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Master of Business Administration MBA Semester 3 MB0051 Legal Aspects of Business Assignment Set- 1

Q.1 Explain the characteristics of law and briefly describe the sources of Indian Law. [10 marks] Ans : The term law is used in many senses; you may speak of the law of physics, mathematics, science, or the laws of the football or health. In its widest sense, law means any rule of conduct, standard or pattern, to which actions are required to conform; if not conformed, sanctions are imposed. Characteristics of Law : 1. Law is a body of rules : These rules prescribe the conduct, standard or pattern to which actions of the persons in the state are required to conform. However, all rules of conduct do not become law in the strict sense. We resort to various kinds of rules to guide our lives. For example, our conduct may be guided by a rule such as do not be arrogant or do not be disrespectful to elders or women. These are ethical or moral rules by which our daily lives are guided. If we do not follow them, we may lose our friends and their respect, but no legal action can be taken against us. 2. Law is for the guidance or conduct of persons both human and artificial : The law is not made just for the sake of making it. The rules embodies in the law are made, so as to ensure that actions of the persons in the society conform to some predetermined standard or pattern. This is necessary so as to ensure continuance of the society. No doubt, if citizens are self-enlightened or self-controlled, disputes may be minimized, but will not be eliminated. Rules are, therefore, drawn up to ensure that members of the society may live and work together in an orderly manner. Therefore, if the rules embodied in the law are broken, compulsion is used to enforce obedience, and certain consequences ensue. 3. Law is imposed : Law is imposed on the members to bring about an order in the group, enabling it to continue and prosper. It is not something which may or may not be obeyed at the sweet will of the members of society. If you cannot impose a rule it is better not to have it. Thus, law is made obligatory on the members of the society. 4. Law is enforced by the executive : Obviously, unless a law is enforced it ceases to be a law and those persons subject to it will regard it as dead. For example, if A steals Bs bicycle, he may be prosecuted by a court and may be punished. Also, the court may order the restitution of the bicycle to its rightful owner i.e., B if government passes many laws but does not attempt to enforce them, the citizens lose their respect for government and law, and society is greatly weakened. The force used is known as sanction which the state administers to secure obedience to its laws. 5. The state : A state is a territorial division, with people therein subject to a uniform system of law administered by some authority of the state. Thus, law presupposes a state. 6. Content of law : The law is a living thing and changes throughout the

course of history. Law responds to public opinion and changes accordingly. Law can never be static. Therefore, amendments are made in different laws from time to time. For example, the Monopolistic and Restrictive Trade practices Act, 1969 has been subjected to many amendments since its inception in 1969. 7. Two basic ideas involved in law : The two basic ideas involved in any law are : (i) to maintain some form of social order in a group and (ii) to compel members of the group to be within that order. These basic ideas underline formulations of any rules for the members of a group. A group is created because first, there is a social instinct in the people to live together and secondly, it helps them in self-preservation. Rules are made by the members of the group, so that the group doesnt whither away. 8. Law is made to serve some purpose which may be social, economic or political : Some examples of law in the widest sense of the term. Law in its widest sense may include : (i) Moral rules or etiquettes, the nonobservance of which may lead to public ridicule, (ii) Law of Land the nonobservance of which may lead to arrest, imprisonment, fines, etc. (iii) Rules of international law, the non-observance of which may lead to social boycott, trade-sanctions, cold war, hot war, proxy war, etc. The main sources of modern Indian Law, as administered by Indian courts, may be divided into two broad categories : (i) Primary Sources and, (ii) Secondary Sources. Primary Sources of Indian Law: The primary sources of Indian law are : (a) customs, (b) Judicial precedents (c) statutes and (d) personal Law. Customary Law : In Simple words it is the uniformity of conduct of all persons under like circumstances. It is generally observed course of conduct by people on a particular matter. Judicial precedents are an important source of law It is based on the principle that a rule of law which has been settled by a series of decisions generally should be followed in similar cases. These rules of law are known as judicial precedents. Statute an important source of law The statutes or the statutory law or the legislation is the main source of law. This law is created by legislation such as Parliament. It is sometimes called enacted law as it is brought into existence by getting Acts passed by the legislative body. Personal Law : Many times, a point of issue between parties to a dispute is not covered by any statute or custom. In such cases, the courts are required to apply the personal law of the parties. Secondary Sources of Indian Law : The secondary sources of Indian Law are English Law and Justice, Equity and

