CC-302 LEGAL ASPECTS OF BUSINESS INDEX NO.

1 2 3 4 5 6 7 8 9 10 11 12 CONTENTS INDIAN CONTRACT ACT,1872 SPECIAL CONTRACTS INDIAN COMPANIES ACT, 1956 NEGOTIABLE INSTURMENT ACT, 1881 SALE OF GOODS ACT,1930 CONSUMER PROTECTION ACT,1986 INFORMATION TECHNOLOGY ACT, 2000 THE PATENTS ACT,1970 THE TRADE MARKS ACT THE COPYRIGHTS ACT,1957 ENVIRONMENT PROTECTION ACT PRACTICAL PROBLEMS AND SOLUTIONS PAGE NO 1-27 28-53 54-80 81-89 90-96 97-106 107-114 115-119 120-126 127-133 134-139 140-146

INDIAN CONTRACT ACT, 1872

Q1. Define Contract. Explain the essential elements of a valid contract? A1. Contract in simple language is called an Agreement. Sec: 2(h).

An agreement enforceable by Law is a contract. According to Salmond: - An agreement creating legal obligations between the parties is called contract. Thus we can say that 5 CONTRACT = AGREEMENT+ LEGAL OBLIGATION AGREEMENT:- Sec 2(c) Every promise and every set of promises, forming the consideration for each other, is an agreement. Agreement is an accepted offer when accepted becomes an Agreement. Therefore AGREEMENT= OFFER + ACCEPTANCE & CONTRACT = OFFER + ACCEPTANCE + LEGAL OBLIGATION

o Thus Every Contracts are agreements but all agreements are not contracts. In order to
make a valid Contract, the parties must have intention to create legal relationship. There must be legal enforceability of an Agreement then only it can became a valid Contract.

o When the parties have no intentions to create legal relations, the Agreement is mere a
social agreement or domestic Agreement or a friendly Agreement. For e.g. X invites Y to a Tea party. Y accepts the O and reaches to the place. X is not found there, now Y cannot sue against X because the parties do not have any intention to create legal relationship. Here Agreement was mere Friendly Agreement. Moreover, According to Section 2(j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. How Contract is made Possible? OFFER / PROPOSAL When one party asks to do something he is said to have made an offer. According to Section 2(a) When one person signifies to another his willingness to do or to 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. ACCEPTANCE According to Section 2(b) When one person to whom the proposal is made, signifies his accent there to the proposal is said to be accepted. A proposal when accepted becomes a promise. OFFER & ACCEPTANCE may be I. by oral II. by written III. by conduct

3 ESSENTIAL ELEMENTS OF A VALID CONTRACT 1) 2) OFFER & ACCEPTANCE: - [2(a), 2(b)] There must be minimum two parties entering into a Contract. One party is offeror and other is Acceptor. Offer when accepted becomes an Agreement. Such an Offer and Acceptance must be valid and not illegal. The terms of Offer must be definite & certain. Offer may be conditional. Offer may be specific or general. Offer & Acceptance may be --- Oral, Written or by conduct For e.g.: - A asks to B Well you sell me your Scooter at Rs.20,000?. B said Yes. This is an Oral offer & Acceptance. It is a valid Contract. LEGAL ENFORCEABILITY: An Agreement Enforceable by Law is Contract. Section [2(h)].The agreement becomes a contract only if it is legally enforceable. According to Section 2(j).A Contract which ceases to be enforceable by law, becomes void when it ceases to be enforceable. Also an agreement having no intention to create legal rights & obligations are mere Social Agreements or Domestic Agreements or Friendly Agreements. For e.g.: - An invitation to a Friend for a cup of tea is not a C. It is mere friendly Agreement. For e.g.: - In Balfour V/s Balfour: A husband promised his wife to pay his wife a household allowance of 30 every month. Later, the husband failed to pay the amount. The wife sued for Allowance. Held, Ag. Was not having any intention to create legal relations, it was mere Domestic Agreement. LAWFUL CONSIDERATION: The Agreement to be enforceable by Law, must be supported by consideration. Consideration means something in return of something (Quid Pro Quo.) The Agreement is legally enforceable only when both the parties get something in return. A promise to do something, getting nothing in return, is usually not enforceable by Law. Consideration must be Lawful. It may be past, present or future. CAPACITY OF PARTIES: - [S:11] The parties must be competent to enter into a Contract. According to Section 11 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. Therefore, the following persons cannot enter into a Contract: Minors Unsound mind Disqualified by law. FREE CONSENT: - [S:13 to 18; 20 to 22] It is essential that the consent obtained must be free.

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4 According to Section 13 , Two or more persons are said to consent when they agree upon the same thing in the same sense. According to Section 14 : Consent is said to be Free when it is not caused by --Coercion, as defined in section: 15, or Undue influence, as defined in S:16, or Fraud, as defined in S:17, or Misrepresentation, as defined in S:18, or Mistake, subject to the provisions of Sec: 20,21 and 22. Consent obtained without Free Consent is not enforceable. LAWFUL OBJECT [Section 23] The object of Agreement must be Lawful. It must not be ---Illegal , Immoral, and opposed to public policy. Every Agreement of which the object is unlawful is void. CERTAINTY OF TERMS: The Agreement must be definite and certain. It should not be vague. [Sec: 29]. For e.g.: -A agrees to sell B 100 tons of Oil, There is nothing whatever to show kind of oil was extended. The Agreement is void. Agreement, the meaning of which is not certain, or capable of being made certain, is void. CONSENSUS AD IDEM: The parties entering into Contract must have consensus ad idem. It means they must think same thing in same sense. For e.g.: - A offer B to sell his car at Rs.80, 000 accepts the offer thinking it to be Maruti instead of Fiat. Here there is no Consensus ad idem. POSSIBILITY OF PERFORMANCE: - [S:56] The Agreement must be capable of being performed. An Agreement. to do an impossible act is void. [Sec:56] For e.g.: - A agrees with B to put life into Bs dead wife, the agreement. is void as it is impossible to perform.

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10) SHOULD NOT BE VOID : - [S: 26 to 30] The Agreement. Must not be expressed declared be void. Following are some e.g. which are expressly declared to be void: A. Agreement in restraint of marriage [S:26] B. Agreement in restraint of legal of Trade [S:27] C. Agreement in restraint of legal of Proceedings [S:28] D. Agreement having uncertain meaning [S:29] E. Wagering Agreements [S:30] 11) LEGAL FORMALITIES: The Agreement must be oral or written. But there are certain agreements which require written documents.

5 Q2. What do you mean by offer? Explain the essentials of valid offer? A2. Meaning: At the formation of every agreement there must be definite offer by one person to another and its unqualified acceptance by the person to whom the offer is made. An offer is a proposal by one party to another party to enter into a legally binding agreement with him. Definition: According to {Section 2(a)} A person is said to have made a proposal, when he "signifies to another his willingness to do or abstain from doing anything, with a view to obtaining assent of that other to such an act or abstinence". Example: 'A' says to B', "Will you purchase my car for Rs 50,000/-. 'A', in this case, is making an offer to B' as he signifies to 'B' his willingness to sell his car to B' for Rs 50,000/, with a view to obtaining B's assent to purchase the car. The person making the offer is known as the offeror, and the person to whom the offer is made is called the offeree or proposee. When the offeree accepts the offer, he is called the acceptor or promisee. {Section2(c)} Essentials of a valid offer: A valid offer must comply with following rules. 1. Offer must be capable of creating legal relationship: An offer must be of such a nature as would result in a valid contract when accepted by the party to whom it is made. A social invitation, even if it is accepted, does not create a legal relationship because it is not so intended. In other words invitation to a friend for a cup of tea is a mere social invitation and as such an invitation, even if accepted, does not create legal relations. 2. The terms of offer must be definite and certain: The terms of offer must be definite, unambiguous and certain and not loose and vague. If the terms of an offer are vague its acceptance cannot create contractual relationship. 3. The offer must be communicated: An offer to be complete must be communicated to the person to whom the offer is made. Unless an offer is communicated, there can be no acceptance of the offer. An acceptance of the offer in the ignorance of the offer is no acceptance and does not confer any right upon the acceptor. Case Law: Lalman V. Gauri Dutt Facts: G sent his servant L in search of his missing nephew. G then announced a reward for information concerning the boy. L traced the boy in the ignorance of any such announcement. Subsequently, when he came to know of this reward, he claimed it. Decision: It was held that he was not entitled to the reward, as an acceptance of the offer in the ignorance of the offer is no acceptance. 4. The offer may be conditional: A proposer is at liberty to make an offer subject to certain conditions. If the conditions are properly communicated so that the offeree should have known them, he cannot plead the ignorance of the conditions and such conditions will be binding to the offeree. 5. The offer may be general or specific: When the offer is made to a definite person or any class of the persons it is called specific offer. It can be accepted by the person to whom it is made. On the other hand when the offer is made to general public at large it is called general offer. It can be accepted by any person. If the certain person accepts it than it

6 results in to a valid contract. 6. The offer must be made with a view to obtaining assent: An offer must be addressed to another person with a view to obtaining his assent thereto and thereby creating legal relationship between them. When it is made merely with a view to disclosing the intention of making an offer, or is made for soliciting information, it is not an offer. 7. Offer must thrust the burden of acceptance: Offer should not contain a term, "noncompliance of which, may be assumed to amount to acceptance". Thus, a man cannot say that if he fails to hear from the other party within a week, he shall consider the offer as being accepted. 8. Statement of Price is not an offer: Tender or a price list is not an offer. It is only a mere invitation to an offer. 9. Auction is not an offer: The person shows intention to certain goods. One who bids price is said to have made the offer. Whether to accept such amount is the discretion of the person who puts the articles for auction. Q3. Define the term acceptance? Discuss the essentials of valid acceptance? A3. Meaning: An agreement emerges from the acceptance of the offer. Offer creates no legal rights until acceptance. Acceptance is an expression by the offeree of his willingness to be bound by the terms of the offer. Definition: According to Section 2(b) of the Indian Contract Act, 1872. "The proposal is said to be accepted when the person to whom the proposal is made signifies his assent thereto. A proposal when accepted becomes a promise." Acceptance can be given by express words spoken, in writing and by conduct. Essentials of Valid Acceptance. 1. Acceptance must be absolute and unqualified: An acceptance must be absolute and unqualified of all the terms of the offer. A conditional acceptance is no acceptance. For e.g. X makes the proposal to give a pen for Rs.50. Y agrees to purchase on a condition to give money after two months. This is the case of conditional acceptance and as stated above conditional acceptance is no acceptance. 2. It must be expressed in some usual manner: If the offeror prescribes the mode of acceptance the acceptance must be given accordingly, e.g. if the offeror says, "Wire Reply" and the reply is sent by post, there is no acceptance of the offer. Thus acceptance must be according to the mode prescribed by the offeror. 3. It must be by the party named in the offer: An offer made to a particular person is to be accepted by him alone, because he is the only party intended to accept. However, if it is made generally, any member of the public may accept it. Example: W offers by advertisement a reward of 5 pounds to anyone who will bring his lost dog. Any member of the public can accept this offer. 4. An acceptance must be communicated to the offeror: The acceptance must be communicated to the offeror. The acceptor should signify his intention to accept the

7 proposal. Mere mental acceptance is no acceptance. It must be evidenced by words or by conduct. For e.g. T makes proposal to S to purchase the house. S says to his relatives that sale of house is made. T's proposal is not said to have been accepted. As S informed his relatives about the sale of the house and not the offeror T about it. Besides this, acceptance can be communicated by post also. Communication of acceptance by post is considered to be complete as against the proposer as soon as the letter of acceptance is posted. 5. Acceptance can be made by accepting consideration: An offeree receives consideration shown in the proposal. It is acceptance of the proposal. E.g.: P informs Q that his house rent is Rs. 700/- instead of Rs. 500/- Q pays rs.700/- here, Q accepted the proposal of P. 6. Acceptance must be within a reasonable time: The acceptance must be made while the offer is still in force i.e. before the offer lapses. If any time limit is prescribed in the offer, it should be accepted within the prescribed time limit. However, if no time limit is prescribed, it must be accepted within the "reasonable time". What is a "reasonable time", depends upon the circumstances of each case. 7. Acceptance cannot be in ignorance of an offer: Acceptance cannot precede the offer nor acceptance in total ignorance of an offer result in a contract. 8. Silence will not amount to acceptance: Offer made to another will not ripen into agreement merely because offeree sends no reply. Example: A offers his watch for sale to B at Rs.500. A says, "If I do not hear anything from you, it will be deemed that you accepted my proposal". B does not reply within the stipulated period. In this circumstance it cannot be said that B accepted the proposal. Q4. Discuss the position of minor under the Indian Contract Act. A4. According to Section: 10, an Agreement becomes a Contract if it is entered into between the parties competent to contract. o Capacity refers to competency to contract. o Capacity means physical & mental capacity. Sec: 11 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. Hence following are not competent to enter into a contract : MINORS UNSOUND MIND DISQUALIFIED BY LAW. MINORS According to Indian Majority Act: 1875, Sec: 3 Every person domiciled an India is deemed to have attained his majority when he has completed his age of 18 years and not before.

8 Rules \ Laws for Minors Agreement:1) Minors Age is Void ab intio oToday an agreement with or by a minor is void and inoperative abintio. Formerly it was not so. oPrivy Council held in case of Mohri V/s Dharmadas Ghose 1903 that minors contract is void ab initio. oIn this case, a minor mortgaged his house in favour of money-lender to secure a loan of Rs. 20,000 out of which, the money-lender paid to minor a sum of Rs. 8,000. Subsequently, the Minor sued for setting aside the mortgage, stating that she was under-aged when he made a mortgage. oHeld, the mortgage was cancelled and the Contract was void. A Minor can be a promise or a beneficiary oThere is nothing which deprives a minor from becoming a beneficiary. oThus an Agreement under which a Minor in whose favour a mortgage has been executed can be enforced by law. oSimilarly, a promissory note executed in favour of a minor can be enforced. oHe can draw, negotiate or endorse a negotiable instrument. No Ratification (approval) oA minor on attaining majority cannot ratify an Agreement entered into while he was a minor oSince minors Agreement is void ab initio, it cannot be validated by any subsequent action. oFor eg :- A Promissory note was given by a person attaining majority as renewal of another promissory note given by him during his minority in consideration (return of ) of money them borrowed. Held, as the consideration for the promissory note is only the note executed during minority, the fresh promissory not was unenforceable. Claim for Necessaries oA Minor is liable to pay out of his property for Necessaries supplied to him or to any one whom the Minor is bound to support. [S:68] oThe claim arises not from Contract but form Quasi-Contract [Implied Contract] oHowever, only the property of the Minor is liable. Minor personally is not liable. oThe term Necessaries is not defined in Indian Contract Act. oThe English sale of goods Act states in Sec : 2 Goods suitable to the condition in life of such infant or the person, and to his actual requirement at the time of sale and delivery oNecessaries may also be teaching, medical legal advice, etc. No Estoppel oA Minor falsely representing himself of age of majority has induced a person to enter into a Contract with him, can any time plead his minority, as defense oThere cannot be estoppel against a minor. oThus, a Contract entered into by a Minor is a complete nullity. No Restitution or Compensation oIf a Minor has received any benefit under a void Agreement, he cannot be asked to compensate for it.

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oSec : 65 to restore or compensate does not apply for minor oFor eg: - M, a minor obtains loan by mortgaging the property. Minor is not liable to

refund the loan. Not only this, even mortgaged property cannot be made liable to pay for the debt. [Mohribibi v/s Dharmadas ghose 1903] 7) No Specific Performance oThere can be no specific performance of the Agreement entered into by a m as they are void ab initio. oIf a person after attaining majority pays a debt incurred during his minority, he cannot subsequently bring a suit for the refund of this amount. No Insolvency oA minor cannot be adjudged insolvent oThis is because he is incapable of contracting debts. Minor as a Partner oA minor cannot become a partner in his own right as he is incapable of entering into Contract under section 11. oBut a m maybe entered into the benefits of a partnership with the consent of other partners. [Sec :30 of Partnership Act ]

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10) Minor as an Agent oAn Agent is simply a connecting link between the principal and the third party. oSince the parties to a contract here are principal and the third party, they should be competent to Contract. oAn Agent, being not a party to a Contract can be either a major or a minor. 11) Minor along with a major oWhere a Contract is entered into by a minor and a major jointly with another person, the minor is not liable under the contract. oHowever, Contract can be enforced against the major if his liability can be separately ascertained. 12) Minors guardian oAn Agreement by a minor is void, but an Agreement by his guardian on his behalf is valid provided (a) The contract is within the scope of authority of guardian ; and (b) The contract is for the benefit of the minor. 13) Liability for Torts oPrivilege of Infancy is used only as a shield and not a Sword. oA minor is liable for Torts. oFor eg : In the case of Jennings v/s Rundall-1799, Rundall, a minor entered into a Contract to hire a horse for riding He rode the horse negligently and thereby caused the injury to the horse. Rundall was not held liable, since he was doing the act which was permitted by the contract. oFor eg :- In case of Bunard v/s Haggis, Haggis, a minor entered into a contract to hire horse for riding, Burnard, the owner of the horse gave specific instruction. Not to jump Horse. Haggis lent the horse to a friend who used it for jumping. The horse

10 was injured and killed. Held, Haggis was liable since jumping of horse was prohibited by contract and even though he did not performed it. Q5 A5. What is consideration. Explain its ingredients. Explain the exceptions to the statement No consideration, no contract.

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Consideration is one of the essential requirements to support a Contract. It is the sign and symbol of every bargain. Consideration means something in return of something In Latin, it is quid pro quo An agreement without consideration is normally void. Consideration is the cause of all promises. An Agreement without consideration is a base of naked promise and ex nudo pacto non oritio action i.e.:- cannot be held to be binding upon the parties o For eg: A agrees to sell his car to B for Rs.50, 000. Car is consideration for B and Rs. 50,000 is consideration for A. o According to section:2 (d) :- 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 abstain from doing, or promises to do or abstain from doing, something, such an act or abstinence or promise is called a consideration for the promise . Legal rules / Essentials of Consideration 1) It may move at the desire of the Promisor :o Consideration must have been done at the desire or request of the Promisor. o If act is done at desire of a third party or without the desire of the Promisor, it will not be a good consideration o Acts done voluntarily or gratuitously do not constitute good consideration. o For eg :- In case of Durga Prasad v/s Baldev 1880 Baldev constructed a market at the desire of the collector of the district, Durgaprasad promised to pay Baldev, a commission on articles sold through Ds agency, in the market. This was in considered of money spend by B on the construction of the market. Here Promisor was collector and not Durgaprasad. Hence Consideration Can move only from collector. Held. Agreement Was void as there was no Consideration between Durgaprasad & Baldev. 2) It may move from the promise or any other person :o Under English law Consideration Must move from the promise o But under Indian law, Consideration May move from the promise or any other person even a stranger. o Even a stranger to Consideration Can sue on the Agreement. o However, Stranger to contract cannot such on the Agreement. o For eg ; In the case of Chinnaya v/s Ramayya 1882 An old lady X, by a deed of gift made over certain property to her daughter Y, under the direction that she (Y) should pay her aunt Z ( sister of old lady X), a certain sum of money every year. The same day daughter Y entered into an Agreement with aunt Z to pay her agree amount. Later, daughter Y refused to give money on agreement that no consideration was passed from aunt Z to daughter Y. Hence it is not Contract. However, it was held that consideration may move from the promise or any other

11 person. Hence Consideration Had already been passed from old lady X to daughter Y. Hence Z is stranger to Consideration but not stranger to contract. Therefore she is entitled to get money from daughter Y. 3) It may be past, Present or future o The words in Sec :2 (d) has done or abstained, or does or abstains; or promises to do or abstain from doing .. o It indicates that Consideration according to 3 types. It may be Past, Present or Future (a) Past Consideration o When the Consideration of one party was given before the date of the promise it is said to be past. o For eg: A finds the purse of B, and returns it (without expecting any reward). A promised to pay him some money. The Consideration of B is past Consideration. (b) Present Consideration :o Consideration Which moves simultaneously with the promise is called Present Consideration Or Executed Consideration o For e.g.: X buys an article from shop and pays the price immediately. It is present Consideration.

o When the consideration is to be move at a future date, it is future or Executory o For eg. P promises to pay money after a week for goods to be delivered by a Q after
two days, it is a valid Contract having future or executory consideration. 4) Something need not be Adequate Consideration means something in return. This something need not necessarily given. The Law simply provides that a Contract must be supported by consideration. So long as consideration exists, court are not concerned with its adequacy The courts do not exist to repair bad-bargain. Acc to section : 25 Explanation : 2 An Agreement to which the consent of the promises is freely given is not void merely because the consideration is inadequate. o For eg. A agree to sell a horse worth Rs.10, 000 For Rs.100. As consent was freely given. The Agreement is Contract in spite of the inadequate consideration. consideration.

(c) Future Consideration:-

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It must be Real and not Illusory o The consideration to be valid must be real and not be illusory or sham. o The following considerations are not Real. Physical Impossibility:o For e.g. A promises to find lost treasure by magic to B. the consideration is physically impossible. Legal Impossibility:o For e.g.:- A owes (liable) Rs.500 to B. He promises to pay Rs.100 to C, the nephew of B, who in turn promises to discharge A from the debt. This is legally impossible

12 because Contract cannot give a legal discharge for debt due to B. [ Harvey v/s gibbons 1675 ] Already Existing Duty:o Where a promise is already under an existing public duty, an express promise to perform that duty will not amount to consideration. o For eg. A promises to pay B, a witness in a trial, certain sum of money. B had already received a subpoena to appear before the court. Here consideration is not real. Illusory or sham: o For eg: - Two of the crew of a ship deserted (left) the ship half the way in a voyage. The captain there by promised to divide the salary of those two crews among other remaining crews, if they brought the vessel home. The other crews could not require the amount as Consideration was illusory they were already under obligation to bring the vessel home. 6)

o Consideration Given must be lawful o Where Consideration is illegal, immoral or opposed to public policy, the courts do not o o o o o o
allow an action on such contract. [Sec :23] No Consideration No Contract According to section: 25, An Agreement without consideration is normally void. General rule is that if there is no Consideration There cannot be a contract. According to Salmond : A promise without Consideration Is a gift Under Roman Law : An Agreement without Consideration Is nudum pactum ( naked agreement) However, there are exceptions to the general Rule No Consideration No Contract. EXCEPTIONS TO THE RULE: NO CONSIDERATION NO CONTRACT consideration :Natural love & Affection [sec :25 (1)] Voluntary Services [25(2)] To pay a time-barred debt [25(3)] Agency [185] Completed gift [Explanation :1 sec :25]

It must not be Illegal, Immoral or opposed to public policy

o The following are cases where a Contract is enforceable even if there is no

1) 2) 3) 4) 5)

1) Natural love & Affection :- [25(1)] o According to section : 25(1) Where an agree is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between the parties standing in a near relation to each other is enforceable even if there is no consideration o Ingredients of section :25 (1) :1. The parties to agreement must stand in near relation to each other. 2. Agreement must be made on account of natural love and affection 3. Agreement should be in form of a written document 4. Document must be registered. o For eg :- In case of Rajlukhy Devi v/s Bhootnath 1900 An Agreement entered into by husband Bhootnath with his wife Rajlukhy during quarrels and disagreements, whereby B promised to give some property to wife R. Here Agreement is void because parties do not have natural love and affection though

13 they are husband and wife. 2) Voluntary Services :- [25 (2)] o According to section : 25(2) :Where it is a promise to compensate wholly or in part, a person who has already voluntarily done something for the Promisor , or something which the Promisor was legally compellable to do, is enforceable even though without Consideration o For eg: - A finds Bs purse and gives it to him. B promises to give A Rs 30/- This is Contract. o For eg: - A supports Bs minor son. B promises to pay As expenses in doing so. This is Contract 3) To pay a time-barred debt :-[s:25(3)] o A promise by a debtor to pay a time-barred debt is enforceable provided it is made in writing and signed by the debtor or his Agent. o The promise may be to pay the whole or any part of the debt. o The debt must be such of which the creditor might have enforced payment but for the law for the limitation of suits. o A debt is barred by limitation if it remains unpaid or unclaimed for a period of three years. Such a debt becomes legally irrecoverable. o For eg: D owes c Rs.1,000 but the debt is barred by the limitation Act. D signs a written promise to pay c Rs.500 on account of the debt. This is a contract even if without consideration. 4) Agency :- [s.185] o According to section 185 No consideration is necessary to create an agency. 5) Completed Gift :- [s : 25 Explanation :1] o The rule No consideration, no Contract does not apply to completed gifts. o Explanation:1 of Sec:25 states Nothing in this section shall affect the validity as between the donor and the done, of any gift actually made. Q6. Define consent. When consent is said to be free? A6. o Consent in general, means an agreement. o According to section 13 : Two or more persons are said to consent when they agree upon the same thing in the same sense. o According to section 14 :Consent is said to be free when it is not caused by : 1. coercion as defined in sec. 15, or 2. undue influence as defined in sec. 16, or 3. fraud as defined in sec. 17, or 4. misrepresentation as defined in sec. 18, or 5. mistake, subject to the provisions of sec. 20, 21 and 22. o If there is no consent, there is no contract. o When the consent is caused by coercion, undue influence, fraud or misrepresentation, then the contract becomes voidable. o When the consent is caused by mistake, then the contract becomes void. o Hence, the following are the possible alternatives when the consent is not free :

14 1) Coercion o When the person is forced to enter into a contract under a threat, it is said coercion o According to section 15 : Coercion is committing, or threatening to commit, any act forbidden by the Indian Penal Code 1860, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. o It is immaterial whether the Indian Penal Code is or is not in force in place where the coercion is employed. o For e.g.: A threatens to kill B if he does not lend Rs. 1000 to C. B agrees to lend the amount to C. The agreement is entered into under coercion. o Threat to commit a suicide is also coercion. 2) Undue Influence o Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other party. o This happens when a special kind of relationship exists between the parties such that one party is in a position to exercise undue influence over the other. o According to section 16 : A contract is said to be induced by undue influence where the relations subsisting between parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. o For e.g. A spiritual guru induced his devotee to gift to him the whole of his property in return of a promise of salvation of the devotee. Held, the consent of the devotee was given under undue influence. 3) Fraud o According to section 17 : Fraud means and includes any of the following acts committed by a party to a contact, or with his connivance or by his agent with intent to deceive or to induce a person to enter into a contract: 1. the suggestion that a fact is true when it is not true and the person making the suggestion does not believe it to be true 2. the active concealment of a fact by a person having knowledge or belief of the fact 3. a promise made without any intention of performing it 4. any other act fitted to deceive 5. any such act or omission as the law specially declares to be fraudulent. 4) Misrepresentation o Misrepresentation is a false statement which the person making it honestly believes to be true or which he does not know to be false.. o According to section 18 : There is a misrepresentation 1. When a person positively assets that a fat is true when his information does not warrant it to be so, thought he believes it to be true. 2. When there is any breach of duty by a person which brings an advantage to the person committing it by misleading another to his prejudice. 3. When a party cause, however, innocently, the other party to the agreement to make a mistake as the substance of the thing which is the subject of the agreement. o Misrepresentation is also called an innocent fraud. 5) Mistake o Mistake is erroneous belief about something or Mistake may be (a) of law, or (b) of fact.

