs of a company by virtue of an agreement
with the company, and under the control and direction of the directors
except to the extent, if any, otherwise provided for in the agreement, and
includes any person, firm or company occupying such position by whatever
name called.
(13A) "marine insurance business" means the business of effecting
contracts of insurance upon vessels of any description, including cargoes,
freights and other interests which may be legally insured, in or in relation
to such vessels, cargoes and freights, goods, wares, merchandise and
property of whatever description insured for any transit, by land or water,
or both, and whether or not including warehouse risks or similar risks in
addition or as incidental to such transit, and includes any other risks
customarily included among the risks insured against in marine insurance
policies;
(13B) "miscellaneous insurance business" means the business of effecting
contracts of insurance which is not principally or wholly of any kind or kinds
included in clause (6A), (11) and (13A);
(14) "prescribed" means prescribed by rules made under this Act; and
(15) "principal agent" means a person who, not being a salaried employee
of an insurer, in consideration of any commission - (i) performs any
administrative and organising functions for the insurer; and (ii) procures
general insurance business whether wholly or in part by employing or
causing to be employed insurance agents on behalf of the -
(16) "private company" and "public company" have the meanings
respectively assigned to them in Clauses (13) and (13A) of Sec. 2 of the
Indian Companies Act, 1913 (7 of 1913);
(17) "special agent" means a person who, not being a salaried employee of
an insurer, in consideration of any commission, procures life insurance
business for the insurer whether wholly or in part by employing or causing
to be employed insurance agents on behalf of the insurer, but does not
include a chief agent.
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11.3 RISK AND COMPENSATION

11.3.1 Risk: Insurance is a business which basically deals in risk. If there
is no risk, there is no Insurance. Also, the exact time of occurrence of risk
factor is not known, and so the insurance is necessary to cover the losses
due to risk. But every business risk cannot be insured against. The risk has
to satisfy certain criteria such as – (A) The probability of the risk should be
calculated to calculate the premium. After all, the insurance business is
based on theory of probability. (B) The loss caused due to the risk should
be predictable and possible to convert to currency amount. (C) The loss
should be accidental and not due to intended human efforts. (D) The loss
should not be catastrophic.
These four elements of an insurable risk are characteristics that permit the
successful operation of the insurance. It is to be noted that every risk
cannot be insured against. If an insurance against a risk has to exist, (a)
the risk should not be artificial ; (b) the risk should be commonly known;
(c) the loss due to risk should be capable of estimation in common
currency and (d) the insured party should have real interest in non-
occurrence of the risk or in avoiding the risk.
The type of risk and the amount of compensation and the time period of
the insurance offered is documented in a document known as – Insurance
Policy.
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Earlier, a contract of insurance was assumed like a wagering contract. The

policy money is payable on the happening of a future uncertain event. In
the case of whole life insurance the date of occurrence of the event is
uncertain, so the date of payment of money is also uncertain. In the case
of fire, marine and other forms of insurance the happening of the event
upon which the money is payable, is itself uncertain. :Earlier the common
belief was that "Insurance is a contract on speculation". But nowadays the
view is that insurance contracts are not speculative or wagering contracts.
11.3.2 Compensation
Principles for Determining Compensation
Part A
The compensation to be given by the Corporation to an insurer having a
share capital on which dividend or bonus is payable, who has allocated as
bonus to policy-holders the whole or any part of the surplus as disclosed in
the abstracts prepared in accordance with Part II of the Fourth Schedule to
the Insurance Act in respect of the last actuarial investigation relating to
his controlled business as at a earlier than the 1st day of January, 1955,
shall be computed in accordance with the provisions contained in
paragraph 1 or paragraph 2, whichever is more advantageous to the
insurer.
Paragraph 1.— Twenty times the annual average of the share of the surplus
allocated to shareholders as disclosed in the abstracts aforesaid in respect
of the relevant actuarial investigations multiplied by a figure which
represents the proportion that the average business in force during the
calendar years 1950 to 1955 bears to the average business in force during
the calendar years comprised in the period between the date as at which
the actuarial investigation immediately preceding the earliest of the
relevant actuarial investigations was made and the date as at which the
last of such investigations was made.
Paragraph 2.— Half the amount payable under paragraph 1 plus the paid-
up capital or assets equivalent thereto, or, in the case of a composite
insurer, that part of the paid-up capital or assets equivalent thereto which
has or been transferred to and vested in the Corporation under this Act less
the amount, if any of expenses or losses or both capitalised by the insurer
for the purposes of Form A in the First Schedule to the Insurance Act.
335
Provided that in the case of any such insurer in respect of whom an order
has been made under section 35 the amount computed as follows shall be
deemed to be the annual average of the surplus:—
(a) There shall be deducted from the annual average of the surplus,
interest at 31/2 per cent, per annum for one year calculated on the assets
specified in any order made under subsection (2) of section 35;
(b) With respect to the balance arrived at under clause (a), there shall be
computed an amount that bears the same proportion to the said balance as
the liability on policies appertaining to the controlled business of the
insurer, other than those expressed in any foreign currency issued on the
lives of persons who are citizens of India, bears to the liability in respect of
all policies appertaining to such business, the liabilities on policies being
computed as at the 31st day of December, 1955, in accordance with the
provisions contained in clause (b) of the Second Schedule:
Part B
Paragraph 3. Assets —
a. The market value of any land or buildings.
b. The market value of any shares, securities or other investments held by
the insurer.
c. The total amount of the premiums paid by the insurer in respect of all
leasehold properties reduced in the case of each such premium by an
amount which bears to such premium the same proportion as the
expired term of the lease in respect of which such premium shall have
been paid bears to the total term of the lease.
d. The amount of debts due to the insurer, whether secured or unsecured,
to the extent to which they are reasonably considered to be recoverable.
e. The amount of premiums which have fallen due to the insurer on
policies of life Insurance but have not been paid and the days of grace
for payment of which have not expired.
f. The amount of cash held by the insurer whether in deposit with a bank
or otherwise.
g. The value of all tangible assets other than those falling within any of the
preceding clauses.
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Paragraph 4 Liabilities —
a. The total amount of liabilities of the insurer to holders of policies in
respect of his controlled business on account of matured claims on
which payment has to be made.
b. The total amount of liabilities of the insurer to holders of policies in
respect of his controlled business which have not matured for payment,
the liabilities in respect thereof being calculation on the following
actuarial bases:—
i. In respect of whole-life assurances and endowment assurances, the
mortality table to be used shall be the Oriental (23-35) ultimate
mortality table, and an interest rate of 31/4 per cent, per annum
shall be assumed and for expenses 20 per cent of office premiums in
the case of with-profit policies and 15 per cent of office premiums in
the case of non-profit policies shall be reserved;
ii. In respect of other policies such actuarial bases determined by the
actuary making the valuation as may be consistent with the basis
specified in clause (i); and
iii. In determining the liabilities of insurers under clause (b) the actuary
shall make all the usual provisions and reserves as are ordinarily
done in such cases.
c. The total amount of all other liabilities of the insurer.
d. Where, as a result of the actuarial valuation of policy liabilities made
under clause, (b) the life insurance fund is shown to be in surplus, a
sum equal to 96 per cent.of such surplus shall be deemed to be a
liability under this paragraph.
Paragraph 5.—If the insurer to whom compensation is to be given under
this part is a displaced insurer, the compensation to be given shall be
computed in accordance with following provisions:—
Firstly, there shall be ascertained the losses incurred by the displaced
insurer in respect of claims arising by deaths established by the displaced
insurer to have been caused by the civil disturbances which took place on
the occasion of the setting up of the Dominions of India and Pakistan, the
total loss being taken as the difference between the amounts paid as
claims in respect of such deaths and the total amount of the actuarial
reserve in respect of the relevant policies;
337
Secondly, there shall be ascertained the difference between the market

value as at the 15th day of August 1947, of any immovable property in
West Pakistan belonging to the displaced insurer and the market value
thereof determined under Paragraph 3 of this part, or, where any such
immovable property has been sold before the 19th day of January, 1956,
the difference between the market value thereof as at the 15th day of
August 1947, and the sale price;
Thirdly, there shall be ascertained the amount of deposits held by the
displaced insurer in banks which could not be withdrawn on account of a
moratorium declared under any law for the time being in force, to the
extent to which such deposits have become losses;
Fourthly, there shall be ascertained the difference between the market
value as at the 15th day of August, 1947, of any shares in any company
now carrying on business in West Pakistan held by the displaced insurer
and which had been acquired before the 15th day of August, 1947, and the
market value of such shares as at the 19th day of January, 1956.
The amount of compensation to be given to the displaced insurer under
this part shall be—
a. The amount which would have to be given to him if this Paragraph had
not been enacted, plus
b. An amount which represents one-half of the difference between the
compensation which would have to be given to him if to the value of the
assets referred to in Paragraph 3 there had been added the sum of the
four items referred to in this Paragraph and with respect to the liabilities
referred to in Paragraph 4, the life insurance fund had been increased
by a like sum, and the compensation which would have to be given to
him if this Paragraph had not been enacted or one half of the paid-up
capital of the displaced insurer whichever is less.
338
PART C
The compensation to be given by the Corporation to an insurer:—
a. Having no share capital; or
b. Having a share capital on which a dividend or bonus is not payable;
Shall be in the form of an addition at the rate of rupee one per thousand
in respect of the sun assured (excluding bonuses) under each with-profit
policy, and in the case of an insurer falling under clause (b), such
compensation shall also include a sun equivalent to the paid-up capital
of the insurer to be paid to him.
Principles for Determining the Value of Liabilities in Certain Cases
The total amount of the liabilities of an insurer incorporated outside India
for the purposes of subsection (2) of section 36 shall be the sum of the
amounts computed in accordance with the following provisions:—
a. The total amount of liabilities of the insurer to holders of policies in
respect of his controlled business on account of matured claims on
which payment has to be made:
b. The total amount of liabilities of the insurer to holders of policies in
respect of his controlled business which have not matured for payment,
the liabilities in respect thereof being the liabilities calculated in
accordance with method B below or the mean of the liabilities calculated
in accordance with method A and method B below, whichever is greater.
Method A.—Actuarial liability calculated on the same bases as adopted by
the insurer at the last actuarial investigation as at a date earlier than the
1st of January, 1955.
Method B.—Actuarial liability calculated on the methods knows as the
modified net premium method of valuation, the mortality table to be used
being the Oriental (25-35) ultimate mortality table, an interest rate of 21/2
per cent, per annum being assumed and the allowance for first year
expenses being Rs. 40 per thousand rupees of the sum assured by the
policy.
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Principles for Determining Compensation Payable to Chief Agents

The compensation payable to a chief agent shall consist of seventy-five per
cent, of the overriding commission specified in the contract relating to chief
agency with the insurer on the renewal premiums received by the
Corporation during a period of ten years from the appointed day in respect
of the business procured by the chief agent before the appointed day; and
such compensation shall be determined and paid annually for the said
period.
Principles for Determining Compensation Payable to Special Agents
The compensation payable to a special agent shall consist of one eighth of
his annual average earnings during the period beginning on the 1st day of
January, 1952, and ending on the 31st day of December, 1955, in the form
of overriding commissions in respect of business procured by him through
insurance agents.
Return of Premium
Sometimes, the conditions are such that the contract of insurance becomes
void, e.g., when the affected party has opted to avoid the contract. Or,
sometimes the consideration has failed, e.g., where the property insured is
destroyed before the commencement of business. Thus, in some cases, the
insurer is bound to return the premiums.
The cases might be non-disclosure of facts or mistakes by the insured, or a
fraud made by him or the insurance agent, or cancellation by the insured
or insurer due to some ignorance earlier, or negligence, or in some cases,
the surrender of the policy in the free-look period. In such cases, the
premium is returned by the insurer. There are specific laws about the life
insurance policies about this by IRDA.
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11.4 REINSURANCE
Reinsurance is a term used when the insurer find that the risk involved is
beyond his capacity, so he insures the same risk either wholly or partially
with other insurers. This can happen in all kinds of insurance. The insurer
has an insurable interest in the subject-matter insured to the extent of the
amount insured by him because a contract of re-insurance is also a
contract of indemnity. The regular principles of insurance like insurable
interest, utmost good faith, etc, are also applicable to reinsurance.
Reinsurer is allowed to get a proportionate part of the premium. He gets
the benefits of the terms and conditions of the original policy. If for any
reason the original policy lapses, the reinsurance is also ended with
immediate effect. Reinsurer is liable to pay the portion of the risk
transferred to him. Reinsurer is liable only to the first insurer because there
is no contract between the insurer and the originally insured person.
Double insurance is a term applied when the same risk and the same
subject-matter is insured with more than one insurer. If a person, who is
the owner of a factory building, insures it against fire for Rs. 10,00,000
with one insurer and insures the same factory building for Rs. 5,00,000
with another insurer, that is double insurance. However, if the assured
insurers the same risk and the same subject with two or more independent
insurers, and the total sum insured exceeds the actual value of the subject-
matter, the assured is said to be over-insured by double insurance. Here, in
this case, the assured cannot recover more than the actual amount of loss.
Because, in cases other than life and personal accident insurance, the
contract of insurance is a contract of indemnity.
The major differences between reinsurance and double insurance are (a) In
case of double insurance, the same risk and same subject is covered, while
in reinsurance, the part of risk is transferred to another insurer. (b) In case
of double insurance other than life, the loss will be shared by all the
insurers (In case of life insurance being double, all the insurers are liable;
while in reinsurance, the reinsurer is liable for proportionate part of the
loss. (c) In double insurance, each insurer is liable directly to policy holder,
while the re-insurer is liable only to the first insurer. (d) Double insurance
is a method of assuring the benefit of insurance. (In case of life insurance
the insured may have any number of policies and for any amount) While
reinsurance is a method of reducing of the risk of the insurer.
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11.5 FIRE INSURANCE

The fire insurance contracts are governed by the Insurance Act, 1938 (as
amended up to date) and the General Insurance Business (Nationalisation)
Act, 1972, besides the judicial decisions of courts.
The Insurance Act defines fire insurance as : "Fire insurance business
means the business of effecting, otherwise than incidentally to some other
class of business contracts of insurance against loss by or incidental to fire
or other occurrence customarily included among the risks injured against in
fire insurance policies".
‘Fire’ in a fire insurance policy is the fire when something burns. Fire
produces heat and light but either of them alone is not fire. Electricity or
Lightning is not fire. But if that ignites something, the damage may be
covered by a fire policy. Unless there is actual ignition and loss be
proximately caused by such ignition, the insurers are not liable. The heat of
the sun often contacts timber, but that would not be considered as loss by
fire. Note that had the heat might be cause by actual ignition of premises
where the timber was kept, the damage shall be deemed as 'damage by
fire'. To understand the fire insurance business governed by the General
Insurance Business (Nationalisation) Act, 1972, let us study the details and
definitions of the act.
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The General Insurance Business (Nationalisation) Act, 1972

1. This Act may be called the General Insurance Business (Nationalisation)
Act, 1972.
2. It is applicable to all States of India.
Definitions
In this Act, unless the context otherwise requires,--
a. "acquiring company" means any Indian insurance company and, where
a scheme has been framed involving the merger of one Indian insurance
company in another or the amalgamation of two or more such
companies, means the Indian insurance company in which any other
company has been merged or the company which has been formed as a
result of the amalgamation; 206
b. "appointed day" means such day , not being a day later than the 2nd
day of January, 1973, as the Central Government may, by notification,
appoint;
c. "Companies Act" means the Companies Act, 1956 (1 of 1956);
d. "Corporation" means the General Insurance Corporation of India formed
under section 9;
e. "existing insurer" means every insurer the management of whose
undertaking has vested in the Central Government under section 3 of
the General insurance (Emergency Provisions) Act, 1971 (17 of 1971),
and includes the undertaking of the Life Insurance Corporation in so far
as it relates to the general insurance business carried on by it;
f. "foreign insurer" means an existing insurer incorporated under the law
of any country outside India;
g. "general insurance business" means fire, marine or miscellaneous
insurance business, whether carried on singly or in combination with
one or more of them, but does not include capital redemption business
and annuity certain business;
h. "Government company" means a Govt. company as defined in section
617 of the Companies Act;
i. "Indian insurance company" means an existing insurer having a share
capital who is a company within the meaning of the Companies Act;
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j. "Insurance Act" means the Insurance Act, 1938 (4 of 1938);

k. "Life Insurance Corporation" means the Life Insurance Corporation of
India established under the Life Insurance Corporation Act, 1956 (31 of
1956);
l. "notification" means a notification published in the Official Gazette;
m. "prescribed" means prescribed by rules made under this Act;
n. "Schedule" means the Schedule to this Act;
o. "scheme" means the scheme framed under section 16 2
p. words and expressions used in this Act but not defined herein and
defined in the Insurance Act, shall have the meanings respectively
assigned to them in that Act,
q. words and expressions used in this Act but not defined herein or in the
Insurance Act and defined in the Companies Act, shall have the
meanings respectively assigned to them in the Companies Act.
General Insurance Corporation of India was formed under which four
companies were established to take care of General Insurance (Other
than Life Insurance) and which included fire insurance, marine insurance
and miscellaneous insurance business.
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Fire Insurance Policies

The policies of fire insurance are divided into seven types based on the
type of policy. The insured sums may or may not be different in these
types, but the type of risk may be different.
The types of policies are – (i) Ordinary – The insured amount equals the
original stated price of the property less the depreciated cost. (ii) Specific –
Where the liability equals the specific amount , which is less than the total
original cost of the property, and the loss reimbursed is the actual loss
incurred; which is less than the insured amount. (iii) Valued policy – Where
the insurer is bound to pay specific amount irrespective of the actual loss.
(iv) Average Policy – Here the insurer does not pay the full loss amount but
pays only a pre-decided proportion of the loss for which it is insured. This
is done basically to reduce the premium and cover the loss to certain
extent. (v) Replacement policy – Here the insurer pays the cost of
replacement of the property or its part under consideration. (vi) Floating
policy – To cover the property situated at different places, this type of
policy is used. It is based on average of the prices. (vii) Combined policy –
When the cause of loss may be different, this policy is used. Say, along
with fire, riots/burglary/flood, etc. In this type, the loss of downtime of the
property/equipment may also be added but the premium rises in such
cases.
On the happening of any loss or damage to the property or goods insured,
the assured should give the notice of loss to the insurer, then immediately
report to the police if the fire is caused by arson, then submit the
statement of claim in writing along with the police report copy. Particulars
of other insurance, if any, are also required to be mentioned. The claim
should be submitted within 15 days of mishap, and should include evidence
of the losses.
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11.6 MISCELLANEOUS INSURANCE

Personal Accident Insurance
The accident or miscellaneous department covers those types of risk which
are not covered either under Fire or Marine Departments. Its scope is
therefore, very wide and extensive and includes such a wide range of
contingencies as may not be included in the strict interpretation of the
term ‘Accident’. The Accident or the miscellaneous insurance includes many
subsections under which different classes of business are transacted. A
special feature of this department is that it covers many branches which
are grouped together in it which are apparently unrelated to each other.
However in practise, unrelated risks are grouped together for the
convenience of the insured.
In case of personal accident insurance, the insurer promises to pay a
certain sum of money to the insured in case of injury by accident and to
the dependent of the insured in case of death by accident. Normally, the
insurer has to pay a fixed sum of money. He is not required to indemnify
the assured. The contract of insurance is made in the same manner as
other forms of insurance. The contract must satisfy all the essential
requirements of an insurance contract. In India, accident insurance
against railway accidents is almost unknown but insurance against
accidents during air journeys is very popular. Recently, Indian Railways is
also considering to adopt accident insurance limited to the journey, by
purchase of extra coupons, like ari journey coupons. Insurance against
personal accident may be and usually is, a part of motor car insurance,
known as ‘third party insurance’ which is compulsory in car and two
wheeler owners.
Insurance against theft : Goods may be insured against robbery or theft.
The policy in such cases lays down what risks are covered. The
policyholders is usually required to take all reasonable precautions against
loss by theft or robbery. In burglary and accident notice/information must
be given to the insurer immediately or as soon as possible, followed by a
police station F.I.R.
Motor Vehicle Insurance (Motor Vehicles Act of 1988)
In case of road accidents, which are more in quantity in India, the Motor
Vehicles Act,1988 has laid down specific clauses for preparing proper
documents for claiming insurance.
346
Definitions
a. “authorised insurer” means an insurer for the time being carrying on
general insurance business in India under the General Insurance
Business (Nationalisation) Act, 1972 (57 of 1972), and any Government
insurance fund authorised to do general insurance business under that
Act;
b. “certificate of insurance” means a certificate issued by an authorised
insurer in pursuance of subsection (3) of section 147 and includes a
cover note complying with such requirements as may be prescribed, and
where more than one certificate has been issued in connection with a
policy, or where a copy of a certificate has been issued, all those
certificates or that copy, as the case may be;
c. “liability”, wherever used in relation to the death of or bodily injury to
any person, includes liability in respect thereof under section 140;
d. “policy of insurance” includes “certificate of insurance”;
e. “property” includes goods carried in the motor vehicle, roads, bridges,
culverts, causeways, trees, posts and mile-stones;
f. “reciprocating country” means any such country as may on the basis of
reciprocity be notified by the Central Government in the Official Gazette
to be a reciprocating country for the purposes of this Chapter;
g. “third party” includes the Government.
347
Duty of driver in case of accident and injury to a person.

When any person is injured or any property of a third party is damaged, as
a result of an accident in which a motor vehicle is involved, the driver of
the vehicle or other person in charge of the vehicle shall—
a. unless it is not practicable to do so on account of mob fury or any other
reason beyond his control, take all reasonable steps to secure medical
attention for the injured person, 1[by conveying him to the nearest
medical practitioner or hospital, and it shall be the duty of every
registered medical practitioner or the doctor on the duty in the hospital
immediately to attend to the injured person and render medical aid or
treatment without waiting for any procedural formalities], unless the
injured person or his guardian, in case he is a minor, desires otherwise;
b. give on demand by a police officer any information required by him, or,
if no police officer is present, report the circumstances of the
occurrence, including the circumstances, if any, for not taking
reasonable steps to secure medical attention as required under clause
(a), at the nearest police station as soon as possible, and in any case
within twenty-four hours of the occurrence; 2[(c) give the following
information in writing to the insurer, who has issued the certificates of
insurance, about the occurrence of the accident, namely:—
i. insurance policy number and period of its validity;
ii. date, time and place of accident;
iii. particulars of the persons injured or killed in the accident;
iv. name of the driver and the particulars of his driving licence.
Explanation.—For the purposes of this section the expression “driver”
includes the owner of the vehicle.]
348
Liability to pay compensation in certain cases on the principle of no

fault.
1. Where death or permanent disablement of any person has resulted from
an accident arising out of the use of a motor vehicle or motor vehicles,
the owner of the vehicle shall, or, as the case may be, the owners of the
vehicles shall, jointly and severally, be liable to pay compensation in
respect of such death or disablement in accordance with the provisions
of this section.
2. The amount of compensation which shall be payable under subsection
(1) in respect of the death of any person shall be a fixed sum of 1[fifty
thousand rupees] and the amount of compensation payable under that
subsection in respect of the permanent disablement of any person shall
be a fixed sum of twenty-five thousand rupees.
3. In any claim for compensation under subsection (1), the claimant shall
not be required to plead and establish that the death or permanent
disablement in respect of which the claim has been made was due to
any wrongful act, neglect or default of the owner or owners of the
vehicle or vehicles concerned or of any other person.
4. A claim for compensation under subsection (1) shall not be defeated by
reason of any wrongful act, neglect or default of the person in respect of
whose death or permanent disablement the claim has been made nor
shall the quantum of compensation recoverable in respect of such death
or permanent disablement be reduced on the basis of the share of such
person in the responsibility for such death or permanent disablement.
349
Provisions as to other right to claim compensation for death or

permanent disablement.
1. The right to claim compensation under section 140 in respect of death
or permanent disablement of any person shall be in addition to 1[any
other right, except the right to claim under the scheme referred to in
section 163A (such other right hereafter] in this section referred to as
the right on the principle of fault) to claim compensation in respect
thereof under any other provision of this Act or of any other law for the
time being in force.
2. A claim for compensation under section 140 in respect of death or
permanent disablement of any person shall be disposed of as
expeditiously as possible and where compensation is claimed in respect
of such death or permanent disablement under section 140 and also in
pursuance of any right on the principle of fault, the claim for
compensation under section 140 shall be disposed of as aforesaid in the
first place.
3. Notwithstanding anything contained in sub-section (1), where in respect
of the death or permanent disablement of any person, the person liable
to pay compensation under section 140 is also liable to pay
compensation in accordance with the right on the principle of fault, the
person so liable shall pay the first-mentioned compensation and—
a. if the amount of the first-mentioned compensation is less than the
amount of the second-mentioned compensation, he shall be liable to
pay (in addition to the first-mentioned compensation) only so much
of the second-mentioned compensation as is equal to the amount by
which it exceeds the first mentioned compensation;
b. if the amount of the first-mentioned compensation is equal to or
more than the amount of the second-mentioned compensation, he
shall not be liable to pay the second-mentioned compensation.
350
Necessity for insurance against third party risk.

