Legal Aspects of

Business
By:
Dr. Sugandha Sharma
Assistant Professor Management
Outline of the Sessions
• The Indian Contract Act, 1872
• The Sale of Goods Act, 1930
• The Negotiable Instruments Act, 1881
• The Consumer Protection Act, 1986
• Companies Act, 1956/ 2013
• Competition Act, Insolvency & Bankruptcy Code and Intellectual
Property Rights, Cyber Security, Introduction to SDG
“Law, like war, appears to be an
inescapable fact of the human condition”
• Law is an officially recognized, enforceable system of rules.

•General characteristic of Law

System of rules made by the state,
To regulate behavior in a society,
Imposed and enforcement by the Sovereign (State)
What is a legal system?
Set of legal principles and norms to protect and promote a secure
living in a society.
It recognizes rights and duties of people and provides the ways and
means of enforcing the same.
193+ countries = 193+ legal systems
Different legal systems may have different sets of principles and values,
making it different from one another.
Branches of Law
• International Law
• Constitutional Law
• Criminal Law
• Civil Law
• Business Law/ Mercantile Law
Business Law/ Mercantile Law
That branch of law that contains laws concentrating on trade, industry
and commerce
Indian Contract Act, 1872
Assumptions:
• There shall be freedom of contract to the contracting parties and law
shall enforce only what parties have agreed to be bound
• Expectations create by promises of the parties shall be fulfilled and
non fulfillment gives rise to legal consequencies
 Scheme of Act

• General Principles of Law of Contract (Sec 1-75)

• Specific kinds of Contracts:
• Contracts of Indemnity and Guarantee (Sec 124-147)
• Contracts of Bailment and Pledge (Sec 148-181)
• Contracts of Agency (Sec 182-238)
Definition of Contract:
• According to section 2 (h) of ICA, “ An agreement enforceable by Law
is a contract”.
Agreement:
• An agreement is an accepted proposal
• To form an agreement, there must be a proposal/ offer by one party
and its acceptance by the other
• Types of agreement
Legal Obligations:
• It is a legal tie which imposes upon a definite person(s) the necessity
of doing or abstaining for doing a definite act(s)
Essential elements of a valid
contract
• Offer and Acceptance
• Intention to create legal relationship
• Lawful consideration
• Capacity of the parties
• Free consent
• Lawful object
• Possibility of performance
• Certainty of terms
• Agreement not expressedly declared void
• Legal formalities
Legal Rules for a Valid Offer:
• An offer may be expressed or Implied
• The offer must be capable of creating a legal relationship
• The terms of the offer must be certain and not vague
• The offer must be well communicated to the other party
• An offer must be made with a view to obtain the consent of the offeree
• An offer should not contain a term the non compliance of which would
amount to acceptance
• An offer can be made subject to ant terms and conditions
• An invitation too offer is not an offer
Legal Rules for a Valid Acceptance:
• Acceptance must be given only to the person to whom the offer is
made
• Acceptance must e communicated by the accepter
• Acceptance must be absolute and unqualified
• Acceptance must be given within the time prescribed
• Acceptance must succeed the offer