15 Q7. What is performance of contract? Discuss the provisions relating to performance of contract under Indian Contract Act, 1872? A7 MEANING OF PERFORMANCE The term 'performance' means that the parties to the contract have fulfilled or carried out their respective obligations arising out of the contract. For example, A contracts to sell his book to B for Rs. 50. A delivers the book and B makes the payment, the contract is discharged by performance. Section 37 of the Indian Contract Act lays down the obligations of the parties regarding performance. It 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 this Act, or any other law. TYPES OF PERFORMANCE From Section 37 it can be inferred that the performance may be either actual or attempted. Actual performance: When a party to a contract has done, what he had undertaken to do and there remains nothing to be done by him the promise is said to have been actually performed and the liability of such a party comes to an end. For example A who is indebted to B for Rs. 1,000, promises to repay the amount after two months. A repays the amount on the due date. This is actual performance. . Attempted Performance: Sometimes, when the performance becomes due, the promisor offers to perform his obligation but the promisee refuses to accept the performance. This is known as 'attempted performance' or tender. For example, A. promises to deliver certain goods to B. A takes the goods to the appointed place during business hours but B refuses to take the delivery of goods. Thus, A has done what he was required to do under the contract, It is an attempted performance. In case of an attempted performance, the promisor shall not be held liable for non- performance as an attempted performance or tender is as good as performing the contract. Section 38 of the Contract Act provides. Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non performance, nor does he thereby lose his rights under the contract. KINDS OF TENDER Tender or attempted performance can be of two types (i) tender of goods and services and (ii) tender of money. Tender of goods and services: A. contract to deliver goods or render some service is completely discharged when the goods are tendered for acceptance according to the terms of the contract. If the goods or services are refused, they need not be offered again and the promisor is discharged from his liability. At the same time, he may file a suit against the promisee for non-acceptance. Tender of money: Where the debtor (promisor) makes a valid tender i.e., offers to pay the amount to the creditor and the creditor refuses to accept the same, the debtor is not discharged from his liability to pay the amount. In other words, a tender of money does not amount to discharge of the debt. The debtor continues to be liable for the payment of debt.

16 But, the debtor will not be liable for interest from the date of a valid tender i.e., no interest shall become payable from the date of the rejection of a valid tender of money. EFFECT OF REFUSAL TO PERFORM PROMISE WHOLLY When a party to a contract has refused to perform, or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract. But, if the promisee has signified by words or conduct, his acquiescence in the continuation of the contract, he cannot terminate it. For example, A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights every week during the next two months, and B engages to pay her at the rate of Rs. 100 for each night. On the sixth night A willfully absents herself from the theatre. In such a situation, B is at liberty to put an end to the contract, If however, with the consent of B, A sings on. the seventh night, B has signified his acquiescence in the continuation of the contract and, therefore, he cannot now put an end to it. of course, B is entitled to compensation for damage sustained by him through A's failure to sing on the sixth night. WHO CAN DEMAND PERFORMANCE? Promisee: Normally, the promisee is the only person who can demand performance of the promise under a contract. A third party cannot demand performance of the contract even if it was made for his benefit. For example, A .promises B to pay Rs. 500 to C. The person who can demand performance is B and not C. Legal Representative: In the case of death of the promisee, his legal representative can demand performance, unless a contrary intention appears from the contract or the contract, is of a personal nature. For example, A agrees to marry B. However, before marriage takes place. B dies. Since it is a contract, of personal nature the legal representative of B cannot demand performance of the promise from A. Third Party: In some exceptional cases, the third party can also demand performance of the contract even though he is not a party to the contract. Joint Promises: When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the performance of the promise may be demanded either (i) by all the promisees jointly; or (ii) in case of death of any of joint promisees, by the representatives of such deceased person jointly with the surviving promisees, or (iii) in case of death of all joint promisees, by representatives of all of them jointly. Thus, the right of joint promisees is only joint and any of them cannot demand performance unless it was so agreed. For example, A for a consideration of Rs. 5,000 lent to him by Band C, promises Band C jointly to repay them Rs. 5,000 plus interest on a specified day. B dies. The right to claim performance rests with B's representative jointly with C during his life time, and after C's death it would lie with the representatives of B and C jointly. WHO MUST PERFORM? Normally, the contract should be performed by the promisor himself However, in certain cases; it can also be performed by his agents or legal representatives. It all depends upon the intention of the parties. Normally a contract can be performed by the following persons. Promisor himself: If from the nature of the contract it appears that it was the intention of the

17 parties that the promise should be performed by the promisor himself, such promise must be performed by the promisor. This usually applies to contracts involving personal skill, taste or art work. For example, A promises to paint a picture for B. As this promise involves personal skill of A, it must be performed by A. Promisor or Agent: Where the contract does not involve personal skill of the promisor, the contract could be performed by the promisor himself or by any competent person employed by him for the purpose, For example, A promises to ' pay to B a sum of money, A may perform this promise either by paying the money personally to B or by causing it to be paid to B by his authorized agent. Legal Representatives: The contracts which do not involve any personal skill or taste may be performed by his .legal representative after the death of the promisor. For example, A promises to deliver goods to B on a certain day on payment of Rs. 2,000. A dies before the said day. A's legal representatives are liable to deliver the goods to B and B is bound to pay Rs. 2,000 to A's representatives. If, however, the contract involves some personal skill or taste, it comes to an end with the death of the promisor. Third Person: In some cases, a contract may be performed by a third person provided the promisee accepts the arrangement. According to Section 41, once the promisee accepts the performance from a third person, he cannot compel the promisor to perform the contract again. Performance of Joint Promises: According to section 42, when two or more persons have made a joint promise, the joint promisors must fulfil the promise jointly during their life time. And if any one of them dies, then his legal representatives and survivors must jointly fulfil the promise. For example, A., B and C jointly promise to pay Rs. 3,000 to D. A dies. B and C along with A's legal representative are jointly and severally liable to pay the amount to D. This rule is called 'devolution of joint liabilities'. It is however, subject to the condition that no other intention appears from the contract. In other words, if a contrary intention appears from the contract then the rule given above shall not apply. In case the joint promisors do not perform their promise jointly, then Section 43 comes into operation. It provides 'When two or more persons make a joint promise, the promisee may, in the absence of express agreement to the contrary, compel any one or more of such joint promisors to perform the whole of the promise. Thus, the, liability of joint promisors is joint and several and any of the joint promisors can be compelled to perform. For example, A, B and C jointly promised to pay Rs. 3,000 to D. In this case D may compel either A, or B or C to pay the entire amount of Rs. 3,000. TIME & PLACE FOR PERFORMANCE It is for the parties to a contract to decide the time and place for the performance of the contract. The rules regarding the time and place of performance are given in sections 46 to 50 of the Contract Act. These are as follows: Performance of a promise within a reasonable time: According to Section 46 where the time for performance is not specified in the contract and the promisor himself has to perform the promise without being asked for by the promisee, the contract must be performed within a reasonable time. The question 'what is a reasonable time' is, in each particular case, a question of fact. Thus, it is clear from this provision that if time for performance is not stated, the contract is not bad for want of certainty.

18 Performance of promise where time is specified: Sometimes, the time for performance is specified in the contract and the promisor has undertaken to perform it without any application or request by the promisee. In such cases, the promisor must perform his promise on that particular day during the usual hours of business and at a place where the promise ought to be performed (Section 47). Performance of promise on application by the Promisee: It may also happen that the day for the performance of the promise is specified in the contract but the promisor has not undertaken to perform it without application or demand & by the promisee. In such cases, the promisee must apply for performance at a proper place and within the usual hours of business. (Section 48) Performance of promise where no place is specified and also no application is to be made by promisee: When a promise is to be- performed without application or demand by the promisee, and no place is specified for performance, then it is the duty of the promisor to apply or ask the promisee to fix a reasonable place for the performance of the promise and to perform it at such place (Section 49). For example, A undertakes to deliver 1,000 kilos of jute to B on a fixed day. A must apply to B to fix a reasonable place for the purpose of receiving it, and must deliver it to him at such place. Performance of promise in the manner and time prescribed or sanctioned by promisee: Sometimes the promisee himself prescribes the manner and the time of performance. In such cases, the promise must be performed in the manner and at the time prescribed by the promisee. The promisor shall be discharged from his liability if he performs the promise inthe manner and time prescribed by the promisee (Section 50). Examples i) B owes A Rs. 2,000.A desires B to pay the amount to A's account with C, a banker. B, who also has an account with Bank C, orders the amount to be transferred to A's credit and this is done by the banker. Afterwards, and before A knows of the transfer, the Bank C fails. There has been a good payment by B and he is discharged from his obligation. (ii) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The debt is discharged as soon as B puts into the post a letter containing note duly addressed to A. APPROPRIATION OF PAYMENT OF DEBT Where a debtor owes several distinct debts to the one and the same creditor and makes a payment towards those debts, the question may arise as to which of this particular debt, this payment is to be appropriated. The rules regarding Appropriation of payments are laid under section 59, 60 and 61. There are 3 aspects: Debtors Right: - [S: 59] If the Debtor expressly intimates at the time of actual payment, that the payment should be applied towards the discharge of a particular debt, then the creditor must do so. If the creditor does not agree to the proposed Appropriation, he must refuse to receive the payment. Maxim here is, when money is paid, it is to be applied according to giver not the receiver. However, this section will not apply to a single debt payable in installments. Creditors Right: - [S: 60] Where the Debtor does not expressly intimate or where the circumstances attending on payment do not indicate any intention, then the creditor may apply at his discretion to any lawful debt actually due and payable to him from the debtors. The Creditor may alter the

19 appropriation until he has declared the appropriation to the Debtor. However, Creditor cannot apply the payment to a disputed or unlawful debt, but he may apply it to a debt which is barred by the Law of Limitation. When Interest and Principal amount both are due, then subject to the contract contrary, the payment should be first appropriated for Interest and after the Interest is fully paid of, then only the principal amount. Neither partys Right: - [S: 61] Where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or they are not barred by the Law in force for the time being as to the limitation of suits. If the debts are of equal standing (same date) the payment shall be made in discharge of each debt proportionately. Where there is a debt carrying interest, if money is paid and received without any definite appropriation, it should be first applied in the payment of interest. Q8. What is Discharge of Contract? Explain Modes of Discharge of Contract in detail? A8. A valid contract creates certain obligations for the contracting parties and the parties become liable to fulfil their respective promises. When such promises are performed, contract is said to be discharged. The term discharge of a contract means that the parties to it are no more liable under the contract. The most obvious or desirable method of discharge of a contract is to perform it A contract may be discharged in any one of the following ways: By performance By mutual agreement By lapse of time By operation of law By impossibility of performance By breach. DISCHARGE BY PERFORMANCE The most obvious or natural mode of discharge of a contract is by performance. The performance may be either actual or an attempted one. DISCHARGE BY MUTUAL AGREEMENT Just as a contract is created by means of an agreement, it can be terminated or discharged by mutual agreement. If the parties to a contract agree to make a fresh contract in place of the original contract, the original contract is discharged. A contract can be discharged by mutual agreement in any of the following ways. Novation: The term novation means the substitution of a new contract for the existing one. This arrangement may be either between the same parties or between different parties. The consideration for the new contract is the discharge of the original contract. Since novation implies a new contract, all the parties to the existing contract must agree to it. Examples A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth accept C as his debtor instead of A. The old debt of A to B is discharged, and a new debt from C to B has been contracted. This is novation involving change of parties. A owes B Rs. 10,000. A enters into an agreement with B and gives B a mortgage of his estate for Rs. 5,000 in place of the debt of Rs. 10,000. This arrangement constitutes a new contract and terminates the old.

20 Rescission: Rescission means cancellation of the contract. If by mutual agreement the contracting parties agree to rescind the contract, the contract is discharged. A contract can be rescinded before the performance becomes due. Non-performance of a contract by both the parties for a long period, without complaint, amounts to implied rescission. Rescission is different from novation in the sense that in case of novation a new contract is substituted for the original contract whereas in rescission the original contract is cancelled and no new contract is made. Alteration: It means a change in one or more of the terms of a contract with consent of all the parties. Alteration has the effect of terminating the original contract. In an alteration there is a change in the terms of a contract but no change of parties to it. In novation there may be change of parties. Remission: It means the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made. According to section 63, every promisee may remit or dispense with it, wholly or in part, or extend the time of performance, or accept any other satisfaction instead of performance. Example: A owes B Rs. 5,000. A pays to B Rs. 3,000 who accepts it in full satisfaction of the debt. The whole debt is discharged. Waiver: Waiver means abandonment or intentional relinquishment of a right under the contract. When a party waives his rights under it, the other party is released from his obligation. For example, A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise. DISCHARGE BY LAPSE OF TIME The rights and obligations under a contract can be enforced only within a specified period called the 'period of limitation'. The Limitation Act has prescribed the period of limitation for various contracts: For example, period of limitation for exercising right to recover an immovable property is twelve years and right to recover a debt is three years. After the expiry of this limitation period, the contractual rights Cannot be enforced. In other words, if a debt is not recovered within three years of its payment becoming due, the debt becomes time barred and is discharged by lapse of time. DISCHARGE BY OPERATION OF LAW A contract may be discharged by operation of law in the following cases. Death of the Promisor: Contracts involving the personal skill or ability of the promisor come to an end with the death of the promisor. Insolvency: When a person is declared insolvent by Court, he is discharged from his obligation existing at that time. So, if a promisor is declared insolvent, he is discharged from his liability. Merger: When an inferior right accounting to a party in a contract merges into the superior rights accruing to the same party, the earlier contract is discharged. For example, A took a land on lease from B. Subsequently, A purchases that very land. Now A becomes the owner of the land and the earlier contract of lease stands terminated.

21 Material alteration: In a written contract if any party makes some material alteration in the terms of the contract without the approval of the other party, the contract stands terminated. A material alteration is one which varies the rights, liabilities or the position of the parties as such, one should note that immaterial alterations, such as correcting the clerical errors or the spelling of a name has no effect on the validity of the contract. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE For a contract to be valid it must be capable of being performed. But sometimes, due to some reasons which are beyond the control of the parties, the performance of a contract becomes impossible. In such cases, the contract is discharged on the ground of impossibility of performance. Section 56 of Contract Act provides that an agreement to do an act impossible in itself is void. This rule is based on the principle that law does not recognize the impossible and what is impossible does not create any obligations. Impossibility may be of two types: (i) initial and (ii) subsequent. Initial impossibility: It means impossibility at the time of making the contract. Whether the fact of impossibility is known or unknown to the parties, the agreement is void ab initio. For example A agrees with B to discover a treasure by magic. The agreement is void due to initial impossibility. Subsequent or Supervening Impossibility: Impossibility which arises subsequent to the making of the contract is called supervening impossibility. If the contract was capable of performance at the time of making it, but subsequently because of some event (over which neither party has any control) the performance becomes impossible or unlawful, the contract becomes void and the parties are discharged from their obligations. It can be noticed that supervening impossibility is different from initial impossibility. In case of initial impossibility the agreement is void ab-initio while in case of supervening impossibility the contract becomes void. Conditions for the contract becoming void The contract will become void on the ground of supervening impossibility only if the following conditions are satisfied. The act should have become impossible. The impossibility should be by reason of some event which the promisor could not prevent. The impossibility should not be self-induced by the promisor Reasons for Supervening Impossibility The performance of a contract may become subsequently impossible due to any of the following reasons ; Destruction of the Subject Matter, Death or Personal Incapacity, Change of Law, Cessation of the state of things, Declaration of war etc. Effects of Supervening Impossibility Contract becomes void: When the performance of a contract becomes .subsequently impossible or unlawful; the contract becomes void (section 56 -- para 2). Compensation for Non-performance: When the promisor alone knows that the performance is impossible or unlawful, he must compensate the promisee for any loss which he might have suffered on account of non-performance (section 56 para 3). Benefit to be Restored: When a contract becomes void, any person who has received any advantage under such contract is bound to restore it, or to make compensation for it, to the person from whom he received it (section 65). For example, A contracts to sing for B at a concert for Rs. 1,000, which is paid in advance, A is too ill to sing. A must refund the advance of Rs. 1,000 to B.

22 DISCHARGE BY BREACH OF CONTRACT When a contract is made, the parties to it are expected to perform it, unless they are excused. If any party refuses or fails to perform his part of the contract, a breach of contract occurs and the contract is discharged. In case of breach the aggrieved party is relieved from performing his obligation and gets a right to proceed against the party at fault. A breach of contract may arise in two ways: (i) actual breach and (ii) anticipatory breach. Actual Breach: Actual breach of contract may take place either on the due date of performance or during the course of performance. For example, A agreed to deliver 100 bags of rice to B at a certain price on 10th July. If A refuses or fails to deliver the goods on time, there occurs an actual breach. If the promisor has performed part of the contract and then refuses or fails to deliver the remaining goods, it is also actual breach of contract. Anticipatory Breach: Anticipatory breach occurs when the party declares his intention of not performing the contract before the performance is due. This intention may be declared expressly or impliedly. For example, A agrees to supply certain goods to B on 10th July. Before this date A informs B that he shall not supply the goods. If, instead of, expressly informing B about his intention of not performing the contract, A does something which makes it impossible for him to perform; this will also amount to anticipatory breach. If in the example given above, A sells all the goods before the said date to P at a higher price, this action of A clearly indicates his intention. Thus a breach of contract operates a discharge of contract. In case of breach, the aggrieved party gets the right to claim compensation or damages from the defaulter. Q9. Describe different remedies available in case of breach of contract? Ans. When a contract is broken by a party, there are several courses of action (remedies) which the other party may pursue. These remedies include: Rescission of the contract Suit for damage Suit for specific performance Suit for injunction Suit upon quantum meruit RESCISSION OF THE CONTRACT When a party to a contract has refused to perform, or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract. This is called right of rescission. It means setting aside of the contract. In such a case aggrieved party is discharged from all the obligations under the contract. For example, A promises to supply the furniture B's new office on a certain day. B promises to pay for the furniture on its receipt. A does not supply the furniture on the agreed date. B is discharged from the liability of paying the price and can rescind the contract. Thus, in the above example B shall not only be entitled to rescind the contract but also to claim compensation for the damage which he has sustained because of the nonsupply of furniture by A on the specified date. SUIT FOR DAMAGES In the event of breach of contract; the aggrieved party besides rescinding the contract can claim for damages.

23 Damages are monetary compensation allowed for loss suffered by the aggrieved party due to the breach of contract. The object of the court in awarding damages for breach is that the aggrieved party may be put in the financial position which would have existed had there been no breach of contract. The law does not punish a party because he has broken a contract but if, by reason of his wrongful act, the other party has suffered any pecuniary (monetary) loss, the court will compel the party in breach to compensate the loss by paying damages to the other party. HADLEY VERSUS BAXENDALE CASE In India, the rules relating to damages are based on the judgement in English case of Hadley v. Baxendale. Facts H's mill was stopped due to the breakdown of a shaft. He delivered the shaft to B, a common carrier, to be taken to a manufacturer to copy it and make a new one. H had not made it known to B that delay would result in a loss of profits. By some neglect on the part of B, the delivery of the shaft was delayed in transit beyond a reasonable time. Findings Held, B was not liable for loss of profits during the period of delay as the circumstances communicated to B did not show that a delay in the delivery of shaft would entail loss of profits to the mill. Thus where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally i.e., according to the usual course of things, from such breach of contract itself. TYPES OF DAMAGES In case of the breach of contract following different types of damages can be awarded to the aggrieved party. They are Ordinary Damages Special Damages Exemplary or Punitive or Vindictive Damages Nominal Damages Damages for Deterioration Caused by Delay Damages for Inconvenience and Discomfort Liquidated Damages and Penalty Stipulations for Interest ORDINARY DAMAGES Ordinary damages are. those which naturally arise in the usual course of things from such breach. The measure of ordinary damages is the difference between the contract price and the market price on the date of the breach. If the seller retains the goods after the breach, he cannot recover from the buyer and further loss if the market falls, nor is he liable to have the damages reduced if the market rises. For Example, A contracts to deliver 100 bags of rice at Rs. 100 per bag on a future date. On the due dates he refuses to deliver. The market price on that day is Rs.

24 110 per bag. The measure of damages is the difference between the market price on the date of the breach and the contracted price i.e., Rs. 110-100 = Rs. 10. SPECIAL DAMAGES When there are certain special or extraordinary circumstances present and their existence is communicated to the promisor, the non-performance of the promise entitles the promisee to not only the ordinary damages but also special damages that may result there from. For example, A, who is a builder, agrees to erect and finish a house by 1 January in order that B, may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that it falls down before 1 January and has to be rebuilt by B. As a consequence, B loses the rent which he was to have received from C, and is obliged to make compensation to C for the breach of his contract. Thus A must make compensation to B for the cost of rebuilding the house, for the rent lost, and for the compensation made to C. EXEMPLARY OR PUNITIVE OR VINDICTIVE DAMAGES They are not proportionate to the actual pecuniary loss sustained by the aggrieved party but are inflicted by way of punishment. These are normally awarded in case of: A breach of promise to marry, or Wrongful dishonour of a cheque by a banker. The measure of damages in case of breach of promise to marry is dependent upon the severity of the shock to the sentiments and goodwill of the promisee. In case of wrongful dishonour of a cheque, the rule is- smaller the amount of the cheque, larger will be the amount of damages awarded and vice versa. NOMINAL DAMAGES Nominal damages are awarded in case of breach of contract where there is only a technical violation of the legal right, but no substantial loss is caused thereby. The damages granted in such cases are called nominal because they are very small, say, a rupee. It may be noted that the aggrieved party cannot claim these damages as a matter of right. It is always at the discretion of the court whether or not to award nominal damages. DAMAGES FOR DETERIORATION CAUSED BY DELAY In the case of deterioration caused to goods by delay, damages can be recovered from carrier even without notice. The word 'deterioration' implies not only physical damages to the goods but also loss of special opportunity for sale. Case: Wilson v. Lancashire and Yorkshire Railway Company The plaintiff had bought velvet for making caps for sale during the spring season. But, due to delay in transit, he was unable to utilize it for making caps for sale during the season. It was held that the fall in value of the cloth arrived after the season amounted to a deterioration for which the plaintiff was entitled to recover damages without notice.