In this section, the act defines the necessity of a third party insurance in
India, where the damaged person gets the amount from the vehicle owner
or driver. The damaged person has himself not paid any premium but he
has suffered due to the accident and hence the necessity. The act has
elaborated all the required points in details, including the rights of the third
party. In addition to this, the owner of a motor vehicle may and, usually
does, insure his vehicle against any damage that it may suffer. He may also
insure against personal accident to himself and other occupants of the
motor vehicle.
The policies under motor insurance are (i) act liability (ii) their party only
and (iii) comprehensive policy. A comprehensive policy covers the risks like
damage to car parts or body, removal, charge for repairs, third party
liabilities, costs and expenses incurred with risk, repair changes, medical
expenses etc.
11.7 MARINE INSURANCE

Marine Policy or Sea Policy is issued in case of Marine Insurance. Normally,
a marine insurance is effected only against risks at sea. But the contract
may by its express terms or by usage of trade be extended so as to protect
the assured against loss on inland waters or on any land risk which may be
incidental to the sea voyage. A marine insurance policy may cover a ship in
the course of building or launching of a ship, or any adventure of ship or
boat at the sea.
351
The Marine Insurance may be obtained to cover the vessel and its
equipment (furniture, fittings, engines, machinery etc.); or Cargo and
goods in the shipment (Cargo Insurance); Or Shipping Freight (freight
insurance); Or to take care of damages by collision, storm, etc. (Liability
Insurance).
11.8 The Marine Insurance Act, 1963

Short title and commencement.—
1. This Act may be called the Marine Insurance Act, 1963.
2. It shall come into force on such date1 as the Central Government may,
by notification in the Official Gazette, appoint.
Definitions.—In this Act, unless the context otherwise requires,—
a. “contract of marine insurance” means a contract of marine insurance as
defined by section 3;
b. “freight” includes the profit derivable by a shipowner from the
employment of his ship to carry his own goods or other movables, as
well as freight payable by a third party, but does not include passage
money;
c. “insurable property” means any ship, goods or other movables which
are exposed to maritime perils;
d. “marine adventure” includes any adventure where—
i. any insurable property is exposed to maritime perils;
ii. the earnings or acquisition of any freight, passage money,
commission, profit or other pecuniary benefit, or the security for any
advances, loans, or disbursements is endangered by the exposure of
insurable property to maritime perils;
iii. any liability to a third party may be incurred by the owner of or other
person interested in or responsible for, insurable property by reason
of maritime perils;
e. “maritime perils” means the perils consequent on, or incidental to, the
navigation of the sea, that is to say, perils of the sea, fire, war perils,
pirates, rovers, thieves, captures, seizures, restraints and detainments
of princes and peoples, jettisons, barratry and any other perils which
are either of the like kind or may be designated by the policy;
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f. “movables” means any movable tangible property, other than the ship,
and includes money, valuable securities and other documents;
g. “policy” means a marine policy;
h. “ship” includes every description of vessel used in navigation;
i. “suit” includes counter-claim and set-off.
Marine insurance defined.—A contract of marine insurance is an agreement
whereby the insurer undertakes to indemnify the assured, in the manner
and to the extent thereby agreed, against marine losses, that is to say, the
losses incidental to marine adventure.
Mixed Sea and Land Risks.—
1. A contract of marine insurance may, by its express terms, or by usage
of trade, be extended so as to protect the assured against losses on
inland waters or on any land risk which may be incidental to any sea
voyage.
2. Where a ship in course of building or the launch of a ship, or any
adventure analogous to a marine adventure, is covered by a policy in
the form of a marine policy, the provisions of this Act, in so far as
applicable, shall apply thereto, but, except as by this section provided,
nothing in this Act shall alter or affect any rule of law applicable to any
contract of insurance other than a contract of marine insurance as by
this Act defined. Explanation.—An adventure analogous to a marine
adventure’ includes an adventure where any ship, goods or other
movables are exposed to perils incidental to local or inland transit.
Lawful marine adventure.—Subject to the provisions of this Act, every
lawful marine adventure may be the subject of a contract of marine
insurance.
Avoidance of wagering contracts.—Every contract of marine insurance by
way of wagering is void.
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A contract of marine insurance is deemed to be a wagering contract—

a. where the assured has not an insurable interest as defined by this Act,
and the contract is entered into with no expectation of acquiring such an
interest; or
b. where the policy is made “interest or no interest”, or “without further
proof of interest than the policy itself”, or “without benefit of salvage to
the insurer”, or subject to any other like term: Provided that, where
there is no possibility of salvage, a policy may be effected without
benefit of salvage to the insurer.
Insurable interest defined.—
1. Subject to the provisions of this Act, every person has an insurable
interest who is interested in a marine adventure.
2. In particular a person is interested in a marine adventure where he
stands in any legal or equitable relation to the adventure or to any
insurable property at risk therein, in consequence of which he may
benefit by the safety or due arrival of insurable property, or may be
prejudiced by its loss, or by damage thereto, or by the detention
thereof, or may incur liability in respect thereof.
Reinsurance.—
1. The insurer under a contract of marine insurance has an insurable
interest in his risk, and may reinsure in respect of it.
2. Unless the policy otherwise provides, the original assured has no right
or interest in respect of such reinsurance.
Advance freight.—In the case of advance freight, the person advancing the
freight has an insurable interest, in so far as such freight is not repayable
in case of loss.
Charges of insurance.—The assured has an insurable interest in the
charges of any insurance which he may effect.
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Quantum of interest.—
1. Where the subject-matter insured is mortgaged, the mortgagor has an
insurable interest in the full value thereof, and the mortgagee has an
insurable interest in respect of any sum due or to become due under the
mortgage.
2. A mortgagee, consignee, or other person having an interest in the
subject-matter insured may insure on behalf and for the benefit of other
persons interested as well as for his own benefit.
3. The owner of insurable property has an insurable interest in respect of
the full value thereof, notwithstanding that some third person may have
agreed, or be liable to indemnify him in case of loss.
Assignment of interest.—Where the assured assigns or otherwise parts with
his interest in the subject-matter insured, he does not thereby transfer to
the assignee his rights under the contract of insurance, unless there be an
express or implied agreement with the assignee to that effect. But the
provisions of this section do not affect transmission of interest by operation
of law.
Insurance is uberrimae fidei.—A contract of marine insurance is a contract
based upon the utmost good faith, and if the utmost good faith be not
observed by either party, the contract may be avoided by the other party.
When contract is deemed to be concluded.—A contract of marine insurance
is deemed to be concluded when the proposal of the assured is accepted by
the insurer, whether the policy be then issued or not; and for the purpose
of showing when the proposal was accepted, reference may be made to the
slip, covering note or other customary memorandum of the contract,
although it be unstamped.
Contract must be embodied in policy.—A contract of marine insurance shall
not be admitted in evidence unless it is embodied in a marine policy in
accordance with this Act. The policy may be executed and issued either at
the time when the contract is concluded, or afterwards.
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What policy must specify

A marine policy must specify—
1. the name of the assured, or of some person who effects the insurance
on his behalf;
2. the subject matter insured and the risk insured against;
3. the voyage, or period of time, or both, as the case may be, covered by
the insurance;
4. the sum or sums insured;
5. the name or names of the insurer or insurers.
Signature of insurer
1. A marine policy must be signed by or on behalf of the insurer.
2. Where a policy is subscribed by or on behalf of two or more insurers,
each subscription, unless the contrary be expressed, constitute a
distinct contract with the assured.
Voyage and time policies
1. Where the contract is to insure the subject-matter at and from, or from
one place to another or others, the policy is called a “voyage policy”,
and where the contract is to insure the subject matter for a definite
period of time, the policy is called a “time policy”. A contract for both
voyage and time may be included in the same policy.
2. A time policy which is made for any time exceeding twelve months is
invalid.
Valued policy
1. A policy may be either valued or unvalued.
2. A valued policy is a policy which specifies the agreed value of the
subject matter insured.
3. Subject to the provisions of this Act, and in the absence of fraud, the
value fixed by the policy is, as between the insurer and assured,
conclusive of the insurable value of the subject intended to be insured,
whether the loss be total or partial.
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4. Unless the policy otherwise provides, the value fixed by the policy is not
conclusive for the purpose of determining whether there has been a
constructive total loss.
Unvalued policy - An unvalued policy is a policy which does not specify
the value of the subject matter insured, but subject to the limit of the sum
insured, leaves the insurable value to be subsequently ascertained, in the
manner hereinbefore explained.
Floating policy by ship or ships
1. A floating policy is a policy which describes the insurance in general
terms, and leaves the name or names of the ship or ships and other
particulars to be defined by subsequent declaration.
2. The subsequent declaration or declarations may be made by
endorsement on the policy, or in other customary manner.
3. Unless the policy otherwise provides, the declarations must be made in
the order of dispatch or shipment. They must, in the case of goods,
comprise all consignments within the terms of the policy, and the value
of the goods or other property must be honestly stated, but an omission
or erroneous declaration may be rectified even after loss or arrival,
provided the omission or declaration was made in good faith.
4. Unless the policy otherwise provides, where a declaration of value is not
made until after notice of loss or arrival, the policy must be treated as
an unvalued policy as regards the subject matter of that declaration.
Construction of terms in policy
1. A policy may be in the form in the Schedule.
2. Subject to the provisions of this Act, and unless the context of the policy
otherwise requires, the terms and expressions mentioned in the
Schedule shall be construed as having the scope and meaning assigned
to them in the Schedule.
Premium to be arranged
1. Where an insurance is effected at a premium to be arranged, and no
arrangement is made, a reasonable premium is payable.
2. Where an insurance is effected on the terms that an additional premium
is to be arranged in a given event, and that event happens but no
arrangement is made, then a reasonable additional premium is payable.
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Double insurance
1. Where two or more policies are effected by or on behalf of the assured
on the same adventure and interest or any part thereof, and the sums
insured exceed the indemnity allowed by this Act, the assured is said to
be over-insured by double insurance.
2. Where the assured is over-insured by double insurance—
a. the assured, unless the policy otherwise provides, may claim
payment from the insurers in such order as he may think fit, provided
that he is not entitled to receive any sum in excess of the indemnity
allowed by this Act;
b. where the policy under which the assured claims is a valued policy,
the assured must give credit as against the valuation, for any sum
received by him under any other policy, without regard to the actual
value of the subject matter insured;
c. where the policy under which the assured claims is an unvalued
policy he must give credit, as against the full insurable value, for any
sum received by him under any other policy;
d. where the assured receives any sum in excess of the indemnity
allowed by this Act, he is deemed to hold such sum in trust for the
insurers, according to their right of contribution among themselves.
11.9 WARRANTY
Nature of warranty
1. A warranty, in the following sections relating to warranties, means a
promissory warranty, that is to say a warranty by which the assured
undertakes that some particular thing shall or shall not be done, or that
some condition shall be fulfilled, or whereby he affirms or negatives the
existence of a particular state of facts.
2. A warranty may be express or implied.
3. A warranty, as above defined, is a condition which must be exactly
complied with, whether it be material to the risk or not. If it be not so
complied with, then, subject to any express provision in the policy the
insurer is discharged from liability as from the date of the branch of
warranty but without prejudice to any liability incurred by him before
that date.
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When breach of warranty excused.—

1. Non-compliance with a warranty is excused when, by reason of a
change of circumstances, the warranty ceases to be applicable to the
circumstances of the contract, or when compliance with the warranty is
rendered unlawful by any subsequent law.
2. Where a warranty is broken, the assured cannot avail himself of the
defence that the breach has been remedied, and the warranty complied
with before loss.
3. A breach of warranty may be waved by the insurer.
Express warranties.—
1. An express warranty may be in any form of words from which the
intention to warrant is to be inferred.
2. An express warranty must be included in, or written upon, the policy, or
must be contained in some document incorporated by reference into the
policy.
3. An express warranty does not exclude implied warranty, unless it be
inconsistent therewith.
Warranty of neutrality.—
1. Where insurable property, whether ship or goods, is expressly warranted
neutral, there is an implied condition that the property shall have a
neutral character at the commencement of the risk, and that, so far as
the assured can control the matter, its neutral character shall be
preserved during the risk.
2. Where a ship is expressly warranted “neutral”, there is also an implied
condition that, so far as the assured can control the matter, she shall be
properly documented, that is to say, that she shall carry the necessary
papers to establish her neutrality, and that she shall not falsify or
suppress her papers, or use simulated papers. If any loss occurs
through breach of this condition, the insurer may avoid the contract.
No implied warranty of nationality.—There is no implied warranty as to
the nationality of a ship, or that her nationality shall not be changed
during the risk.
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Warranty of good safety - Where the subject matter insured is warranted

“well” or “in good safety” on a particular day, it is sufficient if it be safe
at any time during that day.
Warranty of seaworthiness of ship

1. In a voyage policy there is an implied warranty that at the
commencement of the voyage the ship shall be seaworthy for the
purpose of the particular adventure insured.
2. Where the policy attaches while the ship is in port, there is also an
implied warranty that she shall, at the commencement of the risk, be
reasonably fit to encounter the ordinary perils of the port.
3. Where the policy relates to a voyage which is performed in different
stages, during which the ship requires different kinds of or further
preparation or equipment, there is an implied warranty that at the
commencement of each stage the ship is seaworthy in respect of such
preparation or equipment for the purposes of that stage.
4. A ship deemed to be seaworthy when she is reasonably fit in all respects
to encounter the ordinary perils of the sea of the adventure insured.
5. In a time policy there is no implied warranty that the ship shall be
seaworthy at any stage of the adventure, but where, with the privity of
the assured, the ship is sent to sea in an unseaworthy state, the insurer
is not liable for any loss attributable to unseaworthiness.
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No implied warranty that goods are seaworthy.—

1. In a policy on goods or other movable there is no implied warranty that
the goods or movables are seaworthy.
2. In a voyage policy on goods or other movables there is an implied
warranty that at the commencement of the voyage the ship is not only
seaworthy as a ship, but also that she is reasonably fit to carry the
goods or other movables to the destination contemplated by the policy.
Warranty of legality.—There is an implied warranty that the adventure
insured is a lawful one, and that, so far as the assured can control the
matter, the adventure shall be carried out in a lawful manner.
Implied conditions as to commencement of risk.—
1. Where the subject matter is insured by a voyage policy “at and from” or
“from” a particular place, it is not necessary that the ship should be at
that place when the contract is concluded, but there is an implied
condition that the adventure shall be commenced within a reasonable
time, and that if the adventure be not so commenced the insurer may
avoid the contract.
2. The implied condition may be negatived by showing that the delay was
caused by circumstances known to the insurer before the contract was
concluded, or showing that he waived the condition.
Alteration of port of departure.—Where the place of departure is
specified by the policy, and the ship instead of sailing from that place
sails from any other place, the risk does not attach.
Sailing for different destination.—Where the destination is specified in
the policy, and the ship, instead of sailing for that destination, sails for
any other destination, the risk does not attach.
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Change of voyage.—
1. Where, after the commencement of the risk, the destination of the ship
is voluntarily changed from the destination contemplated by the policy,
there is said to be a change of voyage.
2. Unless the policy otherwise provides, where there is a change of
voyage, the insurer is discharged from liability as from the time of
change, that is to say, as from the time when the determination to
change it is manifested, and it is immaterial that the ship may not in
fact have left the course of voyage contemplated by the policy when the
loss occurs.
Deviation.—
1. Where a ship, without lawful excuse, deviates from the voyage
contemplated by the policy, the insured is discharged from liability as
from the time of deviation, and it is immaterial that the ship may have
regained her route before any loss occurs.
2. There is a deviation from the voyage contemplated by the policy—
a. where the course of the voyage is specifically designated by the
policy, and that course is departed from; or
b. where the course of the voyage is not specifically designated by the
policy, but the usual and customary course is departed from.
3. The intention to deviate is immaterial; there must be a deviation in fact
to discharge the insurer from his liability under the contract.
Several ports of discharge.—
1. Where several ports of discharge are specified by the policy, the ship
may proceed to all or any of them, but, in the absence of any usage or
sufficient cause to the contrary, she must proceed to them, or such of
them as she goes to, in the order designated by the policy. If she does
not there is a deviation.
2. Where the policy is to “ports of discharge”, within a given area, which
are not named, the ship must, in the absence of any usage or sufficient
cause to the contrary, proceed to them, or such of them as she goes to,
in their geographical order. If she does not there is a deviation.
362
Delay in voyage.—In the case of a voyage policy, the adventure insured

must be prosecuted throughout its course with reasonable despatch, and, if
without lawful excuse it is not so prosecuted, the insurer is discharged
from liability as from the time when the delay became unreasonable.
Excuse for deviation or delay.—
1. Deviation or delay in prosecuting the voyage contemplated by the policy
is excused—
a. where authorised by any special term in the policy; or
b. where caused by circumstances beyond the control of the master and
his employer; or
c. where reasonably necessary in order to comply with an express or
implied warranty; or
d. where reasonably necessary for the safety of the ship or subject-
matter insured; or
e. for the purpose of saving human life or aiding a ship in distress
where human life may be in danger; or
f. where reasonably necessary for the purpose of obtaining medical or
surgical aid for any person on board the ship; or
g. where caused by the barratrous conduct of the master or crew, if
barratry be one of the perils insured against.
2. When the cause excusing the deviation or delay ceases to operate, the
ship must resume her course, and prosecute her voyage, with
reasonable dispatch.
When premium payable.—Unless otherwise agreed, the duty of the assured
or his agent to pay the premium, and the duty to the insurer to issue the
policy to the assured or his agent, are concurrent conditions, and the
insurer is not bound to issue the policy until payment or tender of
premium.
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11.10 MARINE LOSSES

Included and excluded loses
1. Subject to the provisions of this Act, and unless the policy otherwise
provides, the insurer is liable for any loss proximately caused by a peril
insured against, but, subject as aforesaid, he is not liable for any loss
which is not proximately caused by a peril insured against.
2. In particular—
a. the insurer is not liable for any loss attributable to the wilful
misconduct of the assured, but, unless the policy otherwise provides,
he is liable for any loss proximately caused by a peril insured against,
even though the loss would not have happened but for the
misconduct or negligence of the master or crew;
b. unless the policy otherwise provides, the insurer on ship or goods is
not liable for any loss proximately caused by delay, although the
delay be caused by a peril insured against;
c. unless the policy otherwise provides, the insurer is not liable for
ordinary wear and tear, ordinary leakage and breakage, inherent vice
or nature of the subject matter insured, or for any loss proximately
caused by maritime perils.
Partial and total loss
1. A loss may be either total or partial. Any loss other than a total loss, is a
partial loss.
2. A total loss may be either an actual total loss, or a constructive total
loss.
3. Unless a different intention appears from the terms of the policy, an
insurance against total loss includes a constructive, as well as an actual,
total loss.
4. Where the assured brings a suit for a total loss and the evidence proves
only a partial loss, he may, unless the policy otherwise provides, recover
for a partial loss.
5. Where goods reach their destination in specie, but by reason of
obliteration of marks, or otherwise, they are incapable of identification,
the loss, if any is partial and not total.
364
Actual total loss

1. Where the subject matter insured is destroyed, or so damaged as to
cease to be a thing of the kind insured, or where the assured is
irretrievably deprived thereof, there is an actual total loss.
2. In the case of an actual total loss no notice of abandonment need be
given.
Missing ship.—Where the ship concerned in the adventure is missing, and
after the lapse of a reasonable time no news of her has been received, an
actual total loss may be presumed.
Constructive total loss defined
1. Subject to any express provision in the policy, there is a constructive
total loss where the subject matter insured is reasonably abandoned on
account of its actual total loss appearing to be unavoidable, or because
it could not be preserved from actual total loss without an expenditure
which would exceed its value when the expenditure had been incurred.
2. In particular, there is a constructive total loss—
i. where the assured is deprived of the possession of his ship or goods
by a peril insured against, and
a. it is unlikely that he can recover the ship or goods, as the case
may be, or
b. would exceed their value when recovered; or
ii. in the case of damage to a ship, where she is so damaged by a peril
insured against that the cost of repairing the damage would exceed
the value of the ship when repaired. In estimating the cost of repairs,
no deduction is to be made is respect of general average
contributions to those repairs payable by other interests, but account
is to be taken of the expense of future salvage operations and of any
future general average contributions to which the ship would be liable
if required; or
iii. in the case of damage to goods, where the cost of repairing the
damage and forwarding the goods to their destination would exceed
their value on arrival.
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Effect of constructive total loss—Where there is a constructive total loss the

assured may either treat the loss as a partial loss, or abandon the subject
matter insured to the insurer and treat the loss as if it where an actual
total loss.
Particular average loss
1. A particular average loss is a partial loss of the subject-matter insured,
caused by a peril insured against, and which is not a general average
loss.
2. Expenses incurred by or on behalf of the assured for the safety or
preservation of the subject-matter insured, other than general average
and salvage charges, are called particular charges. Particularly charges
are not included in particular average.
General average loss
1. A general average loss is a loss caused by or directly consequential on a
general average act. It includes a general average expenditure as well
as a general average sacrifice.
2. There is a general average act where any extraordinary sacrifice or
expenditure is voluntarily and reasonably made or incurred in time of
peril for the purpose of preserving the property imperilled in the
common adventure.
3. Where there is a general average loss, the party on whom it falls is
entitled, subject to the conditions imposed by maritime law, to a ratable
contribution from the other parties interested, and such contribution is
called a general average contribution.
4. Subject to any express provision in the policy, where the assured has
incurred a general average of expenditure, he may recover from the
insurer in respect of the proportion of the loss which falls upon him; and
in the case of a general average sacrifice, he may recover from the
insurer in respect of the whole loss without having enforced his right of
contribution from the other parties liable to contribute.
5. Subject to any express provision in the policy, where the assured has
paid, or is liable to pay, a general average contribution in respect of the
interest insured, he may recover therefor from the insurer.
366
6. In the absence of express stipulation, the insurer is not liable for any
general average loss or contribution where the loss was not incurred for
the purpose of avoiding, or in connection with the avoidance of a peril
insured against.
7. Where ship, freight, and cargo, or any two of those interests, are owned
by the same assured, the liability of the insurer in respect of general
average losses or contributions is to be determined as if those interests
were owned by different persons.
Extent of liability of insurer for loss
1. The sum which the assured can recover in respect of a loss on a policy
by which he is insured, in the case of an unvalued policy to the full
extent of the insurable value or in the case of a valued policy to the full
extent of the value fixed by the policy, is called the measure of
indemnity.
2. Where there is a loss recoverable under the policy, the insurer or each
insurer if there be more than one, is liable for such proportion of the
measure of indemnity as the amount of his subscription bears to the
value fixed by the policy in the case of a valued policy, or to the
insurable value in the case of an unvalued policy.
Total loss - Subject to the provisions of this Act, and to any express
provision in the policy, where there is a total loss of the subject matter
insured—
1. if the policy be a valued policy, the measure of indemnity is the sum
fixed by the policy;
2. if the policy be an unvalued policy the measure of indemnity is the
insurable value of the subject-matter insured.
367
Partial loss of ship Where a ship is damaged, but is not totally lost, the
measure of indemnity subject to any express provision in the policy, is as
follows:—
1. where the ship has been repaired, the assured is entitled to the
reasonable cost of the repairs, less the customary deductions, but not
exceeding the sum insured in respect of any one casualty;
2. where the ship has been only practically repaired, the assured is entitled
to the reasonable cost of such repairs, computed as above, and also to
be indemnified for the reasonable depreciation, if any, arising from the
unprepaired damage, provided that the aggregate amount shall not
exceed the cost of repairing the whole damage, computed as above;
3. where the ship has not been repaired, and has not been sold in her
damaged state during the risk, the assured is entitled to be indemnified
for the reasonable depreciation arising from the unrepaired damage, but
not exceeding the reasonable cost of repairing such damage, computed
as above;
4. where the ship has not been repaired, and has been sold in her
damaged state during the risk, the assured is entitled to be indemnified
for the reasonable cost of repairing the damage, computed as above,
but not exceeding the depreciation in value as ascertained by the sale.
Partial loss of freight - Subject to any express provision in the policy,
where there is a partial loss of freight, the measure of indemnity is such
proportion of the sum fixed by the policy in the case of a valued policy or of
the insurable value in the case of an unvalued policy, as the proportion of
freight lost by the assured bears to the whole freight at the risk of the
assured under the policy.
368
Partial loss of goods, merchandise, etc - Where there is a partial loss

of goods, merchandise, or other movable, the measure of indemnity,
subject to any express provision in the policy, is as follows:—
1. where part of the goods, merchandise or other movable insured by a
valued policy is totally lost, the measure of indemnity is such proportion
of the sum fixed by the policy as the insurable value of the part lost
bears to the insurable value of the whole, ascertained as in the case of
an unvalued policy;
2. where part of the goods, merchandise or other movable insured by an
unvalued policy is totally lost, the measure of indemnity is the insurable
value of the part lost, ascertained as in case of total loss;
3. where the whole or any part of the goods or merchandise insured has
been delivered damaged at its destination, the measure of indemnity is
such proportion of the sum fixed by the policy in the case of a valued
policy, or of the insurable value in the case of an unvalued policy, as the
difference between the gross sound and damaged values at the place of
arrival bears to the gross sound value;
4. “Gross value” means the wholesale price, or, if there be no such price,
the estimated value, with, in either case, freight, landing charges, and
duty paid beforehand; provided that, in the case of goods or
merchandise customarily sold in bond, the bonded price is deemed to be
the gross value. “Gross proceeds” means the actual price obtained at a
sale where all charges on sale are paid by the sellers.
Successive losses
1. Unless the policy otherwise provides, and subject to the provisions of
this Act, the insurer is liable for successive losses, even though the total
amount of such losses may exceed the sum insured.
2. Where, under the same policy, a partial loss, which has not been
repaired or otherwise made good, is followed by a total loss, the
assured can only recover in respect of the total loss: Provided that
nothing in this section shall affect the liability of the insurer under the
suing and labouring clause.
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11.11 IRDA (INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY)
In the year 1993 in April, the Central Government set up a committee on
insurance sector reforms, known as the Malhotra Committee. In January
1994, the Government accepted the entry of private players in this sector.
In addition to Indian companies, a number of international companies have
shown strong interest in entering the Indian insurance sector, both life and
general.
Most experts agreed that there is considerable potential that can be
exploited by new entrants. In the life insurance sector, the ratio of
premium expenditure to gross domestic product is a low 1.2 per cent. This
is much lower than many developed and developing economies. Similarly,
in the general insurance business; premium expenditure is only about 0.6
per cent of the Gross Domestic Product (GDP). In the non-life insurance
business, corporate covers are usually insisted upon by financing
institutions, thus leading to wide coverage. However, there is low coverage
in personal lives.
The Indian Insurance Act of 1938, covering both life and non-life insurance,
was formed after the regulation of the insurance business was introduced
with the Indian Life Assurance Companies Act in 1912; and subsequently,
the Indian Insurance Companies Act followed in 1928. After the
nationalisation of insurance business, certain provisions of the Insurance
Act became redundant, as most of the regulatory functions were included
in Life Insurance Corporation (LIC) and General Insurance Corporation
(G1C) themselves. After following the recommendations of the Malhotra
Committee, an interim insurance Regulatory Authority (IRA) was setup in
1996.
The Lok Sabha passed the Insurance Regulatory and Development
Authority (IRDA) Bill on December 2,1999 ; and then the Rajya Sabha
passed the Bill on December 7. The Bill became an Act after obtaining
Presidential assent. The Insurance Act has given statutory status to IRDA,
and thus IRDA was established and started its operations.
As per the Act, an applicant; may be Indian of in collaboration with foreign
insurance company; granted a certificate of registration, and they were
allowed to commence business within 12 months. An extension of another
12 months may be granted by the IRDA, depending on the circumstances.
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Insurers will also have to obtain an annual renewal of certificate from the
IRDA.
IRDA Act :
Short Title, Extent and Commencement
1. This Act may be called the Insurance Regulatory and Development
Authority Act, 1999.
3. It shall come into force on such date as the Central Government may,
by notification in the Official Gazette, appoint: Provided that different
dates may be appointed for different provisions of this Act and any
reference in any such provision to the commencement of this Act shall
be construed as a reference to the coming into force of that provision.
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Definitions
1. In this Act, unless the context otherwise requires, -
a. "appointed day" means date on which the Authority is established
under subsection (1) of section 3;
b. "Authority" means the Insurance Regulatory and Development
Authority established under subsection (1) of section 3;
c. "Chairperson" means the Chairperson of the Authority;
d. "Fund" means the Insurance Regulatory and Development Authority
Fund constituted under subsection (1) of section 16;
e. "Interim Insurance Regulatory Authority" means the Insurance
Regulatory Authority set up by the Central Government through
Resolution No.17(2)/94-Ins-V, dated the 23rd January, 1996;
f. "intermediary or insurance intermediary" includes insurance brokers,
reinsurance brokers, insurance consultants, surveyors and loss
assessors;
g. "member" means a whole time or a part time member of the
Authority and includes the Chairperson;
h. "notification" means a notification published in the Official Gazette;
i. "prescribed" means prescribed by rules made under this Act;
j. "regulations" means the regulations made by the Authority. (2)
Words and expressions used and not defined in this Act but defined in
the Insurance Act, 1938 (4 of 1938) or the Life Insurance Corporation
Act, 1956 (31 of 1956) or the General Insurance Business
(Nationalisation) Act, 1972 (57 of 1972) shall have the meanings
respectively assigned to them in those Acts.
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IRDA - Establishment and Incorporation of Authority.