Good Conscience. English Law The chief sources of English Law are : (i) the common Law, (ii) Equity, (iii) The law Merchant and (iv) The Statute Law. Even though the bulk of our law is based on and follows the English law, yet in its application our courts have to be selective. It is only when the courts do not find a provision on a particular problem in the primary sources of Indian law that it may look to subsidiary sources such as English Law. Q.2 Suman is an agent. In an agency contract, what will be Sumans rights and duties? Explain. [10 marks] Ans : Duties of Agent: The duties of agent towards his principal are : 1. To conduct the business of agency according to the principals directions (Sec. 211). The duty of the agent must be literally complied with i.e. the agent is not supposed to deviate from the directions of the principal even for the principals benefit. If he does so, any loss occasioned thereby shall have to be borne by the agent, whereas any surplus must be accounted for to the principal. 2. The agent should conduct the business with the skill and diligence that is generally possessed by persons engaged in similar business, except where the principal knows that the agent is wanting in skill. 3. To render proper accounts (Sec. 213) The agent has to render proper accounts. If the agent fails to keep proper accounts of the principals business, everything consistent with the proved facts will be presumed against him. Rendering of accounts does not mean showing the accounts, but maintaining proper accounts supported by vouchers. 4. To communicate with the principal in case of difficulty (Sec. 214) It is the duty of agent, in case of difficulty, to use all reasonable diligence, in communicating with his principal and in seeking to obtain his instructions. In case of emergency, however, the agent can do all that a reasonable man would, under similar circumstances, do with regard to his own business. He becomes agent by necessity. 5. Not to make any secret Profits. Agent should deliver to the principal all moneys including secret commission received by him. He can, however, deduct his lawful expenses and remuneration. 6. Not to deal on his own account. Agent should not deal on his own account without first obtaining the consent of his principal. If he does so, the principal can claim from the agent any benefit which he might have obtained. 7. Not entitled to remuneration for misconduct (Sec. 220). Agent who is guilty of misconduct in the business of agency is not entitled to any remuneration in respect of that part of the business which he has misconduct. 8. Not to disclose confidential information supplied to him by the principal.


To take all reasonable steps for the protection and preservation of the interests entrusted to him when the principal dies or becomes of unsound mind (Sec 209).

Rights of Agents Agents has a number of rights these are : 1. Right to remuneration (Sec. 219-220). Agent is entitled to his agreed commission or remuneration and if there is no agreement, to a reasonable remuneration. But the remuneration does not become payable unless he has carried out the object of agency, except where there is a contract to the contrary. When the object of agency is deemed to have been carried out or the act assigned to the agent is completed would depend on the terms of the contract. 2. Right of retainer (Sec 217). Agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business and also such remuneration as may be payable to him for acting as agent. This is known as agents right of retainer. 3. Right of Lien (Sec . 221). In the absence of any contract to the contrary, agent is entitled to retain goods, papers and other property, whether movable or immovable of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. This lien of the agent is a particular lien confined to all claims arising in respect of the particular goods and property. By a special contract, however, agent may get a general lien extending to all claims arising out of the agency. Since, the word lien means retaining possession, it can be enjoyed by the agent only where the goods or papers are in actual or constructive possession of the agent. The right of lien will, therefore, be lost where he parts with the possession of goods or papers. But if the possession is obtained from the agent by fraud or unlawful means, his lien is not affected by the loss of possession. 4. Right of stoppage in transit. The agent can stop the goods while in transit in two cases : (a) where he has purchased goods on behalf of the principal either with his own funds, or by incurring a personal liability for the price, he stands towards the principal in the position of an unpaid seller. Like an unpaid seller, he enjoys the right of stopping the goods in transit if in the meantime the principal has become insolvent. (b) Where agent holds himself liable to his principal for the price of the goods sold, For E.g. del credere agent, he may exercise the unpaid sellers right of stopping the goods in transit in case of buyers insolvency. 5. Right of Indemnification (Secs. 222-224) The principal is bound to indemnify agent against the consequences of all lawful acts done by the agent in exercise of authority conferred on him. Q.3. a. What is a contract of indemnity? Explain? [5 marks] Ans : Sec. 124 and 125 for a contract of indemnity. Sec. 124 provides that a contract