25 DAMAGES FOR INCONVENIENCE AND DISCOMFORT When a party has suffered physical discomfort and inconvenience as a result of breach of contract, that party can move a suit for claiming compensation. However, according to the general rule, the motive or the manner of breach do not affect the measure of the damages. CASE: (HOBBS V. LONDON & S.W. PAIL &CO.) H, with his wife and children took a ticket for a midnight train, to be transported to a particular place where he lived. They were, however, transported to a wrong place and they had to walk several miles on a drizzling night. H was awarded compensation for inconvenience but nothing for the medical expenses of his wife who caught cold, as this consequence was too remote. LIQUIDATED DAMAGES & PENALTY Some time, in order to avoid delay in the assessment and payment of damages, at the time of formation of contract, the parties to a contract mutually agree to stipulate or specify sum, which will become payable by the party guilty of breach. If the specified sum represents a fair and genuine pre-estimate of the damages likely to result due to breach, then it is called liquidated damages. On the other hand, if the sum fixed at the time of formation of contract is disproportionate to the damages likely to occur, the sum is deemed to be a penalty. The amount is so provided to ensure performance of the contract. Under English law, liquidated damages are enforceable but penalty cannot be claimed. In India, however, there is no such distinction recognised between penalty and liquidated damages. The courts in India allow only 'reasonable. compensation' (section 74). STIPULATIONS FOR INTEREST A stipulation for payment of interest in case of default is not in the nature of a penalty, if the interest is reasonable. If the court. finds that the rate of interest is exorbitant and is penal in character it may grant some relief. A stipulation in a bond for payment of compound interest on failure to pay simple interest at the same rate as was payable upon the principal is not a penalty. But a stipulation in a bond for the payment of compound interest at a rate higher than that of simple interest is a penalty and the party may be relieved against. Q10. What is Quasi Contracts? Discuss its provisions under Indian Contract Act,1872? A10. o When one person obtains a benefit at the expense of the another and the circumstances are such that he should, equitably, pay for it, the law will compel payment. Even though there is no contract between the parties. o Such relationships are termed as Quasi Contracts because although there is no agreement or contract between them, they are in same position as if there is Contract. o Actually, essentials of valid Contract are lacking, but as circumstances are similar to Contract, they are termed as Quasi Contracts. o The term Quasi Contract is derived from the Roman Law. o Quasi contracts are not contractual in law, but in fact. o Law of Quasi Contract is also known as Law of Restitution. o The following are Quasi Contract

26 1. 2. 3. 4. 5. Necessaries 68 Reimbursement 69 Non-gratuitous 70 Finder of Goods 71 Mistake or coercion 72

1) Necessaries 68 o If a person incapable of entering in to a C. or any one whom he is legally bound to support, is supplied by another person with necessaries suited to conditions of his life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable persons. o For e.g. A supplies B, a lunatic with necessaries. A is entitled to be reimbursed from Bs property. o The term Necessaries is not defined in Indian Contract Act: 1872. o It includes articles required to maintain a particular position in which he is. o Necessaries may include goods and services i.e. teaching, medical advice etc. 2) Reimbursement:-69 o A person who is interested in the payment of money, which another is bound by Law to pay, and who therefore pays it, is entitled to be reimbursed by the other. o However, the following are essential requirements. o The payment must be made such as the other party was bound by Law to pay o For e.g. Brooks wharf Ltd. Was the owner of a wear house. Goodman Bros.(G) imported certain goods and kept them in wear house. The goods were stolen without any negligence as part of W. the authorities made a demand on W for payment of custom duties which W paid. Held, W could recover the amount form G. [ Brooks wharf Ltd. V/s Goodman Bros. 1937 ] (i) The payment made must be bonafide (ii) The payment must be made to another person and not to himself. For e.g. A canal Co. owned a canal and was under a statutory duty to keep the bridge on the canal under repair. The bridge fell into disrepair and Maccles Field corporation(M) called upon canal Co. failed to do so, M repaired the bridge themselves and bring an action to recover the amount. Held, here payment is voluntary and hence, M cannot recover. [ Macclesfield Corporation v/s Great Central Railway 1911 ] 3) Non Gratuitous: o Where a person lawfully does anything for another person or delivers anything to him, not intending to do so gratuitously and such other person enjoy the benefit thereof, the latter is bound (who has enjoyed) is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered. [Sec: - 70] o For e.g.: - A saves Bs property from fire. A is not entitled to compensation from B, if circumstances show that he intended to act gratuitously. o However, the following are the essentials of see: 70 (i) The thing must be done lawfully : For e.g.: - A managed the property of his wife and sister-in-law and was under an impression that he will receive remuneration. He was entitled to claim reasonable remuneration. (ii) It must be by person not intending to act gratuitously ; For e.g.: - Pollangee & Sons (p) enters into a Contract with Lonawalla municipality (L) to construct a market. The CONTRACT was in writing but it did not bear seal of municipality

27 to make it binding on L according to Municipality Act. P construct the market accordingly and L takes the possession there of but refuses to pay P as agreed for its construction. Held, P is entitled to receive the dues. [ Pollangee & Sons V/s A Lonawala Municipality] 4) Finder of goods: -Section 71 o A person who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee [ Sec: - 71] o He is bound to take as much care of the goods, as a man of ordinary prudence would take care of his own goods. o He must also take necessary steps to trace the true owner, if he does not, he will be guilty. o Till the owner is found out, the property in goods will vest with the finder and he can keep with him against the whole world. (except true owner) o For e.g.: - In case of Hollins V/s Fowler: Hollins picked up a diamond from Fowlers shop and handed it to F to keep it till the true owner appears. In spite of several advertisement, no one appeared to claim. Hollins claims the diamond, and F refuses. o Held, the finder of goods is Hollins and so he can keep with himself against the whole world except true owner. F must return it to H. 5) Mistake or Coercion-Section 72 o A person to whom money has been paid or anything delivered, by mistake or coercion, must repay or return it to the person who paid it by mistake or coercion. o For e.g . A pays some money to B by mistake. It is really due to C. B must refund money to A. C, however cannot recover the amount from B, as there is no privity of contract.

28

SPECIAL CONTRACTS
Q1. Explain the Contract of Indemnity & Guarantee under Special Contracts? A1 CONTRACT OF INDEMNITY MEANING The term 'indemnity' simply means to make good the loss or to compensate the party who has suffered some loss. The term 'contract of indemnity' is defined in Section 124 of the Indian Contract Act as follows: "A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the: conduct of any other person, is called a contract of indemnity." PARTIES The person who promises to compensate for the loss is called the "indemnifier. The person to whom this promise is made or whose loss is to be made good is known as "indemnity-holder" or "indemnified". For example, A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of money. This is a contract of indemnity, Here A is the indemnifier and B is the indemnified. ENFORCEABILITY To enforce such contracts it is necessary that all the essentials of a valid contract must be present. In case any one of the essential is missing, the contract cannot be enforced. Thus if the object or consideration of an indemnity agreement is unlawful, it cannot be enforced. For example, A asks B to beat C, promising to indemnify him against the consequences this cannot be enforced. Suppose B beats C and is fined Rs. 500, B cannot claim this amount from A, because the object of the agreement is unlawful. SCOPE All contracts of insurance (except Life Insurance) are also contracts of indemnity. In an auction sale there is an implied contract of indemnity between the auctioneer and the person who asks him to sell goods. A promise to make good the loss arising from any cause whatsoever e.g. fire, perils of sea, accidents etc. are also considered to be contract of indemnity. IMPLIED CONTRACT OF INDEMNITY Section 69 of the Contract Act implies a duty to indemnity in case a person who is interested in the payment of money which another is bound by law to pay, has paid the amount. Similarly, in an auction sale there is an implied contract of indemnity between the auctioneer and the person who asks him to sell goods. For example, A, an auctioneer, sold certain goods on the instructions of B. Later on, it is discovered that the goods belonged to C and not B. So, C recovered damages from A for selling the goods belonging to him. Here A is entitled to recover the compensation from B.

29 In the above case there was an implied promise to compensate the auctioneer for any loss which he may suffer on account of the defective title of B.

RIGHTS OF INDEMNITY HOLDER In pursuance of Section 125 of the Act the indemnity-holder may recover from the indemnifier (promisor), the following amounts, provided the acts within the scope of his authority : 1. He is entitled to recover all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applied. 2. He is entitled to recover from the indemnifier all costs which he had paid in bringing or defending any suit in respect of contracts of indemnity. In bringing or defending the suit the indemnity-holder must not contravene the orders of the indemnifier and he must act in the same way as a prudent man would have acted under similar circumstances in his own case. 3. He is entitled to recover from the indemnifier, all the amount which he had paid under the terms of the compromise of such suit. However, it is essential that the compromise must not be contrary to the orders of the indemnifier and in compromising the suit, he must act as a prudent man. This right is also available to the indemnity-holder when he paid any amount under any compromise entered by him and authorized by the indemnifier. INDEMNIFIERS LIABILITY 1. An important question in this connection is when does the indemnifier become liable to pay, or, when is the indemnity-holder entitled to recover his indemnity? 2. The indemnity-holder is entitled to above-mentioned rights as soon as his liability has become certain, although lie has himself paid nothing. 3. Indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay. 4. Thus, if the indemnity-holder has incurred an absolute liability, he is entitled to ask the indemnifier to save him from that liability and pay it off. 5. In simple words, the liability of indemnifier commences as soon as the liability of the indemnity-holder becomes absolute. CONTRACT OF GUARANTEE MEANING According to Section 126 of the Indian Contract Act, 'A contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety. The person in respect of whose default the guarantee is given is called the Principal Debtor. The person to whom the guarantee is given is called the Creditor. For example, if A, and his friend B enter a trader's shop, and A asks the trader, supply the articles required by B, and if he does not pay you. I will. It is a contract of guarantee. The primary liability to pay is that of B but if he fails to pay, A becomes liable to pay. On the other hand, if A says to the trader, "let him (B) have the goods, I will sec you are paid", the contract is one of indemnity and not a contract of guarantee.

30 COMPETENCY OF PARTIES A contract of guarantee is an agreement and as such all the essentials of valid contract must be present. For instance, the contracting parties should be competent to contract. Suppose in the above-mentioned example B is a minor i.e., incompetent to contract. In such a situation A would be regarded as the principal debtor and he will become personally liable to pay. Thus, the incapacity of the principal debtor does not affect the validity of a contract of guarantee. The requirement is that the creditor and the surety must be competent to contract. ESSENTIAL FEATURES OF CONTRACT OF GUARANTEE There should be existence of a debt, for which some person other than the surety should be primarily liable. It is not necessary that the surety should be benefited in respect of consideration. All the essentials of a valid contract should be present. Creditor and surety must be competent i.e., principal debtor need not be competent to contract. Surety's liability is dependent on principal debtor's default. Guarantee must not be obtained by misrepresentation. Guarantee must not be obtained by concealment of material facts. Q2. Distinguish between Contract of Indemnity and Contract of Guarantee? A2. The points which differentiate the contract of indemnity from guarantee are given below. PARTIES In a contract of indemnity there are only two parties i.e., indemnifier and the indemnified while in contract of guarantee there are three parties principal debtor, creditor and the surety. NO. OF CONTRACTS In a contract of indemnity there is only one contract, whereas in a contract of guarantee, there are three contracts. WHO IS LIABLE In a contract of indemnity the indemnifier undertakes to save the indemnified from any loss caused to him by the conduct of indemnifier himself or the conduct of any other person, while in a contract of guarantee, the surety undertakes for the payment of debts of principal debtor, if the principal debtor fails to pay it. NATURE OF LAIBILITY In a contract of indemnity, the liability of indemnifier is primary and independent, while in a contract of guarantee the liability of surety is secondary i.e., it arises only on the default of principal debtor. The primary liability is that of the principal debtor. TYPE OF OBLIGATION In a contract of indemnity, indemnifier's liability arises only on the happening of a contingency, while in a contract of guarantee there is an existing duty or debt, the performance of which is guaranteed by the surety.

31 INITIATIVE In a contract of indemnity, indemnifier acts independently without any request of the debtor or the third party, while in a contract of guarantee the surety guarantees at the request of principal debtor. CONSEQUENCE In a contract of guarantee, if the principal debtor fails to pay and the surety discharge his debt, the surety can proceed against the principal debtor in his own right, while in a contract of indemnity, the indemnifier cannot sue the third party in his own name unless there is an assignment In indemnifier's favour. If there is no such assignment, the indemnifier must bring the suit in the name of indemnified Q3.Explain types of Guarantees under Indian Contract Act, 1872? How can the continuing guarantee be revoked? A3. A guarantee may be specific or continuing. SPECIFIC GUARANTEE A specific guarantee covers only one transaction or objective, is limited to a certain sum of money and is limited as to time. Any amount paid towards the advance by the borrower in his debt account with the creditor will go to reduce the guarantor's liability. CONTINUING GUARANTEE A continuing guarantee is defined in Section 129 of the Indian Contract Act. It covers a series of transactions; subject to the limit as mutually agree upon, irrespective of the payments towards the advance and irrespective of the fluctuations of the balance in the debtor's account between debit and credit. Whether a guarantee is a continuing guarantee or not depends upon the construction of the document. If there are several documents covering a debt and guarantee, all the documents must be read as whole. In case of ambiguity in the contract, the nature of the contract is to be determined basing upon the surrounding circumstances. In Nottingham Hide Co. vs. Bottrill it was held that the following words used in a guarantee made the guarantee a continuing one: "Having every confidence in him, he as but to call on us for a cheque and have it with pleasure for any account he may have with you and when to the contrary we will write to you". REVOCATION OF THE CONTINUING GUARANTEE In the case of a Partnership firm, a Continuing guarantee is revoked on the reconstruction of the firm. According to" Section 38 of the Indian Partnership Act, a continuing guarantee given to a firm or to a third party in respect of the transaction of the firm, is, in the absence of agreement to the contrary revoked as to future transaction from the date of any change in the constitution of the firm. In Neel Comul Mookerjee vs. Bipro Das Mookerjee, 'A' was surety for 'B', who was a cashier in N.C. Mookerjee & Co. The firm was thereafter reconstituted. It was held that the continuing guarantee was revoked by the change of the constitution of the firm and 'A' was not liable for any misappropriation or defalcation by 'B' after the date of the change of the constitution of the firm. In Montosh Kumar Chaterjee and Another vs. Central Bank and others, the Calcutta High Court held that "when there is arrangement for an overdraft in a current account up to a

32 specified limit and several advances, not exceeding that limit in their liability less the credits, are made, such advances are not each a separate loan but are component parts of a single loan. It was also held that when a guarantee is given in respect of such an overdraft, it is a continuing guarantee covering the running and fluctuating account and securing the general debit balance at any time, subject however, to the limit specified." METHODS OF REVOCATION OF CONTINUING GUARANTEE A continuing guarantee may be revoked in two ways: by the surety giving notice oral or in writing to the creditor as to future transactions (Section 130) and in the absence of a contract to the contrary, by the death of the surety as to future transactions (Section 131). It should be noted that the notice of revocation must be given according to the terms of the contract. If the contract of guarantee requires three month's notice, the surety must give a three month's notice. In Wall Muhammed vs. Ganpat, it was held that a notice revoking a guarantee given just a day before the performance of the contract is not illegal. If there are more than one surety, the notice must be given by or on behalf of all the co-sureties. Notices by one co-surety do not determine the guarantee. The death of the surety terminates his guarantee as to future transaction in the absence of a contract to the contrary. His estate is, however bound to all transactions entered into before the death of the surety. In several Court decisions it has been held that if the consideration for the continuing guarantee is one and whole, in that case the guarantee does not come to an end by the death of a surety, and the estate of the deceased surety continues to be liable for future transaction as well. Where two sureties give joint and several continuing guarantee, the death of one of them does not terminate the liability of the survivor.. The lunacy of the surety terminates the guarantee as to future advances. CONSIDERATION OF GUARANTEE "Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee". It is relevant to discuss following illustrations in this regard. 'B' requests 'A' to sell and deliver to him goods on credit. 'A' agrees to do so, provided 'C will guarantee the payment of the price of the goods. 'C promises to guarantee the payment in consideration of 'A's promise to deliver the goods. This is a sufficient consideration of 'C's promise. 'A' sells and delivers goods to 'B'. 'C afterwards, without consideration agrees to pay for them in default of 'B'. The agreement is void. In a contract of guarantee it is not necessary that all the material facts be disclosed unless it is in nature of an insurance. In other words a contract of guarantee is not a contract of Uberrimae Fidei. The following case aptly describes this. LONDON GENERAL OMNIBUS COMPANY C engaged P as a clerk to collect money for him. P misappropriated some of C's receipts and failed to account for them. This sum was made good by P's relations and C agreed to retain P in his service on having a fidelity guarantee. S gave his guarantee for P's duly accounting. C did not acquaint S with P's previous dishonesty. Held, the guarantee could not be enforced against S owing to the nondisclosure of P's previous dishonesty.

33 Q3. Explain Nature of Surety's Liability? What are his rights? A3. According to Section 128, the liability of the surety is co-extensive with that of the principle debtor, unless otherwise provided by the contract. The liability of the surety is normally to the same extent as that of the principal debtor. The surety cannot however, be made liable beyond what he had earlier contracted to. The surety may however, limit his liability to a part of the entire debt. The extent of liability of a surety assumes importance when the principal debtor is declared insolvent. A reduction in the liability of the principal debtor (for example, after the creditor has recovered a part of the sum due from him out of his property) will result in a proportionate scaling down of the surety's liability. It has been specifically provided in the contract that the surety's liability arises only when the principal debtor is made liable, the surety continues to be liable in the given instances: death of the principal debtor; discharge of the principal debtor's liability by operation of law; and creditor's failure to sue the principal debtor within the period of limitation. release of one of the co-sureties by the creditor. LIMITATION OF SURETY'S LIABILITY In the first instance, the guarantee given is restricted to a part of the debt whereas in the second instance the guarantee given is for the entire debt subject to a limit. This will result in the following consequences: where guarantee is given for a part of the debt. Here, Prem will be able to recover Rs.5,000 from the Srinath (surety) and Rs.750 (1 /4th of the balance of Rs.3,000) from Arun's estate. After making the payment, Srinath (surety) steps in the shoes of the creditor and can recover Rs. 1,250 (i.e., l/4th of Rs.5,000) from Arun's estate. where guarantee is given for the entire debt subject to a limit, Prem will succeed in recovering Rs.5,000 from Srinath (i.e. the guaranteed amount) and Rs.2,000 (l/4th of the entire debt of Rs.8,000) from Arun's estate. Srinath will not get any dividend from Arun's estate till the full amount of Rs.8, 000 is paid to Prem. RIGHTS OF THE SURETY Right against the Creditor The surety can exercise the following two rights against the creditor: Section 141 provides that a surety is entitled to all the securities of the principal debtor in the possession of the creditor at the time when the contract of surety is entered into. This right can be exercised by the surety irrespective of whether he is aware of the existence of the security or not. Secondly, in case the creditor loses or parts with the security without the consent of the surety, then the surety is discharged to the extent of the value of the security. Rights against the Principal Debtor According to Section 140 of the Contract Act, soon after discharging the liability of the principal debtor, the surety steps into the shoes of the creditor and can exercise all the rights which the creditor himself would have exercised against the principal debtor. This right of the surety is called the right of subrogation.

34 Right to Indemnity : According to Section 145, in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully. Thus a surety is entitled to full indemnification (i.e., he can recover not only the amount paid to the creditor but also any interest thereon). However, Section 145 lays down certain restrictions as to what the surety can claim. A surety can claim only that amount which he has actually paid to the creditor. He cannot claim amounts paid by him negligently or wrongfully. Rights of surety on payment or performance: Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor (Section 140). He is also entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully (Section 145). Surety's rights against the 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-sureties who are equally bound with him in absence of any agreement to the contrary. If they are bound in different sums, they are liable to pay equally as far as the limits of their respective obligations permit (Section 147). As between co-sureties, there is equality of burden and benefit. 'A', 'B' and 'C are sureties for a debt due by 'D' to 'E'. A restricts his liability to Rs.10,000, B to Rs.20,000 and 'C to Rs.40,000. 'D' makes default to the extent of Rs.30,000. In such an event, 'A', 'B' and 'C will be liable to the extent of Rs.10,000 each. The position varies in case D' makes default to the extent of Rs.40,000. A shall then be liable to pay Rs.10,000 and 'B' and 'C Rs. 15,000 each. A suit can be filed to declare that the debtor shall be the person liable to pay debt before the payment of principal debt and on the payment of the principal debt the surety will be placed in the position of the creditor. Q4. Discuss the provisions relating to Discharge of Surety under Indian Contract Act? A4. Surety is Discharged from Liability By Revocation A continuing guarantee can be revoked by the surety any time by giving notice to the creditor. A notice given, discharges the liability of the surety with respect to all future transactions. However, the surety will remain liable for those transactions prior to the revocation. By death of the surety so far as future transactions are concerned. However, the surety's liability will not be discharged even on his death, in case there is a contract to that effect. By Novation - where a new contract substitutes the old contract by which the liability under the old contract stands canceled. By Conduct of the Creditor Any variance made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

35 The validity of a contract of guarantee will not be affected in case there is a written contract of guarantee and there is no variance of the same in writing. Where the creditor enters into an agreement with the principal debtor releasing him from his liability, the surety stands discharged. The following illustration aptly discusses this. 'A' gives guarantee to 'C for goods to be supplied by 'C to B C supplies goods to 'B and afterwards 'B' becomes embarrassed and contracts with his creditors (including C's) to assign to them his property in consideration of their releasing him from their demands. Here, 'B' is released from his debt by the contract with 'C and 'A' is discharged from his surety ship. It has already been discussed that as per Section 128 the liability of a surety is coextensive with that of the principal debtor. Hence, if the principal debtor isdischarged from his liability by virtue of an agreement between him and the creditor, then the surety also will stand discharged. Another explanation for the discharge of the surety is as follows: As per Section 140, the surety can claim reimbursement from the principal debtor after making payment to the creditor. If the principal debtor is no more liable, then the remedy of the surety will be affected. This would result in a discharge of his liability. When the creditor compounds with principal debtor giving him time to pay his debt the surety stands discharged.

According to Section 135, the following circumstances will lead to a discharge of surety's liability. When the creditor compounds with the principal debtor. When the creditor agrees not to sue the principal debtor: A contract between the creditor and the debtor, wherein the creditor agrees not to sue the debtor will discharge the surety from his liability. Where the creditor, by his act or failure to perform his duty to the surety impairs the remedy available to the surety against the principal debtor, the surety is discharged. Also, any act of the creditor which by implication releases the principal debtor from liability, will discharge the surety from his liability. In Hewison vs. Rickets, goods were given on hire purchase basis. The payment of the installments was guaranteed by a third person. When the debtor failed to make payment, the creditor determined the agreement, seized the goods and sued the surety on his guarantee. It was held that as the creditor had determined the agreement, the surety cannot be held liable. Where the creditor loses or disposes off, without the consent of the surety any security pledged with him, the surety stands discharged to the extent of value of the security so lost or disposed.

By Invalidation of Contract A guarantee obtained by means of either misrepresentation or concealment of material fact which the creditor was aware of, at the time of entering into the contract, invalidates the guarantee and discharges the surety.