1. With effect from such date as the Central Government may, by
notification, appoint, there shall be established, for the purposes of this
Act, an Authority to be called "the Insurance Regulatory and
Development Authority".
2. The Authority 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.
3. The head office of the Authority shall be at such place as the Central
Government may decide from time to time.
4. The Authority may establish offices at other places in India.
Composition of Authority
The Authority shall consist of the following members, namely:- (a) a
Chairperson; (b) not more than five whole-time members; (c) not more
than four part-time members, to be appointed by the Central Government
from amongst persons of ability, integrity and standing who have
knowledge or experience in life insurance, general insurance, actuarial
science, finance, economics, law, accountancy, administration or any other
discipline which would, in the opinion of the Central Government, be useful
to the Authority: Provided that the Central Government shall, while
appointing the Chairperson and the whole-time members, ensure that at
least one person each is a person having knowledge or experience in life
insurance, general insurance or actuarial science, respectively.
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Tenure of Office of Chairperson and other Members.

1. The Chairperson and every other whole-time member shall hold office
for a term of five years from the date on which he enters upon his office
and shall be eligible for reappointment: Provided that no person shall
hold office as a Chairperson after he has attained the age of sixty-five
years: Provided further that no person shall hold office as a whole-time
member after he has attained the age of sixty two years.
2. A part-time member shall hold office for a term not exceeding five years
from the date on which he enters upon his office.
3. Notwithstanding anything contained in subsection (1) or subsection (2),
a member may - (a) relinquish his office by giving in writing to the
Central Government notice of not less than three months.
Administrative Powers of Chairperson - The Chairperson shall have the
powers of general superintendence and direction in respect of all
administrative matters of the Authority.
Meetings of Authority -
1. The Authority shall meet at such times and places and shall observe
such rules and procedures in regard to transaction of business at its
meetings (including quorum at such meetings) as may be determined
by the regulations.
2. The Chairperson, or if for any reason he is unable to attend a meeting of
the Authority, any other member chosen by the members present from
amongst themselves at the meeting shall preside at the meeting.
3. All questions which come up before any meeting of the Authority shall
be decided by a majority of votes by the members present and voting,
and in the event of an equality of votes, the Chairperson, or in his
absence, the person presiding shall have a second or casting vote.
4. The Authority may make regulations for the transaction of business at
its meetings.
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Duties, Powers and Functions of Authority

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
subsection (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 policyholders 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; (d) specifying the code of conduct for
surveyors and loss assessors; (e) promoting efficiency in the conduct of
insurance business; (f) promoting and regulating professional
organisations connected with the insurance and reinsurance business;
(g) levying fees and other charges for carrying out the purposes of this
Act; (h) calling for information from, undertaking inspection of,
conducting enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organisations
connected with the insurance business; (i) control and regulation of the
rates, advantages, terms and conditions that may be offered by insurers
in respect of general insurance business not so controlled and regulated
by the Tariff Advisory Committee under section 64U of the Insurance
Act, 1938 (4 of 1938); (j) specifying the form and manner in which
books of account shall be maintained and statement of accounts shall be
rendered by insurers and other insurance intermediaries; (k) regulating
investment of funds by insurance companies; (l) regulating maintenance
of margin of solvency; (m) adjudication of disputes between insurers
and intermediaries or insurance intermediaries; (n) supervising the
functioning of the Tariff Advisory Committee; (o) specifying the
percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organisations referred to in
clause (f); (p) specifying the percentage of life insurance business and
general insurance business to be undertaken by the insurer; and (q)
exercising such other powers as may be prescribed.
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Constitution of Funds
(1) There shall be constituted a fund to be called "the Insurance Regulatory
and Development Authority Fund" and there shall be credited thereto- (a)
all Government grants, fees and charges received by the Authority; (b) all
sums received by the Authority from such other source as may be decided
upon by the Central Government; (c) the percentage of prescribed
premium income received from the insurer. (2) The Fund shall be applied
for meeting - (a) the salaries, allowances and other remuneration of the
members, officers and other employees of the Authority; (b) the other
expenses of the Authority in connection with the discharge of its functions
and for the purposes of this Act.
Accounts and Audit
1. The Authority shall maintain proper accounts and other relevant records
and prepare an annual statement of accounts in such form as may be
prescribed by the Central Government in consultation with the
Comptroller and Auditor-General of India.
2. The accounts of the Authority shall be audited by the Comptroller and
Auditor-General of India at such intervals as may be specified by him
and any expenditure incurred in connection with such audit shall be
payable by the Authority to the Comptroller and Auditor-General.
3. The Comptroller and Auditor-General of India and any other person
appointed by him in connection with the audit of the accounts of the
Authority shall have the same rights, privileges and authority in
connection with such audit as the Comptroller and Auditor-General
generally has in connection with the audit of the Government accounts
and, in particular, shall have the right to demand the production of
books of account, connected vouchers and other documents and papers
and to inspect any of the offices of the Authority.
4. The accounts of the Authority as certified by the Comptroller and
Auditor-General of India or any other person appointed by him in this
behalf together with the audit-report thereon shall be forwarded
annually to the Central Government and that Government shall cause
the same to be laid before each House of Parliament.
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Miscellaneous
Power of Central Government to Issue Directions.
1. Without prejudice to the foregoing provisions of this Act, the Authority
shall, in exercise of its powers or the performance of its functions under
this Act, be bound by such directions on questions of policy, other than
those relating to technical and administrative matters, as the Central
Government may give in writing to it from time to time. PROVIDED that
the Authority shall, as far as practicable, be given an opportunity to
express its views before any direction is given under this subsection.
2. The decision of the Central Government, whether a question is one of
policy or not, shall be final.
Power of Central Government to Supersede Authority.
1. If at any time the Central Government is of the opinion- (a) that, on
account of circumstances beyond the control of the Authority, it is
unable to discharge the functions or perform the duties imposed on it by
or under the provisions of this Act, or (b) that the Authority has
persistently defaulted in complying with any direction given by the
Central Government under this Act or in the discharge of the functions
or performance of the duties imposed on it by or under the provisions of
this Act and as a result of such default the financial position of the
Authority or the administration of the Authority has suffered; or (c) that
circumstances exist which render it necessary in the public interest so to
do, the Central Government may, be notification and for reasons to be
specified therein, supersede the Authority for such period, not
exceeding six months, as may be specified in the notification and
appoint a person to be the Controller of Insurance under section 2B of
the Insurance Act, 1938 (4 of 1938), if not already done : Provided that
before issuing any such notification, the Central Government shall give a
reasonable opportunity to the Authority to make representations, if any,
of the Authority.
2. Upon the publication of a notification under sub-section (1) superseding
the Authority, - (a) the Chairperson and other members shall, as from
the date of supersession, vacate their offices as such; (b) all the
powers, functions and duties which may, by or under the provisions of
this Act, be exercised or discharged by or on behalf of the Authority
shall, until the Authority is reconstituted under subsection(3), be
exercised and discharged by the Controller of Insurance; and (c) all
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properties owned by the Authority shall, until the Authority is

reconstituted under subsection(3), vest in the Central Government.
3. On or before the expiration of the period of supersession specified in the
notification issued under subsection(1), the Central Government shall
reconstitute the Authority by a fresh appointment of its Chairperson and
other members and in such case any person who had vacated his office
under clause(a) of subsection(2) shall not be deemed to be disqualified
for reappointment.
4. The Central Government shall cause a copy of the notification issued
under subsection(1) and a full report to any action to be laid before
each House of Parliament at the earliest.
Protection of Action Taken in Good Faith.
No suit, prosecution or other legal proceedings shall lie against the Central
Government or any officer of the Central Government or any member,
officer or other employee of the Authority for anything which is in good
faith done or intended to be done under this Act or the rules or regulations
made thereunder: Provided that nothing in this Act shall exempt any
person from any suit or other proceedings which might, apart from this
Act, be brought against him.
Delegation of Powers
(1) The Authority may, by general or special order in writing, delegate to
the Chairperson or any other member or office of the Authority subject to
such conditions, if any, as may be specified in the order such of its powers
and functions under this Act as it may deem necessary. (2) The Authority
may, by a general or special order in writing, also form committees of the
members and delegate to them the powers and functions of the Authority
as may be specified by the regulations.
378
Power to Make Rules.

(1) The Central Government may, by notification, make rules for carrying
out the provisions of this Act. (2) In particular, and without prejudice to the
generality of the foregoing power, such rules may provide for all or any of
the following matters, namely : (a) the salary and allowances payable to,
and other terms and conditions of service of, the members other than part-
time members under subsection(1) of section 7; (b) the allowances to be
paid to the part-time members under sub-section(2) of section 7; (c) such
other powers that may be exercised by the Authority under clause (q) of
subsection(2) of section 14; (d) the form of annual statement of accounts
to be maintained by the Authority under subsection(1) of section 17; (e)
the form and the manner in which and the time within which returns and
statements and particulars are to be furnished to the Central Government
under subsection(1) of section 20; (f) the matters under subsection(5) of
section 25 on which the Insurance Advisory Committee shall advise the
Authority; (g) any other matter which is required to be, or may be,
prescribed, or in respect of which provision is to be or may be made by
rules.
Establishment of Insurance Advisory Committee
(1)The Authority may, by notification, establish with effect from such date
as it may specify in such notification, a Committee to be known as the
Insurance Advisory Committee. (2) The Insurance Advisory Committee
shall consist of not more than twenty-five members excluding exofficio
members to represent the interests of commerce, industry, transport,
agriculture, consumer forum, surveyors, agents, intermediaries,
organisations engaged in safety and loss prevention, research bodies and
employees' association in the insurance sector. (3) The Chairperson and
the members of the Authority shall be the ex officio Chairperson and ex
officio members of the Insurance Advisory Committee. (4) The objects of
the Insurance Advisory Committee shall be to advise the Authority on
matters relating to the making of the regulations under section 26. (5)
Without prejudice to the provisions of subsection(4), the Insurance
Advisory Committee may advise the Authority on such other matters as
may be prescribed.
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Power to Make Regulations

(1) The Authority may, in consultation with the Insurance Advisory
Committee, by notification, make regulations consistent with this Act and
the rules made thereunder to carry out the purposes of this Act. (2) In
particular, and without prejudice to the generality of the foregoing power,
such regulations may provide for all or any of the following matters,
namely :- (a) the time and places of meetings of the Authority and the
procedure to be followed at such meetings including the quorum necessary
for the transaction of business under subsection(1) of section 10; (b) the
transactions of business at its meetings under subsection(4) of section 10;
(c) the terms and other conditions of service of officers and other
employees of the Authority under subsection(2) of section 12; (d) the
powers and functions which may be delegated to Committees of the
members under subsection(2) of section 23; and (e) any other matter
which is required to be, or may be, specified by regulations or in respect of
which provision is to be or may be made by regulations.
Rules and Regulations to be Laid before Parliament
Every rule and every regulation made under this Act shall be laid, as soon
as may be after it is made, before each House of Parliament, while it is in
session, for a total period of thirty days which may be comprised in one
session or in two or more successive sessions, and if, before the expiry of
the session immediately following the session or the successive session
aforesaid, both Houses agree in making any, modification in the rule or
regulation or both Houses agree that the rule or regulation should not be
made, the rule or regulation shall thereafter have effect only in such
modified form or be of no effect, as the case may be; so, however, that any
such modification or annulment shall be without prejudice to the validity of
anything previously done under that rule or regulation.
IRDA Objectives
The objectives of the IRDA are (a) to open the insurance sector for private
sector in order to take care of the policy holders’ interests, (b) to regulate
insurance and reinsurance companies by ensuring continued financial
soundness and solvency of the insurance companies, (c) to supervise the
activities of intermediaries by eliminating dishonesty and unhealthy
competition, and (d) to amend the Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and the General Business Nationalisation Act, 1972 ;
periodically.
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Establishment of Insurance Advisory Committee (IAC) and Tariff

Advisory Committee
Section 25 of the IRDA Act specifies how to establish the Insurance
Advisory Committee (IAC). The IAC will consist of not more than 25
members excluding ex-officio members to represent the interests of
commerce, industry, transport, agriculture, consumer for a, surveyors,
agents, intermediaries, organisations engaged in safety and loss
prevention, research bodies and employees' associations.
Section 64U provides the powers of the Tariff Advisory Committee (TAC) to
regulate rates, advantages, terms and conditions that may be offered by
general insurance companies. This committee regulates the rates,
advantages, terms and conditions that may be offered by insurers in
respect of any risk.
11.12 THE INSURANCE OMBUDSMAN
The Insurance Ombudsman scheme was created by Government of India

for individual policyholders to have their complaints settled out of the
courts system in a cost-effective, efficient and impartial way. There are 12
Insurance Ombudsman in different locations and you can approach the one
having jurisdiction over the location of the insurance company office that
you have a complaint against.
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Under Notification dated IIth November, 1998; redressal of Public

Grievances rules, 1998 were reframed, providing for appointment of
Insurance Ombudsman by the Governing Body of Insurance Council
constituted under these rules. And accordingly, the Governing Body of
Insurance Council has appointed Insurance Ombudsman. The Insurance
Ombudsman has been awarded with powers to receive and consider
complaints from the insurer, in the following circumstances -
The insurer can approach the Ombudsman with complaint if:
• They have first approached their insurance company with the complaint
and
• They have not resolved it
• Not resolved it to peoples’ satisfaction or
• Not responded to it at all for 30 days
• The complaint pertains to any policy which has taken as an individual and
• The value of the claim including expenses claimed is not above Rs 20
lakh
The complaint to the Ombudsman can be about:
• Any partial or total repudiation of claims by an insurer
• Any dispute about premium paid or payable in terms of the policy
• Any dispute on the legal construction of the policies as far as it relates to
claims
• Delay in settlement of claims
• Non-issue of any insurance document to the insurer after payment of
premium
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The settlement process

Recommendation:
The Ombudsman will act as counselor and mediator and
• Arrive at a fair recommendation based on the facts of the dispute
• If the customer accepts this as a full and final settlement, the
Ombudsman will Inform the company which should comply with the
terms in 15 days
Award:
If a settlement by recommendation does not work, the Ombudsman will -
• Pass an award within 3 months of receiving the complaint and which will
be
❖ A speaking award with the detailed reasoning
❖ Binding on the insurance company but
❖ Not binding on the policyholder
❖ The Ombudsman can also award an ex-gratia payment
Once the Award is passed
❖ Insurer has to accept the award in writing and the insurance company
has to be informed of it within 30 days and
❖ The Insurance company has to comply with the award in 15 days after
that.
Note : The manner of settlement of complaint or passing of an award by
the Ombudsman shall be in accordance with provisions of the aforesaid
notified redressal of Public Grievances Rules, 1998.
11.13 ACTIVITY FOR STUDENTS

1. Search Google for Life Insurance Companies in India and their market
share last year.
2. Draft a compliant letter to insurance ombudsman as to non-receipt of a
policy document even after the discharging of your loan.
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11.14 SUMMARY
• Except the Life Insurance, all other types of Insurances fall under
‘General Insurance’.
• Insurance business is regulated by the respective acts and the Insurance
Regulatory Development Authority (IRDA).
• The objective of IRDA is to take care of policy holders’ interest, by
supervising the activities of intermediaries so as to eliminate dishonest
and unhealthy competition.
• Fire insurance means the insurance against any loss caused by fire.
• Marine insurance is effected for losses occurred to the goods and ships at
sea/large rivers.
• The Regulatory Authority has formed a Code of Conduct for players in the
insurance business.
• Insurance advisory committee has been established representing the
interests of members concealed with insurance business dealings.
• Insurance Ombudsman has been appointed and vested with powers to
receive and consider complaints.
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1. What are the details of a contract of Insurance?
2. Explain the term ‘insurable interest’.
3. Define the contract of reinsurance.
4. Write down the differences between reinsurance from double insurance.
5. Explain the term ‘cover note’ with reference to insurance.
6. What are the two essential features of a fire insurance contract?
7. What is meaning of 'fire' in a fire policy?
8. How can a fire insurance policy be assigned?
9. Define a fire insurance contract.
10.What are the rights of insurer in a fire policy?
11.Writes short notes on Motor Vehicle Insurance.
12.What are perils of the sea?
13.What is a 'mixed' policy of marine insurance?
14.When is premium in marine insurance returnable?
15.What are the three interests which are risked during the course of a sea
voyage?
16.Explain briefly the various kinds of marine insurance policies.
17.What are the objectives of IRDA?
18.What are the powers of Central Government in regulating the business
of insurance?
19.What are the functions, powers and duties of IRDA?
20.Write short notes on ‘Insurance Ombudsman’.
385
1. ReInsurance of a insurance policy is done by the __________

a. Government
b. Original Insurer
c. IRDA
d. Customer
2. A fire Insurance is usually done for a period of ________.

a. Lifetime
b. Ten years
c. One year
d. Any of the above
3. A motor vehicle insurance serves the maximum purposes of

___________
a. On property (vehicle) insurance
b. Against personal accident
c. Against liability for accidents
d. All of the above
4. If there is no ________ at the place of stock, fire insurance cannot be

claimed.
a. ignition
b. heat
c. high temperature
d. combustion fuel
5. The main objective of IRDA is to take care of the interest of -

a. Central Government
b. Insurer company
c. State Government
d. Policyholder
Answers : (1-b), (2-d), (3-d), (4-a), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
387
TYPES OF INTELLECTUAL PROPERTY RIGHTS (IPR)
Chapter 12
Types Of Intellectual Property Rights (IPR)
Learning objectives
At the end of the chapter, you will be able to understand the definition of
supply chain management, the evaluation of supply chain management,
the need of legal aspects in the supply chain management, and the
importance of various legal aspects in the supply chain management.
Structure:
12.1 Protection of Intellectual Property Rights
12.2 The Copyright Act, 1957
12.3 Patents
12.4 Trademarks and Brands
12.5 Activity for Students
12.6 Summary
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12.1 PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
Intellectual Property, Copyright, Authorship, and Individuality in Print,

Music and Internet.
When the alphabet was invented, spoken epics could be converted into an
abstract representation - writing. The experience of the spoken epic poem
could be transformed into written format. Although books can be read
aloud and therefore, retain some similarity to the communal nature of the
oral tradition, books can also be read silently in solitude, emphasizing the
individual reader. The figure of the author is not only the role of creator to
the content, but also to appropriate ownership of that creation to
whomever owns the property rights to that content.
Copyright law protects the specific manifestations of ideas and facts, but
not those ideas and facts themselves. When commemoration was no longer
used to experience memory, individual authors came to be recognized as
readers became less participatory in the process of getting meaning from
the work. The author as creator became an individual who gave meaning to
an audience fragmented by the ability of the written word to separate its
readers from one another. The author serves as a meeting point for
individual readers to receive meaning, whereas in pre-literate times, this
meaning would have been constructed by a the entire group in the
immediacy of the performance.
Earlier, this was restricted only to the field of Print, Machinery Design,
Pharmacy and Music, but subsequently, after the introduction and
widespread of Internet, the information has become more and more
available at everybody’s fingertips and the necessity of copyright and
patent protection became inevitable. The formation of General Agreement
on TRIPs (Trade Related Aspects of Intellectual Property Rights) under the
GATT (Now-WTO) accelerated the implementation of Intellectual Property
Rights worldwide. So the “information with commercial value” gained its
importance.
The various means of legal protection are - patents, copyrights, industrial

designs, geographical indications, trademarks, and the protection of layout
designs of integrated circuits. Some countries have also added trade
secrets in their nation’s copyright acts to protect their manufacturers.
389
The basic Copyright Act in India started with The Copyright Act, 1957.
12.2 THE COPYRIGHT ACT, 1957
Meaning of copyright
For the purposes of this Act, “copyright” means the exclusive right subject
to the provisions of this Act, to do or authorise the doing of any of the
following acts in respect of a work or any substantial part thereof, namely:
—
a. in the case of a literary, dramatic or musical work, not being a computer
programme,—
i. to reproduce the work in any material form including the storing of it
in any medium by electronic means;
ii. to issue copies of the work to the public not being copies already in
circulation;
iii. to perform the work in public, or communicate it to the public;
iv. to make any cinematograph film or sound recording in respect of the
work
v. to make any translation of the work;
vi. to make any adaptation of the work.
vii.to do, in relation to a translation or an adaptation of the work, any of
the acts specified in relation to the work in subclauses (i) to (vi);
b. in the case of a computer programme,—
i. to do any of the acts specified in clause (a);
ii. to sell or give on commercial rental or offer for sale or for commercial
rental any copy of the computer programme:
390
Provided that such commercial rental does not apply in respect of

computer programmes where the programme itself is not the essential
object of the rental.
a. in the case of an artistic work,—
i. to reproduce the work in any material form including depiction in
three dimensions of a two dimensional work or in two dimensions of a
three dimensional work;
ii. to communicate the work to the public;
iii. to issue copies of the work to the public not being copies already in
circulation;
iv. to include the work in any cinematograph film;
v. to make any adaptation of the work;
vi. to do in relation to an adaptation of the work any of the acts specified
in relation to the work in subclauses (i) to (iv);
b. in the case of a cinematograph film,—
i. to make a copy of the film including a photograph of any image
forming part thereof;
ii. to sell or give on hire or offer for sale or hire, any copy of the film,
regardless of whether such copy has been sold or given on hire on
earlier occasions;
iii. to communicate the film to the public;
c. in the case of a sound recording,—
i. to make any other sound recording embodying it;
ii. to sell or give on hire, or offer for sale or hire, any copy of the sound
recording, regardless of whether such copy has been sold or given on
hire on earlier occasions;
iii. to communicate the sound recording to the public.
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Short title, extent and commencement