• Acceptance must be given before the lapse of the offer
• Rejected offer can be accepted only if renewed
• Acceptance cant be presumed n silence
Lapse and Revocation of offer (Sec-
6)
• By notice
• By the lapse of time
• By failure of the condition precedent
• By death or insanity
• By refusal
• By not accepting the offer in the prescribed/ usual mode
Classification of Contracts
• Classification according to Validity
• Valid
• Void
• Voidable
• Classification according to Formation
• Expressed
• Implied
• Quasi
• E-commerce
• Classification according to Performance
• Executed
• Executory
• Unilateral
 Termination/ Discharge of a Contract
• Meaning
• Modes of Termination of a Contract:
• By Performance (Actual/Attempted)
• By Mutual consent/ Agreement (Novation/Alteration/Recission/Remission/Waiver)
• By Subsequent/ supervening impossibility- void ab initio (Destruction of subject
matter/Change of law/Change of circumstances/Death(Insanity)/Outbreak of war)
• By Operation of Law (Death/Insolvency/Merger)
• By Lapse of time
• By Breach of contract (Actual/Anticipated)
Remedies for breach of Contract
• Suit for Rescission
• Suit for Damages
• Types of Damages (Ordinary/ Compensatory Damages, Special Damages,
Vindictive/Exemplary Damages, Nominal Damages)
• Rules regarding award of damages:
• Compensation not penalty
• Limited damages
• Damages for attributable losses
• Mitigation of losses
• Damages in case of contract of sale of good
• Cost of suit
• Suit for Quantum Meruit
• Suit for Specific Performance
• Suit for Injuction
SPECIFIC KINDS OF CONTRACTS
• Contract of Bailment
• Contract of Pledge
• Contract of Indemnity
• Contract of Guarantee
• Contract of Agency
1. Bailment:
• Meaning
• Characteristics
• Classification
• Difference b/w Bailment and Sale
• Rights and Duties of a Bailor
• Rights and Duties of a Bailee
• Finder of lost goods
• Termination of Bailment
Meaning
A bailment is a transaction whereby one person delivers the goods to
another person for some purpose, upon a contract that they are, when
the purpose is accomplished to be returned or otherwise disposed off
according to the directions of the persons delivering them.
Characteristics
• Contract
• Purpose
• Delivery of the possession
• Return of specific goods
• Ownership
• Consideration
• Movable goods
• Bailor/ Bailee
Classification
• Benefits delivered by the parties
• Exclusive benefits of Bailor
• Exclusive benefits of Bailee
• Mutual benefits of Bailor and Bailee
• Rewards to the parties
• Gratuitous Bailment
• Non-Gratuitous Bailment
Difference b/w Bailment and Sale
Rights and Duties of a Bailor
RIGHTS
• Enforcement of Bailee’s Duties
• Right to terminate bailment if the bailee uses the goods wrongfully
• Right to demand return of goods at any time in case of gratuitous bailment
• Compensation for a wrong doer
Duties
• Duties to disclose faults in goods bailed (Case of Gratuitous and Non Gratuitous)
• Duty to repay necessary expenses in case of gratuitous bailment
• Duty to repay any extra ordinary expenses in case of non- gratuitous bailment
• Duty to receive the goods back
• Duty to indemnify bailee
Rights and Duties of a Bailee
RIGHTS
• Enforcement of Bailor’s Duties
• Right to deliver goods to one of the several joint bailor
• Right to apply to court to stop delivery of goods
• Bailee’s lien