36 Where there is no consideration between the creditor and the principal debtor, the surety is discharged. Where a person gives guarantee on the condition that the creditor shall not act upon it until another person joins in as co-surety, the guarantee is not valid if that other person does not join.

Q5. A5.

What is Bailment? State the Duties And Rights of Bailor And Bailee under Contract of Bailment? Bailment and Pledge are special types of contracts which are regulated by Sections 148 to 181 of the Indian Contract Act, 1872. The word 'bailment' takes its roots from the French word 'bailor' which means 'to deliver'. According to Section 148, "bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them". The person delivering the goods is called the 'bailor' and the person to whom they are delivered is called the 'bailee'. Thus, the essentials of a bailment can be summarized as under: Firstly, there should be delivery of goods for some purpose. The delivery of goods should not be accompanied by transfer of ownership. Secondly, the goods should either be returned to the bailor after the purpose has been accomplished or it should be disposed off according to the bailor's directions. Delivery of goods in a contract of bailment may be actual or constructive. Actual delivery takes place when goods are physically delivered to the bailee. For example, delivery of gold to a goldsmith for making jewels constitutes actual delivery. On the other hand, in constructive delivery, there is no physical transfer of goods. Possession of goods is handed over to the bailee without actually transferring them physically. For example, 'A' sells his walkman to "C". "C" requests 'A' to keep the walkman with him for two weeks instead of delivering it to him immediately. Here 'A' holds the walkman as a bailee. Where the owner retains control over the goods there is no bailment. The position would be similar if a locker in a safe deposit vault is given by a bank to a customer along with the key without which the locker cannot be opened. Classification of Bailment Bailments may be for exclusive benefit of the bailor; exclusive benefit of the bailee; mutual benefit of the bailor and the bailee; gratuitous bailment; where there is no consideration between the parties; and Non-gratuitous bailment or bailment for reward. The rights and duties of bailor and bailee are contained in Sections 150 to 164 of the Act. We shall first discuss the duties and rights of a bailor.

37 Duties of a Bailor The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and that which materially interferes with the use of them, or exposes the bailee to extraordinary risks. The following illustration is relevant in this regard: 'A' lends a horse, which he knows to be vicious, to 'B'. He does not disclose the fact that the horse is vicious. The horse runs away. 'B' is thrown and injured. 'A' is responsible to 'B' for the damage sustained. In a contract of bailment, the bailee will have to bear all the ordinary-expenses incurred, while the bailor will be responsible for any extraordinary expenses incurred by virtue of the bailment. In case of a gratuitous bailment, it is the duty of the bailor to bear the ordinary and reasonable expenses incurred by the bailee. The bailor is responsible to the bailee for any loss sustained by him in the following instances: Where the bailor is not entitled to make the bailment, or to receive back the goods, or to give directions, regarding them. Premature termination of a gratuitous bailment. It is the duty of bailor to receive back the goods after the purpose is achieved.

Rights of Bailor The bailor is entitled to enforce by suit all the liabilities or duties of the bailee, as his rights. The bailor can terminate the bailment if the bailee does, with regard to the goods bailed, any act which is inconsistent with the terms of the bailment (Section 153). Demand return of goods lent gratuitously. The bailor can sue a third party who by his act causes any injury o the bailee the possession and use of good bailed.

Duties of Bailee According to Section 151, the bailee should take such care of the goods as a man of ordinary prudence would take of his own goods. If the bailee has not acted in a prudent manner, he cannot be excused by pleading that he had taken similar care of his own goods also, and his goods, have also been lost or damaged along with those of the bailor, or that the bailor had the knowledge that his goods were being kept in a negligent manner. Some cattle belonging to 'A' were with 'B'. Without any negligence on B's part the cattle were stolen. B did not inform the owner or the police or make any effort to recover them, because he thought it would be useless to do so. Held, 'B' was liable for the loss, unless he could prove that even if he had reported the loss the cattle still could not have been recovered. The bailee should not make any unauthorized use of goods. For example: 'M' lends a car to 'N' for his own use. 'N' rents it out to 'X'. 'X' drives with care, but the car accidentally falls and has to be repaired. 'N' is liable to make compensation to 'M' for the damage caused to the car. In case the bailee makes unauthorized use of the goods bailed, the bailor may resort to either of the following two remedies. He may terminate

38 the bailment or may recover compensation for the loss caused due to unauthorized use of the goods. The bailee should not mix the goods of the bailor with his own goods, but keep them separate from his own goods. Where the bailee mixes the bailor's goods with those of his own with the bailor's consent, then the bailor and the bailee shall have an interest in the mixed goods in proportion to their respective shares. Where he mixes the goods without the consent of the bailor, two possibilities may arise. - The goods can be separated. - The goods cannot be separated. Where the goods can be separated: Where the goods of the bailor and the bailee can be separated, then they will remain the owners in accordance with their respective shares. However, the costs of separation as well as any damage arising from the mixture will have to be borne by the bailee. When the goods cannot be separated: The bailor can recover damages from the bailee for the loss of the goods.

The bailee should not set up an adverse title of the goods bailed claiming them to be his. The bailee not only has to return the goods bailed but also any accretion to the goods.

Rights of Bailee The duties of the bailor are the rights of the bailee. Delivery of goods to one of several joint bailors of goods. In the absence of any agreement to the contrary. According to Section 166, if the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or according to the directions of, the bailor, the bailee is not responsible to the owner in respect of such delivery. According to Section 167, if a person other than the bailor, claims the goods bailed, the bailee may apply to the court to stop the delivery of the goods to the bailor, and to decide the title to the goods. According to Section 180, if a third person wrongfully deprives the bailee of the use or possession of the goods bailed to him, he has, the right to bring an action against that party. The bailor can also bring a suit in respect of the goods bailed. The bailee is also entitled to recover necessary expenses incurred on bailment. He can also recover compensation from the bailor in case he incurs a loss owing to the defective title of the bailor. Retain the goods (lien) till his dues are paid, in other words exercise a general lien. The bailee may also exercise a particular lien when the contract requires him to use his skills. General lien entitles the bailee to retain goods of the bailor for a 'general balance of account'. Here, the bailee may retain not only those goods of the bailor in respect of

39 which some particular service has been rendered, but also other goods in the possession of the bailee belonging to the bailor. The right of general lien is conferred on bankers, factors, wharfingers, attorneys of High Court and policy brokers. This right is conferred only to the above specified and none else unless there is an express contract to that effect. For example: A delivers a rough diamond to B, a jeweller, to be cut and polished which is accordingly done. B is entitled to retain the stone till he is paid for the services he has rendered. Rights of Finder of Goods When a person finds an article and takes it into his custody, he assumes the role of a bailee. He then has the same responsibilities like any other bailee. The rights available to him are: According to Section 168, the finder of goods can exercise lien over the goods till the owner reimburses the expenses incurred for the safe custody of the goods. Where the owner has announced a reward for recovery of the lost article, the finder has the right to retain the goods till he receives the award. The finder has a right to sell the article: - if the owner cannot be found provided the bailee has made reasonable efforts; if the owner refuses, upon demand, to pay the lawful charges of the finder; the article is of perishable nature or that which loses most of its value with passage of time; or if the lawful charges of the finder in respect of the goods found, amount to two thirds of their value.

Q6. What is Pledge? State the Rights and Duties of Pawnee and Pawnor? A6. According to Section 172, bailment of goods as security for payment of a debt or performance of a promise is called "pledge". The bailor is, in this case, called the "Pledger" or "Pawnor" and the bailee is called the "Pledgee" or "Pawnee". In a pledge, the pawnor deposits any type of movable property with the pawnee. In other words, actual transfer of possession should take place. Essentials of a Pledge may be summarized as: There should be a delivery of goods. The purpose of delivery should be to make the goods bailed serve as security for the payment of a debt, or performance of a promise. Delivery of the goods by the pawnor to the Pawnee is essential. An agreement to transfer possession in future is not pledge. When the goods are pledged, the Pawnee becomes a secured creditor and has a prior claim over the goods pledged. In Bank of India vs. Binod Steel Limited, it was

40 held that when certain movables were pledged with a bank, the same could not be sold to meet the liability of other creditors, unless the claim of the bank was fully satisfied. The owner of the goods or any person authorized mentioned below by him in that behalf can pledge the goods. A mercantile agent. A person in possession under a voidable contract. A person with a limited interest A seller in possession after sale A buyer in possession after sale. Pledge by Non-owners The general rule is that it is the owner who can ordinarily create a valid pledge. But in the following cases even a non-owner can create a valid pledge: Pledge by mercantile agent: Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of mercantile agent, shall be as valid as if he were expressly authorized by the owner of the goods to make the pledge: provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge. Pledge by seller after sale or buyer in possession before sale, provided the pawnee has acted in good faith without any notice of sale to the buyer over the goods or lien of the seller. Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. Goods can be pledged by a co-owner in possession. When the pawnor has obtained possession of the goods pledged by him under a contract voidable under Section 19 or Section 19-A, and the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods provided he acts in good faith and without notice of the pawnor's defect of the title.

Rights and Duties of Pawnee The pawnee has a right to retain the goods not only for payment of the principal debt or for performance of a promise but also for any expenses incurred or interest accrued thereon. The pawnee can sue the pawnor to recover from him any extraordinary expenses incurred by him for the preservation of the goods pledged. When the goods pledged have been obtained by the pawnor under a voidable contract and where such contract has not been rescinded at the time of pledge, the

41 pawnee acquires a good title to the goods, provided he has acted in good faith and has no knowledge of the defective title. When the pawnor defaults in payment of debt or fails to perform his part of the promise, the pawnee can initiate a suit against the pawnor; retain the goods as a collateral security; sell the goods pledged after giving the pawnor a reasonable notice of sale; and recover from the pawnor any deficit between the debt due and sale price.

Rights and Duties of Pawnor The pawnor can get back the goods pledged on his performance of promise or repayment of loan and interest. In case the pawnor makes default in payment, he can still pay the pledged amount and redeem the goods pledged at any subsequent time. However, he can exercise his right to redeem only before the pawnee has made an actual sale of the goods. The right to redeem the pledged goods will be invalidated when the pawnee sells the goods in exercise of his right under Section 176. The right of redemption of goods also includes a right to any accretion to the goods pledged. For example, if shares are pledged and during that period the company issues bonus and right shares, then the pawnor will be entitled to the same on redemption. The pawnor can oversee whether the pawnee preserves and maintains the goods properly. The pawnor has rights of an ordinary debtor which he has acquired by various statutes for the protection of debtors.

Q7. What is Lien? Discuss its types? A7. Lien is the right of a person (usually the creditor) to retain the possession of the goods and securities belonging to another person (the debtor) till the amounts due to him from such owner are fully realized. The lien can be defined as "The right to retain the lawful possession of the property of another until the owner fulfills a legal duty to the person holding the property, such as the payment of lawful charges for work done on the property. A mortgage is a common lien". A lien has judicially been defined as "a right in one man to retain that which is in his possession belonging to another until certain demands of the person in possession are satisfied". In its widest meaning the term "lien" includes every case in which real or personal property is charged with the payment of any debt or duty; every such charge being denominated a lien on the property. In a more limited sense it is defined to be a right of detaining the property of another until some claim be satisfied. For example: The transporter of goods retains the possession of the goods that he has carried to the

42 destination till the amount of freight is paid to him. The tailor retains the dress stitched by him till the service charges for making the dress is paid to him. The right of exercising Lien may arise in three ways: By express contract in between the parties From implied contract in accordance with the general or particular usage of trade; By legal relation between the parties. In order to create a valid lien, the following factors are essential. The party who acquired the property should have the absolute title of ownership over that property; That the party claiming the lien should have an actual or constructive possession of property or goods with the assent of the party against whom the claim is made; The lien should arise upon an agreement, express or implied and not be for a limited or specific purpose inconsistent with the express terms or the clear, intent of the contract; e.g., when goods are deposited to be delivered to a third person or to be transported to another place. The Effect of Lien In general, the right of the holder of the lien is confined to the mere right of retainer. But when the creditor has made advances on the goods of a factor, he is generally invested with the right to sell. In the absence of express contract a lien does not of itself carry (subject to a few exceptions) a right of sale of goods/property on the part of the lienee. (The person who exercises the right). However, when such right of sale is incorporated as a matter of special contract in between the owner and the lienee, the lienee will have to closely observe the contractual rights given to him and should be careful to serve any notices of his intention to sell the goods/property according to the terms of the contract and he should follow the necessary procedures stipulated by the contract meticulously. There are two kinds of lien; "particular lien and general lien". PARTICULAR LIEN A person claims the right to retain property in respect of money or labor expended on such particular property. This right is known as particular lien. In Indian law, particular lien is available to all the classes of people other than those mentioned in Section 171 of the Indian Contract Act. The creditor with a particular lien can retain the possession of the goods only till the dues from the debtor for a particular debt for which the securities were handed over have been satisfied. He can not retain them for arty dues from th debtor on other accounts. Example: A, the goldsmith is given the gold by B, the owner to convert it in the form of golden ornaments. He can retain the possession of the ornaments only till the service charges for making those ornaments are paid by the owner, but not for any other liability to be discharged by the owner of the golden ornaments. GENERAL LIEN "A general lien is one which the holder thereof is entitled to enforce as a security for the performance of all the obligations, or all of a particular class of obligation which exist in his favor against the owner of the property".

43 A general lien is a lien in respect of all monies owed to the lienee. A particular lien is limited to monies owed to the lienee in respect of the goods over which the lie-is sought to be exercised. For example: 'X' has borrowed from the bank in the form of two types of loans, one is the agricultural loan for cultivation of crop and the other is a personal loan against the security of his gold ornaments to meet his personal expenditure The agricultural loan has become due for repayment. If there is no specific agreement in between the bank and the borrower in consistent with the lien, when the personal loans is repaid, the bank can exercise the right of general lien by retaining the possession of golden ornaments after the borrower repays the entire liability in his personal loan till the dues accrued in the agricultural loan are repaid. But, the bank can not exercise the right of lien when the agricultural loan is not due for repayment at the time when the personal loan is closed. In Indian law, the general lien is available only to a select class of people. Section 171 of the Indian Contract Act provides, that bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain, as a security for a general balance of account, any goods bailed to them. Accordingly, the bankers can retain the goods and securities which come into their possession in the course of their dealings as bankers for a general balance due from the customers, provided there is no arrangement inconsistent with the lien. No agreement is necessary for the creation of the lien. Q8. Explain Meaning and Nature of Agency? How is it created? A9. INTRODUCTION Modern business is growing and becoming competitive day by day. To keep pace with this development it is not possible for a businessman to carry on all his business transactions on his own. This impossibility necessitates him to allow another person to work on his behalf. This means he is delegating some of his powers to another person to carry on some of his business transactions on his behalf. Here, the other person is an agent and the person who delegated the powers is the principal. The contract which binds the principal and agent is called an agency. For Example: X Co. engages the services of Y firm to sell its products. Here X is the principal, Y is the agent and the contract between them is the contract of agency. The Indian Contract Act, 1872 is the relevant statute which regulates the contract of agency. The provisions of Section 183 to Section 238 of the Act regulate the contract of agency. MEANINGANDNATUREOFAGENCY Section 182 of the Indian Contract Act, 1872 defines an Agent and Principal as: "Agent" means a person employed to do any act for another or to represent another in dealing with the third persons and the "Principal" means a person for whom such act is done or who is so represented. Mere designation of a person as an 'Agent' in an agreement does not by itself make him an agent, and his position depends on the nature of legal relationship.

44 According to Section 182 of the Contract Act, an agent is defined as a person employed to do any act for another or to represent another in dealings with third persons. The persons for whom such act is done, or who is so represented, is called the 'principal'. In a contract of agency, it is the agent who brings about a legal relationship between two persons. It should be noted that an agent is not merely a connecting link between the principal and a third person. The agent is also capable of binding the principal by acts done within the scope of his authority. An agent does not act on his own behalf but acts on behalf of his principal. He either represents his principal in transactions with third parties or performs an act for the principal. The question as to whether a particular person is an agent can be verified by finding out if his acts bind the principal or not. Essential Ingredients of Contract of Agency According to Section 183, any person who is of the age of majority and is of sound mind may employ an agent. According to Section 184 of the Act, between the principal and the third persons, any person may become an agent. But no person who is a minor and of unsound mind can become an agent. According to Section 185 of the Act, no consideration is necessary to create an agency. It is not essential that a contract of agency be entered into. It is sufficient if a person acts on behalf of another and is accepted by the latter.

Creation of Agency An agency can be created either in writing or orally. An oral appointment is a valid appointment even though the contract of Agency by which the agent is authorized has to be in writing. EXPRESS AGREEMENT An Agency may be created either by Express agreement, i.e., an agreement is said to be express when it is given by words spoken or written. (Section 187) Under normal circumstances, agency is created by an express agreement, specifying the scope of the authority of agent. The agent may, in such a case, be appointed either by word of mouth or by an agreement in writing. However, in certain cases, e.g. to execute a deed for sale or purchase of land, the agent must be appointed by executing a formal power of attorney on a stamped paper. IMPLIED AGREEMENT Implied agreement, i.e., by inference from the circumstances of the case and things spoken or written, or the ordinary course of dealing. (Section 187) Implied Agency comes into existence where there is no express agreement appointing a person as agent. It arises from the conduct, situation or relationship of parties. This means the authority to act as an agent may be inferred from the nature of business, the circumstances of the case, the conduct of the principal or the course of dealing between the parties.

45 Illustration: X who, resides in Ahmedabad, owns a shop in Hyderabad. He visits his shop occasionally. The shop is managed by Y who orders goods from Z in the name of X for and pays the amount out of X's funds with X's knowledge. This means Y has an implied authority from X to order goods from Z in the name of X. Implied agency includes: Agency by Estoppel or Holding out: When a person, by his conduct or by statement, leads willfully another person to believe that a certain person is his agent, he is estopped from denying subsequently that such person is not his agent. Agency by Necessity: Where there is no opportunity of communicating to the concerned parties about any urgency and a person in such a situation acts as the agent for the benefit of the other, agency by necessity is said to have arisen. Agency in Emergency: An agent has authority in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances. As per Section 189 of the Indian Contract Act, 1872, an agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances. Illustration: 'A' consigns provision to 'B' at Kolkata, with directions to send them immediately to 'C, at Cuttack. 'B' may sell the provisions at Kolkata, if they can not bear the journey to Cuttack without spoiling. Agency by Ratification: Where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority. The ratification may be express or implied.

Q9. Write Explanatory note on Different types of Agents? A9. An agent is employed to bring the principal into legal relations with third persons or to represent him in dealings with third persons. He is bound to follow all the lawful instructions of the principal but he is not subject to the direct control and supervision of the principal. He may work for several principals at the same time. However, a principal is liable for the acts of his agent done within the scope of his authority. An Agent is classified on two different aspects - on the basis of authority and on the basis of nature of work. Figure Classification of Agents on the basis of Authority

General Agent

Special Agent

Universal Agent

General Agent He is entrusted to perform all the works connected with a particular business or employment, for example, a manager of a firm. He can make his principal responsible for all the acts done

46 in course of performance of such particular business or employment. Here, the question of authorization is immaterial provided the third party acts bonafide, because it is deemed that the third party assumes that such an agent is authorized to do all that which is usual for a general agent to do. Thus, he is an agent who has authority to do all acts connected with a particular trade, business or employment. The principal may limit the authority of such an agent. Unless the principal puts an end to the authority, it shall be assumed to be continuous. Special Agent He is entrusted to do some particular work or represent his principal in some particular transaction. An agent employed to sell a motor car is the best example. Soon after such work is completed, the authority of such an agent comes to an end. If such an agent does or performs an act which is outside the purview of his authority then he is personally liable for the same and the third parties are not entitled to assume that the agent has unlimited powers. Thus, it is always advisable for the third party to make necessary enquiry as to the extent of an agent's authority before entering into any contract with him. Universal Agent He is an agent whose authority is unlimited. This means he is an agent who is authorized to do all such acts which his principal can lawfully do and can delegate. Thus, he enjoys extensive powers to transact every kind of business on behalf of the principal. Thus, he is an agent whose authority to act for the principal is unlimited. He has authority to bind his principal by any act which he does, provided the act (i) is legal, (ii) is agreeable to the law of the land. The distinction between general and universal agents is that the general agent can do everything related to particular business or employment, whereas a universal agent can do everything relating to everything of his principal. Figure Classification of Agents on the basis of Nature of Work

Mercantile Agents

Non-Mercantile Agents

Factor

Commission Agent

Del Credere Agent

Broker

Auctioneer

Mercantile Agents As per Section 2(9) of the Sale of Goods Act, 1930 a Mercantile Agent is one who has authority either to sell goods or to buy goods or to raise money on the security of goods. They are of four kinds based on the nature of work they perform: Factor: He is a mercantile agent to whom goods are entrusted for sale with wide discretionary powers. He may sell such goods on his own name and may pledge the goods as well on such terms as he thinks fit. Further, he has a general lien on the goods of his principal for the general balance of account between him and the principal. Commission Agent: He is the mercantile agent who buys or sells goods for his principal on terms as he thinks fits and receives commission for such work done. It is immaterial whether he possess such goods or not.

47 Del Credere Agent: The term del Credere means 'of entrusting'. Normally the duty of an agent is to enter into an agreement with the third person on behalf of his principal and he is not personally liable for the defaults of third persons towards his principal. However, del credere agent is a mercantile agent, who for additional consideration or extra commission from his principal, undertakes to perform the financial obligations of such third person in case such third person fails to fulfill the same. Thus, he occupies the position of surety as well as of an agent. In case a del credere agent is made to pay an amount to his principal on default of such third person, he cannot recover this amount from such third person later. His compensation is the extra commission that he was getting. Thus, the difference between the del credere agent and an ordinary agent is that the former acts also as a guarantor of the solvency of the third person while the latter acts only as a contracting link between the principal and the third person. Broker: He is the mercantile agent who is employed to negotiate and make contracts for the purchase and sale of goods. He has neither control nor possession of goods. He serves as a connecting link and tries to bring out a business contract between the principal and the third party. In case the deal materializes then he receives the commission called brokerage. Auctioneer: He is an agent entrusted with the possession of goods for sale to the highest bidder in public competition and authorized only to deliver the goods on receipt of the price. Further he has implied authority to sign a contract or memorandum of sale on behalf of the vendor and the purchaser. Thus, an auctioneer is an agent appointed by a seller to sell his goods by public auction for a reward generally in the form of a commission. He is primarily the agent of the seller, but after the sale has taken place, he becomes the agent of the purchaser also. He has the authority to receive the price of the goods sold. He can also sue for the price in his own name.