(1) This Act may be called the Copyright Act, 1957
(2) It extends to the whole of India
In this Act, unless the context otherwise requires,—
a. “adaptation” means,—
i. in relation to a dramatic work, the conversion of the work into a non-
dramatic work;
ii. in relation to a literary work or an artistic work, the conversion of the
work into a dramatic work by way of performance in public or
otherwise;
iii. in relation to a literary or dramatic work, any abridgement of the
work or any version of the work in which the story or action in
conveyed wholly or mainly by means of pictures in a form suitable for
reproduction in a book, or in a newspaper, magazine or similar
periodical;
iv. in relation to a musical work, any arrangement or transcription of the
work;
v. in relation to any work, any use of such work involving its
rearrangement or alteration;
b. ‘‘work of architecture’’ means any building or structure having as artistic
character or design, or any model for such building or structure;
c. “artistic work” means,—
i. a painting, a sculpture, a drawing (including a diagram, map, chart or
plan), an engraving or a photograph, whether or not any such work
possesses artistic quality;
ii. a work of architecture; and
iii. any other work of artistic craftsmanship;
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d. “author’’ means,—
i. in relation to a literary or dramatic work, the author of the work;
ii. in relation to a musical work, the composer;
iii. in relation to an artistic work other than a photograph, the artist;
iv. in relation to a photograph, the person taking the photograph;
v. in relation to a cinematograph film or sound recording, the producer;
and
vi. in relation to any literary, dramatic, musical or artistic work which is
computer-generated, the person who causes the work to be created;
e. “broadcast” means communication to the public—
i. by any means of wireless diffusion, whether in any one or more of
the forms of signs, sounds or visual images; or
ii. by wire,and includes a re-broadcast;
f. “calendar year” means the year commencing on the 1st day of January;
g. “cinematograph film” means any work of visual recording on any
medium produced through a process from which a moving image may
be produced by any means and includes a sound recording
accompanying such visual recording and “cinematograph” shall be
construed as including any work produced by any process analogous to
cinematography including video films;
h. “communication to the public” means making any work available for
being seen or heard or otherwise enjoyed by the public directly or by
any means of display or diffusion other than by issuing copies of such
work regardless of whether any member of the public actually sees,
hears or otherwise enjoys the work so made available.
Note—For the purposes of this clause, communication through satellite or
cable or any other means of simultaneous communication to more than
one household or place of residence including residential rooms of any
hotel or hostel shall be deemed to be communication to the public;
i. “composer”, in relation to a musical work, means the person who
composes the music regardless of whether he records it in any form of
graphical notation;
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j. “computer” includes any electronic or similar device having information

processing capabilities;
k. “computer programme” means a set of instructions expressed in words,
codes, schemes or in any other form, including a machine readable
medium, capable of causing a computer to perform a particular task or
achieve a particular result;
l. “copyright society” means a society registered under sub-section (3) of
section 33;
m. “delivery”, in relation to a lecture, includes delivery by means of any
mechanical instrument or by broadcast;
n. “dramatic work” includes any piece of recitation, choreographic work or
entertainment in dumb show, the scenic arrangement or acting, form of
which is fixed in writing or otherwise but does not include a
cinematograph film;
o. “duplicating equipment” means any mechanical contrivance or device
used or intended to be used for making copies of any work;
p. “engravings” include etchings, lithographs, wood-cuts, prints and other
similar works, not being photographs;
q. “exclusive license” means a license which confers on the licensee or on
the licensee and persons authorised by him, to the exclusion of all other
persons (including the owner of the copyright) any right comprised in
the copyright in a work, and “exclusive licensee” shall be construed
accordingly;
r. “Government work” means a work which is made or published by or
under the direction or control of—
i. the Government or any department of the Government;
ii. any Legislature in India;
iii. any Court, Tribunal or other judicial authority in India;
iv. “Indian work” means a literary, dramatic or musical work,—
v. the author of which is a citizen of India; or
vi. which is first published in India; or
vii.the author of which, in the case of an unpublished work is, at the
time of the making of the work, a citizen of India;
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s. “infringing copy” means,—

i. in relation to a literary, dramatic, musical or artistic work, a
reproduction thereof otherwise than in the form of a cinematographic
film;
ii. in relation to a cinematographic film, a copy of the film made on any
medium by any means;
iii. in relation to a sound recording, any other recording embodying the
same sound recording, made by any means;
iv. in relation to a programme or performance in which such a broadcast
reproduction right or a performer’s right subsists under the provisions
of this Act, the sound recording or a cinematographic film of such
programme or performance, if such reproduction, copy or sound
recording is made or imported in contravention of the provisions of
this Act;
t. “lecture” includes address, speech and sermon;
u. “literary work” includes computer programmes, tables and compilations
including computer databases;
v. “musical work” means a work consisting of music and includes any
graphical notation of such work but does not include any words or any
action intended to be sung, spoken or performed with the music;
w. “performance”, in relation to performer’s right, means any visual or
acoustic presentation made live by one or more performers;
x. “performer” includes an actor, singer, musician, dancer, acrobat, juggler,
conjurer, snake charmer, a person delivering a lecture or any other
person who makes a performance;
y. “photograph” includes photo-lithograph and any work produced by any
process analogous to photography but does not include any part of a
cinematograph film;
z. “plate” includes any stereotype or other plate, stone, block, mould,
matrix, transfer, negative ,duplicating equipment or other device used
or intended to be used for printing or reproducing copies of any work,
and any matrix or other appliance by which sound recording for the
acoustic presentation of the work are or are intended to be made;
aa.“prescribed” means prescribed by rules made under this Act;
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bb.“producer”, in relation to a cinematograph film or sound recording,

means a person who takes the initiative and responsibility for making
the work;
cc.“reprography” means the making of copies of a work, by photocopying
or similar means;
dd.“sound recording” means a recording of sounds from which such sounds
may be produced regardless of the medium on which such recording is
the method by which the sounds are produced;
ee.“work” means any of the following works, namely:—
i. a literary, dramatic, musical or artistic work;
ii. a cinematograph film;
iii. a sound recording;
ff. “work of joint authorship” means a work produced by the collaboration
of two or more authors in which the contribution of one author is not
distinct from the contribution of the other author or authors;
Literary work: Scope
The definition of “literary work” given in section 2 of the Act is an inclusive
definition and, therefore, not exhaustive. Its “literary work” includes tables
and compilations. Dissertation is, therefore, prima facie a literary work.
The expression “work” inter alia means a literary work. The word “original”
does not mean that the work must be the expression of original or
invented thought. Copyright Acts are not concerned with the origin of
ideas, but with the expression of thoughts and in the case of “literary
work” with the expression of thoughts in print or writing. The originality
which is required relates to the expression of the thought but the Act does
not require that the expression must be in an original or novel form, but
that the work must not be copied from another work that it should
originate from the author.
Video tape within the definition of cinematograph film
In view of the extended definition of a cinematograph film in section 2 (f),
which includes any process analogous to cinematography, the video tape
had to be taken to come within the definition of cinematograph film.
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Meaning of publication
Meaning of publication – For the purposes of this Act, “publication” means
making a work available to the public by issue of copies or by
communicating the work to the public.
When work not deemed to be published or performed in public
Except in relation to infringement of copyright, a work shall not be deemed
to be published or performed in public, if published, or performed in public,
without the license of the owner of the copyright.
When work deemed to be first published in India
For the purposes of this Act, a work published in India shall be deemed to
be first published in India, notwithstanding that it has been published
simultaneously in some other country, unless such other country provides a
shorter term of copyright for such work, and a work shall be deemed to be
published simultaneously in India and in another country does not exceed
thirty days or such other period as the Central Government may, in relation
to any specified country, determine.
Certain disputes to be decide by Copyright Board
Certain disputes to be decide by Copyright Board - If any question arises
a. Whether a work has been published or as to the date on which a work
was published for the purposes of Chapter V, or
b. Whether the term of copyright for any work is shorter in any other
country than that provided in respect of that work under this Act, it shall
be referred to the Copyright Board constituted under section 11 whose
decision thereon shall be final:
Provided that if in the opinion of the Copyright Board, the issue of copies or
communication to the public referred to in section 3 was of an insignificant
nature, it shall not be deemed to be publication for the purposes of that
section.
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Nationally of author were the making of unpublished work is

extended over considerable period -
Where, in the case of an unpublished work the making of the work is
extended over a considerable period, the author of the work shall, for the
purposes of this Act, be deemed to be a citizen of, or domiciled in, that
country of which he was a citizen or wherein he was domiciled during any
substantial part of that period.
Activities which are not Copyright Violations
The copyright act has made provisions for permitting several activities.
These are detailed provisions. Some of the provisions are known to a
common man, but they are reproduced to know exactly what the law says
–
• Reproduction of work for the purpose of functioning of law, e.g. judicial
proceedings.
• Reporting current events in newspapers or in other media, along with use
of photographs.
• Using them for the purpose of private use, research, criticism or review.
• Reading or recitation in public, of an extract from a published literary or
dramatic work.
• Publication of passages of literary work for educational purpose.
• Reproduction of any matter published in official gazette, along with all
remarks and comments.
• Reproduction or publication of judgment or order of a court unless it has
been prohibited.
• The reproduction of literary, dramatic, musical or artistic work in the
course of instructions.
• Making a copy to protect against loss of the original, in case of a work on
computer only.
• Making copies of a computer program or adapting it for non commercial
personal use.
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Duration of Copyright Protection

The law allows copyright protection to be available for a limited number of
years. The period is decided considering the benefits of the creator as well
as benefits of the society. The duration of protection is up to lifetime of the
author and is continued for 60 years after the death of the author, for the
literary, dramatic, musical or artistic work of the known artists/writers. In
case of anonymous or pseudonymous, copyright is for sixty years from the
date of publication. Whereas, the copyright for the photograph or a film,
copyright protection is available for a period of sixty years from the date of
its first publication.
Copyright Office -
1. There shall be established for the purposes of this Act on office to be
called the Copyright Office.
2. The Copyright Office shall be under the immediate control of the
Registrar of Copyrights who shall act under the superintendence and
direction of the Central Government.
3. There shall be seal for the Copyright Office.
Registrar and Deputy Registrars of Copyrights
1. The Central Government shall appoint a Registrar of Copyrights and may
appoint one or more Deputy Registrars of Copyrights.
2. A Deputy Registrar of Copyrights shall discharge under the
superintendence and direction of the Registrar of Copyrights such
functions of the Registrar under this Act as the Registrar of Copyrights
such functions of the Registrar under this Act as the Registrar may, from
time to time, assign to him : and any reference in this Act to the
Registrar of Copyrights shall include a reference to a Deputy Registrar of
Copyrights when so discharging any such functions.
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Ownership of Copyright and the Rights of the Owner

First owner of copyright -
Subject to the provisions of this Act, the author of a work shall be the first
owner of the copyright therein:
Provided that—
a. in the case of a literary, dramatic or artistic work made by the author in
the course of his employment by the proprietor of a newspaper,
magazine or similar periodical under a contract of service or
apprenticeship, for the purpose of publication in a newspaper, magazine
or similar periodical, the said proprietor shall, in the absence of any
agreement to the contrary, be the first owner of the copyright in the
work in so far as the copyright relates to the publication of the work in
any newspaper, magazine or similar periodical, or to the reproduction of
the work for the purpose of its being so published, but in all other
respects the author shall be the first owner of the copyright in the work;
b. subject to the provisions of clause (a), in the case of a photograph
taken, or a painting or portrait drawn, or an engraving or a
cinematograph film made, for valuable consideration at the instance of
any person, such person shall, in the absence of any agreement to the
contrary, be the first owner of the copyright therein;
c. in the case of a work made in the course of the author’s employment
under a contract of service or apprenticeship, to which clause (a) or
clause (b) does not apply, the employer shall, in the absence of any
agreement to the contrary, be the first owner of the copyright therein;
d. in the case of any address or speech delivered in public, the person who
has delivered such address or speech or if such person has delivered
such address or speech on behalf of any other person, such other
person shall be the first owner of the copyright therein notwithstanding
that the person who delivers such address or speech, or, as the case
may be, the person on whose behalf such address or speech is
delivered, is employed by any other person who arranges such address
or speech or on whose behalf or premises such address or speech is
delivered;
e. in the case of a Government work, Government shall, in the absence of
any agreement to the contrary, be the first owner of the copyright
therein;
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f. in the case of a work made or first published by or under the direction

or control of any public undertaking, such public undertaking shall, in
the absence of any agreement to the contrary, be the first owner of the
copyright therein;
No ownership in case of mere ‘idea’
A person may have a brilliant idea for a story, or for a picture, or for a play,
and one which, so far as he is concerned, appears to be original, but, if he
communicates that idea to an author or a playwriter or an artist, the
production which is the result of the communication of the idea to the
author or the artist or the playwright is the copyright of the person who
has clothed the idea in a form, whether by means of a picture, a play, or a
book, and the owner of the idea has no rights in the product.
Assignment of copyright -
1. The owner of the copyright in an existing work or the prospective owner
of the copyright in a future work may assign to any person the copyright
either wholly or partially and either generally or subject to limitations
and either for the whole term of the copyright or any part thereof.
Provided that in the case of the assignment of copyright in any future
work, the assignment shall take effect only when the work comes into
existence.
2. Whereas the assignee of a copyright becomes entitled to any right
comprised in the copyright, the assignee as respects the rights to
assigned, and the assignor as respects the rights not assigned, shall be
treated for the purposes of this Act as the owner of copyright and the
provisions of this Act shall have effect accordingly.
3. In this section, the expression, “assignee” as respects the assignment of
the copyright in any future work includes the legal representatives of
the assignee, if the assignee dies before the work comes into existence.
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Dispute with respect to assignment of copyright -

1. If an assignee fails to make sufficient exercise of the rights assigned to
him, and such failure is not attributable to any act or omission of the
assignor, then, the Copyright Board may, on receipt of a complaint from
the assignor and after holding such inquiry as it may deem necessary,
revoke such assignment.
2. If any dispute arises with respect to the assignment of any copyright,
the Copyright Board may, on receipt of a complaint from the aggrieved
party and after holding such inquiry as it considers necessary, pass such
order as it may deem fit including an order for the recovery of any
royalty payable: Provided that Copyright Board shall not pass any order
under this subsection to revoke the assignment unless it is satisfied that
the terms of assignment are harsh to the assignor in case the assignor
is also the author:
12.3 PATENTS
History of Patents in India

The history of Patent law in India starts from 1911 when the Indian Patents
and Designs Act, 1911 was enacted. The present Patents Act, 1970 came
into force in the year 1972, amending and consolidating the existing law
relating to Patents in India.
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Application of Patent
In India, a patent application can be filed, either alone or jointly, by true
and first inventor or his assignee. Procedure for Grant of a Patent in India
After filing the application for the grant of patent, a request for
examination is required to be made for examination of the application by
the Indian Patent Office. After the First Examination Report is issued, the
Applicant is given an opportunity to meet the objections raised in the
report. The Applicant has to comply with the requirements within 12
months from the issuance of the First Examination Report. If the
requirements of the first examination report are not complied with within
the prescribed period of 12 months, then the application is treated to have
been abandoned by the applicant. After the removal of objections and
compliance of requirements, the patent is granted and notified in the
Patent Office Journal.
Product Patent
The Patent Act provides for grant of product patent. Previously, for food,
pharmaceutical and chemical products only process patent was granted.
This meant that anybody was free to manufacture the same or similar
product by a process different from the patented one. This is no more
allowed because of the adoption of the product patent.
Term of Patent
The term of every patent in India is twenty years from the date of filing the
patent application, irrespective of whether it is filed with provisional or
complete specification. However, in case of applications filed under the
Patent Cooperative Treaty (PCT), the term of twenty years begins from the
international filing date. Payment of Renewal Fee It is important to note
that a patentee has to renew the patent every year by paying the renewal
fee, which can be paid every year or in lump sum.
Restoration of Patent
A request for restoration of patent can be filed within eighteen months
from the date of cessation of patent along with the prescribed fee. After
the receipt of the request, the matter is notified in the official journal for
further processing of the request. Patent of Biological Material If the
invention uses a biological material which is new, it is essential to deposit
the same in the International Depository Authority (“IDA”) prior to the
filing of the application in India in order to supplement the description. If
such biological materials are already known, in such a case it is not
403
essential to deposit the same. The IDA in India located at Chandigarh is

known as Institute of Microbial Technology (IMTECH).
The Rights granted by a Patent
If the grant of the patent is for a product, then the patentee has a right to
prevent others from making, using, offering for sale, selling or importing
the patented product in India. If the patent is for a process, then the
patentee has the right to prevent others from using the process, using the
product directly obtained by the process, offering for sale, selling or
importing the product in India directly obtained by the process. Before
filing an application for grant of patent in India, it is important to note
“What is not Patentable in India?” Following, i.e., an invention which is (a)
frivolous, (b) obvious, (c) contrary to well established natural laws, (d)
contrary to law, (e) morality, (f) injurious to public health, (g) a mere
discovery of a scientific principle, (h) the formulation of an abstract theory,
(i) a mere discovery of any new property or new use for a known
substance or process, machine or apparatus, (j) a substance obtained by a
mere admixture resulting only in the aggregation of the properties of the
components thereof or a process for producing such substance, (k) a mere
arrangement or rearrangement or duplication of known devices, (l) a
method of agriculture or horticulture and (m) inventions relating to atomic
energy, are not patentable in India. Maintainability of Secrecy by the Indian
Patent Office (IPO) All patent applications are kept secret up to eighteen
months from the date of filing or priority date, whichever is earlier, and
thereafter they are published in the Official Journal of the Patent Office
published every week. After such publication of the patent application,
public can inspect the documents and may take the photocopy thereof on
the payment of the prescribed fee. Compulsory Licensing One of the most
important aspects of Indian Patents Act, 1970, is compulsory licensing of
the patent subject to the fulfillment of certain conditions. At any time after
the expiration of three years from the date of the sealing of a patent, any
person interested may make an application to the Controller of Patents for
grant of compulsory license of the patent, subject to the fulfillment of
following conditions, i.e., the reasonable requirements of the public with
respect to the patented invention have not been satisfied; or that the
patented invention is not available to the public at a reasonable price; or
that the patented invention is not worked in the territory of India. It is
further important to note that an application for compulsory licensing may
be made by any person notwithstanding that he is already the holder of a
license under the patent. For the purpose of compulsory licensing, no
404
person can be stopped from alleging that the reasonable requirements of

the public with respect to the patented invention are not satisfied or that
the patented invention is not available to the public at a reasonable price
by reason of any admission made by him, whether in such a licence or by
reason of his having accepted such a licence. 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
available to the public at a reasonable price, may order the patentee to
grant a licence upon such terms as he may deem fit. However, before the
grant of a compulsory license, the Controller of Patents shall take into
account following factors: The nature of invention; The time elapsed, since
the sealing of the patent; The measures already taken by the patentee or
the licensee to make full use of the invention; The ability of the applicant
to work the invention to the public advantage; The capacity of the
applicant to undertake the risk in providing capital and working the
invention, if the application for compulsory license is granted; As to the
fact whether the applicant has made efforts to obtain a license from the
patentee on reasonable terms and conditions; National emergency or other
circumstances of extreme urgency; Public non commercial use;
Establishment of a ground of anti competitive practices adopted by the
patentee. The grant of compulsory license cannot be claimed as a matter of
right, as the same is subject to the fulfilment of above conditions and
discretion of the Controller of Patents. Further judicial recourse is available
against any arbitrary or illegal order of the Controller of Patents for grant of
compulsory license.
Exceptions for the Patent
The Government has protected certain rights to themselves about some
exceptions for the rights of be patentee. Any patented product or process
may by made, imported or used by or on behalf of the government for its
own use or purpose. The Central Government may also acquire a patent for
public purpose, if necessary. Any patented medicine or drug may be
imported by the Government for the purpose merely of its own use or for
distribution in any dispensary, hospital or other medical institution
maintained by or on behalf of the Government or any other dispensary,
hospital or other medical institution specified by the government in public
interest. Any patented process or product may be used or made by any
person, for the purpose merely of experiment or research including the
imparting of instructions to pupils.
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Infringement of Patent
Patent infringement proceedings can only be initiated after grant of patent
in India but may include a claim retrospectively from the date of
publication of the application for grant of the patent. Infringement of a
patent consists of the unauthorized making, importing, using, offering for
sale or selling any patented invention within the India. Under the (Indian)
Patents Act, 1970 only a civil action can be initiated in a Court of Law.
Further, a suit for infringement can be defended on various grounds
including the grounds on which a patent cannot be granted in India and
based on such defense, revocation of Patent can also be claimed.
Patents Amendment Act, 2005
The Patents (Amendment) Act, 2005; published on 5th April, 2005 is now
to be referred for the latest developments in the Act, as compared with the
earlier version, and the ‘Budapest Treaty’ on the international recognition
of the deposit of micro organisms for the purposes of patent procedure has
been adopted. This amended Act has to be referred for the latest
amendments and versions.
12.4 TRADEMARKS AND BRANDS

Trademarks and Brands are used; or nowadays hammered through media;
to popularize and maintain product identity and to accelerate product
promotion.
A trade mark is incorporated to protect the manufacturer/seller’s exclusive
rights to use the specific registered brand name and/or specifically
designed brand mark. A trademark is given legal protection because it is
capable of exclusive appropriation.
406
A brand is intended to identify the goods or services of one seller or group

of sellers and to clearly differentiate them from those of competitors, and
also to popularize them. It is very common to use a name, term, sign,
symbol, or design or a combination of them, to develop and establish a
brand. The Brand name is that part of the brand which can be pronounced
verbally and communicated by media. Brand mark is a symbol, design or
distinctive coloring or lettering form of a brand.
Brands and Trademarks have to be registered with the proper authorities to
use them officially and to avoid the duplication/misuse by the competitors.
They are controlled in India by The Trade marks Act,1999.
The Trademarks Act, 1999
The Indian law relating to trademarks as been amended and consolidated
and a Trade and Merchandise Mark Act, 1958 has been replaced by the
Trade Marks Act, 1999.
An Act to amend and consolidate the law relating to trademarks, to provide
for registration and better protection of trademarks for goods and services
and for the prevention of the use of fraudulent marks. Be it enacted by
Parliament in the Fiftieth Year of the Republic of India as follows:-
1. This Act may be called the Trademarks Act, 1999.
3. It shall come into force on such date as the Central Government may,
by notification in the Official Gazette, appoint:
Provided that different dates may be appointed for different provisions of
this Act, and any reference in any such provision to the commencement of
this Act shall be construed as a reference to the coming into force of that
provision.
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Definitions and interpretation

(1) In this Act , unless the context otherwise requires, -
a. “Appellate Board” means the Appellate Board established under
section 83:
b. “assignment” means an assignment in writing by act of te parties
concerned;
c. “associated trademarks” means trademarks deemed to be, or
required to be, registered as associated trademarks under this Act;
d. “Bench” means a Bench of the Appellate Board;
e. “certification trademark” means a mark capable of distinguishing the
goods or service in connection with which it is used in the course of
trade which are certified by the proprietor of the mark in respect of
origin, material, mode of manufacture of goods or performance of
service not so certified and registrable as such under Chapter IX in
respect of those goods or service in the name, as proprietor of the
certification trademark, of that person;
f. “Chairman” means the Chairman of the Appellate Board.
g. “collective mark” means a trade mark distinguishing the goods or
services of members of an association of persons (not being a
partnership within the meaning of the Indian Partnership Act, 1932 (9
of 1932) which is the proprietor of the mark from those of others.
h. “deceptively similar”, – A mark shall be deemed to be deceptively
similar to another mark if it so nearly resembles that other mark as
to be likely to deceive or cause confusion.
i. “false trade description” means-
i. a trade description which is untrue or misleading in a material
respect as regards the goods or services to which it is applied or
ii. any alteration of a trade description as regards the goods or
services to which it is applied, whether by way of addition,
effacement or otherwise, where that alteration makes the
description untrue or misleading in a material respect, or
iii. any trade description which denotes or implies that there are
contained, as regards the goods to which it is applied, more yards
408
or metres than there are contained therein standard yards or

standard metres, or
iv. any marks or arrangement or combination thereof when applied-
a. to goods in such a manner as to be likely to lead persons to
believe that the goods are the manufacture or merchandise of
some person other than the person whose merchandise or
manufacture they really are.
b. in relation to services in such a manner as to be likely to lead
persons to believe that the services are provided or rendered by
some persons other than the person whose services they really
are, or
v. any false name or initials of a person applied to goods or service in
such manner as if such name or initials were a trade description in
any case where the name or initials-
a. is or are not a trademark or part of a trademark, and
b. is or are identical with or deceptively similar to the name or
initials of a person carrying on business in connection with
goods or services of the same description or both and who has
not authorized the use of such name or initials, and
c. is or are either the name or initials of a fictions person or some
person not bona fide carrying on business in connection with
such goods or services.
And the fact that a trade description is a trademark or part of a trademark
shall not prevent such trade description being a false trade description
within the meaning of this Act.
j. “goods” means anything which is the subject of trade or
manufacture.
k. “Judicial Member” means a Member of the Appellate Board appointed
as such under this Act, and includes the Chairman and the Vice-
Chairman.
l. “limitations” (with its grammatical variations) means any limitation of
the exclusive right to the use of a trademark given by the registration
of a person as proprietor thereof, including limitations of that right a
to mode or area of use within India or outside India.
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m. “mark” includes a device, brand, heading, lable, ticket, name,

signature, word, letter, numeral, shape of goods, packaging or
combination of colours or any combination thereof.
n. “Member” means a Judicial Member or a Technical Member of the
Appellate Board and includes the Chairman and the Vice-Chairman.
o. “name” includes and abbreviation of a name.
p. “notify” means to notify in the Trademark Journal published by the
Registrar.
q. “package” includes any case, box, container, covering, folder,
recetacle, vessel, casket, bottle, wrapper, labler, band, ticket, reel,
frame, capsule, cap, lid, stopper and cork.
r. “permitted use: in relation to a registered trademark, means the use
of trademark-
i. by a registered user of the trademark in relation to goods or
service-
a. with which he is connected in the course of trade, and
b. in respect of which the trademark remains registered for the
time being, and
c. for which he is registered as registered user, and
d. which complies with any conditions or limitations to which the
registration of registered user is subject, or
ii. by a person other than the registerd proprietor and registered user
in relation to goods or services-
a. with which he is connected in the course of trade, and
b. in respect of which the trademark remains registered for the
time being, and
c. by consent of such registered proprietor in a written agreement,
and
d. which complies with any conditions or limitations to which such
user is subject and to which the registration of the trademark is
subject.
s. “prescribed” means prescribed by rules made under this Act.
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t. “register” means the Register of Trademark referred to in subsection