of indemnity is a contract whereby one party promises to save the other from loss caused to him (the promisee) by the conduct of the promisor himself or by the conduct of any other person. A contract of insurance is a glaring example of such type of contracts. A contract of indemnity may arise either by (i) an express promise or (ii) operation of law, e.g. the duty of a principal to indemnify an agent from consequences of all lawful acts done by him as an agent. The contract of indemnity, like any other contract, must have all the essentials of a valid contract. These are two parties in a contraction of indemnifier and indemnified. The indemnifier promises to make good the loss of the indemnified (i.e. the promisee). Example : A contracts to indemnify B against the consequences of any proceeding which C may take against B in respect of a certain sum of Rs. 200. This is a contract of indemnity. b. Mention the features of different kinds of guarantees. [5 marks]
Oral or written guarantee A contract of guarantee may either be oral or in writing (Sec.126), though a creditor should always prefer to put it in writing to avoid any dispute regarding the terms, etc. In case of an oral agreement the existence of the agreement itself is very difficult to prove.

Specific and continuing guarantee From the point of view of the scope of guarantee a contract of guarantee may either by specific or continuing. A guarantee is a specific guarantee, if it is intended to be applicable to a particular debt and thus comes to end on its repayment. A specific guarantee once given is irrevocable. Example: A guarantees the repayment of a loan of Rs. 10,000 to B by C (a banker). The guarantee in this case is a specific guarantee. A guarantee which extends to a series of transactions is called a continuing guarantee (Sec.129) Example: A guarantees payment to B, a tea-dealer, to the amount of Rs. 10,000 for any tea he may from time to time supply to C. B supplies C with tea of the value above Rs. 10,000 and C pays B for it. Afterwards B supplies C with tea to the value of Rs. 15,000. C fails to pay. The guarantee given by A was a continuing guarantee and he is accordingly liable to B to the extent of Rs. 10,000. A guarantee regarding the conduct of another person is a continuing guarantee. Unlike a specific guarantee which is irrevocable, a continuing guarantee can be revoked regarding further transactions (Sec.130). However, continuing guarantee cannot be revoked regarding transactions that have ready taken place.

The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions. (Sec.131). A guarantee may either be for the whole debt or a part of the debt Difficult questions arise in case of guarantee for a limited amount because there is an important distinction between a guarantee for only a part of the whole debt and a guarantee for the whole debt subject to a limit. For instance, where X owes Y Rs 50,000 and A has stood as surety for Rs. 30,000, the question may arise whether A has guaranteed Rs. 30,000 out of Rs. 50,000 or whether he has guaranteed the full amount of Rs. 50,000 subject to a limit of Rs. 30,000. This matter becomes important if X is adjudged insolvent and Y wants to prove in Xs insolvency and also enforce his remedy against A. If A stood surety only for a part of the debt and if Xs estate can pay only 25 paisa dividend in the rupee, then Y can get Rs. 30,000 the full amount of guarantee from A and Rs. 5,000 from Xs estate, being of the balance, i.e., Rs. 50,000 Rs. 30,000 = Rs. 20,000 which was not guaranteed. Since after paying Rs. 30,000 to Y, A can claim from Xs estate, he will get Rs. 7,500 being of Rs. 30,000 paid by A to Y. If on the other hand, A had stood surety for the whole debt of Rs 50,000 subject to a limit of Rs. 30,000 then Y can recover from A Rs. 30,000 and from Xs estate Rs. 12,500, i.e., of Rs. 50,000. A will not get any dividend unless Y has been fully paid. This can happen only if Xs estate declares a higher dividend.