Non-mercantile Agents Non-mercantile agent is an agent who receives commission from his principle executing of a specified work. They may be called as commission agents, estate agents, house agents, law agents, election agents, advocates, company secretaries. etc. Some of them are explained below: Commission Agent: He is an agent who transacts business for another for a commission. Commission Agent is distinguished from an Ordinary Agent, because he can purchase goods for himself at a price fixed by his principal and later on can sell to another person at a profit. He is not bound to reveal such profit to his principal since such profit is not made in the course of agency. Further, a commission agent is an agent to his principal as such upto the point of sale of goods of his principal and thereafter he becomes a debtor. This clearly reveals that a commission agent is not a fiduciary agent. Estate Agent: He is an agent authorized by his principal to dispose of his property, upon which, is paid commission on agreed terms by his principal. It is the duty of every estate agent to intimate his principal about the best offer received by him at any time prior to entering into a contract for the sale of such property. Election Agent: A candidate at an election may appoint an election agent in the prescribed manner. When such appointment is made, notice of the appointment must be

48 given to the returning officer in the prescribed manner. Subject to the provisions of the Indian Partnership Act, 1932 an agent can delegate his authority as discussed below:

Sub-Agent A sub-agent is a person appointed by an agent to work for the business of agency. He acts under the control and supervision of an agent. That means the agent acts as a principal for the sub-agent (Section 191). Q10 Explain Duties and Rights of Agent and Principal under the Contract of Agency? A10 Duties of Agent An agent is bound to conduct the business of his principal according to the directions given, or in the absence of directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. For Example: 'A', was instructed to warehouse some drapery goods for P, at a particular place. He warehoused a portion of them at another place where they were destroyed by fire without any negligence on the part of 'A'. Held, 'A' was liable to 'P' for the value of the goods destroyed. In case the agent does not follow the instructions of the principal or in case there are no instructions, he departs from the commonly established practice, he will be liable to compensate the principal for any loss incurred because of the departure. If the agent adheres to the instructions given by the principal he cannot be made liable if consequences turn out to be different from those contemplated by the principal. An agent is under no obligation to follow instructions which are unlawful. However, he will be liable if: he sells goods at a rate below than that fixed by the principal; he fails to insure goods as instructed by his principal and the goods are lost; he warehouses goods at a place different from that directed by his principal and the goods are destroyed; or he purchases a larger quantity than directed to do so. An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business unless the principal has notice of his want of skill. The following illustration aptly discusses this. 'A', an agent for the sale of goods, having authority to sell on credit, sells to 'B' on credit, without making the proper and usual inquiries as to the solvency of 'B'. 'B', at the time of such sale is insolvent. 'A' must make compensation to his principal in respect of any loss thereby sustained. An agent is bound to render proper accounts to his principal, and has duty, irrespective of any contract to that effect, to produce vouchers by which items of disbursement are supported as part of the obligation to render proper accounts to the principal on demand. [Section 213]

49 The agent is not discharged from his duty by merely submitting accounts. His duty also consists in explaining them wherever necessary. It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal and seeking to obtain his instructions (Section 214). If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows, either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. (Section 215) In an emergency situation, the agent should exercise reasonable diligence and sound discretion and adopt a course which appears best to him under the said circumstances. He will be justified in this and shall have discharged his duties, though subsequent events may demonstrate that some other course would have been a better option. If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. (Section 216). A transaction made by an agent wherein he sells his own property to the principal is not ipso facto void for failure to disclose a material fact. It is only voidable at the option of the principal. But a transaction which places the agent's duty in conflict with the principal's interest will be presumed to be disadvantageous to the principal. An agent should not set up an adverse title to the goods which he receives from the principal as an agent. An agent is duty bound to pay sums received to the principal on his account. However, the agent can deduct his lawful charges i.e., expenses properly incurred by the agent and the remuneration if any. The principal cannot recover money received by the agent on behalf of the principal in cases where the contract of agency itself is illegal; the agent has lawfully repaid the money to the third person from whom he received it. The principal cannot sue the agent for recovery of money until the latter has received the same. However, if the agent does not account for a reasonable time, it will be presumed that he has received the money. Demand may not be necessary to claim the money, though it is required if the principal wants to claim the interest thereon. An agent should protect and preserve the interests of the principal in case of his death or insolvency. An agent must not use confidential information entrusted to him by his principal for his own benefit or against the principal. The agent must not make secret profit from the extract agency. He must disclose any extra profit that he may make.

50 An agent must not allow his interest to conflict with his duty for example; he must not compete with his principal. An agent must not delegate his authority to a sub-agent. This rule is based on the principle Delegatus non protest delegare - A delegate cannot further delegate (Section 190). The exception to this rule is when delegation is allowed by the principal or the trade custom or usage sanctions delegation or when delegation is essential for proper performance or where emergency renders it imperative or where nature of the work is purely ministerial and where the principal knows that the agent intends to delegate.

Rights of Agent The agent has a right to retain any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of his remuneration and advances made or expenses properly incurred by him in conducting such business. The agent has a right to receive remuneration. It is relevant to discuss the following case in this regard. An agent who does not conduct his business in a proper manner, cannot claim remuneration in respect of that part of the business affected by his misconduct. Right of lien: In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property, whether movable or immovable, of the principal received by him until the amounts due to himself from commission, disbursements, and services in respect of the same has been paid or accounted for to him. The lien exercised by an agent can be either a particular lien or a general lien. The right of lien cannot be exercised where goods have been secured by misrepresentation or where the agent has obtained the goods without the authority of the principal. The property on which lien is claimed should belong to the principal. The property on which lien is claimed should have been received by the agent in his capacity as an agent and not otherwise. The agent should be holding the property for and on behalf of the principal and not a third party. The right of lien is lost if: the agent parts with the goods voluntarily; he waives or abandons his lien or takes another security; the principal repays the amount due; or the agent enters into an agreement which is inconsistent with the lien. The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him. The agent has a right to receive compensation for injuries sustained due to neglect or want of skill on part of the principal. Section 225 provides that an agent can claim compensation under this Section only if he proves: that some injury was caused to him; the injury was caused because of the negligence of the principal. The agent cannot recover compensation from the principal if the injury has been caused because of the nature of his employment. Right of stoppage of goods in transit: This right is available to the agent in the following two cases:

51 where he has bought goods for his principal by incurring a personal liability, he has a right of stoppage in transit against the principal, in respect of the money which he has paid or is liable to pay; where he is personally liable to the principal for the price of the goods sold, he stands in the position of an unpaid seller towards the buyer and can stop the goods in transit on the insolvency of the buyer.

Rights of Principal Right To Repudiate The Transaction If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal has a right to repudiate the transaction, if the case shows, either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. (Section 215) An agent in a fiduciary position, is duty bound to transact the agency work in the interest of his principal business and not otherwise. That means he is not entitled to do anything for his persona] benefit out of his principal business. The principal may repudiate such agent's transaction if he can prove that: a material fact has been dishonestly concealed from him; or the dealing of the agent has been disadvantageous to him. Illustration: X appoints Y to sell her estate at Ahmedabad. Subsequently, Y discovered a mine in her principal's estate. Without disclosing this fact to her she buys the estate for herself. The principal may repudiate the transaction. To Claim Any Resulted Benefit From Agency If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. (Section 216) The agent's relationship with the principal is fiduciary in nature. That means he shall perform his agency work in absolute good faith and thereby shall not make any secret profit out of his agency business. Secret profit means any advantage obtained by the agent over and above his agreed remuneration in the course of his agency business. Knowledge acquired by an agent in the course of his agency business and applied for his own benefit does not result into any secret profit unless he uses the principal's property or makes any diversions of his principal's business opportunities to obtain such benefit. Thus, the principal has every right to obtain an account of secret profits and recover them and resist a claim for remuneration. Right To Recover Damages If the principal suffers any loss due to disregard by the agent of the directions ': the principal, or by not following the custom of trade in the absence of directions by the principal, or where the principal suffers due to lack of requisite skill, care. or diligence on the part of the agent, he can recover damages accruing as a result from the agent. To Resist Agent's Claim For Indemnity Where the principal can show that the agent has acted on his own behalf and not on the behalf of the principal, he can resist the agent's claim for indemnity against liability incurred.

52 Duties of Principal To indemnify against consequences of all lawful acts of agent: The principal is bound to indemnify the agent against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him. (Section 222) Illustration: X employs Y to enter into contract with Z for purchase of 100 rice bags for her. Subsequent to the contract entered with Z by Y, X refuses to take the delivery of such rice bags from him. Z sues Y against such refusal. Y is made liable to pay Z and X is made liable to pay Y towards damages, costs and expenses incurred on such refusal. However, where a person (principal) appoints an agent to do a criminal act then the principal is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act (Section 224). The liability here refers only to the liability existing between the principal and agent i.e., the liability to indemnify. This does not preclude the principal from liability under other Acts. To indemnify against consequences of agent acts done in good faith: The principal is required to indemnify the agent against the consequences of acts done in good faith. According to Section 223 of the Contract Act, where one person employs another to do an act and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act though it causes an injury to the rights of third persons. Thus, Section 223 entitles the agent to claim compensation in respect of acts done in good faith though they cause injury to the rights of third persons. To pay compensation against agent's injury: The principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill. (Section 225).Every principal owes to his agent the duty of care not to expose him to unreasonable risks. To pay the agent the commission or other remuneration agreed.

Q11 A11

Explain the provisions related to Termination of Agency under Indian Contract ` Act, 1872? According to Section 201, an agency is terminated: by an agreement between the parties, or by the principal revoking his authority; or by the agent renouncing the business of agency; or by the business of agency being completed; or by either the principal or the agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for relief of insolvent debtors. Thus Agency may be terminated by Agreement, Revocation of authority by the Principal and by operation of Law. Agreement: The relation of principal and agent like any other agreement may be terminated at any time and at any stage by the mutual agreement between the principal and the agent.

53 Revocation of authority by the principal: Section 203 provides that a principal may revoke the authority of the agent any time before the authority has been exercised so as to bind the principal. However, where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. Where the authority given to the agent has been partly exercised, it cannot be revoked with regard to acts already done in the agency [Section 204]. Where there is an express or implied contract that the agency should be continued for a fixed period of time, the principal must make compensation to the agent or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause [Section 205]. By operation of law: There are certain circumstances where agency is terminated by operation of law such as: o On performance of the contract. Where an agent is appointed to perform a specified transaction, his authority comes to an end on the completion of the said transaction. o On expiry of time. o When the agent or the principal dies or becomes of unsound mind. The death of the agent terminates his authority. o The death of one of the joint agents will terminate the agency only as far as he is concerned, while it will continue to be valid as regards the other surviving agents in the absence of a contrary intention. o On the insolvency of the principal. o On the destruction of the subject matter. o On the principal becoming an alien enemy. o On the dissolution of a company. o On termination of sub-agent's authority. Irrevocable Agency When an agency cannot be put an end to, it is said to be irrevocable agency. An agency is irrevocable where the agent himself has an interest in the property which forms the subject-matter of the agency. Such an agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. Illustration: A' gives authority to 'B', to sell 'A's land, and to pay himself, out of the proceeds, the debts due to him from 'A'. 'A' cannot revoke this authority, nor can it be terminated by his insanity or death. When agent has incurred a personal liability the agency becomes irrevocable. The principal cannot revoke the authority given to his agent after the authority has been partly exercised; so far as regards such acts and obligations as arise from acts already done in the agency. (Section 204) Time When Termination Takes Effect The termination of the authority of an agent does not, so far as regards the agent take effect before it becomes known to him. As regards third persons, it terminates when it comes to their notice.

3: INDIAN COMPANIES ACT, 1956

54

Q1. Define Company? Discuss its types A1. A company is a voluntary association of individuals for profit, having common capital of transferable shares and the ownership is the condition of membership. It is an artificial person created by Law with a distinct name, common seal, limited liability of members and enjoys perpetual succession. Definition under the Companys Act, 1956 The Companies Act, 1956, lays down procedures by which a company can be brought into existence. Anybody who wants to incorporate a company can do so by taking necessary steps outlined therein. By far the largest number of companies is incorporated under the Companies Act. These companies may be called registered companies. In the following pages all references to companies relate to companies incorporated in this manner. Types of company Private company: According to section 3 (1) of Companies act 1956.the company is private when its minimum number of members is two and maximum cannot be more than 50 and the minimum paid up capital is Rs 1 lakh, private Company's shares are not freely transferable and cannot invite public to subscribes its shares and debentures. Private co. need not old statutory meeting and can commence the business after obtaining Incorporation certificate private co. must have minimum 2 directors and can a lot the share soon after its incorporation private co. cannot invite deposits from public. The quorum for private co. general meeting is two. Formation of private co. is simple and pvt company is suitable for small scale business. Public company: According to section 3 (1) the company other than private co. is called public company. In public company minimum no of members are seven and maximum no limit i.e. unlimited public companies shares freely transferable subject to rule in articles of association, public co. collects capital through public issue. So it is compulsory for every public company to prepare prospectus public co. can commence its business only after Trading certificate from registrar of company. It is compulsory for public co. to hold statutory meeting quorum (minimum attendance) for public co. meeting is 5.public co. must have at least 3 directors and its minimum paid up capital is Rs 5lakh. Deemed public company: According to section 43A of companies act 1956,a private company was considered as converted automatically into a public company under certain circumstances such as company called Deemed public company. These circumstances are: 1. Not less than 25% of paid up share capital of pvt company is held by one or more public after advertisement. 2. When pvt company holds 25% or more of the paid up share capital of public co. 3. When Pvt Company accepts deposits from public after advertisement. Where its average annual turnover is not less than Rs 25 crore for the last 3 financial years. The company (Amendment) Act 2000 has deleted the concept of a private company deemed to be public. Therefore at presenting India, deemed public co. do not exist. In addition to the type of companies discussed above you must have come across many other types of companies like: Government company, Statutory company, Chartered company,

55 Foreign company, Indian company, Multinational corporation, Holding company, and Subsidiary company. Government Company: Any company in which at least 51% of the paid up capital is held by the Government is known as government company. Example: Indian Telephone Industry (ITI), Bharat Heavy Electronics Limited (BHEL) etc. A company is called a 'Government Company' under Section 617 of the Companies Act, 1956, if at least 51 per cent of its share capital is held by the Central Government, a State Government or the Central Government and any number of State Governments. Statutory Company: In this case, a special law is passed to establish the company. This is done only in special cases when it is necessary to regulate the working of the company for some specific purposes. Examples of such companies in India are: the Industrial Finance Corporation, the Life Insurance Corporation of India, the Air India, etc. Such companies are also called statutory companies. Chartered Company: A company created under a special charter granted by the king or queen of England. Example- East India Company. Historically, most of the early companies were set up through a Royal Charter. For example, the East India Company, the Chartered Bank of Australia, India and China, etc., were incorporated by the grant of a special Royal Charter, in India, this form of organisation does not exist now because there is no monarchy. Even in England, this method is rarely used now. Companies of this kind may be called chartered companies Foreign Company: A company which is incorporated in a country outside India and having business operation is India, is known as Foreign company. Example- Citi Bank, G.E. Capital, Honda Motors etc Indian/Domestic Company: A company registered in India as per the Indian Companies Act is known as Indian/domestic company Example- Associated Cement Company (ACC), Tata Iron and Steel Company (TISCO) etc. Multinational Corporation (Company): A company which is registered in one country but carries on business in a number of other countries. Holding and Subsidiary Company: If a company controls another company, the controlling company is termed as Holding Company and the company so controlled is called a subsidiary company Companies with unlimited liability: In this case, the liability of the members is unlimited as is the case in partnership or sole proprietorship. The members can be called upon to pay an unlimited amount (even from their private estates) to satisfy the creditors of the company when it is wound up. Such companies are rare. Early in their history, these companies were called joint stock companies. Companies with liability limited by guarantee: In this case, the members agree to pay a sum in addition to the amount of the shares held by them if need arises, in order to pay the creditors of the company. The additional amount payable by members is laid down in the Memorandum or Articles of Association. This type of company is formed mostly when the work is of nonprofit making nature, such as Chambers of Commerce.

56 Companies limited by guarantee may be with share capital or without share capital: Where the company does not have a share capital, it raises its capital through entrance fees and subscriptions. This form is used mostly for clubs and charitable organisations. The amount guaranteed by shareholders is called up when the company is wound up and its assets do not realize enough money to pay off its liabilities. Companies with liability limited by shares: In this case the liability of the members is limited only to the amount of the shares held by them. Q2.State the Characteristics or Features of the company? A2. The Features of the company are enumerated as under: 1. Voluntary association: A company is a voluntary association because any person of any caste or creed religion can buy the shares at any time and shares may be sold at his freewill subject to rules of company act 1956. 2. Number of members: For the private company at least 2 members and maximum should be 50. But in case of public company minimum is 7 and maximum no limit. 3. Governing law: All registered companies in India have to functions according to provisions of company law 1956 i.e. Indian companies operating their business in India. 4. Registration: Registration of all companies is compulsory according to procedure laid down in companies Act 1956. Registrar of companies (ROC) issues certificate of incorporation to newly formed company subject to fulfillment of certain legal requirements. 5. Lawful object: The exact nature of business should be clearly specified in the memorandum of association, the object must be lawful. 6. Artificial person: Company is an artificial person created by law. It doesnt have a physical existence. Therefore it cannot perform activities like natural person. However it can enter into contract with 3rd parties e.g. it can buy and sell property, borrow money. 7. Statutory obligations: Company has to functions according to legal provisions of companies act to protect the interest of shareholders e.g. shareholders meetings must be held in time, audit of company a/c is compulsory, certain documents are required to be filled with registrar and so on. These examples are called statutory obligations. 8. Registered office: All companies must have a registered office and its address should be clearly specified in memorandum of association. All records, books of accounts should be properly classified in office. Moreover all the correspondence between the registrar and company and company with all other parties takes place through office. 9. Common seal: It is a rubber stamp or the signature of company. The company is an artificial person who cannot sign and a common seal is required to be affixed on all important documents of the company. Common seal remains in the safe custody of the company secretary.

57 10. Transferability of share: The share is transferable (movable) property. In case of public company, the members can freely sale (transfer) their shares subject to rules and regulations but private companys shares are not freely transferable. 11. Separation of ownership and management: Due to large membership the Companys management is in the hand of elected representatives called directors and ownership is in the hand of shareholders. 12. Limited liability: The shareholders liability is limited up to the extent of face value of share purchased by member i.e. the shareholders private properly is not in danger. The debts of the company to be settled from companys property and not firm the personal properties of shareholders. 13. Legal status: Company has its own separate status in the eyes of law i.e. the companys liabilities are its own i.e. shareholders cannot act on behalf of the company and not liable for the debts of company, shareholders cannot bind the company by their acts. 14. Perpetual succession: The death insolvency or insanity of any of its members does not result into dissolution of company enjoys a continuous and stable life because it is an artificial person and enjoys long corporate life. Q3. Explain the formation procedure of the company. A3. By incorporation, a company comes in to existence. It becomes a separate corporate entity. The promoters follow following procedure to obtain the certificate of incorporation. Procedure Propose a name: The promoters ascertain and decide upon the name of the company. Apply for the license: If the proposed company, wants to run any industry for the establishment of which license is required under Industries (Development and Regulation) Act, 1951 then they should apply to the concerned Ministry of the Central Government. Prepare requisite documents: The promoters should prepare and finally get printed the Company's Memorandum and Articles of Association. File necessary documents: Before a company is registered, it is desirable to ascertain from the Registrar of Companies if the proposed name of the company is approved. Then the following documents duly stamped together with the necessary fees are to be filed with Registrar. 1. The Memorandum of Association duly signed by the subscribers. 2. The Article of Association, if any signed by the subscribers to the Memorandum of Association. 3. The agreement, if any, which the company purposes to enter into with any individual for appointment as its managing or whole-time director or manager. 4. A list of directors who have agreed to become the first directors of the company and their written consent to act as directors and take up qualification shares.

58 5. A declaration stating that all the requirements of the Companies Act and other formalities relating to registration have been complied with. Such declaration shall be signed byAn advocate of the Supreme Court or High Court. An attorney or pleader entitled to appear before a High Court. A Chartered Accountant practicing in India and who is engaged in the formation of the Company. Any person who is named in the Article of Association as a director, manager, or secretary of the Company. Obtaining Certificate of Incorporation: When the requisite documents are filed with the Registrar along with the fees prescribed, the Registrar shall satisfy himself that the statutory requirements regarding registration have been duly complied with. If the Registrar is satisfied as to the compliance of statutory requirements, he retains and registers the Memorandum, the Articles and other documents filed with him and issues a 'certificate of incorporation', i.e. certificate of the formation of the company. By issuing certificate of incorporation the Registrar certifies "under his hand that the company is incorporated and in the case of a limited company, that the company is limited". A public limited company can commence the business or borrow the money only after it obtains the certificate of commencement of business. These formalities are as follows. Where the company has issued a prospectus: {Section 149(1)}: Companies, which intend to invite the general public for subscription of their shares or debentures, will have to appoint underwriters or brokers for the sale of their shares or debentures make an application to stock exchange for getting their shares or debentures listed and issue the prospectus to the general public. It must also ensure that statutory declaration that is filed with the registrar is verified by one of the directors, or secretary, provision as to minimum subscription and no refund in case of failure to apply are properly recorded in the statutory declaration, which is to be verified and filed with the registrar of the companies. Where the company does not issue the prospectus: {Section 149(2)}: Such a company must file following documents with the registrar of the companies: A statement in lieu of prospectus. A statutory declaration verified by one of the director or secretary in which it should state the amount directors must have paid for the shares taken or contracted to be taken; If the Registrar of the companies is satisfied, then the company shall be issued a CERTIFICATE OF COMMENCEMENT OF BUSINESS, which will entitle the company to start its business or borrow money.

Q4. What is Memorandum of Association? Discuss various clauses of Memorandum of Association. A4. Memorandum of Association is the main document of the company, which defines its constitution and objects and lays down the fundamental conditions upon which alone the company is allowed to be formed. It is correctly termed as the charter of the constitution of the company as he defines the scope of its activity and also states that anything beyond it is unauthorized and illegal. According to Section 2(28) of the Companies Act, Memorandum of Association is defined as "Memorandum of Association as originally framed or as altered from time to time in

59 pursuance of any previous Companies Law or of this Act." Thus Memorandum of Association is a public document binding on the company and the members specifying the scope of the activities of the company and also anything beyond which is illegal or unauthorized. The memorandum shall be one of the forms given in Tables B, C, D, and E in schedule 1 of the Act. The Memorandum of Association must be printed, divided into paragraphs, numbered consecutively and signed by each subscriber (seven or more in case of a public company), who must add his name, address and description in the presence of at least one witness who is to attest the signature. Clauses of Memorandum of Association: Memorandum of Association must have the following clauses: 1. Name clause. 2. Registered office or Situation clause. 3. Object clause. 4. Liability clause. 5. Capital clause. 6. Subscription clause. 1. Name Clause: - The Company is a legal entity. Therefore, it must have its name to establish its identity. The name of the company should not be similar to the name of the another company nor in the opinion of Central Government be undesirable or which will mislead the public and its use has been, therefore, prohibited by the Government under the Emblems and Names (Prevention of Improper Use) Act, 1950. The company's name must display prominently the suffix 'Ltd.' Or Pvt. Ltd.' However the company can change its name by passing a special resolution and obtaining the approval of the Central Government. Registered Office Clause: - Memorandum of Association must state the name of the State in which the registered office of the company is situated. This clause is important as it mentions the residence for the purpose of the communication with the company. It determines the jurisdiction of the company and also mentions the place where all the records of company are maintained. Where the company wants to change its registered office from one state to another then it can do so by passing a special resolution as well as by confirmation of Company Law Board. Such confirmation will be given provided debenture holders and creditors are satisfied and such alteration is fair. Object Clause: - It is the most important clause in the Memorandum of Association. It defines and limits the scope and sphere of the operation of the company. It explains to the members the scope of activities of the company. It affords protection of its funds. It states the main objects as well as incidental objects of the company. The transaction which does not fall within the scope of the main objects of the company will not be valid and binding on the company simply because it is not beneficial for the company. As regards to the alteration of object clause a special resolution must be passed and the confirmation by the Company Law Board must also be obtained. The alteration is done to obtain a main purpose by new means or to enlarge the area of its operation, or to restrict the objects or sell or dispose of or amalgamate the undertaking.

2.

3.

60 4. Liability Clause: - The liability clause states that the member or the shareholder will be liable to pay only the unpaid value of shares held by him. If it is a company limited by guarantee, Memorandum of Association must further state that each member undertakes to contribute to the assets of the company at the time of the winding up while he is a member. Ordinarily this clause cannot be altered except that the liability of the directors may be made unlimited under certain circumstances. Capital Clause: - Amount of share capital with which the company is to b e registered and its division into shares of a fixed amount must be stated in the Memorandum of Association of a company limited by shares. Capital clause can be varied or capital can be reduced (by special procedure) or the rights of the shareholders are varied or create 'reserve liability.' Subscription Clause: - Maximum seven members in a public company and two members in a private company are shown in a Memorandum. A declaration is to be given. Such declaration is to be signed by a member in presence of a witness. Moreover the details as regards to name, address, age, and business of the promoters are also recorded under this clause.

5.

6.