(1) of section 6.
u. “registered” (with its grammatical variations) means registered under
this Act.
v. “registered proprietor” in relation to a trademark, means the person
for the time being entered in the register as proprietor of the
trademark.
w. “registered trademark” means a trademark which is actually on the
register and remaining in force.
x. “registered user” means a person who is for the time being registered
as such under section 49.
y. “Registrar” means the Registrar of Trade mark referred to in section
3.
z. “service” means service of any description which is made available to
potential users and includes the provisions 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.
aa.“trade description” means any description, statement or other
indication, direct or indirect,-
i. as to the number, quantity, measure, gauge or weight of any
goods, or
ii. as to the standard of quality of any goods or services according to
a classification commonly used or recognized in the trade, or
iii. “drug” as defined in the Drugs and Cosmetics Act, 1940 (23 of
194)) or “food” as defined in the Prevention of Food Adulteration
Act, 1954 (37 of 1954), or
iv. as to the place or country in which or the time at which any goods
or services were made, produced or provided, as the case may be,
or
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v. as to the name and address or other indication of the identity of

the manufacturer or of the person providing the services of the
person for whom the goods are manufactured or services are
provided, or
vi. as to the mode of manufacture or producing any goods or
providing services, or
vii.as to the material of which any goods are composed, or
viii.as to any goods being the subject of an existing patent, privilege
or copyright, and includes-
a. any description as to the use of any mark which according to
the custom of the trade is commonly taken to be an indication
of any of the above matters.
b. the description as to any imported goods contained in any bill of
entry or shipping bill.
c. any other description which is likely to be misunderstood or
mistaken for all or any of the said matters.
bb.“trademark” means a mark capable of being represented graphically
and which is capable of distinguishing the goods or services of one
person from choose of others and may include shape of goods, their
packaging and combination of colours , and in relation to Chapter XII
(other than section 107), a registered trademark or mark used in
relation to goods or services for the purpose of indicating or so as to
indicate a connection in the course of trade between the goods or
services, as the case may be, and some person having the right as
proprietor to use the mark, and in relation to other provisions of this
Act, a mark used or proposed to be used in relation to goods or
services for the purpose of indicating or so to indicate to a connection
in the course of trade between the goods or services, as the case
may be, and some person having the right, either as proprietor or by
way of permitted user, to use the mark whether with or without any
indication of the identity of that person, and includes a certification
trademark or collective mark.
cc.“transmission” means transmission by operation of law, devolution on
the personal representative of a deceased person and any other
mode of transfer, not being assignment.
dd.“Technical Member” means a Member who is not a Judicial Member.
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ee.“tribunal” means the Registrar or, as the case may be, the Appellate
Board, before which the proceeding concerned is pending.
ff. (zf) Board.
gg.“well-known trademark” in relation to any goods or service, means a
mark which has becomes so to the substantial segment of the public
which uses such goods or receives such services that the use of such
mark in relation to other goods or services would be likely to be
taken as indicating a connection in the course of trade or rendering of
services between those goods or services and a person using the
mark in relation to the first mentioned goods or services.
In this Act, unless the context otherwise requires, any reference – to
“trademark” shall include reference to “collective mark” or
“certification trademark”.
To the use of a mark shall be construed as a reference to the use of
printed or other visual representation of the mark.
To the use of a mark in relation to goods, shall be construed as a
reference to the use of the mark upon, or n any physical or in any
other relation whatsoever, to such goods.
In relation to goods, shall be construed as a reference to the use of
the mark as or as part of any statement about the availability,
provision or performance of such services.
To the Registrar shall be construed as including a reference to any
officer when discharging the functions of the Registrar in pursuance
of subsection (2) of section 3.
To the Trademarks Registry shall be construed as including a
reference to any office of the Trademarks Registry.
For the purposes of this Act, goods and services are associated with
each other if it is likely that those goods might be sold or otherwise
traded in and those services might be provided by the same business
and so with description of goods and descriptions of services.
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Application for registration -

1. Any person claiming to be the proprietor of a trademark used or
proposed to be used by him, who is desirous of registering it, shall apply
in writing to the Registrar in the prescribed manner for the registration
of his trademark.
2. A single application may be made for registration of a trademark for
different classes of goods and services and fee payable therefor shall be
in respect of each such class of goods or services.
3. Every application under subsection (1) shall be filed in the office of the
Trademarks Registry within whose territorial limits the principal place of
business in India of the applicant or in the case of joint applicants the
principal place of business in India of the applicant whose name is first
mentioned in the application as having a place of business in India, is
situate:
Provided that where the applicant or any of the joint applicants does not
carry on business in India, the application shall be filed in the office of
the Trademarks Registry within whose territorial limits the place
mentioned in the address for service in India as disclosed in the
application, is situate.
4. Subject to the provisions of this Act, the Registrar may refuse the
application or may accept it absolutely or subject to such amendments,
modifications, conditions or limitations, if any, as he may think fit.
5. In the case of a refusal or conditional acceptance of an application, the
Registrar shall record in writing the grounds for such refusal or
conditional acceptance and the materials used by him in arriving at his
decision.
Note : For the registration of a trademark an application is to be made to
the Registrar. A single application can be made for registration of a
trademark for different classes of goods and services by paying prescribed
fee for each such class of goods and services.
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Registration -
1. Subject to the provisions of section 19, when an application for
registration of a trademark has been accepted and either—
a. the application has not been opposed and the time for notice of
opposition has expired; or
b. the application has been opposed and the opposition has been
decided in favour of the applicant, the Registrar shall, unless the
Central Government otherwise directs, register the said trademark
and the trademark when registered shall be registered as of the date
of the making of the said application and that date shall, subject to
the provisions of section 154, be deemed to be the date of
registration.
2. On the registration of a trademark, the Registrar shall issue to the
applicant a certificate in the prescribed form of the registration thereof,
sealed with the seal of the Trademarks Registry.
3. Where registration of a trademark is not completed within twelve
months from the date of the application by reason of default on the part
of the applicant, the Registrar may, after giving notice to the applicant
in the prescribed manner, treat the application as abandoned unless it is
completed within the time specified in that behalf in the notice.
4. The Registrar may amend the register or a certificate of registration for
the purpose of correcting a clerical error or an obvious mistake.
Rights conferred by registration -
1. Subject to the other provisions of this Act, the registration of a
trademark shall, if valid, give to the registered proprietor of the
trademark the exclusive right to the use of the trade mark in relation to
the goods or services in respect of which the trademark is registered
and to obtain relief in respect of infringement of the trademark in the
manner provided by this Act.
2. The exclusive right to the use of a trademark given under subsection (1)
shall be subject to any conditions and limitations to which the
registration is subject.
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3. Where two or more persons are registered proprietors of trademarks,

which are identical with or nearly resemble each other, the exclusive
right to the use of any of those trademarks shall not (except so far as
their respective rights are subject to any conditions or limitations
entered on the register) be deemed to have been acquired by any one
of those persons as against any other of those persons merely by
registration of the trademarks but each of those persons has otherwise
the same rights as against other persons (not being registered users
using by way of permitted use) as he would have if he were the sole
registered proprietor.
Grounds for refusal of registration
1. The trademarks
a. which are devoid of any distinctive character, that is to say, not
capable of distinguishing the goods or services of one person from
those of another person;
b. which consist exclusively of marks or indications which may serve in
trade to designate the kind, quality, quantity, intended purpose,
values, geographical origin or the time of production of the goods or
rendering of the service or other characteristics of the goods or
service;
c. which consist exclusively of marks or indications which have become
customary in the current language or in the bona fide and established
practices of the trade, shall not be registered :
Provided that a trademark shall not be refused registration if before the
date of application for registration it has acquired a distinctive character as
a result of the use made of it or is a well-known trademark.
2. A mark shall not be registered as a trademark if -
a. it is of such nature as to deceive the public or cause confusion;
b. it contains or comprises of any matter likely to hurt the religious
susceptibilities of any class or section of the citizens of India;
c. it comprises or contains scandalous or obscene matter;
d. its use is prohibited under the Emblems and Names (Prevention of
Improper Use) Act, 1950 (12 of 1950).
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3. A mark shall not be registered as a trademark if it consists

exclusively of
a. the shape of goods which results from the nature of the goods
themselves; or
b. the shape of goods which is necessary to obtain a technical result; or
c. the shape which gives substantial value to the goods.
Test of similarity
In order to come to the conclusion whether one mark is deceptively similar
to another the broad and essential features of the two are to be
considered. They should not be placed side by side to find out if there are
any differences in the design and if so whether they are of such a character
as to prevent one design from being mistaken for the other. It would be
enough if the impugned mark bears such an overall similarity to the
registered mark as would be likely to misled a person usually dealing with
one to accept the other if offered to him.
It is common knowledge that ’bidis’ are being used by persons belonging to
poorer and illiterate or semi-literate class. Their level of awareness is not
high. It cannot be expected of them that they would comprehend and
understand the fine differences between the two labels, which may be
detected on comparing the two labels when placed side by side. The
essential features of the two labels are common.
(4) Limitation as to colour -
a. A trademark may be limited wholly or in part to any combination of
colours and any such limitation shall be taken into consideration by
the tribunal having to decide on the distinctive character of the trade
mark.
b. So far as a trademark is registered without limitation of colour, it
shall be deemed to be registered for all colours.
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(5) Relative grounds for refusal of registration -

1. Same as provided in section 12, a trade mark shall not be registered
if, because of—
a. its identity with an earlier trademark and similarity of goods or
services covered by the trademark; or
b. its similarity to an earlier trademark and the identity or similarity
of the goods or services covered by the trademark, there exists a
likelihood of confusion on the part of the public, which includes the
likelihood of association with the earlier trademark.
2. A trademark which -
a. is identical with or similar to an earlier trademark; and
b. is to be registered for goods or services which are not similar to
those for which the earlier trademark is registered in the name of
a different proprietor, shall not be registered, if or to the extent,
the earlier trademark is a well known trademark in India and the
use of the later mark without due cause would take unfair
advantage of or be detrimental to the distinctive character or
repute of the earlier trademark.
3. A trademark shall not be registered if, or to the extent that, its use in
India is liable to be prevented—
a. by virtue of any law in particular the law of passing off protecting
an unregistered trademark used in the course of trade; or
b. by virtue of law of copyright.
4. Nothing in this section shall prevent the registration of a trademark
where the proprietor of the earlier trademark or other earlier right
consents to the registration, and in such case the Registrar may
register the mark under special circumstances under section 12.
5. A trademark shall not be refused registration on the grounds
specified in subsections (2) and (3), unless objection on any one or
more of those grounds is raised in opposition proceedings by the
proprietor of the earlier trademark.
6. The Registrar shall, while determining whether a trademark is a well
known trademark, take into account any fact which he considers
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relevant for determining a trademark as a well known trademark

including -
i. the knowledge or recognition of that trademark in the relevant
section of the public including knowledge in India obtained as a
result of promotion of the trade mark;
ii. the duration, extent and geographical area of any use of that
trademark;
iii. the duration, extent and geographical area of any promotion of the
trademark, including advertising or publicity and presentation, at
fairs or exhibition of the goods or services to which the trademark
applies;
iv. the duration and geographical area of any registration of or any
application for registration of that trademark under this Act to the
extent they reflect the use or recognition of the trademark;
v. the record of successful enforcement of the rights in that
trademark; in particular, the extent to which the trademark has
been recognised as a well known trademark by any court or
Registrar under that record.
7. The Registrar shall, while determining as to whether a trademark is
known or recognised in a relevant section of the public for the
purposes of subsection (6), take into account -
i. the number of actual or potential consumers of the goods or
services;
ii. the number of persons involved in the channels of distribution of
the goods or services;
iii. the business circles dealing with the goods or services,to which
that trade mark applies.
8. Where a trade mark has been determined to be well-known in at
least one relevant section of the public in India by any court or
Registrar, the Registrar shall consider that trade mark as a well
known trademark for registration under this Act.
9. The Registrar shall not require as a condition, for determining
whether a trademark is a well known trademark, any of the following,
namely:—
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i. that the trademark has been used in India;

ii. that the trademark has been registered;
iii. that the application for registration of the trademark has been filed
in India;
iv. that the trademark—
a. is well known in; or
b. has been registered in; or
c. in respect of which an application for registration has been filed
in, any jurisdiction other than India; or
v. that the trademark is well known to the public at large in India.
10.While considering an application for registration of a trademark and
opposition filed in respect thereof, the Registrar shall -
a. protect a well known trademark against the identical or similar
trade marks;
b. take into consideration the bad faith involved either of the
applicant or the opponent affecting the right relating to the
trademark.
11.Prohibition of registration of names of chemical elements or
international non-proprietary names
No word—
a. which is the commonly used and accepted name of any single
chemical element or any single chemical compound (as
distinguished from a mixture) in respect of a chemical substance
or preparation, or
b. which is declared by the World Health Organisation and notified in
the prescribed manner by the Registrar from time to time, as an
international non-proprietary name or which is deceptively similar
to such name, shall be registered as a trade mark and any such
registration shall be deemed for the purpose of section 57 to be an
entry made in the register without sufficient cause or an entry
wrongly remaining on the register, as the circumstances may
require.
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12.Use of names and representations of living persons or persons

recently dead -
Where an application is made for the registration of a trademark which
falsely suggests a connection with any living person, or a person whose
death took place within twenty years prior to the date of application for
registration of the trademark, the Registrar may, before he proceeds with
the application, require the applicant to furnish him with the consent in
writing of such living person or, as the case may be, of the legal
representative of the deceased person to the connection appearing on the
trademark, and may refuse to proceed with the application unless the
applicant furnishes the registrar with such consent.
Appellate Board
The Intellectual Property Appellate Board by the Central Government has
been provided to exercise the jurisdiction, powers and authority conferred
on it by or under this Act.
This Board shall consist of a Chairman, Vice-Chairman and such number of
other Members, as the Central Government may, deem fit. The jurisdiction,
powers and authority of the Appellate Board may be exercised by Benches
thereof. A Bench shall consist of one judicial Member and one Technical
Member and shall sit at such place as the Central Government may specify.
An appeal can be made to the Appellate Board in the prescribed manner
within three months from the date on which the order or decision sought to
be appealed against in communicated to such person preferring the appeal.
Offences and Penalties
Offences under the Act are punishable by imprisonment and fine. Such
offences include falsifying and falsely applying trademarks, and trade
descriptions etc., selling goods or providing services to which false
trademarks or false trade description is applied, or for falsifying and falsely
applying Trademarks, or for falsely representing a Trademark as
registered.
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12.5 ACTIVITY FOR STUDENTS

1. You have developed a computer program for filing the returns of a
salaried person in India. Write down the procedures to register your
creative work with the registrar of the office of the Registrar of the
Copyrights.
2. Search on Internet the registered trademarks of the various biscuit
manufacturers in India.
12.6 SUMMARY
• Act of Copyright is applicable to literary work, music, film, artistic work,
computer program and television broadcast.
• Copyright vests in the person who produces the work or who pays
substantial amount for it.
• The Copyright Act exempts certain use from the application of the act.
These are mainly non-commercial purpose for a public purpose.
• The copyright is for a period of 60 years.
• Copyright violation attracts criminal proceedings and penalty, including
imprisonment.
• A patent is a monopoly right for the use of an invention.
• An application for the patent is to be made to the Controller of Patents.
• The invention should be unique and useful to obtain a patent for the
same.
• The patentee can sell, assign or license the rights in the patent.
• A method of agriculture or horticulture cannot be patented.
• Surgical or other processes for treating human beings cannot be
patented.
• In case of trademarks, Service marks, or collective and certification
marks can be registered.
• Foreign trademarks can be assigned and registered with a very few
restraints.
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• The Act has strengthened civil and criminal liabilities for misusing
trademarks.

1. Write down the legal effects of infringement of copyright of a literary
work in India.
2. How are the patents registered in India?
3. How can the Intellectual Property Rights be safeguarded?
4. Write a short note on – ‘The Rights Granted by a Patent’.
5. List down the formalities involved while applying for a patent.
6. Explain the procedure for registration of a trade mark.
7. What are not considered as ‘inventions’ in the meaning of Patent Act,
1970?
8. Write a short note on – ‘The Rights Conferred by Registration of a
Trademark’.
1. A patent is a legal protection granted for ____________

a. Product
b. Invention
c. Discovery
d. Person
2. Patents are granted for all products for a period of __________years.

a. Unlimited
b. Fifty
c. Hundred
d. Twenty
3. The items which are not patentable are __________.

a. Method of agriculture or horticulture
b. Process of treatment of human beings or animals
c. Method of playing a game
d. All of the above
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4. The duration of a copyright protection is _________ years from the date

of original publication.
a. Sixty
b. Twenty
c. Hundred
d. None of the above
5. A patentee can __________ the right in the patent which he is

holding.
a. Assign
b. License
c. Sell
d. Either / All of the above.
Answers : (1-b), (2-d), (3-d), (4-a), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
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GST AND SUPPLY CHAIN MANAGEMENT
Chapter 13
GST And Supply Chain Management
Learning Objectives
At the end of the chapter, you will be able to understand the definition and
concept of GST and its importance in the present business scenario; the
salient features of GST; the existing rates and proposed model of GST; the
Implications and Impact of GST on supply chain management; comparison
of scenario of GST in India and in other major business countries of the
world, and challenges faced so far and possible solutions.
Structure:
13.1 GST – Definition and Need in India
13.2 Objectives of GST
13.3 Salient Features of GST
13.4 Model of GST
13.5 GST – Tax Rates
13.6 GST – Exemptions
13.7 Implementation of GST
13.8 GST Challenges and Solutions
13.10 Summary
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The following diagram summarizes the erstwhile indirect taxation in India:
With the passing of GST legislations and its adoption by the states all,
except a small minority of taxes have been subsumed into GST. Only a
handful of products in the domestic market continue to be governed by the
erstwhile regime of indirect taxes.
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13.1 GST – DEFINITION AND NEED IN INDIA
13.1.1 Definition
Goods and Service Tax (GST) is a comprehensive tax levy on manufacture,

sale and consumption of goods and service at a national level.
GST is a tax on goods and services with value addition at each stage
having comprehensive and continuous chain of set-of benefits from the
producer’s/service provider’s point up to the retailer’s level where only the
final consumer should bear the tax.
After the introduction of GST, many of the indirect taxes at various levels of
Central Government, State Government and local bodies are abolished.
Some of these taxes are Excise Duty, Service Tax, Value Added Tax, Entry
Tax on Goods and Vehicles, Octroi Duty, Local Body Tax, etc. All these are
multi-stage value added taxes. The structure of these taxes today is much
better than the system that prevailed a few years ago, which was
described in the Bagchi Report as “archaic, irrational, and complex –
according to knowledgeable experts, the most complex in the world”. Over
the past several years, significant progress has been made to improve their
structure, broaden the base and rationalize the rates.
13.1.2 Need of GST in India
In spite of the improvements made in the tax design and administration

over the past few years, the systems at both central and state levels
remain complex. Their administration leaves a lot to be desired. They are
subject to disputes and court challenges, and the process for resolution of
disputes is slow and expensive. At the same time, the systems suffer from
substantial compliance gaps, except in the highly organized sectors of the
economy. The business sector also suffered from cascading tax effect due
to multiple taxation of state and central governments. There are several
factors contributing to this unsatisfactory state of affairs. This scenario
generated a need of major tax reform in India, in line with the current
trend in major developed and developing countries in the world.
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The significant improvements made under the reformed tax structure of

VAT are:
• the replacement of the single-point state sales taxes by the VAT in all of
the states and union territories,
• reduction in the Central Sales Tax rate to 2%, from 4%, as part of a
complete phase out of the tax,
• the introduction of the Service Tax by the Centre, and a substantial
expansion of its base over the years,
• rationalization of the CENVAT rates by reducing their multiplicity
• replacement of many of the specific rates by ad valorem rates based on
the maximum retail price (MRP) of the products.
These changes have yielded significant dividends in economic efficiency of

the tax system, ease of compliance, and growth in revenues. The State
VAT eliminated all of the complexities associated with the application of
sales taxes at the first point of sale. The consensus reached among the
States for uniformity in the VAT rates has brought an end to the harmful
tax competition among them. It has also lessened the cascading of tax.
The application of CENVAT at fewer rates and the new system of CENVAT
credits has likewise resulted in fewer classification disputes, reduced tax
cascading, and greater neutrality of the tax. The introduction of the Service
Tax has been a mixed blessing. While it has broadened the tax base, its
structure is complex. The tax is levied on specified services, classified into
one hundred different categories. This approach has spawned many
disputes about the scope of each category. Unlike goods, services are
malleable, and can and are often packaged into composite bundles that
include taxable as well as non-taxable elements. Also, there is no
standardized nomenclature for services, such as the HSN for goods. The
design of the CENVAT and state VATs was dictated by the constraints
imposed by the Constitution, which allows neither the Centre nor the
States to levy taxes on a comprehensive base of all goods and services and
at all points in their supply chain. The Centre is constrained from levying
the tax on goods beyond the point of manufacturing, and the States in
extending the tax to services. This division of tax powers makes both the
CENVAT and the state VATs partial in nature and contributes to their
inefficiency and complexity. The principal deficiencies of the current
system, which need to be the primary focus of the next level of reforms,
are discussed below.
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The CENVAT is levied on goods manufactured or produced in India. This

gives rise to definitional issues as to what constitutes manufacturing, and
valuation issues for determining the value on which the tax is to be levied.
While these concepts have evolved through judicial rulings, it is recognized
that limiting the tax to the point of manufacturing is a severe impediment
to an efficient and neutral application of tax.
Moreover, the effective burden of tax becomes dependent on the supply

chain, i.e., the taxable value at the point of manufacturing relative to the
value added beyond this point. It is for this reason that virtually all
countries have abandoned this form of taxation and replaced it by multi-
point taxation system extending to the retail level.
The introduction of Goods and Services Tax on 1st of July 2017 was a very
significant step in the field of indirect tax reforms in India. By
amalgamating a large number of Central and State taxes into a single tax,
the aim was to mitigate cascading or double taxation in a major way and
pave the way for a common national market. Introduction of GST is
important to make Indian products competitive in the domestic and
international markets. Studies show that this would have a positive impact
on economic growth. Last but not the least, this tax, because of its
transparent and self-policing character, would be easier to administer.
Considering all these facts and the shortcomings in the present system,
and also to remain competitive in the global market, the need for
introduction of GST has come to the front and it is of utmost priority to put
it into operation.
The idea of moving towards the GST was first mooted by the then Union
Finance Minister in his Budget for 2006-07. Initially, it was proposed that
GST would be introduced from 1st April, 2010. The Empowered Committee
of State Finance Ministers (EC) which had formulated the design of State
VAT was requested to come up with a roadmap and structure for the GST.
Joint Working Groups of officials having representatives of the States as
well as the Centre were set up to examine various aspects of the GST and
draw up reports specifically on exemptions and thresholds, taxation of
services and taxation of inter-state supplies. Based on discussions within
the EC and between the EC and the Central Government, the EC released
its First Discussion Paper (FDP) on GST in November, 2009. This spelled
out the features of the proposed GST and has formed the basis for
430
discussion between the Centre and the States. Accordingly, after the series
of various discussions and meetings, the 101st Amendment Act was passed
by the Parliament and GST was finally introduced with effect from 1st July,
2017.
13.2 OBJECTIVES OF GST
The basic objective of tax reform would be to address the problems of the
current system. It should establish a tax system that is economically
efficient and neutral in its application, distributionally attractive, and simple
to administer. The distributional or sectoral concerns have been at the
heart of the excessive differentiation of the Indian tax system—but that the
objectives are negated by the cascading effects of the taxes. While an
optimal design of the consumption tax system, taking into account both
production efficiency and distributional concerns, would not imply
uniformity of the overall tax structure, the desired structure can be
achieved by a combination of taxes and transfers. The optimal pattern of
tax rates implied by a given degree of aversion to poverty and concern for
the poor is to be analysed. At high levels of concern for the poor, one
would reduce the tax on cereals (but not dairy products) and increase the
taxes on non-food items (durables). Thus, a differentiated overall structure
appears desirable for a country in which the government has consistently
expressed a concern for the poor.
However, individual taxes should not be highly differentiated, as that

complicates administration and makes it difficult to evaluate the overall
effects of the tax design. This applies particularly to value added type of
taxes. In principle, a single rate (or at the most two-rate) VAT, together
with excises and spending measures could achieve the desired
distributional effects, for reasonable degrees of inequality aversion of
policymakers. In particular, it is important from an administrative
perspective that close substitutes should not be taxed at very different
rates, to avoid leakages and distortions. Revenue considerations suggest
that the tax base should be broad, and comprise all items in the consumer
basket, including goods, services, as well as real property.
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The neutrality principle would suggest that:

• the tax be a uniform percentage of the final retail price of a product,
regardless of the supply-chain arrangements for its manufacturing and
distribution;
• the tax on inputs be fully creditable to avoid tax cascading; and
• the tax be levied on the basis of the destination principle, with all of the
tax on a given product/service accruing in the jurisdiction of its final
consumption.
Multiple VAT rates become a source of complexity, and disputes, for

example, over borderlines, adding to the costs of tax administration and
compliance. It is for this reason that countries like New Zealand,
Singapore, and Japan have chosen to apply the tax at a low and uniform
rate, and address any concerns about vertical equity through other fiscal
instruments, including spending programs targeted to lower-income
households.
Another important objective of tax reform is simplification of tax

administration and compliance, which is dependent on three factors. The
first determining factor for simplicity is the tax design itself. Generally, the
more rational and neutral the tax design, the simpler it would be to
administer and encourage compliance. If the tax is levied on a broad base
at a single rate, there would be few classification disputes and the tax-
specific record keeping requirements for vendors would be minimal. The
tax return for such a system can be as short as the size of a postcard. It
would simplify enforcement, and encourage voluntary compliance.
The second factor is the infrastructure for tax administration, including the
design of tax forms, data requirements, system of tax rulings and
interpretations, and the procedures for registration, filing and processing of
tax returns, tax payments and refunds, audits, and appeals. A modern tax
administration focuses on providing services to taxpayers to facilitate
compliance. It harnesses information technology to enhance the quality of
services, and to ensure greater transparency in administration and
enforcement.
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The third factor in a federation such as India is the degree of

harmonization among the taxes levied by the Centre and the States. The
Empowered Committee has already indicated a preference for a dual GST,
consisting of a Centre GST and a State GST. For the interstate movement
of goods or services, the idea of Inter-state GST (IGST) is brought forward.
Under this model, harmonization of the Centre and State GSTs would be
critical to keep the overall compliance burden low. Equally important is
harmonization of GSTs across the states.
An important consideration in the design of reform options is the degree of

fiscal autonomy of the Centre and the States. It goes without saying that
the power to govern and to raise revenues go together. The Constitution of
India lays down a clear division of powers between the Centre and the
States, including the power to levy taxes. Such a system would have much
to commend itself from the perspectives of economic efficiency and the
establishment of a common market within India. It is interesting to note
that China moved to a centralized VAT with revenue sharing with the
provinces ensuring that provinces got as much revenues as under the prior
arrangements, plus a share of the increment.
GST is a single national levy and part of the GST revenues collected at the
Centre are returned to the states. However, such a compromise is unlikely
to find much favor with the States in India, as is already revealed in their
preference for the Dual GST. To give political substance to the federal
structure in India, the States (as well as the Centre) are likely to insist that
they have certain autonomy in exercise of their taxation powers. Full
autonomy would mean that:
• retain the power to enact the tax,
• enjoy the risks and rewards of ‘ownership’ of the tax,
• be accountable to their constituents, and
• be able to use the tax as an instrument of social or economic policy.
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Notwithstanding the above, there is a clear recognition of the need for

harmonization of the Centre and State Taxes. Fiscal autonomy is important
to allow the Centre and the States to set the tax rates according to their
revenue needs. Harmonization of tax laws and administrative procedures is
needed to simplify compliance and enforcement. It is also necessary to
ensure that inter-State differences in policies and procedures do not
generate additional economic distortions. An important question then is the
desired degree of harmonization and the mechanism for achieving it.
The elements of harmonization can be divided into three broad sets: tax
rates, tax base and tax infrastructure, i.e., the administration and
compliance system. The first two elements could be viewed as important
levers on which States want to have some degree of control to achieve
their social, economic, and fiscal policy objectives.
These considerations suggest that harmonization of virtually all major

areas of GST law and administration would be desirable. There is merit in
keeping even the GST rate(s) uniform, at least during the initial years until
the infrastructure for the new system is fully developed. Harmonized laws
would mean lower compliance costs for taxpayers and may also improve
the efficiency of fiscal controls. The Central Sales Tax (CST) in India
provides a very useful for model for such harmonization. The CST is a
state-level tax, applied to inter-state sales of goods, based on the origin
principle. The tax law (including the base, rates, and the procedures) is
enacted by Parliament, but the States collect and keep the tax. It is a
perfect example of absolute harmonization, with the States enjoying the
risks and rewards of ownership of the tax.
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13.3 SALIENT FEATURES OF GST
The introduction to the features of GST helps to understand that the GST is
designed to overcome the problems discussed earlier and to cater the
overall need of the business and economy as a whole.
i. GST is applicable on “supply” of goods or services as against the earlier
concept of tax on manufacture of goods or on sale of goods or on
provision of services.
ii. GST is based on the principle of destination-based consumption taxation
as against the earlier principle of origin-based taxation.
iii. (iii) It is a dual GST with the Centre and the States simultaneously
levying it on a common base. The GST to be levied by the Centre would
be called Central GST (central tax CGST) and that to be levied by the
States (including Union Territories with legislature) would be called
State GST (state tax – SGST). Union Territories without legislature
would levy Union Territory GST (union territory tax – UTGST).
iv. An Integrated GST (integrated tax – IGST) is levied on inter-state
supply of goods or services.
v. Import of goods is treated as inter-state supplies and is subjected to
IGST in addition to the applicable customs duties.
vi. Import of services is treated as inter-state supplies and is subjected to
IGST.
vii.CGST, SGST/UTGST and IGST is levied at rates mutually agreed upon by
the Centre and the States under the aegis of the GST Council.
viii.GST has replaced the following taxes currently levied and collected by
the Centre:
a. Central Excise Duty;
b. Duties of Excise (Medicinal and Toilet Preparations);
c. Additional Duties of Excise (Goods of Special Importance);
d. Additional Duties of Excise (Textiles and Textile Products);
e. Additional Duties of Customs (commonly known as CVD);
f. Special Additional Duty of Customs (SAD);
g. Service Tax;
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h. Cesses and Surcharges insofar as they relate to supply of goods or

services.
ix. State taxes subsumed within the GST are:
a. State VAT;
b. Central Sales Tax;
c. Purchase Tax;
d. Luxury Tax;
e. Entry Tax (All forms);
f. Entertainment Tax (except those levied by the local bodies);
g. Taxes on advertisements;
h. Taxes on lotteries, betting and gambling;
i. State cesses and surcharges insofar as they relate to supply of goods
or services.
x. GST is applicable to all goods and services except alcohol for human
consumption.
xi. GST on five specified petroleum products (Crude, Petrol, Diesel, ATF and
Natural gas) would be applicable from a date to be recommended by the
GSTC.
xii.Tobacco and tobacco products would be subject to GST. In addition, the
Centre would continue to levy Central Excise duty.
xiii.The list of exempted goods and services is harmonized for the Centre
and the States as well as across States as far as possible.
xiv.All exports and supplies to SEZs and SEZ units are zero-rated.
xv.Input Tax Credit (ITC) is available in respect of taxes paid on any supply
of goods or services or both used or intended to be used in the course
or furtherance of business.
xvi.Electronic filing of returns by different class of persons at different cut-
off dates.
xvii.Various modes of payment of tax available to the taxpayer including
internet banking, debit/credit card and National Electronic Funds
Transfer (NEFT)/Real Time Gross Settlement (RTGS).
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xviii.System of self-assessment of the taxes payable by the registered

person.
xix.Audit of registered persons to be conducted in order to verify
compliance with the provisions of Act.
13.4 MODEL OF GST
In defining the proposed model of GST, the starting point is the basic
structure of the tax. GST is basically a progressive tax which is
consumption type (allowing full and immediate credit for both current and
capital inputs attributable to taxable supplies) and destination based (i.e.,
the tax levied on the basis of the place of consumption of the goods and
services, not the place of production). Under this system, credits for input
taxes are allowed on the basis of invoices issues by the vendors registered
for the tax. This is the most common type of structure adopted around the
world.
Introduction of GST required amendments in the Constitution so as to

concurrently empower the Centre and the States to levy and collect the
GST. The assignment of concurrent jurisdiction to the Centre and the
States for the levy of GST required a unique institutional mechanism that
would ensure that decisions about the structure, design and operation of
GST are taken jointly. For it to be effective, such a mechanism also needed
to have Constitutional force.
To address all these and other issues, the Constitution (122nd

Amendment) Bill was introduced in the 16th Lok Sabha on 19.12.2014. The
Bill provides for a levy of GST on supply of all goods or services except for
alcohol for human consumption. The tax shall be levied as Dual GST
separately but concurrently by the Union (central tax – CGST) and the
States (including Union Territories with legislatures) (state tax – SGST)/
Union Territories without legislatures (union territory tax – UTGST). The
Parliament would have exclusive power to levy GST (integrated tax – IGST)
on inter-state trade or commerce (including imports) in goods or services.
The Central Government will have the power to levy excise duty in addition
to the GST on tobacco and tobacco products. The tax on supply of five
specified petroleum products namely crude, high speed diesel, petrol, ATF
and natural gas would be levied from a later date on the recommendation
of GST Council.
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A Goods and Services Tax Council (GSTC) was constituted comprising the
Union Finance Minister, the Minister of State (Revenue) and the State
Finance Ministers to recommend on the GST rate, exemption and
thresholds, taxes to be subsumed and other features. This mechanism
would ensure some degree of harmonization on different aspects of GST
between the Centre and the States as well as across States.
The Constitution Amendment Bill was passed by the Lok Sabha in May,
2015. The Bill was referred to the Select Committee of Rajya Sabha on
12.05.2015. The Select Committee submitted its Report on the Bill on
22.07.2015. The Bill with certain amendments was finally passed in the
Rajya Sabha and thereafter by Lok Sabha in August, 2016. Further, the bill
was ratified by required number of States and received assent of the
President on 8th September, 2016 and has since been enacted as
Constitution (101st Amendment) Act, 2016 w.e.f. 16th September, 2016.
The Goods and Services Tax Council (GSTC) designed the framework of
GST after a series of extensive discussions. It was decided that:
a. There will be four tax rates namely 5%, 12%, 18% and 28%.
b. The tax rates for different goods and services are finalized and notified.
c. Besides, some goods and services are under the list of exempt items.
d. The list of exempted services has been finalized which is same as the
services exempted under the service tax law, except services supplied
by Goods and Services Tax Network which is the addition to the list of
exempted services under service tax.
e. Rate for precious metals is an exception to ‘four-tax slab-rule’ and the
same was fixed at 3%. In addition, unworked diamonds, precious
stones, etc. attracts a rate of 0.25%.
f. A cess over the peak rate of 28% on certain specified luxury and
demerit goods, like tobacco and tobacco products, pan masala, aerated
waters, motor vehicles, etc. would be imposed for a period of five years
to compensate States for any revenue loss on account of
implementation of GST.
g. The list of goods and services in case of which reverse charge would be
applicable has also been finalized.
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h. The five laws namely CGST Law, UTGST Law, IGST Law, SGST Law and
GST Compensation Law are recommended.
i. In order to ensure single interface, all administrative control over 90%
of taxpayers having turnover below Rs. 1.5 crore vests with State tax
administration and over 10% with the Central tax administration.
Further, all administrative control over taxpayers having turnover above
Rs. 1.5 crore is divided equally in the ratio of 50% each for the Central
and State tax administration.
j. Powers under the IGST Act shall also be cross-empowered on the same
basis as under CGST and SGST Acts with few exceptions.
k. Power to collect GST in territorial waters shall be delegated by Central
Government to the States.
l. Formula and mechanism for GST Compensation Cess is also finalized.
At a broad conceptual level, this model has a lot to commend itself. It

strikes a good balance between fiscal autonomy of the Centre and States,
and the need for harmonization. It empowers both levels of government to
apply the tax to a comprehensive base of goods and services, at all points
in the supply chain. It also eliminates tax cascading, which occurs because
of truncated or partial application of the Centre and State taxes.
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13.5 GST – TAX RATES
In the proposed GST design for India, it was the challenge before the policy
makers to decide on the rate of tax on various goods and services. It was
due to the fact that India is a vast country and having the varies
consumption statistics across various States. The socio-economic factors of
the person determine the standard of living and consumption of an
individual. The social and economic disparities in Indian population post a
big challenge to design the uniform and single tax system under GST. The
design and tax rates of various goods were accordingly different in different
States of India. Hence, considering the above facts, it was decided that the
GST Tax rates should be based on Revenue Neutral Rates (RNR) of that
goods or services. Focus under GST is to arrive at such rates which would
not decrease the current revenue generation by Central and State
Government. Revenue neutral rate (RNR) is a structure of different rates
established in order to match the current revenue generation with revenue
under GST. RNR calculation has to include the cascading effect on certain
goods having no excise or sales tax implications. For example, wheat would
get costlier due to RNR fixed for fertilizers being higher than current tax
rate even though wheat does not have any excise or sales tax implications.
The Government of India had appointed a committee which is headed by
Dr. Arvind Subramanian. Committee had released a detailed report on the
calculation of RNR and the tax structure.
13.5.1 GST on Goods

Finance Ministry, Government of India issued a Notification No. 1/2017
wherein the different rate of tax was notified for all the goods under
Central GST. The goods were classified into following major tax slabs. The
classification on goods is basically based on Excise Tariff of respective
commodities.
a. 2.5% in respect of goods specified in Schedule I,
b. 6% in respect of goods specified in Schedule II,
c. (iii) 9% in respect of goods specified in Schedule III,
d. 14% in respect of goods specified in Schedule IV,
e. 1.5% in respect of goods specified in Schedule V, and
f. 0.125% in respect of goods specified in Schedule VI.
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Accordingly, all the State Governments also issued Notifications and

prescribed same tax rates under State GST.
In Schedule I, all the goods covered attracts total 5% GST (2.5% Central
GST + 2.5% State GST). The major goods that are covered under
Schedule I are household necessities including edible oil, spices, sugar, tea
and coffee (except those instant packing and noodles), coal, Indian sweets,
and life-saving drugs and medications.
In Schedule II, all the goods covered attracts total 12% GST (6% Central
GST + 6% State GST). This slab includes all the computers, its parts, and
processed and instant food products.
In Schedule III, all the goods covered attracts total 18% GST (9% Central
GST + 9% State GST). The major goods that are covered under Schedule
III are commodities like toothpaste, hair oils, soaps, cleaners’ industrial
intermediaries, capital goods, etc.
In Schedule IV, all the goods covered attracts total 28% GST (14% Central
GST + 14% State GST). The major goods that are covered under Schedule
IV are luxury items like cars, high-end bikes, consumer appliances like AC
and refrigerators and other electrical goods, cigarettes, aerated drinks
come under this high tax reform category.
In Schedule V, all the goods covered attracts total 3% GST (1.5% Central
GST + 1.5% State GST). This slab includes the commodities like silver,
gold, precious and semi-precious stones, and includes silver and gold
jewellery and ornaments.
In Schedule VI, all the goods covered attracts total 0.25% GST (0.125%
Central GST + 0.125% State GST). This slab includes precious stones
(other than diamonds) and semi-precious stones, unworked or simply sawn
or roughly shaped.
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13.5.2 GST on Services
Finance Ministry, Government of India issued a Notification No. 11/2017

wherein the different rate of tax was notified for all the services under
Central GST. The Scheme of Classification of Services adopted for the
purposes of GST is a modified version of the United Nations Central Product
Classification. The Explanatory notes for the said Scheme of Classification
of Services is based on the explanatory notes to the UNCPC, and as
recommended by the Committee constituted for the purpose. The
explanatory notes indicate the scope and coverage of the heading, groups
and service codes of the Scheme of Classification of Services. These may
be used by the assessee and the tax administration as a guiding tool for
classification of services. However, it may be noted that where a service is
capable of differential treatment for any purpose based on its description,
the most specific description shall be preferred over a more general
description.
GST Council further published a Notification No. 11/2017 wherein all the
services were accordingly notified under various tax slabs. The tax slabs
were maintained mainly under 5%,12%,18% and 28%. But for specific
services especially under the real estate and construction sector, various
other tax rates are also prescribed considering the need of the industry.
Further, different tax rates are prescribed for affordable housing schemes
also. Following are some of the important service categories notified by the
Council:
1. Heading 9954: This Heading includes the construction services of
buildings, general construction services of civil engineering works, site
preparation services, assembly and erection of prefabricated
constructions, special trade construction services, installation services,
and building completion and finishing services.
2. Heading 9963: This includes the accommodation, food and beverage
services, other accommodation services, food, edible preparations,
alcoholic and non-alcoholic beverages serving services.
3. Heading 9964: Passenger transport services including local transport
and sightseeing transportation services of passengers and long-distance
transport services of passengers.
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4. Heading 9965: This includes the goods transport services, land

transport services of goods, water transport services of goods, and air
and space transport services of goods.
5. Heading 9966: Rental services of transport vehicles with operators and
rental services of transport vehicles with or without operators.
6. Heading 9967: Supporting services in transport, cargo handling
services, storage and warehousing services, supporting services for
railway transport, supporting services for road transport, supporting
services for water transport (coastal, transoceanic and inland
waterways), supporting services for air or space transport and other
supporting transport services, etc.
7. Heading 9969: This includes the electricity, gas, water and other
distribution services.
8. Heading 9971: This heading includes the financial and related services,
insurance services, pension services, reinsurance services, etc.
9. Heading 9972: This includes the real estate services, real estate
services involving owned or leased property, real estate services on a
fee or commission basis or on contract basis, etc.
10.Heading 9973: This heading covers the service like leasing or rental
services concerning machinery and equipment with or without operator,
leasing or rental services concerning other goods, licensing services for
the right to use intellectual property and similar products, etc.
11.Heading 9981: This includes the research and development services,
research and experimental development services in natural sciences and
engineering, research and experimental development services in social
sciences and humanities, interdisciplinary research services, etc.
12.Heading 9982: This includes the legal and accounting services,
auditing and bookkeeping services, tax consultancy and preparation
services, other professional, technical and business services, etc.
13.Heading 9983: This heading includes the management consulting and
management services, information technology services, architectural
services, urban and land planning and landscape architectural services,
engineering services, scientific and other technical services, etc.
Above are few examples of services categorization made for the purpose of
tax rates under GST.
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13.6 GST – EXEMPTIONS
13.6.1 Exempted Goods

The Finance Ministry issued a Notification No. 2/2017 wherein the goods
were notified where exemption from levy of GST is given. These goods are
majorly belonging to primary sector like agriculture, dairy and fisheries
industry. The essential commodities and religious goods are also exempted
vide this Notification.
The agriculture commodities like fruits and vegetable seeds, raw
foodgrains, oilseeds, fruits and vegetables, legumes, cereals, etc. are
exempted from GST.
The dairy and livestock products like unbranded milk, curd, lassi,
buttermilk, etc., fish seeds, live fish, prawns, live animals like live poultry,
sheep, goat and their meat are covered under this Notification.
The commodities like salt, water, contraceptives, plastic and glass bangles,
manures, human blood, wood charcoal, children drawing books, raw silk,
khadi items, flags, etc. are also given exemption from GST.
The religious commodities like prasad, rudraksha, panshgavya, unbranded
honey, etc. are exempted from GST.
13.6.2 Exempted Services
Notification No. 12/2017 is issued by Finance Ministry whereby various
services are exempted from levy of GST.
Some of the important exempted services are:
1. Services by the Central Government, State Government, Union Territory
or local authority excluding the following services—
a. services by the Department of Posts by way of speed post, express
parcel post, life insurance and agency services provided to a person
other than the Central Government, State Government or Union
territory;
b. services in relation to an aircraft or a vessel, inside or outside the
precincts of a port or an airport;
c. transport of goods or passengers; or
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d. any service, other than services covered under entries (a) to (c)
above, provided to business entities.
2. Pure services (excluding works contract service or other composite
supplies involving supply of any goods) provided to the Central
Government, State Government or Union Territory or local authority or a
Governmental Authority [or a Government Entity] by way of any activity
in relation to any function entrusted to a Panchayat under article 243G
of the Constitution or in relation to any function entrusted to a
Municipality under article 243W of the Constitution.
3. Services provided by the Central Government, State Government, Union
Territory or local authority to another Central Government, State
Government, Union Territory or local authority except postal, insurance
and transport services.
4. Services provided by way of pure labour contracts of construction,
erection, commissioning, installation, completion, fitting out, repair,
maintenance, renovation or alteration of a civil structure or any other
original works pertaining to the beneficiary-led individual house
construction or enhancement under the Housing for All (Urban) Mission
or Pradhan Mantri Awas Yojana.
5. Services by a person by way of–
a. conduct of any religious ceremony;
b. renting of precincts of a religious place meant for general public,
owned or managed by an entity registered as a charitable or religious
trust under section 12AA of the Income-tax Act, 1961 (hereinafter
referred to as the Income-tax Act) or a trust or an institution
registered under sub-clause (v) of clause (23C) of section 10 of the
Income-tax Act or a body or an authority covered under clause
(23BBA) of section 10 of the said Income-tax Act.
6. Services by way of transportation by rail or a vessel from one place in
India to another of the following goods—
a. relief materials meant for victims of natural or man-made disasters,
calamities, accidents or mishap;
b. defence or military equipments;
c. newspaper or magazines registered with the Registrar of
Newspapers;
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d. railway equipments or materials;

e. agricultural produce;
f. milk, salt and foodgrain including flours, pulses and rice; and
g. organic manure.
7. Transmission or distribution of electricity by an electricity transmission
or distribution utility.
8. Services of life insurance business provided under the following
schemes:
a. Janashree Bima Yojana;
b. Aam Aadmi Bima Yojana;
c. Life micro-insurance product as approved by the Insurance
Regulatory and Development Authority, having maximum amount of
cover of two lakhs rupees;
d. Varishtha Pension Bima Yojana;
e. Pradhan Mantri Jeevan Jyoti Bima Yojana;
f. Pradhan Mantri Jan Dhan Yojana;
g. Pradhan Mantri Vaya Vandan Yojana.
9. Services provided by the Indian Institutes of Management, as per the
guidelines of the Central Government, to their students, by way of the
following educational programmes, except Executive Development
Programme—
a. two-year full-time Post Graduate Programmes in Management for the
Post Graduate Diploma in Management, to which admissions are
made on the basis of Common Admission Test (CAT) conducted by
the Indian Institute of Management;
b. fellow programme in Management;
c. five-year integrated programme in Management.
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10.Services by way of—

a. health care services by a clinical establishment, an authorised
medical practitioner or paramedics;
b. services provided by way of transportation of a patient in an
ambulance, other than those specified in (a) above.
It is pertinent to note that there are many other services that are
exempted under the GST other than mentioned above. Specific exceptions
are again provided under various categories for levy of taxes. But mostly,
the agriculture and allied services, medical and educational services,
services related to weaker sections of the society are seen to be exempted
under the GST.
13.7 IMPLEMENTATION OF GST

In the earlier section of Model of GST, it is already explained how the GST
is being administered in India. For the successful implementation of GST,
the Goods and Services Tax Council (GSTC) has been notified with effect
from 12th September, 2016. A Goods and Services Tax Council (GSTC) was
constituted comprising the Union Finance Minister, the Minister of State
(Revenue) and the State Finance Ministers to recommend on the GST rate,
exemptions and thresholds, taxes to be subsumed and other features. This
mechanism ensures some degree of harmonization on different aspects of
GST between the Centre and the States as well as across States. One-half
of the total number of members of GSTC forms quorum in meetings of
GSTC. Decision in GSTC is taken by a majority of not less than three-fourth
of weighted votes cast.
Goods and Services Tax Network (GSTN) has been set up by the
Government as a private company under erstwhile Section 25 of the
Companies Act, 1956. GSTN provides various front-end services to the
taxpayers namely registration, payment, return, refund, appeals, etc.
Besides providing these services to the taxpayers, GSTN has developed
back-end IT modules (BO Module) for many States who have opted for the
same. The migration of existing taxpayers registered under earlier acts is
already completed. The Revenue department of both Centre and States
regularly peruses the presently registered taxpayers to complete the
necessary formalities on the IT system operated by GSTN for successful
migration. GSTN has selected 74 IT, ITeS and financial technology
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companies to be called GST Suvidha Providers (GSPs). GSPs develops

applications to be used by taxpayers for interacting with the GSTN.
The CGST and SGST Authorities of the Central and State Governments are
responsible for day-to-day monitoring and implementation of GST under
their respective jurisdiction.
13.8 GST CHALLENGES AND SOLUTIONS

It is a well-known fact that GST is designed to cater the provisions of
various acts and duties subsumed in it. It is also administered and
implemented across all States of India. It is one of the largest single tax
system in the world. As this is transitional phase and the initial stage of
implementation, there are certain challenges faced by the tax system.
These challenges are forecasted from time to time and adequate measures
are being taken accordingly by the GST Council and GSTN.
Technical Challenges: The technical front of the GST System is the
responsibility of GSTN (Goods and Services Tax Network). The online
registration, returns, refund, appeals, etc. applications are developed by
the GSTN. By the end of March 2021, there are almost 1.27 crore
taxpayers registered in India under GST. There is average of 90-95 lakh
returns filed in every month on the GSTN System. Thus, there is
humongous number of taxpayers and returns that is required to be cater
by the GSTN. Therefore, sometimes, the taxpayers faced issues with
respect to uploading of returns, registration or any other documents,
website issues, etc. Majority of these technical issues are faced during the
deadline of filing of returns or any other applications.
GSTN every now and then upgrades the system network to overcome such
issues. The problem of low connectivity in certain locations in remote areas
is also required to be addressed. The GSTN also has developed the online
complaint resolution mechanism which resolves the technical issues faced
by taxpayers from time to time. The taxpayers are also advised by
Government not to wait until the deadlines for filing returns, etc.
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Legal Challenges: The GST Act caters the taxation on all goods and
services those are erstwhile covered under various earlier acts. The smooth
flow of Input Tax Credit (ITC) from business to business is the crux of GST
system. The requirement of single tax act on all goods and services has led
to certain complexity in the Act. There are various Writ Petitions filed
before the Courts in some States against many provisions of the Act. Also,
it is observed that various Advance Ruling Authorities in different States
have given different judgements on same issue. This leads to more
confusion amongst the businesses for the legal provisions of the Act.
The GST Council shall bring clarity on the ambiguous provisions of the Act.
Council also issues various clarification circulars, press releases from time
to time on such complex provisions. The more simplification in the tax
structure and rules thereof will help to reduce the confusion amongst the
taxpayers. Reduction in the tax slabs will reduce the ambiguity about the
tax rates in various goods and services.
Administrative Challenges: The Central and State Authorities are
assigned to administer the GST Act across all States. Sometimes a single
taxpayer or company receives notices both from CGST Authorities and
SGST Authorities. During such times the taxpayer goes into dilemma to
which Authority he shall comply to. The PAN India based companies also
faces challenges of various orders by various authorities located in different
States on single issue.
To overcome the issue of multiplicity of proceedings, the taxpayers are now
divided and allocated to Central and State Authorities for the purpose of
administration. As a result of which the taxpayer is now require to comply
to a single authority for any proceedings and issue. The frequent internal
communications amongst the CGST and SGST Authorities has also reduced
the glitches in administering the taxpayers.
Though, GST has already been implemented from the 1st of July 2017 a
number of implementation issues related to IT systems, legal challenges,
exports, return filing and reconciliations, passing on transition credit, anti-
profiteering in GST etc. are being faced by field formations of States and
CBEC. In the current set-up the aim is to ensure that all these challenges /
feedback effectively reach the Government and both short term and long
term solutions are provided.
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Students are advised to refer latest Government Notifications released time

to time about revision of rates. Reference websites are given below-
https://www.cbic.gov.in/
https://www.gst.gov.in/