Q.4. Divya, Vidya and Rajendra want to start a partnership firm dealing with designer jewelery. Explain to them the different elements in a Partnership deed and other aspect of a partnership firm. [10 marks] Ans : A partnership is defined as the relationship between persons who have agreed to share profits of a business carried on by all, or by any of them acting for all. On analysis of the definition, certain essential elements of partnership emerge. These elements must be present so as to form a partnership and are discussed below. 1. Partnership is an association of two or more than two persons. There must be at least two persons who should join together to constitute a partnership, because one person cannot become a partner with himself. These persons must be natural persons having legal capacity to contract. Thus, a company (which is an artificial person) cannot be a partner. Similarly, a partnership firm cannot be a partner of another partnership firm. As regards maximum number of partners in a partnership firm, Sec.11 of the Companies Act, 1956, puts the limit at 10 in case of banking business and 20 in case of any other business. 2. Partnership must be the result of an agreement between two or more persons.

An agreement presupposes a minimum number of two persons. As mentioned above, a partnership to arise, at least two persons must make an agreement. Partnership is the result of an agreement between two or more persons (who are known as partners after the partnership comes into existence). 3. The agreement must be to carry on some business. The term business includes every trade, occupation or profession [Sec.2(b)]. Though the word business generally conveys the idea of numerous transactions, a person may become a partner with another even in a particular adventure or undertaking (Sec.8). Unless the person joins for the purpose of carrying on a business, it will not amount to partnership. 4. The agreement must be to share profits of the business. The joint carrying on of a business alone is not enough; there must be an agreement to share profits arising from the business. Unless otherwise so agreed, sharing of profits also involves sharing of losses. But whereas the sharing of profits is an essential element of partnership, sharing of losses is not. Example: A, a trader, owed money to several creditors. He agreed to pay his creditors out of the profits of his business (run under the creditors supervision) what he owed to them. Held, the arrangement did not make creditors partners with A in business [Cox v. Hickman, (1860) 8 H.L.C., 268]. Q. 5 a. Explain the rights of unpaid seller. [5 marks] Ans : A contract is comprised of reciprocal promises. In a contract of sale, if seller is under an obligation to deliver goods, buyer has to pay for it. In case buyer fails or refuses to pay, the seller, as unpaid seller, shall have certain rights. Who is an unpaid seller? A seller of goods is an unpaid seller when (i) the whole of the price has not been paid or tendered. (ii) a bill of exchange or other negotiable instrument has been received as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise. Rights of an unpaid seller The rights of an unpaid seller may broadly be classified under two heads, namely: (i) Rights under the Secs.73-74 of the Indian Contract Act, 1872, i.e., to recover damages for breach of contract. (ii) Rights under the Sale of Goods Act, 1930: (a) rights against the goods; (b) rights against the buyer personally. The rights against the goods are as follows: Lien on goods (Secs. 47-49) The word lien means to retain possession of. An unpaid seller who is in possession of goods is entitled to retain them in his possession until payment

or tender of the price in three situations, namely, (a) where the goods have been sold without any stipulation 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. Lien can be exercised only for non-payment of the price and not for any other charges due against the buyer. For Example, the seller cannot claim lien for godown charges for storing the goods in exercise of his lien for the price. Right of stoppage in transit This right of the unpaid seller consists in preventing the goods from being delivered to the buyer and resuming and regaining their possession while in transit, retaining them till the price is paid. The right of stoppage in transit is earned only where the right of lien is lost and is available only where the buyer has become insolvent (Sec.50).