Duties
• To take reasonable care of goods bailed
• Not to make any unauthorized use of goods
• Not to mix the goods bailed with his own goods
• To retain any accretion to the goods
• To return the goods
Lien
• It means right of a person to retain possession of some goods
belonging to another until some debt/claim of the person in
possession is satisfied
• It pertains to the to the person who has possession of the goods
which belong to another entitling him/her to retain them until the
debt due to him/her has been paid
• Types:
• General Lien
• Particular Lien
Finder of lost goods
• Rights of finder of lost goods
• Right to take possession of goods until the owner of the goods is found
• Right of lien
• Right to sue for reward
• Right of sale
• Duties of finder of lost goods
• He must take a reasonable care of goods
• The finder of the goods and if inspite of this goods are destroyed he is NOT
responsible for any loss
• The finder must try to find out the true owner
• He must not use the goods for his own purpose
• H must not mix the goods with his own goods
Termination of Bailment
• On the expiry of time period
• On the achievement of the objective/ purpose
• Inconsistent use of goods
• Destruction of subject matter
• Goods lent gratuitously
• Death of bailor/ bailee
 Contract of Pledge
• The bailment of goods as a security for payment of debt or
performance of a promise is called as Pledge
• It is bailment for security
• It is a special kind of bailment
• Features:
• Movable property
• Delivery should be on conditions of return
• Delivery of possession
• Delivery should be for a purpose
Similarities between Bailment and
Pledge
• Agreement
• Involves only transfer of possession of goods
• Ownership remains with the Bailor and Pledger
• Goods are returned on fulfillment of the objective
Differences
• In case of Pledge delivery of goods is only for the purpose of security
• The goods pledged can also be sold by giving prior notice but in
bailment they can only be retained
• Pledger cannot use the goods
Rights of Pledger: Rights of Pledgee:
• Enforcement of Pledgees duties • Right of retainer
• Defaulting pledger right to redeem • Right of retainer for subsequent
anytime before the goods are sold pledge
• Reservation and maintenances • Right of extraordinary expenses
• Right to get the goods back • Pledgee rights where pledger makes
Duties of Pledger: default
• To compensate pledgee for any Duties of Pledgee:
extraordinary expenses incurred by • Take reasonable care of goods
him delivered
• To meet his obligations on • Duty not to make unauthorized use
stipulated date and comply with the of goods
terms of the contract • Duty not to mix goods pledged with
his own goods
• Duty to return the goods
• Duty to deliver any accretion
 Contract of Indemnity
• A contract by which one party promises to save the other from loss
caused to him by the conduct of any other persons
• This contract is entered with the objective of protecting the promise
against anticipated loss
• Parties to the contract are : Indemnifier and Indemnity holder
• Life insurance is not a contract of indemnity and it falls under
Principles of Insurance under ICA 1872
Rights of Indemnity Holder:
• All damages which he may be compelled to pay in any suit in
respect of any matter to which the promises to indemnify
applies
• All costs which he may be compelled to pay in such a suit
provided he acted prudently or within the authority of the
indemnifier
• The compromises should not be contrary to the orders of
indemnifier and should be authorized by indemnifier
Rights of Indemnifier
• The ICA is silent regarding the rights of Indemnifier but under
English laws rights of indemnifier are analogous to Rights of
Surety
 Contract of Guarantee
• It is a contract of performance i.e. to perform the promise or to
terminate the liability of a third person in case of his default
• It’s a tripartie agreement and there are three separate contracts :
• Surety (the person who gives guarantee)
• Principal Debtor (the person in respect of whose default the guarantee is
given)
• Creditor (The person to whom the guarantee is given)
• The primary liability is of the principal debtor and liability of surety is
secondary
Kinds of Guarantee
• Absolute Guarantee
• Conditional Guarantee
• Retrospective Guarantee
• Prospective Guarantee
• Limited Guarantee
• Unlimited Guarantee
• Continuing Guarantee
 Contract of Agency
• It connotes the relation that exists where one person has the
authority or capacity to create legal relations between person
occupying the position of principal and third parties
• Can minor act like an Agent?
• Essentials of Agency
• It can be expressed or Implied
• Principal must be competent to contract
• The consideration is not necessary (Under Sec 185 if a person has agreed to
be bound by the act of others, it is a sufficient consideration to support the
transaction of Agency)
Tests of Agency
• If a person has been granted a status under which he can represent
the other person in dealings with the third person and can establish a
privity of contract between the two parties, thus legally binds the
person (he is representing) then he would be called as an agent.
• Who can appoint an Agent?
• Why an Agent is appointed?
• Agent v/s Servant
What are the various kinds of Agents and what are their responsibilities?
• Termination of Agency:
• By the act of parties
• The business of agency is completed
• Revocation by the principal
• Revocation by the Agent
• By the operation of law
• Dissolution of the company
• Performance of the contract
• Expiry of the time Period
• Insanity / Insolvency/ Death of either of the party
 Contract of Sale of goods
Law relating to sale of goods is contained in the Sale of Goods Act
1930. This act contains 66 Sections
“A contract whereby seller transfers or agrees to transfer the
property in goods to the buyer for a price “
Essential Characteristics:
• Two Parties
• Transfer of property
• Goods
• Price
• Includes both Sale and Agreement to Sell
Differences in Sale and Agreement
to sell
• Ownership
• Risk of Loss
• Consequences of Breach
• Right for Resale
Kinds of Goods:
• Existing Goods
• Specific Goods
• Unascertained Goods
• Future Goods
• Contingent Goods
Conditions and Warranties:
• A contract of sales of goods contains various items (Stipulations) but
not all have equal importance
• Some stipulations are major called as Conditions (Law of Sale of Major
terms)
• Some stipulations are minor called as Warranties (Law of Sale of
Minor terms)
Basis Conditions Warranties