1. Search on Government web sites the progress and latest articles on GST
implementation in India.
2. Study the proposed GST rates for luxury items, viz., imported cars,
alcoholic drinks, and cigarettes.
3. Study from the latest Annual Budget Presentation of Central
Government on the subject of GST.
13.10 SUMMARY
• Goods and Service Tax (GST) is a comprehensive tax levy on
manufacture, sale and consumption of goods and service at a national
level.
• Objective of GST is to establish a tax system that is economically
efficient and neutral in its application, distributionally attractive, and
simple to administer.
• CGST will include central excise duty (Cenvat), service tax, and
additional duties of customs at the central level; and value-added tax,
central sales tax, entertainment tax, luxury tax, octroi, lottery taxes,
electricity duty, state surcharges related to supply of goods and services
and purchase tax at the State level.
• GST on export would be zero rated.
• Both CGST and SGST will be levied on import of goods and services into
the country.
• A few items are proposed to be exempted from GST.
450

1. Give brief definition of GST and explain its need in India.
2. What are the advantages in the area of tax collection due to
implementation of GST?
3. Write down point by point the objectives of GST .
4. Which taxes and duties are expected to be abolished in the proposed
GST implementation?
5. Which taxes will be out of the range of GST as per existing propositions?
6. Explain how the traders, the customers and the farmers will be
benefitted by the proper implementation of GST?
1. The word GST stands for –

a. General Service Tax
b. Government Service Tax
c. Goods and Services Tax
d. Government State Tax
2. The GST has replaced

a. Excise Duty
b. VAT
c. Service Tax
d. All of the above
3. In the present tax system, CENVAT stands for–

a. Common Value Added Tax
b. Central Value Added Tax
c. Central Volume Available Tax
d. Common Value Arranged Tax
4. The GST system consists of –

a. GST-1 and GST-2
b. Separate Tax for each State of India
c. Heavy Export Tax
d. CGST, SGST and IGST
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5. In the present tax structure, Central Excise Duty is collected at the point
of –
a. Manufacturing
b. Distribution
c. Warehousing
d. Servicing
Answers : (1-c), (2-d), (3-b), (4-d), (5-a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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GLOBAL SUPPLY CHAIN MANAGEMENT AND WTO
Chapter 14
Global Supply Chain Management And WTO
Learning objectives
At the end of the chapter, you will be able to understand the details and
objectives of the WTO - World Trade Organisation. Also, you will know
about the challenges and issues of global supply chain management. The
WTO agreements will be known to you and also the advantages of the
agreements for all the member countries.
Office of the World Trade Organisation - Geneva

Structure:
14.1 Supply Chain Types and Challenges
14.2 Importance of Global Free Trade
14.3 Need for Change in GSCM
14.4 GATT and WTO
14.5 WTO - Agreements
14.7 Summary
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14.1 SUPPLY CHAIN TYPES AND CHALLENGES
14.1.1 Types of Supply Chains
Not every supply chain is the same, of course. Nor is every company
involved in supply chains active across the same sets of activities. For
example, Company ‘A’ manages 15,000 suppliers across a wide range of
industries in over 40 countries. Company ‘B’ handles not only
manufacturing components, but also spare parts for ATM networks in India.
Company ‘C’ runs cold storage supply chains for perishable items in India
alongside a traditional system that does not require refrigeration and such
careful attention to temperature details. All of these diverse tasks require
different sets of skills and management activities. What unites big players,
however, is expertise in managing systems, making investments in the
individuals who operate these systems, and building up the capacity to
explore new options and opportunities for expansion and distribution.
14.1.2 Managing inventory
One of the most important roles for many manufacturing supply chain
operators is managing inventory. Because lead companies are increasingly
pressing their vendors to manage inventory, this task now falls to suppliers
or to the last rungs of the value chain. Keeping inventory low and located
at different levels of the chain dramatically increases the flexibility and
agility of the supply chain. It also lowers the costs because carrying
inventory no longer appears on the company’s bottom line. Supply chain
operators help by managing inventory flow to ensure that the goods arrive
at the right place at exactly the right time.
As an example, Company ‘X’ produces computer kits for assembly into Dell
Computers. Approximately 50 different suppliers produce the components
that all need to be put together for the production line. When they began
this task, it took the company eight hours to pull the stock and put the kits
together. However, the time soon fell to four hours. Now, when an order is
received, Company ‘X’ can deliver the kit components to the line for
assembly by Dell in just 45 minutes.
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However, this requires very precise timing. If any one of the 50 suppliers is
late on a delivery, the entire line comes to a halt. Because most of the
components are coming from different countries, it requires very close
coordination across multiple countries and tight communication with
customs officials to be able to deliver on time. It also requires company ‘X’
to provide help in setting up resilience for the supply chain network to
ensure that companies have more than one source for critical supplies. This
means that if some disaster knocks out a part of the chain, the rest of the
network of distribution facilities can take over from elsewhere in the
region. Managing inventory requires a delicate balance between carrying
just enough expensive stock to avoid running out, but not too much to
burden the balance sheet. There is one other aspect to carrying low
inventory, however, that is important to note — it quickly uncovers
problems elsewhere in the system. Any internal inefficiency that could be
disguised under conditions of high inventory is rapidly exposed with low
stocks. If orders are being received late, for instance, it might not be too
noticeable when ample items are already sitting on the shelves. If the
cupboard is bare, a late order will be glaringly obvious.
14.1.3 Shifting products across borders
Globally competitive firms literally use the world as their platform. They
source raw materials from everywhere. Imported components — nearly 70
per cent of their total inventory — are vital to creating the final products.
Of the remaining 30 per cent of products that are produced domestically,
many also include some imported components or raw materials as well.
Without imports, it is not possible to create products for the domestic
market or to manufacture exports. Wind energy provides an excellent
example of this kind of globally sourced product. To create huge wind
blades, one of Dow’s customers requires a specialty product created by
Dow. The supply chain for this chemical starts with an oil well somewhere
in the North Sea, which is shipped to a refinery in Amsterdam. From there
the raw material is shipped to the Dow manufacturing facility in Germany.
Afterwards, some is shipped to the Republic of Korea where they do a
relatively high distillation process. Then this product is sent to China for
formulation where it is packed into small drums and sent to the customer
for manufacture of wind blades. In fact, a major manufacturer like Dow
now spends more money on logistics and services than on manufacturing.
This is particularly true considering that costs in logistics are not simply the
costs of the tankers and trucks, but also the inventory costs, service costs,
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government requirements, reporting requirements, import duty tariffs, and

issues like labeling, materials safety, managing inventory, and so forth. As
a result, a huge payoff for business comes from standardization and
optimization in logistics. How can the cycle be shortened? How can
inventory be pushed around better and faster? For businesses, it is easier
to shift products from one location to another through various operations
and touch points while maintaining consistency and standardization in
terms of reporting in terms of values, duty, tariffs and so forth. Anything
that can be done to reduce costs and improve efficiency in transferring
goods across borders would be extremely helpful and welcome.
14.1.4 The role of outsourcing
One risk for supply chain operators is disintermediation — the possibility

that lead firms might decide to cut out the middle man and do things
themselves at some point. For instance, Dell Computer could opt to bundle
their own computer kits and not rely on earlier supplier any longer.
However, this does already happen in some cases. Carter’s, a children’s
clothing company, does not outsource the entire production of a paticular
clothing to company ‘A’. Instead, only certain aspects of logistics are
handed over to them.
What pushes a firm to decide when to outsource and when to hang on to

production internally? In part it comes down to core competencies. If there
is some aspect of the job that is either viewed as a critical competency for
the firm to handle in-house or, if the firm believes it can do this aspect
better and be more cost effective internally, it will not outsource. If,
however, neither condition holds, the task can be handed off to another
firm. The same thing is true for the supply chain operators themselves. If
they do not have a core competency for a task, they should also outsource
the task to some other firm with better, lower cost options for completing
it. It is, after all, just as important for supply chain operators and big
manufacturers to be nimble and keep their own costs down. Their
shareholders and Wall Street analysts are seeking high returns on
investment, which requires them to avoid diverting company performance
by insisting on performing non-key tasks in-house.
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One aspect that bigger supply chain operators bring to the task, however,
is specialized knowledge of markets. For example, Company ‘A’ work with
suppliers not only in well-known parts of China, but increasingly in more
distant places. Building up knowledge requires a commitment on the part
of the firm to form relationships with firms, local government officials,
regional actors and other stakeholders. Such an investment may not be
something that lead firms want to make, but rather to outsource to their
supply chain operators instead.
14.1.5 Pressures for consolidation
Building these relationships can be costly and time consuming. As a result,

it can be hard for smaller players to invest in such resources. Even within
supply chain and logistics operators, there is an increasing push towards
consolidation into larger firms. Not everyone can handle the pressure for
lower margins, higher costs and higher demands for service. Many have
gone out of business. A company in China bought one company every
three weeks in 2011, on average, because they found so many
opportunities.
14.1.6 The role of transportation
Global business relies on efficient means of transportation. The exact

method of transport depends on the business model. Many of the leading
companies use multiple methods — air, rail, road and ships. For some
companies, such as Zara, nearly all shipments are via air. This includes
sourcing some products from Asia, shipping via air back to Spain, then
returning finished goods via air back to Asia for consumers. Despite
expensive shipping costs, Zara remains one of the most profitable clothing
retailers in the world. Why do they use air freight every day? Because their
business model is all about limited fashion. The time of conceptualization
to appearance in the retail store is about six weeks and such a compressed
schedule requires products to move via air. For this company, though their
obsolescence is nearly zero, given their quick response and the fact that
they carry almost no inventory costs at all. If, however, another company
were to try to follow a similar model and air freight all their goods without
being properly geared up for that, they would be bound to fail. Their
logistics costs will be sky high. So, it is important to pick the right transport
model for the overall business model.
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Express delivery by air freight is frequently used for fast-moving consumer

electronics, medical devices and pharmaceutical products, and precision
instruments. It is also used for critical replacement and repair parts, and
for samples and late orders. In addition to speed, firms are increasingly
using express companies because they can rely on door-to- door delivery
systems with careful tracking and monitoring of packages along the way.
However, one challenge that some companies and logistics firms face in
using multiple transportation modes is that the management of
transportation within government falls to different agencies. As a result,
the rules regarding use of road, rail, ship, and air for freight are complex,
fragmented, and vary tremendously across different countries.
For example, the World Bank Logistics Index 2012, notes that lead time for
imports in Asia alone can vary from 1–4 days, time processing at the
border similarly varies from 1–4 days, and physical inspection rates for
cargo shipments could be as little as one per cent manual inspection to as
high as 35 per cent in India and 31 per cent in Indonesia.
For exports, the same report notes 1–3 days lead time for processing a 40
feet container from point of origin to port of loading. The costs, including
agents fees, port, airport or other charges, range from US$ 178 in
Singapore to US$ 310 in Viet Nam to US$ 918 in India. For companies like
UPS, managing these differences can be challenging. The daily delivery
volume for the company is 16.3 million documents and packages, with
2012 revenue of US$ 54.1 billion. More than two per cent of global GDP
moves around the world in UPS trucks and planes and, if it were
independent, the company would have the world’s 9th largest airline.
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14.1.7 Innovation
Supply chain operators are grappling with labour challenges. Getting

sufficient workers with the right set of skills is proving to be difficult. As a
result, more of the process is being automated with a higher reliance on
information technology. Singapore is trying to create something new in a
“supply chain city.” This is a dedicated, highly automated facility designed
by YCH Group for up to 10,000 supply chain experts, professionals and
practitioners. It has been designed from the beginning to allow for very
flexible operations. For example, it allows firms to manufacture on the
spot, change designs, test products, and prepare to scale up if things go
well. It also includes a huge automated storage and retrieval system for
inventory. The facility encourages the clustering of suppliers in one place.
Singapore’s Economic Development Board has strongly backed up the
project.
14.1.8 Changing government policies
All of the logistics operators spoke warmly of specific measures taken by

some countries to speed up the processing of goods. One such example is
bonded logistics parks (BLPs). China makes particularly good use of BLPs.
Among other benefits, they allow an on-the-spot refund of taxes due for
exports. (Although BLPs are different in different parts of the world —
those in India are not the same as those in China.) But some countries
have implemented policies that make it difficult for companies to locate
inventory domestically. To return to the example of the Dell computer
assembly for a moment, although most of the components are delivered
just-in-time for assembly, it can be critical to have some inventory on
hand, as well as spare parts. But a variety of policies can make it
impossible for Dell or YCH to locate such a facility in some domestic
jurisdictions.
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Equally problematic can be policies that create extra challenges to servicing

equipment. In many places, domestic rules make it too costly to allow a
proper third-party repair hub to operate outside the country and allow
products to flow easily across borders. This means that firms must set up
suboptimal domestic repair operations, resulting in higher servicing costs
for consumers and firms. Other rules can make it hard for firms to operate
in value chains. For example, lead firms may start operating in a market as
a joint venture. If the business is successful, the lead firm may decide to
take over the business from the joint venture partner. Even if the transition
is entirely amicable between firms, government regulations could turn this
into a nightmare. Customs officials may now regard the company as a
“non-trusted company” in the same category as a new importer and
subject to 100 per cent inspections, higher guarantees, and so forth.
Other problematic rules conflict with the value chain pressures to push
inventory to suppliers. Lead firms may want suppliers to hold inventory.
But in many territories, suppliers cannot hold inventory unless they are
resident companies, as there are no provisions for non-resident importers.
This could require suppliers to do all sorts of contortions to satisfy the
domestic requirements that are not desirable from the perspective of a
global value chain. YCH has had to develop a creative solution to this
problem in India. They are now allowed to represent suppliers that do not
have a physical presence in India. The company underwrites the inventory,
takes part of the license, brings the shipments into the country, and
transfers the product to the manufacturer on a just-in-time basis. Global
value chains have been promoted as one way that countries can pursue
economic development. This is especially true since most developing
countries rely heavily on small and medium enterprises (SMEs), rather
than on large firms. SMEs, even from developing countries, are often seen
as important actors in a global supply chain in providing parts and
components, for example. However, one particular challenge for SME
participation comes from the pressures of lead firms to push inventory
costs down on the suppliers. For larger firms or those with secure
financing, the costs of holding inventory might be manageable. For SMEs,
these costs are prohibitive. Imagine that you are being asked to hold a
US$ 1 million in inventory. This has to be held for a full month, plus the
time it takes for the order to be delivered. It could also take another 60–75
days to be paid for this delivery. This leaves the company with no cash flow
for several months and several million tied up in inventory. Solving this
problem requires some creative thinking on the part of governments and
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financial institutions. Another set of business obstacles comes from

incompatible regulations and standards. Distribution centers currently need
to carry two different sets of pallets — one for Europe and one standard
size. If you want to ship products from Asia to the Russian Federation and
on to Europe via rail, it needs to change cargos three times. Why? Because
the rail width is different. Each change adds significantly to the cost and
complexity of moving goods. One bright spot is the creation of data
messaging protocols for air freight. This will allow any airline transporting
cargo to know exactly what data has been transmitted and ensure the
quality of that data. It will also help secure the supply chain by limiting the
handoffs or touch points along the chain. The buy-in for the program so far
has been limited, particularly to countries that are technologically savvy.
But, should the program spread in the future, the benefits could be
significant.
14.2 IMPORTANCE OF GLOBAL FREE TRADE
14.2.1 The importance of global free trade
Not surprisingly, top supply chain and lead manufacturing firms believe
passionately in the importance of maintaining free and open trade. The
dream for many is to have the ability to source, ship and sell products in
the most efficient locations, and to do so as seamlessly as possible. Falling
transport and communications costs have made it easier than ever for
companies to participate in a global economy.
Supply chain operators can be extremely creative, inventive problem

solvers. They manage to bring together suppliers and lead firms from far-
flung regions across the globe. Many persevere in the face of difficult
obstacles, including a wide variety of policies that stand in the way of the
smooth movement of goods. One important lesson business leaders
recognize is the need for continuous engagement with government
policymakers. Without regular feedback and conversations with the policy
community, neither side may be entirely aware of the obstacles faced by
the other. Dialogues on global value chains can be one important
mechanism for getting diverse groups to talk openly about key issues —
and lead to better policy results. The differentiated roles can be seen in
retail banking. Mortgages tend to be the magnetic product. Customers are
most likely to change banks in order to get a good deal on a mortgage. The
banking relationship is anchored by the current account. Unsecured
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lending, as with an overdraft or debit card balance, is the profit engine.

Further, mobile banking supports a bank’s image as an innovator and
provides opportunities for differentiation.
The same differentiated roles exist in supply chains. Often sourcing brings
new clients to an intermediary and sourcing plus logistics anchor the
relationship. “Onshore” services such as distribution, wholesaling and
retailing have become the principal sources of value and growth, while
product design and development are the spice. In the future, deep market
knowledge of China and India will attract new clients. Managing supply
chain sustainability and integrity is likely to be an important relationship
anchor. Finance and e-commerce platforms will be key profit engines, while
brands and risk management will be fertile ground for innovation.
Requiring each element of supply chain service to justify itself as a profit
centre is a dangerous oversimplification. The customer relationship should
be the profit centre.
The services that play the key roles change over time as the relationship
matures and the customer’s situation evolves. Customers, in the context of
relationships, determine the value of individual services.
Dramatic changes in supply chain architectures and objectives and their

associated value systems are underway. Possible future architectures
include:
• Changes in the Chinese supply base, e.g., far more sophisticated and
sustainable
• Manufacture in Asia to sell in Asia, e.g., China is a huge domestic market
• Nearshoring, e.g., manufacturing in Mexico for the US market
• Manufacture to order, e.g., very flexible and rapid supply chains, and
• Adding value close to customers, e.g., final assembly and finishing.
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Government policies and regulations are a very significant part of the

business landscape and will influence future supply chain architectures and
objectives. Inconsistencies across jurisdictions incentivize regulatory
arbitrage. Government policies clearly impact the magnitude and
accessibility of market opportunities as through barriers to entry,
regulation of competition, procurement practices and the advocacy of
particular technologies. Government policies affect the dynamics of
product, service and business model innovation. Governments can drive
the virtuous dynamics by reducing the risks for other participants, such as
through the establishment of standards, protection of intellectual property,
being a lead user of innovative technology, tax incentives for risky
investments and making markets more open, transparent and efficient.
There is a circular relationship between government policies and
regulations and market conditions. Sometimes regulations shape the
market but often they respond, e.g., to incidents regarding product or
process safety, personal privacy, and environmental impact.
14.2.2 Changing Landscape of the Business
The business landscape is changing rapidly and, in many respects,

discontinuously. Supply chains face significant disruptions in the markets
where they operate and an inflection point for the sources of value and
growth. Many factors are combining to reshape supply chains and their
associated value systems. These dynamics are connected. They reinforce
and accelerate one another. The principal drivers of change are:
• Adoption and commoditization of broadband
• Innovations in media and e-commerce
• Increased market transparency
• Deconstruction of integrated value chains
• A discontinuity in consumer aspirations and use of technology, and
• China becoming a vibrant domestic market
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Ubiquitous, very-low-cost broadband connectivity is disrupting and

reshaping how products and services are packaged, marketed, delivered
and used. It changes the social dynamics of markets, creates the new
economics of information, enables deconstruction of integrated value
chains, stimulates innovation and accelerates the commoditization of many
products and services. It offers exciting new opportunities to established
companies while posing major threats to their strategies, business models
and cultures.
The new economics of information are changing the way content is

generated and distributed and the way supply chain members
communicate with one another.
Traditionally, the economics of information were based on several simple

laws. The first law was the tradeoff between reach and richness. You could
reach a huge audience with a simple, undifferentiated message such as a
television advertisement, or you could deliver a complex, personalized
message to a very small audience, as in a salesman talking one-on-one to
a potential customer. The Internet eliminates this tradeoff. Rich messages
can be sent in a highly personalized form to large audiences. Many small
audiences are as good a one large audience, maybe better. The second law
was economies of scale in broadcasting. The larger the audience reached,
the lower the cost per message. That, too, has been changed by the
Internet.
Now the cost per message can be constant, and very low, independent of
the size of the audience reached. Thus, “...the more end-users a network
has, the more valuable the network becomes to the users. Metcalf’s Law,
named after the founder of 3Com and father of Ethernet, states that the
potential value of a network is proportional to the square of the number of
connections.”
The third law was diminishing returns to scale. Unit costs would not decline
indefinitely with size. Beyond a certain point they would become constant
or even rise because of bureaucracy and complexity. In the world of digital
media and e-commerce, the cost per transaction can be essentially zero.
Instead of driving up costs and reducing the profitability of a relationship,
today the rule has become the more transactions you have with a
customer, the better. Very frequent contacts are essential for building
brand value, customer satisfaction, trust and sticky relationships. The
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world is changing, as “...web services are breaking down barriers between

disparate systems, organizations and creating webs of new relationships.
The shift from closed proprietary networks to the Internet is a very

important development. The Internet is the antithesis of walled garden
systems where customers are restricted to a pre–determined range of
products and services. It inevitably leads to greater customer
independence. Some supply chain functions like sourcing are vulnerable to
disintermediation. e-commerce makes it easy for customers to deal directly
with manufacturers, markets, and one another. Other functions such as
retailing face intermediation by aggregators such as Google and Baidu who
challenge them for the customer relationship. These developments are
disrupting established patterns of influence, control, value creation, and
value capture in supply chains.
The next wave of disruptive innovations includes mobile broadband, smart

phones like the Apple iPhone and “web 2.0”. What is happening in media
shows the future of retailing. Both markets are shifting from a traditional
hub-and-spoke structure to a much more complex decentralized grid
architecture. Much of the innovation is occurring in the peer-to-peer (P2P)
context, as with Facebook, Groupon, Vent Priveé and Gilt Groupe. An
increasing amount of the innovative software is open source, e.g., Android.
Applications and contents are becoming web-based rather than staying on
“fat” clients such as PCs and local servers. This new environment must be
thought of as more than a technological phenomenon.
It also is a major social phenomenon characterized by an explosion of self-

expression and viral content, cloud computing and large-scale piracy of
intellectual property (IP). The emergence of personal media, social
networks and virtual communities is especially significant. It will be
increasingly difficult to maintain control over IP. Forward-thinking
companies are considering where to go “open source.” The new social
ecosystems have powerful network effects. They can drive the emergence
of dominant standards and for next-generation platforms and supply
chains. Increasing market openness and the new economics of information
create a very different ecology. It is far more transparent, competitive and
unforgiving. An ever-greater number of customers will find out who has the
best service, technology and prices, who treats customers well and who
does not. If you are not one of the best, you will find it more and more
difficult to attract and retain high-value customers. The competition will be
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intense and unavoidable. As they say in the US: “you can run but you can’t
hide!”
14.2.3 The changes are disruptive
Each of the drivers of change is quite significant. The combination is highly

disruptive. The situation at Foxconn put the global spotlight on workplace
conditions in China and other low-cost manufacturing locations. The effect
is unfolding in three waves –immediate, near term, and mid term. It
already has precipitated rapid increases in unit labour costs that are
spreading from China to other countries. This produced strong pressures to
improve productivity and/or relocate factories. In the mid term, the
resulting surge in disposable income and consumption will offer exciting
new opportunities for retailers, brands and supply chain members.
Innovations in media and e-commerce have dramatically increased market

transparency. News travels quickly through blogs, social networks and
Twitter. There is no place to hide when something goes wrong. BP’s
incident in the Gulf of Mexico wiped 55 per cent off its market capitalization
in a matter of weeks and badly damaged its reputation. Foxconn has made
sustainability a priority issue among consumers, retailers and brand
owners. They, and inescapably supply chain members, face much greater
reputational risk and financial liability with respect to product safety.
A holistic, end-to-end approach to supply chain sustainability is essential.