Q5. What are Articles of Association? State the contents of Articles of Association? Differentiate between Memorandum and Articles of Association? A5 ARTICLES OF ASSOCIATION (AOA) The Articles of Association of a company contains the various rules and regulations for the day to day management of the company. These rules are also called the bye-laws. It covers various rights and powers of its members, duties of the management and the manner in which they can be changed. It defines the relationship between the company and its members and also among the members themselves. The rules given in the AOA must be in conformity with the Memorandum of Association. Articles of Association of a company generally contain rules and regulations with regard to the following matters: 1. Preliminary contracts 2. Use and custody of common seal 3. Allotment, calls and lien on shares 4. Transfer and transmission of shares 5. Forfeiture and re-issue of shares 6. Alteration of share capital 7. Issue of share certificates and share warrants 8. Conversion of shares into stock 9. Procedure of holding and conducting company meetings 10. Voting rights and proxies of members

61 11. Qualification, appointment, remuneration and power of Directors 12. Borrowing powers and methods of raising loans 13. Payment of dividends and creation of reserves 14. Accounts and audit 15. Winding up. A company can register its own Articles of Association or adopt Table A, which contains a model set of rules as given in the Schedule I of the Companies Act. After knowing about the meaning and the contents of Memorandum of Association and Articles of Association you must be thinking, how these two documents are different from each other. Let us have a comparison between these two. DIFFERENCE BETWEEN MOA AND AOA No. Difference Memorandum of Association Articles of Association based on 1 Subject Matter It contains aims and objectives of Articles of Associations contain rules the company. for implementation of the aims and objectives contained in the Memorandum of Association. 2 Relationship It defines the relationship between Articles defines the relationship the company and outsiders. between the company and its members. 3 Amendment It is very difficult to amend the The rules given in the articles can be aims and other provisions of the easily amended by a special Memorandum of Association resolution. 4 Limitations The provision given in the The rules given in the Articles of Memorandum of Association can Association can neither be outside not be outside the scope of the scope of companies Act nor the Companies Act. Memorandum of Association. 5 Obligation It is obligatory for a company to It is not obligatory to submit this prepare and submit this document document to Registrar of Companies. to the Registrar of Companies. The company may adopt Table A of the companies Act.

Q6. Explain provisions relating to Prospectus in Companies Act, 1956? A6. According Section 2(36) of the Companies Act, 1956, "Prospectus" means any document described or issued as prospectus and it includes any (i) notice, (ii) circular, (iii) advertisement or (iv) other documents inviting the deposits from the public or offers from the public for subscription or purchase of shares or debentures of the company. Thus a document is called a prospectus if it satisfies two things:

62 1. It is a invitation to purchase or subscribe shares or debentures of the company and 2. The invitation is made to the public. Matters included in Prospectus: - Prospectus of the public limited company includes following matters: 1. Main object of the company. 2. Number and classes of shares. 3. Names of directors. 4. Minimum subscription. 5. Particulars of various contracts. 6. Name of underwriters. 7. Estimated preliminary expenses. 8. Voting rights and various reports that are to be set out. Consequences of false and misleading statements made in the prospectus: - The law requires that the person who issues the prospectus should not mislead the public by false or misleading statements. Meaning of false and misleading statement: According to Section 65 of the Companies Act, 1956, 1. A statement in prospectus is deemed to be misleading or untrue if the statement is misleading in form and in context in which it is included. 2. Where the omission from the prospectus of any matter is calculated to mislead, then the prospectus shall be deemed to be a prospectus in which an untrue statement is included. Rights and liabilities arising from false and misleading statements: Several types of rights and liabilities arise from the false and misleading statements. They are broadly of three types. They are as follows: Civil liabilities: 1. Right and liabilities of shareholder against the company (a) The shareholders are entitled to rescind the contract to take up the shares. (b) The shareholders can claim the damages for the deceit when the statement is fraudulent. 2. Rights and liabilities of shareholders against the directors and the promoters(a) The shareholders can claim the damages for the misleading statements made in the prospectus. (b) Shareholders can also claim the damages for not complying with the provisions of Section 56 of Companies Act, 1956 relating to contents of the prospectus. In the aforesaid situation, the defenses available to the directors are: i.e. the director may escape by (i) withdrawal of the consent. He may escape by saying that the prospectus was. issued without his consent.(ii) He may say that prospectus was issued without his knowledge, (iii) He was ignorant of untrue statements made in the prospectus, (iv) He has reasonable ground to believe the statements, as true, as the statements were given by the experts. 3. Rights and liabilities of the company against the directors or the promoters-

63 In the situation of misleading statements made in a prospectus, the company can (a) Repudiate (cancel) the contract, or (b) Claim the damages. Criminal liability: According to Section 63 of Companies Act, 1956, any person who authorizes the issue the prospectus containing any fraudulent statements, then he is liable for (a) imprisonment for two years, or (b) fine of Rs. 5000/- or both.
Q7. Define Meeting? Explain differe4nt kinds of Company Meetings? A7.

Introduction: A company is an association of several persons. Decisions are made according to the view of the majority. Various matters have to be discussed and decided upon. These discussions take place at the various meetings which take place between members and between the directors. Needless to say, the importance of meetings cannot be under-emphasized in case of companies. The Companies Act, 1956 contains several provisions regarding meetings. These provisions have to be understood and followed. For a meeting, there must be at least 2 persons attending the meeting. One member cannot constitute a company meeting even if he holds proxies for other members. Meaning: The management of a company's business is necessarily left to the discretion of the directors. However the ultimate control of the actions of the Board of directors is vested in the members or shareholders of the company, and from time to time they must meet to ratify, or express their disapproval of, the directors past conduct, and to consider their future plans. The members express their will at general meetings by passing resolutions. Shortly after the formation of a public company, a statutory meeting is held. This is the first general meeting of the company. Then each year an annual general meeting is summoned to consider the routine matters relating to the report of the directors, appointment of directors and auditors, accounts and declaration of a dividend. In addition, occasions may arise when it is necessary to consult the members on some urgent and unusual matter which justifies the summoning of an extraordinary meeting. Further, there are class meetings of shareholders of different classes of shares, and of creditors and debenture-holders. Directors of the company also take decisions in Board meetings. Kinds of Company Meetings: Broadly, meetings in a company are of the following types:Meetings of Members: These are meetings where the members / shareholders of the company meet and discuss various matters. Members meetings are of the following types:STATUTORY GENERAL MEETING A public company limited by shares or a guarantee company having share capital is required to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the company. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business i.e. it obtains certificate of commencement of business. In a statutory meeting, the following matters only can be discussed:(a) Floatation of shares / debentures by the company (b) Modification to contracts mentioned in the prospectus

64 The purpose of the meeting is to enable members to know all important matters pertaining to the formation of the company and its initial life history. The matters discussed include which shares have been taken up, what money has been received, what contracts have been entered into, what sums have been spent on preliminary expenses, etc. The members of the company present at the meeting may discuss any other matter relating to the formation of the Company or arising out of the statutory report also, even if no prior notice has been given for such other discussions but no resolution can be passed of which notice have not been given in accordance with the provisions of the Act. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. A statutory meeting may be adjourned from time to time by the members present at the meeting. The Board of Directors must prepare and send to every member a report called the "Statutory Report" at least 21 days before the day on which the meeting is to be held. But if all the members entitled to attend and vote at the meeting agree, the report could be forwarded later also. The report should be certified as correct by at least two directors, one of whom must be the managing director, where there is one, and must also be certified as correct by the auditors of the company with respect to the shares allotted by the company, the cash received in respect of such shares and the receipts and payments of the company. A certified copy of the report must be sent to the Registrar for registration immediately after copies have been sent to the members of the company. A list of members showing their names, addresses and occupations together with the number shares held by each member must be kept in readiness and produced at the commencement of the meeting and kept open for inspection during the meeting. If default is made in complying with the above provisions, every director or other officer of the company who is in default shall be punishable with fine upto Rs. 500. The Registrar or a contributory may file a petition for the winding up of the company if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14 days after the last date on which the statutory meeting ought to have been held. Contents of Statutory Report must provide the following particulars:(a) The total number of shares allotted, distinguishing those fully or partly paid-up, otherwise than in cash, the extent to which partly paid shares are paid-up, and in both cases the consideration for which they were allotted. (b) The total amount of cash received by the company in respect of all shares allotted, distinguishing as aforesaid. (c) An abstract of the receipts and payments upto a date within 7 days of the date of the report and the balance of cash and bank accounts in hand, and an account of preliminary expenses.

65 (d) Any commission or discount paid or to be paid on the issue or sale of shares or debentures must be separately shown in the aforesaid abstract. (e) The names, addresses and occupations of directors, auditors, manager and secretary, if any, of the company and the changes which have taken place in the names, addresses and occupations of the above since the date of incorporation. (f) Particulars of any contracts to be submitted to the meeting for approval and modifications done or proposed. (g) If the company has entered into any underwriting contracts, the extent, if any, to which they have not been carried out and the reasons for the failure. (h) The arrears, if any, due on calls from every director and from the manager. (i) The particulars of any commission or brokerage paid or to be paid, in connection with the issue or sale of shares or debentures to any director or to the manager. (j) The auditors have to certify that all information regarding calls and allotment of shares are correct. Procedure at the meeting: At the commencement of the statutory meeting, the Board shall produce a list showing the names, addresses and occupations of the members of the company and number of shares held by them respectively. The list shall remain open and accessible to any member of the company during the continuance of the meeting. Discussion of matters relating to formational aspect: The members present at the meeting shall be at liberty to discuss any matter relating to the formation of the company. They may also discuss any matter arising out of the statutory report. Previous notice for such discussion is not necessary. However, no resolution may be passed of which notice has not been given in accordance with the provisions of the Act. Adjournment: The meeting may adjourn from time to time. At any adjourned meeting, any resolution (of which notice has been given), whether before or after the former meeting, may be passed. An adjourned meeting shall have the same powers as the original meeting. The object of the adjournment may be to provide members with additional information as to the company's affairs. Consequences of default: If default is made in complying with the provisions of Sec. 165, every director or any other officer of the company who is in default shall be punishable with fine which may extend to Rs. 500. If default is made in delivering the statutory report to the Registrar or in holding the statutory meeting, the company may be wound up by the Court. The Court ordinarily does not take such a serious view of the default. It may, however, direct the company to deliver the statutory report or hold the statutory meeting, as the case may be. Object of the meeting and report: The object of the statutory meeting and forwarding of statutory report to members is (a) To put the members of the company in possession of all the important facts relating to the company, what shares have been taken up, what money received, what contracts entered into, and what sums spent on preliminary expenses, etc.

66 (b) To provide the members an opportunity of meeting and discussing the management, methods and prospects of the company. (c) To approve the modification of the terms of any contract named in the prospectus. ANNUAL GENERAL MEETING Must be held by every type of company, public or private, limited by shares or by guarantee, with or without share capital or unlimited company, once a year. Every company must in each year hold an annual general meeting. Not more than 15 months must elapse between two annual general meetings. However, a company may hold its first annual general meeting within 18 months from the date of its incorporation. In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year only. In the case there is any difficulty in holding any annual general meeting (except the first annual meeting), the Registrar may, for any special reasons shown, grant an extension of time for holding the meeting by a period not exceeding 3 months provided the application for the purpose is made before the due date of the annual general meeting. However, generally delay in the completion of the audit of the annual accounts of the company is not treated as "special reason" for granting extension of time for holding its annual general meeting. Generally, in such circumstances, an AGM is convened and held at the proper time . all matters other than the accounts are discussed. All other resolutions are passed and the meeting is adjourned to a later date for discussing the final accounts of the company. However, the adjourned meeting must be held before the last day of holding the AGM. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. The notice must state that the meeting is an annual general meeting. The time, date and place of the meeting must be mentioned in the notice. The notice of the meeting must be accompanied by a copy of the annual accounts of the company, directors report on the position of the company for the year and auditors report on the accounts. Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence. A proxy need not be a member of that company. A proxy form should be enclosed with the notice. The proxy forms are required to be submitted to the company at least 48 hours before the meeting. The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. The Central Government may, however, exempt any class of companies from the above provisions. If any day is declared by the Central government to be a public holiday after the issue of the notice convening such meeting, such a day will be treated as a working day. A company may, by appropriate provisions in its its articles, fix the time for its annual general meeting and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings. Companies licensed under Section 25 are exempt from the above provisions provided that the time, date and place of each annual general meeting are decided upon beforehand by the Board of Directors having regard to the directions, if any, given in this regard by the company in general meeting. In case of default in holding an annual general meeting, the following are the consequences:-

67 (a) Any member of the company may apply to the Company Law Board. The Company Law Board may call, or direct the calling of the meeting, and give such ancillary or consequential directions as it may consider expedient in relation to the calling, holding and conducting of the meeting. The Company Law Board may direct that one member present in person or by proxy shall be deemed to constitute the meeting. A meeting held in pursuance of this order will be deemed to be an annual general meeting of the company. An application by a member of the company for this purpose must be made to the concerned Regional Bench of the Company Law Board by way of petition in Form No. 1 in Annexure II to the CLB Regulations with a fee of rupees fifty accompanied by (i) affidavit verifying the petition, (ii) bank draft for payment of application fee. (b) Fine which may extend to Rs. 5,000 on the company and every officer of the company who is in default may be levied and for continuing default, a further fine of Rs. 250 per day during which the default continues may be levied. Purpose of holding Annual General Meeting: It is only at the annual general meeting of a company that the shareholders can exercise any control over the affairs of the company. They can confront the directors, their elected representatives, at least once a year. They also get an opportunity to discuss the affairs and review the working of the company. They can also take the necessary steps for the protection of their interests. They may, for example, refuse to reelect a director whose actions and policy they disapprove They can also take up any other business relating to the affairs of the company for discussion. Appointment of auditors is also made at the annual general meeting. Annual accounts are presented for the consideration of shareholders and dividends are declared in the annual general meeting. Business transacted at these meetings: At every AGM, the following matters must be discussed and decided. Since such matters are discussed at every AGM, they are known as ordinary business. All other matters and business to be discussed at the AGM are special business. The following matters constitute ordinary business at an AGM:(a) Consideration of annual accounts, directors report and the auditors report (b) Declaration of dividend (c) Appointment of directors in the place of those retiring (d) Appointment of and the fixing of the remuneration of the statutory auditors. In case any other business (special business ) has to be discussed and decided upon, an explanatory statement of the special business must also accompany the notice calling the meeting. The notice must also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice must also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings. EXTRA ORDINARY GENERAL MEETING Every general meeting (i.e. meeting of members of the company) other than the statutory meeting and the annual general meeting or any adjournment thereof, is an extraordinary general meeting. Such meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Every business transacted at such a meeting is special business. An explanatory statement of the special business must also accompany the notice calling the meeting. The notice must should also give the nature

68 and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice must also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings. The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting. Eg. It may provide that "the board may, whenever it thinks fit, call an extraordinary general meeting" or it may provide that "if at any time there are not within India, directors capable of acting who are sufficient in number to form a quorum, any director or any two members of the company may call an extraordinary general meeting". Extraordinary General Meeting on Requisition : The members of a company have the right to require the calling of an extraordinary general meeting by the directors. The board of directors of a company must call an extraordinary general meeting if required to do so by the following number of members:(a) members of the company holding at the date of making the demand for an EGM not less than one-tenth of such of the voting rights in regard to the matter to be discussed at the meeting ; or (b) if the company has no share capital, the members representing not less than one-tenth of the total voting rights at that date in regard to the said matter. The requisition must state the objects of the meetings and must be signed by the requisitioning members. The requisition must be deposited at the company's registered office. When the requisition is deposited at the registered office of the company, the directors should within 21 days, move to call a meeting and the meeting should be actually be held within 45 days from the date of the lodgment of the requisition. If the directors fail to call and hold the meeting as aforesaid, the requisitionists or any of them meeting the requirements at (a) or (b) above, as the case may be, may themselves proceed to call meeting within 3 months from the date of the requisition, and claim the necessary expenses from the company. The company can make good this sum from the directors in default. At such an EGM, any business which is not covered by the agenda mentioned in the notice of the meeting cannot be voted upon. Power of Company Law Board to Order Calling of Extraordinary General Meeting: If for any reason, it is impracticable to call a meeting of a company, other than an annual general meeting, or to hold or conduct the meeting of the company, the Company Law Board may, either i) on its own motion, or ii) on the application of any director of the company, or of any member of the company, who would be entitled to vote at the meeting, order a meeting to be called and conducted as the Company Law Board thinks fit, and may also give such other ancillary and consequential directions as it thinks fit expedient. A meeting so called and conducted shall be deemed to be a meeting of the company duly called and conducted. Procedure for Application under Section 186: An application by a director or a member of a company for this purpose is required to be made to the Regional Bench of the Company Law Board before whom the petition is to be made in Form No 1 specified in Annexure II to the CLB Regulations with a fee of Rs200. The petition must be accompanied with the following documents

69 (a) (b) (c) (d) Evidence in proof of status of the applicant. Affidavit verifying the petition. Bank draft evidencing payment of application fee. Memorandum of appearance with copy of the Board's resolution or executed vakalat nama, as the case may be.

DEBENTURES HOLDERS MEETING A company issuing debentures may provide for the holding of meetings of the debenture holders. At such meetings, generally any matters pertaining to the variation in terms of security or to alteration of their rights are discussed. All matters connected with the holding, conduct and proceedings of the meetings of the debenture holders are normally specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority. Purpose of holding Debenture holder meeting (a) The meeting of debenture holders is held in accordance with the conditions contained in the debenture trust deed. (b) These meetings are called from time to time where the interests of debenture holders are involved e.g. at the time of reconstruction, reorganization, amalgamation or winding up of the company. (c) The rules and regulations entered in the trust deed relate to notice of the meeting, resolutions, quorum of the meeting and writing and signing of Minutes. CREDITORS MEETING Sometimes, a company, either as a running concern or in the event of winding up, has to make certain arrangements with its creditors. Meetings of creditors may be called for this purpose. E.g. U/s 393, a company may enter into arrangements with creditors with the sanction of the Court for reconstruction or any arrangement with its creditors. The court, on application, may order the holding of a creditorss meeting. If the scheme of arrangement is agreed to by majority in number of holding debts to value of the three-fourth of the total value of the debts, the court may sanction the scheme. A certified copy of the court's order is then filed with the Registrar and it is binding on all the creditors and the company only after it is filed with Registrar. Similarly, in case of winding up of a company, a meeting of creditors and of contributories is held to ascertain the total amount due by the company and also to appoint a liquidator to wind up the affairs of the company. Purpose of holding these meetings Sec. 391 provides that where a compromise or arrangement is proposed between a company and its creditors, meeting of creditors may be called by the company on its own or by an application by any creditor. The meetings of creditors are also held when the company has gone into liquidation. These meetings are held to estimate the total amount due by the company to its creditors and to

70 appoint liquidators to ensure that the company closes down the business legally as per Companies Act 1956. CLASS MEETINGS Class meetings are meetings which are held by holders of a particular class of shares, e.g., preference shareholders. Such meetings are normally called when it is proposed to vary the rights of that particular class of shares. At such meetings, these members discuss the pros and cons of the proposal and vote accordingly. (See provisions on variations of shareholders rights). Class meetings are held to pass resolution which will bind only the members of the class concerned, and only members of that class can attend and vote. Unless the articles of the company or a contract binding on the persons concerned otherwise provides, all provisions pertaining to calling of a general meeting and its conduct apply to class meetings in like manner as they apply with respect to general meetings of the company. Under the Companies Act, class meetings of various kinds of shareholders and creditors are required to be held under different circumstances. Under Sec. 106, class meetings of the holders of different classes of shares are to be held if the rights attaching to these shares are to be varied. Similarly, under Sec. 394, where a scheme of arrangement is proposed, meetings of the several classes of shareholders and creditors are required to be held. Also at the time of winding up. the meetings of creditors and members, for certain purposes, are held. Prima facie, a class meeting should be attended by the members of the class in order that the discussion of the matters which the meeting has to consider may be carried on unhampered. The presence of a number of persons with conflicting interests would render it impossible for members of the class adequately to discuss the matter from their point of view. And if the presence of outsiders is retained in spite of the ascertained wish of the constituents of the meeting for their exclusion, it cannot be said that a separate meeting of the class had been duly held. But where the constituents of the meeting meet together and no one in fact raises any objection to the presence of strangers or outsiders within the same four walls, there is no reason why their meeting should not be a perfectly good meeting MEETING OF BOARD OF DIRECTORS The directors are a body to whom the duty of managing the general affairs of the company is entrusted. They act as the agents of the company as company cannot do any act on its own. Therefore, wide powers have been vested in the board of directors in regard to management of the company. For efficient management of the affairs of the company, the directors are required to meet frequently to discuss and review important matters and to decide number of meetings. Period: Sec. 285 of-the Act provides that a board meeting must be held at least once in every three months, and at least four such meetings must be held in a calendar year. The central government may exempt by notification in Official Gazette any company from the above provisions, if the company does not have enough work to justify expenditure on quarterly meeting of the board. Notice: Notice of every meeting of the board of directors of company shall be given in writing to every director in India at his usual address in India. The Companies Act does not specify any period of notice for board of directors. If directors are informed that in future the meetings will be held on second Monday of every month it is sufficient compliance of the

71 statute. It is not required that the meeting of board of directors should be held only in the city where the registered office of the company is situated. It can be held at any place. Quorum: The quorum for a meeting of the board of directors of company shall be one-third of its total strength (Any fraction contained in that one-third being rounded off as one) or two directors whichever is higher. If the number of interested directors exceeds or is equal to or two-thirds of the total strength, then remaining directors who are not interested being not less than two shall be the quorum. The quorum is required to be present throughout the conduct of the meeting. The decision of the board will be invalid if the quorum is not maintained. If the meeting cannot be held for want of quorum it stands adjourned till the same day m the next week at the same time and place. Chairman: Every meeting of the beard must have a chairman to preside over it. The articles usually name the chairman who shall preside over the board meeting. If the articles do not name the chairman, the director may elect a chairman of the meeting. Generally, The chairman of the board also presides at general meeting of the company. Resolutions: At the meetings of the board the decisions are taken by passing resolutions on the matters placed before the meeting for consideration. The board may pass resolution by circulation in case it is not possible to hold a board meeting for any reason. A resolution is deemed to be passed when the draft together with the necessary papers is circulated among the directors present in India and number among whom it is circulated is not less then quorum fixed for board meeting, and it has been approved by majority. Certain powers of the board can be exercised by means of passing resolutions at board's meeting. These are 1. the power to make call, 2. the power to issue debentures 3. the power to borrow money, 4. the power to fill up casual vacancy, etc. The question arising at the meeting of the board of directors is decided by a single majority. Each director has one vote and the chairman in case of need may exercise casting vote. However, the Act requires unanimous consent of all the directors in question matters
Q8. State the Requisites of a valid Meeting? A8.

A meeting can validly transact any business if the following requirements are satisfied. 1. The meeting must be duly convened by a proper authority. 2. A proper notice must be served in the prescribed manner. 3. A quorum must be present 4. A chairman must preside. 5. Minutes of the proceedings must be kept. Proper authority: The proper authority to convene a general meeting (whether statutory, annual general or extraordinary) of a company is the Board of directors. The Board should pass a resolution to call a general meeting, at a duly convened meeting of the Board. If the directors do not call the meeting, the members or the Company Law Board may call the meeting. If some defect in the appointment or qualification of the directors present at the Board meeting comes to light after the Board has acted bona fide, such a defect is not necessarily fatal to the validity of their resolution to call the meeting. Even if the meeting of the Board at which it is resolved to call a general meeting is not properly convened or constituted, the general meeting called by the Board can act

72 Notice of meeting: A proper notice of the meeting should be given to the members and all others who are entitled to attend the meeting. Length of notice: Not less than 21 days' notice. A general meeting of a company may be called by giving not less that 21 days' notice in writing to the members. The use of the word 'may' in Sec. 171 does not mean that the notice can be dispensed with. The expression "not less than 21 days' notice" implies notice of 21 whole or clear days. Part of the day, after the hour at which the notice is deemed to have been served, cannot be combined with the part of the day before the time of the meeting, or the day of the meeting, to form one day. Each of the 21 days must be a full or a calendar day, so that notice can be said to be not less than 21 days notice. The period of 21 days is computed from the date of receipt of the notice by the members. It excludes the day of service of the notice and the day on which the meeting is to be held. Notice is deemed to have been received by the members at the expiration of 48 hours after the letter containing it is posted. Quorum: The word quorum has a Latin origin literally meaning 'of whom'. It is the minimum number of members of any body of society whose presence is necessary for the transaction of business. When members assemble at the registered office of the company in response to the notice calling a general meeting, the first thing to do is to see whether the quorum is complete or not. The Articles of Association generally lay down the quorum in the absence of which the meeting will not be properly constituted. If the Articles do not provide otherwise, five members present personally (proxies not included) in the general meeting of a public limited company will constitute the quorum. In case of a private limited company, the personal presence of two members will constitute the quorum. If the quorum is not complete, the chairman and members will wait for half an hour after the scheduled time for the meeting. In case the meeting has been called on the basis of a requisition, it shall stand dissolved if the quorum is not complete even within half an hour of the time of the meeting. If, however, the meeting has been convened by the management, it shall be adjourned to the same day in the next week, at the same time and place unless the Board fixes some other time, day and place for it. The adjourned meeting can proceed to business if the quorum is not complete within half an hour. In case of meetings called or directed to be called by the Court or the Central Government, the quorum shall be fixed by the order under which the meeting is held. Chairman: The chairman is the person responsible for the proper conduct of the proceedings. A meeting cannot be said to have been prop9rly constituted without somebody in the chair to regulate its conduct. The first chairman of the company is generally named in the Articles. In most of the companies, the chairman of the Board of Directors presides over their general meeting too. If the chairman of the company is not present within fifteen minutes of the time fixed for a meeting, the directors present shall elect one from amongst themselves to the chair. But if no director is willing to preside, the members present shall elect one of themselves to be the chairman of the meeting, unless the Articles provide otherwise. Duties of the chairman as covered in the agenda 1. He must act at all times bona fide and in the interests of the company as a whole. 2. He must ensure that the meeting is properly convened and constituted, i.e. a proper notice has been given, the rules as to quorum are observed, and his own appointment is in order.