Right of resale (Sec.54) The unpaid seller, who has retained the possession of the goods in exercise of his right of lien or who has resumed possession from the carrier upon insolvency of the buyer, can resell the goods, (i) if the goods are of a perishable nature, without any notice to the buyer and (ii) in other cases after notice to buyer calling upon him to pay or tender the price within a reasonable time and upon failure of the buyer to do so.

b. What are the remedies available for breach of contract? [5 marks] Ans : When someone breaches a contract, the other party is no longer obligated to keep its end of the bargain. From there, that party may proceed in several ways: (i) the other party may urge the breaching party to reconsider the breach; (ii) if it is a contract with a merchant, the other party may get help from consumers associations; (iii) the other party may bring the breaching party to an agency for alternative dispute resolution; (iv) the other party may sue for damages; or (v) the other party may sue for other remedies. Rescission of the contract: When a breach of contract is committed by one party, the other party may treat the contract as rescinded. In such a case the aggrieved party is freed from all his obligations under the contract. Damages (Sec.75): Another relief or remedy available to the promisee in the event of a breach of promise by the promisor is to claim damages or loss arising to him there from. Damages under Sec.75 are awarded according to certain rules as laid down in Secs.73-74. Sec.73 contains three important rules: (i) Compensation as general damages will be awarded only for those losses that directly and naturally result from the breach of the contract. (ii)

Compensation for losses indirectly caused by breach may be paid as special damages if the party in breach had knowledge that such losses would also follow from such act of breach. (iii) The aggrieved party is required to take reasonable steps to keep his losses to the minimum. What is the most common remedy for breach of contracts: The usual remedy for breach of contracts is suit for damages. The main kind of damages awarded in a contract suit are ordinary damages. This is the amount of money it would take to put the aggrieved party in as good a position as if there had not been a breach of contract. The idea is to compensate the aggrieved party for the loss he has suffered as a result of the breach of the contract. Q. 6. a. Discuss the essentials of a valid contract. [6 marks] Ans : Contract A contract is an agreement, enforceable by law, made between at least two parties by which rights are acquired by one and obligations are created on the part of another. If the party, which had agreed to do something, fails to do that, then the other party has a remedy. Example: D Airlines sells a ticket on 1 January to X for the journey from Mumbai to Bangalore on 10 January. The Airlines is under an obligation to take X from Mumbai to Bangalore on 10 January. In case the Airlines fails to fulfil its promise, X has a remedy against it. Thus, X has a right against the Airlines to be taken from Mumbai to Bangalore on 10 January. A corresponding duty is imposed on the Airlines. As there is a breach of promise by the promisor (the Airlines), the other party to the contract (i.e., X) has a legal remedy. Agreement Sec.2(e) defines an agreement as every promise and every set of promises forming consideration for each other. In this context, the word promise is defined by Sec.2(b). In a contract there are at least two parties. One of them makes a proposal (or an offer) to the other, to do something, with a view to obtaining the assent of that other to such act. When the 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 (Sec.2(b)). Enforceability by law: The agreement must be such which is enforceable by law so as to become a contract. Thus, there are certain agreements which do not become contracts as this element of enforceability by law is absent. Essentials of a contract Sec.10 provides that all agreements are contracts, if they are made by free consent of parties, competent to contract, for a lawful consideration, and with a lawful object, and are not expressly declared by law to be void. To constitute

a contract, there must be an agreement between two or more than two parties. No one can enter into a contract with himself. An agreement is composed of two elements offer or proposal by one party and acceptance thereof by the other party. Effect of absence of one or more essential elements of a valid contract: If one or more essentials of a valid contract are missing, then the contract may be either voidable, void, illegal or unenforceable. b. What is consideration? Give some examples. Ans : One of the essential elements of a valid contract is that it must be supported by consideration. In simple terms consideration is what a promisor demands as the price for his promise. The term consideration is used in the sense of quid pro que, i.e., something in return. This something or consideration need not be in terms of money. This something may even be some benefit, right, interest or profit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party. Also a promise by one party may be consideration for the promise of other party. No consideration, no contract (Secs.10 and 25) A promise without consideration cannot create a legal obligation. A person who makes a promise to do or abstain from doing something usually does so as a return of equivalent of some loss, damage, or inconvenience that may have or may have been occasioned to the other party in respect of the promise.