It is clear that “some leading companies have already suffered reputational
and brand damage when problems have been uncovered, even if they are
not contracted to the offending supplier. Consumers will not understand the
contractual complexities, only that a brand is associated with unethical
practices.” Increased market transparency also intensifies competition.
Innovative information aggregators like RedLaser and GoodGuide facilitate
comparison shopping by both B2C and B2B buyers. Others like Panjiva
make it easier for retailers to connect directly with manufacturers. The
risks of disintermediation, of retailers going direct to manufacturers and
manufacturers going direct to consumers, are significant. Greater
transparency enables deconstruction of the value chain and entry of new
competitors who attack the sweet spot and commoditize it. The most likely
result is margin squeeze for intermediaries and commoditization of
traditional sourcing services based on the agency business model.
Intermediaries are caught between higher product costs and customers
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facing weak markets who are unwilling to accept cost increases. Greater
customer power, with Wal-Mart as the extreme example, amplifies this
problem. The sweet spot in the value chain is shifting toward the
customers to wholesale, retail and brands.
A generational discontinuity, especially in China, is reshaping the business

landscape. The “under-30s” are dramatically different from their parents in
their aspirations, attitudes toward consumption and use of technology.
They are always connected to their friends and acquaintances through
mobile phones, Twitter and Facebook. They have a voracious appetite for
digital media. They are driving the explosion of social networks, media, and
commerce through companies like YouTube, Groupon, Vent Privée and Gilt
Group. These young people expect to have a much better life than their
parents and want the material trappings of success as soon as possible.
China is in many respects the biggest and most elusive prize. The country
is transitioning from primarily a centre of low cost export manufacturing to
a large and rapidly growing domestic market. Asian investors are acquiring
high-end western brands such as Jaguar, Hickey Freeman, MCM, Pringle,
Hardy Amies and Gieves & Hawkes, in large part to address this emerging
opportunity. The next step will be to develop global products, brands, and
creative leaders in China. But China needs to turn “made in China” from a
negative into a plus. The problem is similar to “made in Japan” 50 years
ago – perceptions and reality of low quality, oppressive “sweat shops”,
endless product safety scandals and rampant forgery of brands.
Supply chains and their associated value systems will be complex and defy
simple descriptions. They will be simultaneously concentrated (at the
manufacturing level and for buyer power and brands), fragmented (many
new types of channels, intermediaries, and segments) and integrated (in
terms of markets, products, customer relationships, and e-commerce
platforms). And as described by Fine (1998) the balance among
concentration, fragmentation, and integration is dynamic. In the short
term, integrated value chains will be unbundled, attacked and
commoditized. Then a new wave of innovations will drive re-bundling and
de-commoditization.
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14.3 NEED FOR CHANGE IN GSCM
14.3.1 GSCM – Requirements and the need for change :
Supply chain members must contend with a set of complex, interrelated

strategic issues:
• Greater bi-directionality as in bringing products to developing markets,
handling e-commerce returns, recycling products at the end of their lives
• Serving domestic markets as well as exports, addressing the explosive
demand for goods and services in China, India, and other markets
• Major changes in where and how value is created and captured as
through product design, development of powerful brands, and e-
commerce
• Where innovation occurs and its character, for example: China becoming
a hotbed of creativity, innovation around customer experiences and other
intangibles
• Integrated versus specialist business models – anticipating cycles in
supply chain architectures and their associated value system
• Off-shoring versus near-shoring as with increased importance of regional
supply chains, emphasis on adding value close to customers
• Achieving and maintaining supply chain integrity such as building trust,
turning “made in China” from a negative into a plus, and
• New business models including close follower to demand trends, produce
to order, rapid production scale-up and integrated end-to-end solutions
The imperatives for success in this new market ecology begin with greater
coordination among supply chain members. There are many opportunities
to create value through collaboration and information sharing and to
combine capabilities and information in ways that serve customers better.
This will require relationships within supply chains to become far more
“integral” as defined by Fine (2005) and Pipenbrock (2009).
469
The culture of most supply chains is distinctly entrepreneurial. An

entrepreneurial culture is inherently competitive for opportunities,
resources, recognition and rewards. Entrepreneurs must be convinced that
collaboration and sharing generate greater value and that they will get a
fair share. The key is quick wins with clear financial payoffs.
A survey of chief supply chain officers explored the importance of various

supply chain levers. It found: “...supply chain executives have been using
multiple levers to help support value creation. Information visibility is a
means for companies to coordinate their supply chain activities to increase
efficiency, reduce waste, and improve response time reliability. Hence
information visibility becomes the foundation for all other levers.”
The sources of value and growth are shifting significantly. Principal

businesses such as wholesaling, retailing, brands and financial services are
more capital intensive than sourcing based on the agency model. With
more capital at risk customer information and market intelligence have
become critically important. The next stage is to develop a portfolio of
third-generation value-added services for suppliers, retailers and brand
owners. In addition to product design and development, these services
could include market intelligence, hosted platforms and applications,
managing sustainability and advice regarding best practices in
manufacturing, doing business in China, sustainability and supply chain
integrity, and e-commerce solutions.
These services are “third-generation” because they are significantly more

dependent on technology and formal intellectual property, as with
databases, software and models, than the first-generation agency services
and second-generation principal businesses. The future is in value-added
services and customer experiences based on innovative use of information
and sophisticated analytics. This will require investments in IT platforms,
intellectual property and people with new skills and capabilities. Supply
chain members must decide when to develop these assets internally and
when to buy them through acquisitions and venture investments. Roberts
and Liu (2001) conclude that a company should use, in a timely and
appropriate way, a broad range of business development strategies,
including alliances, joint ventures, licensing, equity investments and
mergers and acquisitions, in order to perform optimally over its underlying
technology life cycle.
470
The lead time for building revenues and profits from third-generation
services is significant and the successful business models are unclear, but
think of retail merchandise managers using a portal for market analysis,
sourcing, procurement, supply chain optimization, inventory control and
multi-channel fulfilment. The immediate challenge is to start and accelerate
the learning process regarding which services customers and suppliers
want and need, how to demonstrate their value, the right business models
to monetize them and how to defend them from commoditization.
As noted above, managing supply chain sustainability and its associated

risks have become high priority issues. Locke et al., (2009) undertook
groundbreaking research into the effectiveness of compliance and
commitment-based approaches to sustainability. They concluded that the
compliance model rests on misguided theoretical and empirical
assumptions: “In contrast, ...a more commitment-oriented approach to
improving labour standards coexists and, in many of the same factories,
complements the traditional compliance model. This commitment-oriented
approach, based on joint problem solving, information exchange, and the
diffusion of best practices, is often obscured by the debates over traditional
compliance programmes but exists in myriad factories throughout the
world and has led to sustained improvements in working conditions and
labor rights at these workplaces.”
Plambeck et al., (2012) focus on the challenges in China in the following

passage: “Given how much of the world’s manufacturing takes place in
China and the damage it has wrought on that country’s environment, most
analysts expect that multinational brands’ supply chains will face increasing
scrutiny in the coming years.” The authors highlight the limitations and
counter-productive effects of an audit and enforcement approach to health,
safety, environment and labour practices. They present a series of activities
for getting to know your supply chain and then acting effectively based on
that knowledge. “Any sustainability effort in China must start by creating a
context that facilitates identification and visibility into the supply chain,”
they conclude.
471
Innovation is a key element of a successful response to the changing

business landscape. But innovation is not easy. Large, mature companies
often lack the capabilities to be successful with a disruptive product or
service innovation. There are significant obstacles that should be reduced
or eliminated. Successful innovation is a journey defined by the lessons
learned from a series of quick, low-cost experiments. The willingness to
experiment and ability to learn are critical success factors.The imperative
now should be to get started quickly, simply and inexpensively. The
objective of these experiments is to demonstrate an idea and its value by
making the innovation tangible. Quick wins reinforce the commitment to
innovation and accelerate the virtuous dynamics of learning and value
creation. Research has highlighted critical success factors for innovation
initiatives.
• Experiment inexpensively and often – overcome the bias toward doing
things on a large scale and the aversion to anything “quick and dirty”
• Prototype early – expect this to be an iterative process, assume you
won’t get it right the first time, and show the prototype to customers.
• Empower managers two to three levels from the top to approve and fund
experiments – most of the time this can be business unit leaders
• Expect failures – encourage people to try and enable them to “fail soft”
without career damage
• Involve customers – listen to them, learn from them and recognize that
often they are the source of innovation.
• Use social networks to encourage and reward sharing – the business
benefits must come first, then the personal satisfaction
• Create much more value from existing assets – make innovative use of
current capabilities, information and relationships
• Establish mechanisms for internalizing new technologies – eliminate the
obstacles to collaboration with smaller ventures and outside vendors, and
• Show the payoff in practical terms – measure the effect on customer
satisfaction and retention, staff turnover and productivity, revenues and
profits
472
e-commerce is developing rapidly in all markets. It is a strategic priority

and major source of growth for existing customers. And the pure plays
such as Amazon offer a wide range of new opportunities like private label
programmes. Supply chain members need to get ahead of customers
regarding e-commerce. Many still are racing to catchup. The current lack of
e-commerce understanding and capabilities and the obstacles to effective
collaboration with small ventures and other sources of e-commerce
technology are very serious problems. Bold action is required to deal with
them. Differences among supply chains are important for how we think
about change and policy impacts. The following typology recognizes
differences along four dimensions:
• Architecture – modular versus integral relationships, global versus
regional, physical flows versus digital
• Objectives – cost, quality, speed, flexibility, innovation, resilience, policy
benefits
• Sources of value – manufacturing, services, retailing, brands, design,
intellectual property, and
• Key dynamics – competition, commoditization, clock speed,
fragmentation, integration, concentration.
In theory, there are many combinations of these factors but in practice a

limited set of variations are most significant. Here are two examples:
modular/global architecture moving physical goods with the primary
objective of cost minimization, creating value through sourcing and
retailing in a highly competitive and commoditized market environment
(Wal-Mart); and integral/global architecture with the primary objectives of
flexibility and innovation, creating value through brand, design and IP, in a
fast moving market dominated by a few powerful players (Apple).
Many traditional supply chains generate value primarily through operational

services such as sourcing and logistics. Relationships are modular such as
undifferentiated, transactional and easily substituted. These supply chains
are the most vulnerable to commoditization and disruption and where the
members will have the greatest difficulty prospering in the new market
ecology. The most robust supply chains create value by supporting a
strong, differentiated brand. Examples include Amazon, Apple, Body Shop,
Ikea, Nike and Zara. Relationships are integral, deep, strategic and
enduring. There is a level of mutual trust that enables information sharing
473
among supply chain members and thus collaborative problem solving,

learning and performance improvement. These supply chains are the most
flexible and adaptive.
The major challenge facing supply chain members is to prepare for a very
different business landscape, sooner than most expect. Some understand
the need for change and the changes that are needed, but others do not.
Many are thinking incrementally and seem overconfident, even complacent.
They say: “we understand what is happening and are already responding.
We have plenty of time. Don’t worry, everything is under control.” These
words have been heard many times before, for example, from leaders of
the major telecom groups when the Internet, broadband, mobile, and Wi-Fi
were turning their world upside-down. It is what is called as active inertia.
The capabilities, culture and beliefs that made a company successful
become constraints that cause insufficient and ineffective responses to
market disruptions. Our understanding of the dynamics that are reshaping
global supply chains is incomplete. The influences of government extend
beyond trade policies, taxation and market regulation. They can include
proactive collaboration with the private sector to create enabling
infrastructure and resources. How do these initiatives affect the objectives,
architecture and sources of value and key dynamics of supply chains?
14.3.2 Role of WTO in Global SCM
Much of the literature on supply chains focuses on products. Services,

including finance, healthcare, education, and entertainment have their
supply chains, too. How do service supply chains differ from those for
products? What are the implications of the digitalization and virtualization
of services? These are very fertile areas for research. In brief, the World
Trade Organization (WTO) is the only international organization dealing
with the global rules of trade between nations. Its main function is to
ensure that trade flows as smoothly, predictably and freely as possible.
474
The result is assurance. Consumers and producers know that they can
enjoy secure supplies and greater choice of the finished products,
components, raw materials and services that they use. Producers and
exporters know that foreign markets will remain open to them. The result
is also a more prosperous, peaceful and accountable economic world.
Decisions in the WTO are typically taken by consensus among all member
countries and they are ratified by members’ parliaments. Trade friction is
channeled into the WTO’s dispute settlement process where the focus is on
interpreting agreements and commitments, and how to ensure that
countries’ trade policies conform with them. That way, the risk of disputes
spilling over into political or military conflict is reduced. By lowering trade
barriers, the WTO’s system also breaks down other barriers between
peoples and nations. At the heart of the system – known as the multilateral
trading system – are the WTO’s agreements, negotiated and signed by a
large majority of the world’s trading nations, and ratified in their
parliaments. These agreements are the legal ground-rules for international
commerce. Essentially, they are contracts, guaranteeing member countries
important trade rights. They also bind governments to keep their trade
policies within agreed limits to everybody’s benefit. The agreements were
negotiated and signed by governments. But their purpose is to help
producers of goods and services, exporters, and importers conduct their
business. The goal is to improve the welfare of the peoples of the member
countries.
475
14.4 GATT AND WTO
14.4.1 GATS and GATT
The General Agreement on Trade in Services (GATS) is the first multilateral

agreement, under the auspices of Uruguay Round, to provide legally
enforceable rights to trade in a wide range of services along with their
progressive liberalization. Though very little liberalization was actually
achieved, the negotiations on trade in services established the institutional
structure for negotiating liberalization in the future. Many of the developing
countries have not been very receptive to the conception of GATS mainly
due to non-existence of such rules in the past and also because many of
the service sectors had always enjoyed heavy protection. GATS provides
developing countries with an opportunity to integrate into the global
economy through adopting more liberal policies with regard to trade in
services. Both the developing as well as the developed countries would
gain through liberalization of various service-sectors. In fact, inefficiencies
in the service-sectors of a developing economy impact negatively on the
export competitiveness of its agriculture and manufacturing sectors,
through forward linkages, thus becoming one of the contributory factors
leading to unfavorable balance of current account. The GATS employs a
multi-country computable general equilibrium model to demonstrate
potential gains in welfare for the developing countries from their
liberalization of trade in services. The gains get enhanced further when
developed countries also undertake similar liberalization. Salient features
of India's commitments under GATS can be strengthened and India's
brilliant success in software services can go further. Unilateral moves by
the Indian government towards liberalizing imports of computer software
and hardware along with facilitating inflow of FDI into these sectors during
the 1990s have been the major contributory factors in this success story.
476
The World Trade Organization came into being in 1995. One of the
youngest of the international organizations, the WTO is the successor to
the General Agreement on Tariffs and Trade (GATT) established in the wake
of the Second World War. So while the WTO is still young, the multilateral
trading system that was originally set up under GATT is well over 50 years
old. The past 50 years have seen an exceptional growth in world trade.
Merchandise exports grew on average by 6% annually. Total trade in 2000
was 22-times the level of 1950. GATT and the WTO have helped to create a
strong and prosperous trading system contributing to unprecedented
growth. The system was developed through a series of trade negotiations,
or rounds, held under GATT. The first rounds dealt mainly with tariff
reductions but later negotiations included other areas such as anti-
dumping and non-tariff measures. The last round – the 1986-94 Uruguay
Round – led to the WTO’s creation. The negotiations did not end there.
Some continued after the end of the Uruguay Round. In February 1997 an
agreement was reached on telecommunications services, with 69
governments agreeing to wide-ranging liberalization measures that went
beyond those agreed in the Uruguay Round. In the same year, 40
governments successfully concluded negotiations for tariff-free trade in
information technology products, and 70 members concluded a financial
services deal covering more than 95% of trade in banking, insurance,
securities and financial information. In 2000, new talks started on
agriculture and services. These have now been incorporated into a broader
work programme, the Doha Development Agenda (DDA), launched at the
fourth WTO Ministerial Conference in Doha, Qatar, in November 2001. The
agenda adds negotiations and other work on non-agricultural tariffs, trade
and environment, WTO rules such as anti-dumping and subsidies,
investment, competition policy, trade facilitation, transparency in
government procurement, intellectual property, and a range of issues
raised by developing countries as difficulties they face in implementing the
present WTO agreements.
477
14.4.2 WTO - Basics

Location: Geneva, Switzerland Established : 1 January 1995 Created by :
Uruguay Round negotiations (1986-94) Membership : 160 countries(on 26
June 2014) Budget : 197 million Swiss francs for 2013 Functions:
Administering WTO trade agreements, Forum for trade negotiations,
Handling trade disputes, Monitoring national trade policies, Technical
assistance and training for developing countries, Cooperation with other
international organization.
14.4.3 WTO - Structure

The WTO has 160 members, accounting for almost 95% of world trade.
Around 25 others are negotiating membership. Decisions are made by the
entire membership. This is typically by consensus. A majority vote is also
possible but it has never been used in the WTO, and was extremely rare
under the WTO’s predecessor, the General The WTO’s top level decision
making body is the Ministerial Conference which meets at least once every
two years. Below this is the General Council (normally ambassadors and
heads of delegation in year in the Geneva headquarters. The General
Council also meets as the Trade Policy Review Body and the Dispute
Settlement Body. At the next level, the Goods Council, Services Council
and Intellectual Property (TRIPS) Council report to the General Council.
Numerous specialized committees, working groups and working parties
deal with the individual agreements and other are formed as per the
environment, development, membership applications and regional trade
agreements.
14.4.4 WTO -Secretariat

The WTO Secretariat, based in Geneva, has around 640 staff and is headed
by a director General. Since most decisions are taken by the members
themselves, the Secretariat does not have the decision making role that
other international bureaucracies are given. The Secretariat’s main duties
are to supply technical support for the various councils and committees
and the ministerial conferences, to provide technical assistance for
developing countries, to analyze world trade, and to explain WTO airs to
the public and media. The Secretariat also provides some forms of legal
assistance in the dispute settlement process and advises governments
wishing to become members of the WTO. The annual budget is roughly 197
million Swiss francs.
478
14.5 WTO AGREEMENTS
14.5.1 WTO Agreements
In order to ensure that trade is as fair as possible, and as free as is

practical, negotiation of rules and abiding by them was emphasized by
WTO. The WTO’s rules – the agreements – are the result of negotiations
between the members. The current set were the outcome of the 1986-94
Uruguay Round negotiations which included a major revision of the original
General Agreement on Tariffs and Trade (GATT). GATT is now the WTO’s
principal rule-book for trade in goods. The Uruguay Round also created
new rules for dealing with trade in services, relevant aspects of intellectual
property, dispute settlement, and trade policy reviews. The complete set
runs to some 30,000 pages consisting of about 30 agreements and
separate commitments (called schedules) made by individual members in
specific areas such as lower customs duty rates and services market-
opening. Through these agreements, WTO members operate a non-
discriminatory trading system that spells out their rights and their
obligations. Each country receives guarantees that its exports will be
treated fairly and consistently in other countries’ markets. Each promises
to do the same for imports into its own market. The system also gives
developing countries some flexibility in implementing their commitments.
14.5.2 Goods
It all began with trade in goods. From 1947 to 1994, GATT was the forum
for negotiating lower customs duty rates and other trade barriers; the text
of the General Agreement spelt out important rules, particularly non-
discrimination. Since 1995, the updated GATT has become the WTO’s
umbrella agreement for trade in goods. It has annexes dealing with specific
sectors such as agriculture and textiles, and with specific issues such as
state trading, product standards, subsidies and actions taken against
dumping.
479
14.5.3 Services
Banks, insurance firms, telecommunications companies, tour operators,
hotel chains and transport companies looking to do business abroad can
now enjoy the same principles of freer and fairer trade that originally only
applied to trade in goods. These principles appear in the new General
Agreement on Trade in Services (GATS). WTO members have also made
individual commitments under GATS stating which of their services sectors
they are willing to open to foreign competition, and how open those
markets are.
14.5.4 Intellectual Property

The WTO’s Intellectual Property Agreement amounts to rules for trade and
investment in ideas and creativity. The rules state how copyrights, patents,
trademarks, geographical names used to identify products, industrial
designs, integrated circuit layout-designs and undisclosed information such
as trade secrets – “intellectual property” – should be protected when trade
is involved.
14.5.6 Dispute Settlement

The WTO’s procedure for resolving trade quarrels under the Dispute
Settlement Understanding is vital for enforcing the rules and therefore for
ensuring that trade flows smoothly. Countries bring disputes to the WTO if
they think their rights under the agreements are being infringed.
Judgements by specially-appointed independent experts are based on
interpretations of the agreements and individual countries’ commitments.
The system encourages countries to settle their differences through
consultation. Failing that, they can follow a carefully mapped out, stage-by-
stage procedure that includes the possibility of a ruling by a panel of
experts, and the chance to appeal the ruling on legal grounds. Confidence
in the system is borne out by the number of cases brought to the WTO –
more than 300 cases in ten years compared to the 300 disputes dealt with
during the entire life of GATT (1947-94).
14.5.7 Trade Policy Review

The Trade Policy Review Mechanism’s purpose is to improve transparency,
to create a greater understanding of the policies that countries are
adopting, and to assess their impact. Many members also see the reviews
as constructive feedback on their policies. All WTO members must undergo
periodic scrutiny, each review containing reports by the country concerned
and the WTO Secretariat.
480
14.5.8 Developing Countries’ Development and Trade

Over three-quarters of WTO members are developing or least developed
countries. All WTO agreements contain special provision for them, including
longer time periods to implement agreements and commitments, measures
to increase their trading opportunities, provisions requiring all WTO
members to safeguard their trade interests, and support to help them build
the infrastructure for WTO work, handle disputes, and implement technical
standards. The 2001 Ministerial Conference in Doha set out tasks, including
negotiations, for a wide range of issues concerning developing countries.
Some people call the new negotiations the Doha Development Round.
Before that, in 1997, a high-level meeting on trade initiatives and technical
assistance for least-developed countries resulted in an “integrated
framework” involving six intergovernmental agencies, to help least-
developed countries increase their ability to trade, and some additional
preferential market access agreements. A WTO Committee on Trade and
Development, assisted by a Sub-Committee on Least-Developed Countries,
looks at developing countries’ special needs. Its responsibility includes
implementation of the agreements, technical cooperation, and the
increased participation of developing countries in the global trading
system.
14.5.9 Technical Assistance and Training

The WTO organizes hundreds of technical cooperation missions to
developing countries annually. It holds on average three trade policy
courses each year in Geneva for government officials. Regional seminars
are held regularly in all regions of the world with a special emphasis on
African countries. Training courses are also organized in Geneva for officials
from countries in transition from central planning to market economies.
The WTO has set up reference centers in over 100 trade ministries and
regional organizations in capitals of developing and least-developed
countries. These centers provide computers and internet access to enable
ministry officials to keep abreast of events in the WTO through online
access to the WTO’s immense database of official documents and other
material. Efforts are also being made to help countries that do not have
permanent representatives in Geneva. The organization functions
predictably. It does this by administering trade agreements, acting as a
forum for trade negotiations, settling trade disputes, and reviewing
national trade policies.
481

1. Study the contents of the website www.wto.org for the latest
updations.
2. Enroll yourself in the SCM Forum on Linkedin to remain in touch with the
latest developments in SCM on a global level.
14.7 SUMMARY
• To make effective global supply chain management, it has become
necessary to consolidate into larger firm from the same nation.
• Clustering of suppliers in one place is effective in managing
competitiveness in global supplies.
• l Innovations in media and e-commerce have dramatically increased
market transparency.
• The main function of WTO is to ensure that trade flows as smoothly,
predictably and freely as possible.
• GATS provides developing countries with an opportunity to integrate into
the global economy through adopting more liberal policies with regard to
trade in services.
• The WTO’s rules – the agreements – are the result of negotiations
between the members.
• The WTO’s Intellectual Property Agreement amounts to rules for trade
and investment in ideas and creativity.
482

1. Write short note on ‘History of GATT’.
2. Explain in details the objectives of WTO.
3. With reference to the Global Supply Chain, give a brief description of
‘Role of Outsourcing’ and ‘Role of Transportation’.
4. Write short note on ‘Importance of Global Free Trade’.
5. What are the WTO Agreements? Give brief description of each.
6. How WTO has evolved? Give brief description of its structure and
operations.
483
1. The term WTO stands for_________

a. World Tourism Operations
b. Web Through Opportunities
c. World Trade Opportunities
d. World Trade Organisation
2. The head office of WTO is located at_________

a. London
b. Geneva
c. New York
d. Tokyo
3. The long form of GATT is_________

a. General Agreement on Tariff and Trade
b. General Agreement on Travel and Tourism
c. General Assignment of Trade and Travel
d. None of the above
4. WTO started its operations from the year_________

a. 1945
b. 1950
c. 2000
d. 1995
5. WTO helps its member countries for_________

a. Exports to USA
b. Political Stability
c. Global Free Trade
d. Increasing the tourism
Answers : (1-d), (2-b), (3-a), (4-d), (5-c).
484
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
485

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LEGAL ASPECTS IN SUPPLY

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Mr. Smitesh Bhosale

Prof. Dr. V.H. Iyer Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Course Editor

Prof. Dr. Swapna Pradhan Course Coordinators

Prof. Bijoy B. Bhattacharyya Ms. Kirti Sampat

Mr. P.M. Bendre Mr. Kishor Tamhankar

Mr. Ajay Prabhu

Mr. A.S. Pillai

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition, November 2021

Chapter No. Chapter Name Page No.

1 Supply Chain Management – Legal Aspects 4-13

1.1 INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

In the era of competitive market, every company or a service providing

1.2 DEFINITION OF SUPPLY CHAIN MANAGEMENT

Supply chain is the complete process of receiving a customer order,

Various independent suppliers, firms supplying products and service

According to the Supply Chain Council, U.S.A., the Supply Chain

Thus, the Supply Chain Management encompasses every effort involved in

1.3 THE EVOLUTION OF SCM

1904 – Traces of outsourcing was seen when Charles S. Rolls became

1975 -1980 – Companies began migrating from an inventory ‘push’ to

1980 – Emergence of SCM

1985 – WallMart introduced the concept of Cross-docking.

1996 – Internet revolutionized the distribution system of the business.

1998 – Concept of e-Commerce changed the definition of business and

1.4 VARIOUS TYPES OF LEGALITIES IN SCM

A company ‘ABC’ which is a public limited company, having its

10.Octroi/LBT Act at Pune – As may be applicable during the execution

1.5 IMPORTANCE OF LEGAL ASPECTS IN SCM

The following facts are to be considered while understanding the

A TYPICAL FLOW CHART IN A MANUFACTURING COMPANY

SUPPLY CHAIN MANAGEMENT IS A MUST FOR COST REDUCTION

1.6 ACTIVITIES FOR THE STUDENTS

1.8 SELF ASSESSMENT QUESTIONS

1.9 MULTIPLE CHOICE QUESTIONS

1. In SCM, C denotes which of the following?

2. SCM relates to the activity of –

3. SCM is applicable in case of following industry/activity –

4. In the term SCM, S denotes for –

5. SCM is to be effectively applied to mainly achieve the –

Answers : (1-b), (2-d), (3-d), (4-c), (5-a).

2.1 DEFINITION OF MERCANTILE LAW/COMMERCIAL LAW/

A point which should not be neglected is that Business Law is not

2.2 OBJECTIVES OF BUSINESS LAW

2.3 SOURCES OF MERCANTILE LAW

During the earlier days of constituting and implementation of the

Subsequently, need for the enactment of a uniform law regulating the

Sources of Mercantile Law in India :

2. Judicial Decisions and Precedents: Judicial decisions are usually

2.4 BUSINESS LAW – NEEDS AND NECESSITY

Each and every business has to be based on strong economics and

2.5 MERCANTILE LAW – SCOPE AND BOUNDARIES

The Companies Act, 1956 (Old); And

The Companies Act, 2013 (Latest Revised) Published on 29th

Recently revised due to changed conditions and importance of the stock

The Indian Contract Act, 1872