73 3. He must ensure that the proceedings at the meeting are properly and regularly conducted. 4. He must ensure that the provisions of the Act and the Articles are observed, and the business is taken in the order set out in the agenda. 5. He must see that all the business transacted at the meeting is within the scope of the meeting. 6. He must preserve and maintain order In the meeting and decide any points of order submitted to him. 7. He must ascertain the sense of the meeting properly with regard to any question before it. He must do so by putting the motions in their proper form, and declare the result of the voting. 8. He must decide incidental questions arising for decision during the meeting. 9. He must exercise his casting vote bona fide in the interests of the company. 10. He must exercise correctly his powers of adjournment and of taking a poll. He must see that any disorderly persons are removed, and where it is impossible to maintain order, he should adjourn the meeting. Even if the relevant rules do not give him the power to adjourn the meeting he may do so in the event of disorder. The adjournment must be no longer than he considers necessary and he must, so far as possible, communicate his decision to those present 11. He must give the members who are present a reasonable and sufficient opportunity to express their views on the motion or resolution before the meeting. He must not allow discussion except upon a motion or resolution. But at the expiration of a reasonable time he is entitled, if he thinks fit to put a resolution to the meeting that the discussion be terminated 12. He must also take care that the rights of the minority are not ignored. Conduct of the meeting: The way in which a meeting is to be conducted is a matter for the chairman, with the assent of the persons properly present to be determined in the light of the general law and the company's Article of Association.
Q9. Write Short notes on the following? 1. Minutes 2. Proxies 3. Resolutions A9. 1. Minutes

After the chairman settles in the chair, he calls the meeting to order. The secretary presents the minutes of the last meeting before the members present for confirmation. Minutes of the proceedings of meetings are statutorily required to be maintained under Section 193 of the Companies Act. Under this section the minutes of a meeting must be recorded within fourteen days of the meeting concerned. The minutes must be recorded in a proper minutes book which has pages consecutively numbered. Pasting of minutes to any other book is prohibited. The minutes of each meeting are required to contain a fair and correct summary of the proceeding of the meeting. The chairman enjoys absolute discretion regarding the exclusion of matters which are irrelevant or are detrimental to the interests of the company. Under Sec. 194 of the Act, minutes of meetings kept in accordance with the provisions of Section 193 (signed by the chairman in confirmation thereof) shall be evidence of the proceedings recorded therein.

74 The minutes of general meetings are required to be kept at the registered office of the company and must be open to inspection by members without charge at least for two hours every day. If a member wants a copy of the minutes, he can get it within seven days of the request on payment of 37 paise per hundred words or fractions thereof (Section 196). Minutes of proceedings at a company meeting should "consist of a record of business transacted by the meeting as a whole and would (except in odd cases) exclude any reference to conduct or events which are not themselves items of transacted business.* Minutes may be of two types: Minutes of narrationThese are records of events or items of business which do not require formal resolutions, such as the notation of the members present, recording of apologies for non-attendance, statements of proposers and seconders of motions, etc., and (b) Minutes of resolutionThese set out a statement of what was resolved and may, or may not, be accompanied by a statement indicating the mover and seconder. Signing of Minutes: Minutes are a record of proceedings at a meeting including decisions arrived at such meeting. They show clearly what was done at the meeting. Minutes indicate the proceedings of the meetings of company. They are-the official records of all decisions taken at various meetings of the company. Minutes may enable a member to get a clear idea about the matters discussed in the past. It is essential to get the minutes of a meeting confirmed in the next meeting of the same type and be signed chairman. Minutes are documentary evidence and can be submitted in a court as evidence. They should be clear and precise about the-business transacted at the meeting. Legal Provisions 1. Every company within 30 days of the meeting (General meeting/Directors' meeting) should make an entry in the minutes book kept for this purpose. 2. The minute of each meeting must contain a fair and correct summary of the proceedings thereof. 3. All appointments of officers made at the meeting must be included in the minutes. 4. In the case of the meeting of directors or a committee of the board, the minutes shall also contain the names of directors present at the meeting and in the case of each resolution passed at the meeting the names of directors if any dissenting from or not concurring in respect of each resolution, 5. Those details may not be included in the minutes, which are defamatory of any person or irrelevant or detrimental to the interest of the company in the opinion of the chairman of the meeting. 6. The minute must be signed by the chairman of the meeting. 7. The confirmed minutes should be kept at the registered office of the company 8. It should be kept open during business hours for inspection by any member without charge. 9. Members of the company are not entitled to inspect the minutes of its Board's meeting. Types of Minutes Minutes of Resolutions: In these minutes, only the decisions taken and the resolution passed at a meeting are recorded. The details of the discussion are not recorded. Minutes of the Narration: These minutes describe in brief entire decision making process. It tells the 'whole story', i.e., the nature of discussion, remarks of speakers for both for and against each motion, the manner of voting, etc. Inspection of minutes of proceeding of a general meeting of a company must be kept at the registered office and must be open during business hours to the inspection of any member free of charge.

75
2. Proxies

The term proxy is used to refer to the person who is nominated by a shareholder to represent him at a general meeting of the company and also to the instrument through which such a nominee is named to be authorized to attend a meeting. Under Section 176 (1) every member of the company is entitled to appoint another person (member or a non-member) to attend a general meeting and vote if need be. Unless a provision to the contrary is made in the Articles, the members of companies not having a share capital cannot appoint proxies to represent them. Similarly, a member of a private limited company cannot nominate more than one proxy for the same meeting. As for the rights of the proxy, such a nominee cannot speak at the general meeting for which he is nominated nor can he vote unless there is a poll {i.e., votes are cast in a prescribed form according to each shareholder's holdings). The Act [under Section 176 (2)] expressly requires that a statement, that a member entitled to attend and vote is entitled to appoint a proxy instead of himself and that a proxy need not be a member, must be displayed with reasonable prominence in the notice for th meeting concerned. Default in respect of this requirement is punishable with fine of to Rs. 500. Table 'A' lays down that an instrument appointing a proxy must be deposited with the company not less than 48 hours before the time for the meeting. Any provision in the Articles of a company requiring the proxy form to be deposited earlier than 48 hours will be invalid. In case of a poll, the proxy form can be required to be deposited not less than 24 hours before the time fixed for the poll. The Act also requires that an instrument appointing a proxy must be in writing and must be signed by the appointer or his legally authorized representatives. The form for proxy is given in Schedule IX of the Act, though a company may adapt it to its own circumstances. If officers or an officer of a company invites a member to appoint a person or any of a group of persons as proxies at the expense of the company, he or they will be liable to a fine up to one thousand rupees. This fine will not be imposed if the member concerned himself requested the company to send a list of persons available to be nominated as proxies and such a list is freely made available to every member. Members can inspect proxy forms twenty-four hours before the meeting if they have already given a notice for this purpose three days in advance of the meeting. Two types of proxies may be distinguished, A proxy authorized to vote only upon a particular resolution is called a 'special proxy' while a proxy empowered to vote on all resolutions in a meeting may be called a 'general proxy'.
3. Resolution

A resolution means a formal expression of the opinion of a meeting. It is a motion carried and passed by a meeting. It is a collective decision taken at the meeting with the required majority. The resolutions passed by a company in meetings are of two kinds, namely, ordinary resolution and special resolution. Ordinary Resolution This is a resolution passed at a meeting by a simple majority of votes, including the casting vote of the chairman, if any. The following are some of the examples of acts, which a company can do by passing an ordinary resolution: 1. To change its name where it has been registered with a name very nearly like that of another existing company. 2. To authorize the issue of shares at a discount. 3. To alter the share capital by increase, consolidation and conversion of shares into shares of larger amount, conversion of fully paid shares into stock or vice-versa, subdivision of shares and cancellation of unissued shares.

76 4. 5. 6. 7. 8. 9. To adopt the annual accounts of the company. To appoint directors. To remove a director. To appoint the auditor at the annual general meeting. To declare dividend recommended by the directors. To wind-up the company voluntarily when the period fixed for its duration has expired.

Special Resolution It is a resolution which is passed at general meeting by a majority of three fourth of the members present. The notice of the general meeting at which a special resolution is to be moved must expressly state that the resolution is to be moved as a special resolution. A company can do the following acts only by passing special resolution: 1. To transfer the registered office of the company from one state to another or to alter its objects. 2. To alter the Articles of Association. 3. To reduce share capital. 4. To shift the registered office from one place to another in the same state. 5. To make the liability of directors or managers unlimited. 6. To approve the making of loans to other companies. 7. To resolve that the company be wound up by the court. 8. To wind up a company voluntarily. Resolution requiring special notice Where any provision in Companies Act or in the Articles requires that a special notice must be given for any resolution, notice or the intention to move the resolution is given to the company at least 14 clear days before the meeting at which it is be moved. A special notice therefore means 14 clear days' notice. Special notice must be given in the following cases: For appointment as auditor of a person other than a retiring auditor, or For removal of a director and appointment of a new person as director in place of the removed director. Immediately, after receipt of a special notice the company must give its members notice of such resolution atleast seven days before the meeting or if that is not practicable it must give them notice thereof either by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the Articles. It should be noted that the resolutions requiring special notice might be either ordinary resolutions or special resolutions Q10. Explain provisions related to Position, Appointment and Removal of director. A10. The administration of the company is in the hands of the directors. They take decision on policy matters. They are not paid servants. They serve in three different ways: (A) As a trustee (B) As an agent (C) As a Partner As a Trustee: The directors are not owner of the company and they do not function as an owner, while entering into contract with the third person. The directors have to use their powers in the interest of the company. The directors are expected to show the capacity and

77 diligence as a trustee. If the directors misuse the position, they are held liable. The directors are the trustees in connection with the transfer and distribution of shares. The directors have to disclose the details of his interest. As an Agent: The position of director is like an agent. They have to function as per the provisions contain in the Articles of the company and the Company Law. Their actions are not their personal transactions, but they are the transactions done for and on behalf of the company. As a Partner: Directors held shares. The members of the company also hold share. The directors work as the representatives of the members. Thus, they are liked partners of the members of the company. The powers of the directors are decided from the articles under the Companies Law, 1956. His liability is limited to the extent of the holding of the shares. Thus, the directors are a trustee an agent both. Section 2(13) defines director as "director includes any person occupying the position of a director by whatever name called." Director is not servant of the company. He is rather an officer of the company. The articles of association of the company and provisions of the companies Act will govern the selection of the directors of the company. The management or the affairs of the company will be in the hands of the directors. The directors are collectively called the Board of Directors. The Board of Directors is the company's executive authority. The articles will determine the number of directors to be appointed to the Board of Directors of a company. As per the Act, minimum three directors will be there in a public company and two directors in a private company. Appointment of the directors The different modes of appointment of directors are as follows: 1. First Directors: Person named in the articles of association as directors become the first director of the company or in the absence of the provision in the articles regarding persons to be appointed first Directors, the subscribers to the memorandum of association will become the first directors. 2. Appointment by election: The members at the general meeting of the company will elect the directors. This is the most common and usual mode of appointing directors. Section 255 provides for the procedure for election. 3. Appointment by nomination by Board of Directors: The Board of Directors will fill up the casual vacancy arising among the directors by nomination. Directors so appointed will remain in the office only for the unexpired period for which the director whose post is vacant, would have remained in the office. 4. Appointment by nomination by Central Government: Under Section 408 of the Act, the Central Government can nominate some directors to the Board in case of mismanagement and oppression. 5. Appointment by nomination in statutory corporations: Certain statutory corporations possess similar powers e.g. the Industrial Finance Corporations Act of 1947 empowers the Corporation to nominate a director to the Board of a company to which it has advanced moneys. 6. Appointment on the basis of qualification shares: Where a person holds minimum number of shares as provided in the articles then he is said to have obtained 'qualification shares'. A person can be appointed as a director on the basis of such qualification shares.

78 7. Appointment on the basis of consent filed: A person intending to be appointed as a director must sign and file with the company his consent to act as such, if appointed, unless he himself notifies his candidature to the company. Appointment of alternate directors: The Board of Directors of a Company, may, if so authorized by its articles or by resolution passed by a company in general meeting, appoint alternate director during absence of the existing director for a period not less than three months from the State in which meeting of the Board are ordinarily held. The alternate director cannot hold office longer than the original director. He will vacate his office if and when the original director returns to the Stat.

8.

Disqualification of Directors According to Section 253 of the Companies Act, 1956, only individual can be appointed as the director. However a person shall not be capable of being appointed as director of the company, if 1. He has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force. 2. He is insolvent. 3. He has applied to be adjudicated as an insolvent and his application is pending. 4. He is convicted by a Court, of any offence involving moral turpitude and sentenced in respect thereof, to imprisonment for not less than six months and period of five years has not elapsed from the date of the expiry of the sentence. 5. He has not paid any call in respect of shares of the company held by him whether alone or jointly with others and six months have elapsed from the last date fixed for the payment of the call. 6. An order disqualifying him from appointment as director has been passed by a Court in pursuance of Section 203 and is in force unless the leave of the court has been obtained for his appointment in the pursuance of that Section. Removal of Directors The shareholders, the Central Government or the court may remove the directors. The rules regarding the removal of the directors are as follows: Removal-'by shareholders: A company may by ordinary resolution remove a director before the expiry of period of office except in .the following cases Directors who cannot be removed: An additional director appointed by the Central Government under Section 408 in case of mismanagement and oppression) cannot be removed. In a private company a director appointed for life and holding office as such on 1st April 1952 cannot be removed by member's resolution. Where the articles of a company provide for the election of directors by proportional representation, a director elected by that method cannot be removed by the resolution. Special Notice for removal of directors: Special notice must be given of the resolution to remove a director, copy of which must be given to the director concerned. The meeting which removes a director can elect another in his place if the] director was originally appointed by the election. Remuneration to the director for this removal: If a director, by an agreement or otherwise entitled to receive compensation for the premature termination of his service he can enforce his claim notwithstanding the removal by the resolution. Removal by the Central Government: The Central Government shall by order remove from the office any directors against whom there is a decision of the High Court, holding that he is

79 not a fit or proper person to hold the office of director Removal by Court: Section 402 read with Sections 397 and 398 gives wide power to the court including the removal of the directors. Q11. Explain Powers, Rights, Duties and Liabilities of Director under Indian Companies act, 1956? A11 Powers of the Directors: Section 291 of the Companies Act, 1956,- lays down that subject to the provisions of the articles, the Board of Directors of a company shall be entitles to exercise all such powers and to do all such acts and things as the company is authorized to exercise and do. Powers to be exercised by the Board of Directors: Section 292 of the Companies Act provides that the Board of Directors shall exercise the following powers on behalf of the company and it shall do so only by resolutions passed at the meeting of the Board: (a) Make calls on shareholders. (b) Issue debentures. (c) Borrows the money other than on debentures. (d) Invest the funds of the company, (e) Make loans Some of the powers may be delegated to a committee of directors, to the Managing Director, Manager etc. Limitations on the powers of the Board: Following restrictions are placed on the powers of the Board under Section 293 of the Act. The Board of Directors of a public company or a private company shall not, except with the consent of the company in general meeting(1) Sell, lease or otherwise dispose of the whole undertaking. (2) Remit or give time for repayment of any debt due by a director. (3) Invest or borrow money in the contravention of Companies Act, 1956. (4) Contribute after the commencement of this Act, to charitable or other funds any amount, the aggregate of which will, in any financial year, exceed, fifty thousand rupees or five percent of its average net profit during the three financial years immediately preceding, whichever is greater. Rights of the Directors 1. A director validly appointed and if he is not otherwise disqualified to take part in discussion in the Board's meetings, he is entitled to attend the meetings of the Board and participate in the discussion of the company's affairs. 2. A director is entitled to receive remuneration fixed by the articles or otherwise, but subject to the provisions of the Act. 3. Managing Director and the Whole-time director may be given compensation by the company if the company terminates the services of such a director prematurely. The amount of compensation which will be paid to the director concerned must not exceed the amount of remuneration which he would have earned if he had been in the office for the unexpired residue office term of office or three years whichever is shorter. Duties of the Directors The important duties of the directors are as follows: 1. Every director should work in the manner decided on business lines. 2. Every director must act in good faith and in the interest of the company. 3. Directors must exercise the reasonable care, which an ordinary man might be expected to take in the circumstances.

80 4. A director is expected to exhibit that degree of skill, which can be reasonably expected from a person of his knowledge and experience. He is not liable for mere errors of judgment. 5. He has to attend periodical board meetings and meetings of any committee to which he is appointed. 6. It is obligatory on the directors to disclose certain facts (pertaining to contract or arrangement proposed to be entered into by the company) to the company under the provisions of the Act. 7. He has to send his consent for the post of directors to the Registrar. Every director is obliged to take qualification shares of directorship in accordance with the provisions of Articles of Association of the company. 8. Every director must pay his share money according to the call of the Board of Directors. 9. Directors must not participate in the meeting of the Board of directors when they discuss his contract with a company. 10. In case of failure to perform his duties by the director, he will be guilty of negligence and if the company suffers any damages on account of such negligence, the director will be obliged to compensate the company. Liabilities of the Directors The liabilities of the directors are divided in two parts: (i) Civil liabilities (ii) Criminal liabilities and (iii) Unlimited liability. Civil Liabilities A director may be liable to pay compensation to company and to outsiders in case of (1) any false statement made in the prospectus. (2) where the directors exceed the authority for entering into the contract. (3) for any ultra virus act of the company. (4) where a director is negligent and the company suffers the loss due to the negligence of directors. (5) if the director makes any secret profit in connection with the affairs of the company. (6) if the directors commit any breach of trust relating to the properties and funds of the company. (7) if any act of misfeasance is committed by the director and thereby any loss is caused to the company. Criminal Liabilities The Companies Act imposes criminal liabilities upon the directors for the breach of certainconditions. Various provisions of the Act provide for the imposition of fine for criminal performance of the prescribed duties. Imprisonment is also provided for in certain cases viz. false statement in prospectus, failure to keep certain registers, falsification of books and reports, etc. On any proceedings against any director or officer of the company for. negligence, breach of duty, misfeasance, the court can excuse him from any liability if it is of opinion that such director or officer has acted honestly and reasonably and that having regard to all the circumstances of the case, he ought fairly to be excused. But in criminal proceedings, the court has no power to grant relief from any civil liability. Unlimited liability of directors It may be provided in the memorandum of association that the liability of the directors or any director or manager may be unlimited.

4: NEGOTIABLE INSTRUMENTS ACT, 1881

81

Q1. What is a Negotiable Instrument? Explain characteristics. A1. DEFINITION (SEC 3) Negotiable Instruments means a promissory note, bill of exchange or cheque either payable to order or to bearer. However this definition is not exhaustive because there are certain instrument which courts have considered as Negotiable Instrument. For eg Railway Receipt, share warrant, debenture warrant, etc. An English author, Thomas, has described in his book Principles of Banking, Negotiable Instrument as under A Negotiable Instrument is an instrument whose title can be passed freely from one person to another person by endorsement and delivery and the amount of instrument can be recovered by the holder in his own name and the holder in due course gets a better title than the holder, even though the title of the holder (transferor) may be defective. CHARACTERISTICS The following are the characteristics of a negotiable instrument : 1) Freely Transferable 2) Presumptions 3) Recovery 4) Holder can file a suit 1) Freely Transferable The property (Ownership) in a Negotiable Instrument passes from one person to another by delivery if the instrument is payable to bearer and by endorsement and delivery if it is payable to order. 2) Presumptions Certain presumption apply to all Negotiable Instrument unless contrary proved such as to the date, consideration, acceptance, endorsement or stamp. 3) Recovery The holder in due course can sue upon a Negotiable Instrument in this own name for the recovery of the amount. Moreover, he need not give notice of transfer to the party liable on the instrument to pay such holder in due course shall have better title over Instrument Free from all prior defects. 4) Holder can file a suit in his own name The holder of Negotiable Instrument can file a suit in his own name, if it is dishonored or if he has not been paid money. He is not affected by certain defenses against previous holders. For e.g. fraud. Q2. What is meant by Crossing a Cheque? Indicate its different types? A2. DEFINITION (SEC 6) A cheque is a bill of exchange drawn upon a specified banker and payable on demand. A cheque is a species of bill of exchange.

82 CROSSING OF CHEQUE There are two types of cheque: 1) Open cheque A cheque which is payable in cash across the counter of the bank is called an open cheque. If its holder loses it its finder may go the bank and get payment unless its payment has been stopped. 2) Crossed cheque It is one on which two parallel transverse lines with or without the words & Co. are drawn. The payment of such a cheque can be obtained only through a banker. It affords security and protection to the owner of the cheque. TYPES OF CROSSING There are two types of crossing. (1) General Crossing A cheque is said to be crossed generally where it bears across its face an addition of the words and company between two parallel transverse lines either with or without the words Not Negotiable. Specimen OPTIONS IN THE SPACE 1) Keeping it blank 2) Writing and company 3) Writing & Co. 4) Writing Not Negotiable 5) Writing Not Negotiable & Co. 6) Writing N/N & Co. (meaning, Not Negotiable & Co.) (2) Special Crossing If a cheque across its face an addition of the name of banker eight with or without the words Not Negotiable the cheque is said to be crossed specially. Transverse lines are not Necessary in case of a special crossing. The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears between the lines. Specimen OPTIONS IN THE SPACE 1) Writing Bank of Maharashtra 2) Writing Bank of Maharashtra Not Negotiable 3) Writing Bank of Maharashtra for A/c Payee (3) Restrictive Crossing When the words A/c payee are added to the general or special crossing it is called Restrictive crossing. OPTIONS IN THE SPACE 1) Writing A/c Payee 2) Writing A/c Payee Not Negotiable 3) Writing Bank of Maharashtra A/c Rajendra Patel Q3. Write short note on: Different types of Endorsements? A3. Types of Endorsement Any negotiable Instrument can be endorsed by any of the following types:

83 1) Endorsement in full When a drawer or any other party signs an instrument and specifies the amount too be paid to a party or to his order, it is endorsement in full. e.g. - A draws a bill Pay Mr. Ramesh shah or to his order and then signs it, this is endorsement in full. 2) Endorsement in blank When a drawer or some other party authorized just signs a Negotiable Instrument it is called an endorsement in blank. Under such an endorsement, the name of the party in whose favour a Negotiable Instrument is made will not be specified i.e. the space for name is kept blank. The person holding an instrument is entitle to get payment on its. 3) Restrictive endorsement Any endorsee to a Negotiable Instrument has a right of further negotiation but sometimes this right may be restricted or taken away by words expressed in the instrument. this is restrictive endorsement. If prevents further negotiation of instrument. E.g. Pay to Rajendra Patel only, Pay B on behalf of A. 4) Facultative endorsement When an endorser of Negotiable Instrument Waives has right or repudiates any liability in clear words, it is called facultative endorsement. Eg Pay to Pratik Parikh or on his order without recourse to me 5) Conditional endorsement When any Endorsement of Negotiable Instrument is made by an endorser inserting a condition, it is conditional Endorsement. The condition referred to will be operative between endorser and endorsee. This will not have any payment on its maturity. If such an instrument is rejected, the holders cannot hold the endorser to be liable. Eg. Pay to Mahesh Shah Rs.10,000 on arrival of the ship Vikrant Pay to A Rs.50,000 when construction of dam is completed. Q4. Write Short Note: Acceptance for honour under the Negotiable Instruments Act, 1881? A4. Acceptance for Honour Generally, the drawee to a bill of exchange should accept it. But when he refuses to accept a third party to such a bill may accept it for its drawer or endorser, this is called Acceptance for honour. Any third party to instrument and not liable on it can accept it for honour by making a note on it with permission of the holder. Elements of Acceptance of Honour 1) The acceptance for honour can be made for honour of any party to the bill of exchange. 2) The acceptance for honour can be affected only with the permission of the holder of bill. 3) A bill should have been noting and protest about its non-acceptance. 4) The acceptance for honour can be alone before the lapse of date of payment on bill. 5) The person accepting a bill for honour must make a note on it. 6) Any person not liable in connection with the bill can accept it for honour. 7) The acceptor for honour becomes liable only when the bill of exchange is dispatched to for presented at the place of payment on the very next day of its maturity.