As to Value Essential to the main purpose of Collateral to the main purpose of

the contract the contract

As to breach Can result into refusal of contract Gives aggrieved party the right to
and claim for damages claim damages only

As to treatment Breach of Condition can be treated Breach of Warranty cannot be

as breach of warranty treated as breach of Condition
When the breach of Condition is
treated as breach of Warranty
• Voluntary waiver by Buyer
• Acceptance of goods
Implied Conditions
It is when the law presumes their existence in a contract automatically
• Condition as to title
• Condition in sale by description
• Condition in sale by sample
• Condition in sale by sample as well as description
• Condition as to fitness or quality
• Condition as to Merchantability
• Condition as to wholesomeness
Implied Warranties
• Warranty of quiet possession
• Warranty of disclosing dangerous nature of goods to ignorant buyer
Doctrine of Caveat Emptor : The
maxim of caveat emptor means “Let
the buyer Beware”
Exceptions to doctrine of caveat emptor:
• Where the seller makes misrepresentations
• Where seller makes false representations amounting to fraud
• Where goods are purchased by description and they do not
correspond with the description
• Where the goods are not of merchantable quality
• Where goods are bought by sample
• Where goods are bought by sample as well as description
• Where the buyer makes the purpose of purchase known to seller
Transfer of Property:
When does property passes to the buyer from the
seller
• Risk prima facie passes with the property
• Action against third parties
• Suit for price
• Insolvency of buyer/ seller
Rules regarding transfer of property:
When the goods are in deliverable state
When the goods have to be put to deliverable state
When the goods have to be measured to ascertain the price
When goods are delivered on approval
Unpaid Seller
Seller is deemed to be unpaid seller when:
a) Whole of the price has not been paid
b) Some instrument has been received as a conditional payment and
that gets dishonored

If sale is on credit, is seller unpaid?

Characteristics:
• Must sell the goods on cash and not on credit and he must be unpaid
• Must be unpaid either wholly or partially
• Must not refuse to accept the payment when tendered
Rights of Unpaid Seller
• Rights of unpaid seller against the goods:
• Right of lien
• Right of stoppage of goods in transit
• Right of resale

• Rights of unpaid seller against the buyer personally:

• Suit for price
• Suit for damages for non acceptance
• Suit for special damages and interest
Buyer’s Rights against the seller
• Suit for damages for non delivery
• Suit for specific performance
• Suit for damages for breach of warranty
• Suit for recovery of price together with interest
Negotiable Instruments
Negotiable means “Transfer by delivery”
Instrument means written document by which a right is created in favor
of some person
Therefore, Negotiable Instrument means written document
transferable by delivery
• Payable to order
• Payable to bearer
The law relating to “negotiable instruments” is contained in Negotiable
Instruments Act 1881
Features
• It should be in writing and signed by its maker
• It must contain an unconditional promise or order to pay a definite amount
• It must be paid either to order/ bearer
• An instrument payable by order is negotiable by endorsement and an
instrument payable to bearer is negotiable by mere delivery
• A person taking an instrument bonafide for value and before maturity is
known as holder in due course, gets the instrument free from all defects in
the title of the transferer
• Every negotiable instrument is presumed to been made, drawn, accepted,
endorsed, negotiated, or transferred for consideration
Presented for Presentation
Endorsement
acceptance for payment
Holder
Holder means the bearer of the instrument and the endorsee/ payee of
the ordered instrument.
Is an agent holding an instrument for his principal a holder?
A person is called holder of a negotiable instrument if he satisfies
following two conditions:
• He must be entitled to the possession of the instrument in his own name
• He must be entitled to receive or recover the amount due on the instrument
from the party liable under the instrument
Holder in due course
Holder in due course must satisfy the following conditions:

• He obtained the instrument for valuable consideration

• He became the holder of the instrument before maturity
• He became the holder of the instrument in good faith
• He must receive the instrument complete and regular on the face of it
Rights and Privileges of Holder in
due course
• The defects of the instrument are eliminated
• Liability of prior parties to holder in due course
• Right in case inchoate stamp instrument
• Bills of Exchange
• Promissory notes
• Cheque
Promissory note
• It is an instrument in writing containing an unconditional promise signed by
the maker, to pay a certain sum of money only to or to order thereof or to
the bearer of the instrument
• Essentials of a promissory note:
• It must be in writing
• It must contain a promise or undertaking to pay
• The promise must be unconditional
• It must be signed by the maker
• The maker must be a certain person
• The payee must be certain
• The sum payable must be certain
• The amount payable must be a legal tender money of India
Bills of exchange
• It is an instrument in writing containing an unconditional order, signed
by 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
• Essentials of bills of exchange
• It must be in writing
• It must contain order to pay
• It must be signed by the drawer
• Drawer, drawee and payee must be certain
• The sum payable must be certain
• The bill must contain an order to pay money only
Cheque
A cheque is a bill of exchange drawn on specified banker and not
expressed to be payable otherwise than on demand
• Characteristics:
• It is always drawn on a bank
• It is always payable on demand
• It is authenticated by the handwritten signature or by digital signature
Crossing of Cheque
• Uncrossed- payable at counter of the drawer bank on the presentation
of the cheque. It runs at a great risk as tracing is very difficult
• Crossed- payable only through a collecting banker and has a lot of
security and the payment can easily be traced

• Types of crossing:
• General Crossing
• Special Crossing
• Not negotiable Crossing
• Restrictive crossing