84 Q5. Write Short Note: Acceptance for Payment? A5. According to Sec 113 of Negotiable Instrument Act, When a person responsible to pay on an instrument refuses to pay after its acceptance and if the payment is made by a third party for his honour, payment for honour can be said to have affected. Elements of Acceptance for Payment 1) The protest and noting should be with Notary public about non-payment of bill of exchange. 2) The payment should have been made for the honour of any person liable to make payment on an instrument. 3) The acceptor for honour and his agent should declare the party for whose honour payment is made and the Notary public should register such a declaration. 4) Any person liable or otherwise in connection with the instrument can make payment for the honour. Q6. Write Short Note: Holder in due course (HIDC) under the Negotiable Instruments Act Also Explain the Privileges available to Holder in Due Course? A6. Under Sec-9 of this act there is provision as to the Holder in due course Any Person is a holder in due course if he fulfills the following Conditions. 1. If he became the possessor of Negotiable Instrument Payable to bearer or the payee or endorsee if payable to order for a Valuable Consideration 2. If he became the holder of the instrument before its maturity. 3. If he became the holder of the instrument in good faith-without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. A holder of Negotiable Instrument will not be a holder in-due course if, 1. He has obtained the instrument by gift or for an Unlawful Consideration or, 2. He has obtained the instrument after its maturity or 3. He has not obtained the instrument bona fide Privileges of a holder in due course (HIDC) Thus a holder in due course is an innocent person who has paid valuable consideration and is given special privileges under negotiable instrument act. He is called protected child of negotiable instrument Act. The following are the privileges of HIDC 1) Liability of prior parties Every prior party to negotiable instrument is liable there on to a holder in due course until the instrument is duty satisfied. 2) Better title Once a negotiable instrument passes through the hands of a holder in due course it gets cleaned of its defects. Thus any defect in the title of the transferor will not affect the rights of the holder in due course. 3) Inchoate Stamped instrument A person, who has signed and delivered to another a stamped but kept the amount column blank. When such instrument is possessed by holder in due course he can fill in amount being sufficient to the stamp and can recover it from the maker or drawer of such Negotiable Instrument.

85 4) Fictitious Payee An instrument drawn in favour of Payee the acceptor or maker can not make a plea as against the holder in due-course that the payee or drawer of an instrument was fictitious. 5) Instrument Obtained by Unlawful means & Consideration The person Liable on a Negotiable Instrument can not make pleas against a holder in due Course that it was obtained from him by means of an offence, or fraud or for an Unlawful Consideration. 6) Estoppel against denying original Validity of instrument In a suit filed by holder in due course the maker, drawer or acceptor of a note, bill or cheque can not deny the validity of the instrument as originality. 7) Estoppel against denying capacity of payee to indorse In a suit by holder in due course the maker of note, drawer or acceptor of bill cannot deny the capacity of payee at the date of note or bill to indorse the same. 8) Negotiable Instrument without consideration When Negotiable Instrument is made, drawn, accepted or transferred without consideration, it creates no obligation of payment between parties to the transaction but the NI gets into the hands of holder in due course, he can recover the of the prior parties. Q7.Define Bill of Exchange and Discuss its Essentials? A7. Definition (Sec 5) 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. Essentials of a Bill of Exchange 1) It must be in writing. 2) 3) 4) It must contain law order to pay. The order must be unconditional. Three parties; The person who makes it is called Drawer The person who is directed to pay is called the Drawee The person to whom the payment is to be made is called Payee. It must be signed by the Drawer. The sum payable must be certain. It must contain an order to pay money. Other formalities such as number, date, place, consideration and necessary stamp must be properly complied with.

5) 6) 7) 8)

86 Q8. Define Cheque with its characteristics and distinguish it from Bill of Exchange? A8. Definition (Sec 6) A cheque is a bill of exchange drawn upon a specified banker and payable on demand. A cheque is a species of bill of exchange. Essentials of a Cheque 1) It must be writing. 2) It must contain an unconditional order to pay. 3) It is always drawn on a specified banker. 4) It must be signed by the drawer. 5) Money must be certain. 6) Other formalities relating to number, date, place, consideration must be properly complied with. Difference between Bill of Exchange and Cheque. Sr. No. Cheque Bills of Exchange 1 Cheque is always drawn on a A bill may be drawn on any specified banker Person including a banker. 2 Acceptance is not required as it is A bill must be accepted before the drawee payable on demand can be called upon to make payment for it. 3 It is payable on demand and For making the payment after its therefore it is not entitled to any acceptance, a drawee may have three days days of grace. of grace. 4 The drawee of a cheque is not A bill must be duly presented for payment necessarily discharged from his to the drawee otherwise the drawee of the liability by delay of the holder in bill will be discharged from liability. presenting it for payment. 5 It may be crossed A bill of exchange cannot be crossed, crossing is not necessary. 6 A Cheque does not require any A bill must be stamped stamp. 7 A cheque is not required to be If a bill is dishonoured it requires to be noted or protested. noted and protested. Q9. Define Promissory Note and Discuss its essentials? A9. Definition (Section 4) 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.

87 The person who makes the promissory note and promises to pay is called Maker. The person to whom the payment is to be made is called the Payee. For e.g. - A signs instrument stating I promise to pay B or order Rs.500. Essential Elements of Promissory Note The following are the essential elements / characteristics of promissory note: 1) It must be written (in writing): Mere verbal engagement to pay is not enough. Writing include print or type writing or by pencil or ink. 2) Promise to pay: In such a note, there must be a promise or undertaking to pay the money. A mere acknowledgment of debt is not enough. 3) Promise must be unconditional and absolute: The promise to pay the money must be unconditional for e.g.-I promise to pay X a sum of Rs.500 when convenient or ablethis is not a Promissory note. 4) The promise must be signed: This instrument must be signed by the maker otherwise it is incomplete and of no effect. 5) Money must be certain: In Promissory note, the money for which the promise has been given must be certain and must not be capable of contingent for e.g.- "promise to pay A Rs.1000 and all other sums due to him. This is not a Promissory note. 6) Promise to pay money only: The payment must be in the legal tender of money of India. If there is promise to pay something other than the money or in addition to money, it cannot be a Promissory Note. 7) The payee must be certain: The instrument must contain certainty as the who is the payee. Where the maker and payee cannot be identified with certainty from the instrument, the instrument is not a Promissory Note. 8) Other formalities: Promissory Note must fulfill other formalities like number, date, place, consideration and a necessary stamp. 9) It cannot be made payable to bearer or demand: This restriction has been imposed by the Reserve Bank of India Act 1934. Q10. Distinguish between Promissory Note and Bill of Exchange? A10. Definition (Section 4): 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. The person who makes the promissory note and promises to pay is called Maker. The person to whom the payment is to be made is called the Payee. For e.g.- A signs instrument stating I promise to pay B or order Rs.500. Definition (Sec 5) 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.

88 Difference between Promissory Note and Bill of Exchange Sr. No. Bill of Exchange Promissory Note 1 As to the parties these are three There are two parties. (a) Maker (b) Payee parties.(a) Drawer (b) Drawer (c) Payee 2 There is unconditional order to pay There is unconditional promise to pay money money. 3 A party who has shown as Drawee Acceptance is not necessary. should accept the Bill and therefore acceptance is necessary. 4 The liability of the drawee is The maker of a note is primarily and primary and absolute whereas that absolutely liable to make payment. of drawer is secondary and conditional. 5 In a bill, the drawee and the payee A note cannot be made payable to the may be one and same person. maker himself. 6 After the acceptance on the date of For making the payment of a note, no. maturity, the drawee is granted three days of grace are given i.e. it is payable for making the payment as days of on days demand. grace. 7 If the bill is dishonoured protest and If the note is dishonoured no protest or noting is compulsory notice is required. 8 If the bill is foreign bill, three copies For Promissory Note, no copy is required. are required. Q11. Write Short Note on: Material Alteration? A11. Under sec 87 of this Act, the provision is made for Material Alteration in Negotiable Instrument. Any change which may effect important changes in the liabilities of the parties to a Negotiable Instrument are called alterations. But if such changes are made affected before making the instrument with the consents of all parties to it, they are not called material alteration. Any Material alteration of a Negotiable Instrument renders the same as void as against anyone who is a party there to. The parties can make the following changes: 1) To make an instrument with incomplete stamps declaring it as complete 2) To make a simple endorsement as complete Endorsement 3) To cross a cheque 4) To make the acceptance of instruments conditional The liabilities of parties do not change or comes to an end by such material alteration. Moreover, change in date, place of payment, rate of interest, parties are also called material alterations. Q12.Write Short Note on Maturity & Days of grace? A12. The Maturity of a Promissory Note or bill of exchange is the date on which it falls due-sec22. Every instrument payable otherwise than on demand, is entitled to three days of grace.

89 These days of grace were originally allowed as a gratuitous favour to the debtor. Following instrument are not entitled to days of grace(1) a cheque (2) a bill or note payable at sight or on presentment or on demand (3) a Bill or Note in which no time is mentioned Following instruments are entitled to days of grace. (1) a bill or note payable on a specified day (2) a bill or note payable after sight (3) a bill or note payable at a certain period after date. (4) a bill or note payable at a certain period after the happening of certain event. Calculation of date of maturity: - Sec- 23 to 25 1. If Promissory Note or bill is made payable a stated number of months after date or sight. It becomes payable after the corresponding date of month after the stated number of months. e.g. a bill dated, 1st January 2009 is made payable three months after date, if fall due on 4th April 2009. 2. If the month in which the period would terminate has no corresponding day the period is held to terminate on the last day of such month. 3. The day on which the instrument is presented for acceptance is to be excluded. e.g. a bill payable thirty days after sight is presented for sight on 1st March2009 it falls due on 3rd April2009. 4. When the day on which a bill or note is at maturity is a public holiday the instrument is deemed to be due on the next preceding business day. e.g. a bill dated 1st March2009 is payable three month after date it falls due on 4th June2009, if 4th June, 2009 happens to be holiday it will fall due on 3rd June 2009 the preceding working day.

5: SALE OF GOODS ACT, 1930

90

Q1. What is Contract of Sale? How the Contract of Sale is made? Distinguish between Sale and Agreement to Sell? A1. It is a contract whereby the seller transfers the property or agrees to transfer the property in the goods to the buyer for the price. A contract of sale is made by an offer to buy or sell the goods for the price and the acceptance of such an offer. It may provide for the immediate delivery of the goods or immediate payment of the price or both. It may also provide for delivery or payment by installments or that the delivery may be postponed if the installments are not paid for. It may be made in writing or by word of mouth or partly in writing and partly by word of mouth. It may also be implied by the conduct of the parties. Sale and Agreement to Sell: Where under the contract of sale the property in the goods is transferred from the seller to buyer, the contract is called the sale. But where the transfer of the property in the goods is to take place at the future time or the subject to some condition thereafter to be fulfilled the contract is called an agreement to sell. An agreement to sell becomes the sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. No. 1 2 3 4 5 Points Nature Right Sale Agreement to Sell It is an executory contract. It creates the jus in personam only a personal right Property in the goods passes at a later date It is a future sale (i)In case of buyers breach, seller can sue only for unliquidated damages (ii) If seller commits a breach, buyer has only a personal remedy for damages. If the goods are destroyed, the loss falls on the seller, even though they are in possession with the buyer If the buyer becomes insolvent without paying for the goods, the seller may refuse to deliver the goods unless paid for

It is an executed contract It creates jus in rem right against the entire world Transfer Property in the goods passes instantly Effect It is a present sale Result (i) If buyer fails to pay for the goods the seller can sue him for the price (ii) If seller commits a breach, buyer can sue for damages and claim delivery of the goods. Risk If the goods are destroyed, the loss falls on the buyer even though they are in possession of the seller Insolvency of If the buyer becomes buyer insolvent before he pays for the goods, the seller (in absence of lien etc) must deliver goods Seller is only entitled to claim rateable

91 8 dividend for the price due Insolvency of If the seller becomes seller insolvent, buyer being the owner of the goods would be entitled to recover the goods, form the O.R. of the seller Right to Buyer can pursue the pursue property Right to claim Seller acquired a right on unpaid seller against the goods If the buyer who has paid the price finds that the seller has become insolvent he can claim only rateable dividend and not the goods, since ownership has not passed to the buyer No question of pursuing since the goods are not identified Seller can claim only damages.

9 10

Q2. Explain the Subject Matter of Sale? A2. Goods form the subject matter of the contract of sale. They mean every kind of the actionable claims and money. They include the following: Stock and Shares. Growing crops. Grass. Things attached to or forming the part of land which are agreed to be severed before the sale or under the contract of the sale. Types of Goods: Existing Goods: The goods which are owned and possessed by the seller at the time of the sale are called existing goods. These goods may be specific, ascertained or unascertained. Future Goods: The goods which the seller does not possess at the time of the contract and which will be manufactured, acquired or produced by him at some future date is called future goods. Contingent Goods: The goods the acquisition of which by the seller depends upon the contingency which may or may not happen are called the contingent goods. Price of the Goods The price of the goods in the contract of the sale must be expressed in terms of money. It May be fixed by the contract itself. May be left to be fixed in an agreed manner. May be determined from the course of dealing between the parties. Where the price is not determined in accordance with the above provisions, the buyer may pay the seller the reasonable price. Q3. Write short note on Conditions & Warranties? A3. A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or the warranty. A condition is a stipulation essential to the main purpose of the contract. Its breach gives the right to the buyer to treat the contract as repudiated. A warranty is a stipulation collateral to the main purpose of the contract. Its breach gives rise to the claim for the damages but not the right to reject the goods and treat the contract as repudiated.

92 Express and Implied Conditions and Warranties In a contract of sale, conditions and warranties may be expressed or implied. Express conditions and warranties are those which are agreed upon between the parties at the time of the contract. Implied conditions and warranties are those which are implied by law unless the parties stipulate to the contrary. Implied Conditions: Condition as to title: In a contract of sale, there is an implied condition on the part of the seller that In case of a sale, he has a right to sell the goods, and In case of the agreement to sell, he will have the right to sell the goods at the time when the property is to pass. Condition as to Sale by Description: Where there is a contract of sale of the goods by description, there is an implied condition that the goods shall correspond with the description. If the sale is by sample as well as by the description, the goods shall correspond both with the sample and the description. Condition as to Quality or fitness: The condition as to quality or the fitness is implied where: The goods sold are such as the seller deals in the ordinary course of the business, The buyer relies on the sellers skill and the judgment as to the fitness of the goods for any particular purpose. The buyer expressly or impliedly makes known to the seller that he wants the goods for the particular purpose. Condition as to Merchantability: Where the goods are bought by description from a seller who deals in the 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. Condition implied by Custom: An implied condition as to quality or fitness for a particular purpose may be annexed by the usage of the trade. Condition as to Sale by Sample: In the case of contract for sale by sample there is an implied condition: 3 That the bulk shall correspond with the sample in the quality; That the buyer shall have the reasonable opportunity of comparing the bulk with the sample; and That the goods shall be freed from any defect, rendering them unmerchantable, which would not be apparent on a reasonable examination of the sample. Condition as to Wholesomeness: In case of eatables and provisions, there is an implied condition that the goods shall be wholesome and fit for the human consumption. Implied Warranties: In contract of sale, unless there is a contrary intention, there is an implied warranty that A. The buyer shall have and enjoy quiet possession of the goods. B. The goods are free from any charge or encumbrance in the favour of the third party.

93 Q4. Explain Doctrine of Caveat Emptor? A4. It means let the buyer beware. It means that the buyer should examine the goods thoroughly while purchasing it. If the goods turn out to be defective or do not suit his purpose or if he depends upon the own skill and judgment and makes the bad selection, he cannot blame anybody excepting himself. For Instance: H sent to market 32 pigs to be sold by the auction. The pigs were sold to W with all faults and the errors of description. He knew that the pigs were suffering from the swine fever, but he never disclosed it to W. held, that there was no implied warranty by H and the sale was good and H was not liable in the damages. (Ward V. Hobbs) Exceptions: The doctrine of Caveat Emptor does not apply in the following situations: A. In case of Implied Conditions and Warranties. B. When the buyer intimates the purpose to the seller and depends upon his skill and judgment. C. When there is usage of the trade. D. When there is fraud by the seller. E. Where the goods are bought by the description from then seller who deals in the goods of that description. Q5. No seller can give to buyer a better title than what he himself has Explain. OR Q5. Write a short note on: Sale by non-owners. A5. According to Section 27 to 30 of the Indian Sale of Goods Act, 1930 No seller can give to buyer a better title than what he himself has. The law has been passed with a view to protecting the interests of the owner. E.g. person A can not sell to some other person, B a house owned by C as he does not have ownership title on that property. However, there are the following exceptions to this rule:Ownership by Estoppels: This means that suppose a person A buys property from B who is not the owner of the property but the person who is the real owner of the property either by his action or rewards creates an impression on the mind of A that B is the real owner of the property then A acquire of a clear title of the property that he has purchased from B. Mercantile Agent: According to Section 27 to the Indian Sale of Goods, when a mercantile agent has aright to sell a particular property, then the buyer of the property gets clear title even when he has purchased the goods from the agent. However, he must be an agent as defined by the act and must be in possession of goods or documents of the title of goods with the owners consent. Sale by joint owners: When one of the joint owners of a property sells the property on behalf of all the owners and a if the buyer purchases it without his prior knowledge that the co-owner does not have a right to sell the property, gets a joint right, against all the owners, but not a sound right. Sale of goods purchased from voidable contract: Suppose that a person A purchases a tape recorder from some other person B through undue influence. Now this is a voidable contract.

94 But suppose that, some other person C purchases this tape recorder from the A without his knowledge of the voidable contract, and then he gets a sound ownership right. Sale of the goods by seller after a sale: Here, suppose that a person A purchases some goods from B but does not take the delivery of the goods and so B sells the goods to some other person C. Here, C will get a clear title and A can not ask for the delivery of the goods or possession of the goods from C. However, he has a right to ask for damages from B. Goods sold by buyer after sale: According to section 30(2) when a person A has purchased goods from B and is in possession of goods or documents showing that he is the owner of the goods sells the goods directly or through his agent to some other person C, then C gets a clear tile. Sale by unpaid seller: When a buyer has not paid the price or tendered the payment, to the seller then the seller has aright to stop the goods in transit resell them, and to keep the goods in lien. So when he sells the goods to some third person without informing the original buyer then the new buyer gets a clear title/ the buyer has a right to ask for damages in the event of non intimation. Sale by official receiver: When a person has gone bankrupt and the possession of his is taken change by an official receiver then a person who purchases goods from the receiver gets a clear ownership title. Sale in open market: This exception has been recognized by the British Act. According to his exception when a person buys goods from open market where goods have been openly exposed then buyer gets a clear ownership title. However here again the exception does not apply to sale of a horse. Q6. Who is unpaid Seller? What are the rights of unpaid seller or vendor? A6. Any seller who has sold goods but has not received the amount of price fully or any part of it or when the negotiable instrument given by the buyer has been dishonored or in case of credit sale the period of credit has expired and no payment is received by the seller then such a seller is said to be unpaid seller as per the sale of goods Act. The rights of an unpaid seller are basically divided in to two categories as follows: Right against the goods Right of Lien: This means that the seller can keep the goods in his possession till the price is paid by the buyer. However, this right will apply when:1. There is no condition of selling the goods on credit. 2. The goods have been sold on credit but the time limit of credit has expired. The Lien is lost under the following cases:1. 2. 3. 4. Then the seller delivers the goods to the carrier for transport. When the buyer has obtained possession of goods lawfully. When the seller himself gives up the right of lien. Lien is lost by Estoppels. This means that the seller behaves in such a manner so as to give an impression to third party that he has waived the lien.

95 Stoppage in Transit: - (Section 50) This means to stop the goods from being delivered when they are in the course of transportation. This right will arise under the following circumstances:1. 2. 3. 4. 5. The seller has sold the goods to the buyer but the seller is unpaid. He must have parted with the goods. The goods must be in transit. They have not yet reached the buyer or his agent. The buyer must have become insolvent. The goods are stopped according to the provisions of the law.

The seller can stop the goods in transit and keep them under his lien till the price is paid, or the price has been tendered. The seller may actually keep the goods with him or may give a notice about the stoppage to the buyer. (B) I. II. Right to resale: The seller has also the right to resale the goods. However the provisions are as under: If the goods are perishable in nature, the seller can immediately dispose of the goods: In other cases, he has to give a notice to the buyer about his intension to resell the goods. The buyer may pay the price in reasonable time. If the price is not paid, the seller can sell the goods. The seller can recover damages from the buyer. If the seller re-sells the goods without a notice to the buyer he can not recover damages. Moreover, he has to surrender profit on the sale to the buyer. If in the original contract of sale, there is a provision for the re-sale the seller can sell the goods without a notice to the buyer and can also recover damages. The seller can recover damages from the buyer if the buyer does not pay or tender the price.

III.

IV. V.

Rights against the buyer I. II. If the goods have already passed to the buyer, then seller can sue for the price. If the payment is to be made. On a certain day irrespective of the date of delivery and if the payment is not made on that date, the seller can sue for the price even though the goods are in his possession. If the buyer wrongly refuses to accept the goods, the seller can recover the damages from the buyer.

III.

Q7. Write a short note Sale by auction A7. Section 74 of Indian Sale of goods Act, 1930 mentions the following rules about the sale by auction A. Rules regarding the goods: When the goods are put in different lots, ordinarily they are considered to be the subject matter of different contracts. B. Completed Sale: In any auction the sale of goods is said to be completed when the auctioneer announces the sale to be completed by knocking his hammer. Before the sale is completed the bidder can withdraw his offer and the auctioneer can also withdraw the goods from the auction.

96 C. Right of the seller to bid: When the right is reserved any person can bid on behalf of the seller or any other person appointed by the seller to sell the goods. D. Minimum price: The auctioneer has a right to announce the reserve or the up set price for the goods to be auctioned. The announcement is to be made before the sale starts. E. Pretended bidding: If the auctioneer makes the use of pretended bidding to raise the price of his product, the contract becomes voidable at the option of the buyer. F. Implied conditions: When an auctioneer sells goods, there are some implied conditions such as he has aright to sell the goods; the buyer will get the peaceful possession etc. G. Price: Moreover, according to the law the bidder who has failed to pay the price shall continue to be liable to pay the price even when the goods are sold are sold to some third party. He will have to pay the difference the price that he has offered and the price which the auctioneer actually gets. Q8. Write a short note - Market Overt (Purchase from open market) A8. According to Indian Sale of Goods Act, a seller can not give a better title of his goods to the buyer than what he himself has. This is not applicable to goods bought from the open market. However here it should be noted that this exception is recognized only in UK and not in India. According to this exception the buyer gets a better title than the seller, provided the following conditions are satisfied. I. The goods must have been sold at proper time. They should not have been sold on a Sunday. The goods should have been property displayed in the open market. The buyer should not be aware of the defective title of the seller. Bona fides of the buyer should be honest. The buyer gets a clear title even when the goods delivered to him are stolen goods.

II. III. IV. V.

97

6: THE CONSUMER PROTECTION ACT, 1986

Q1. Explain the objectives of Consumer Protection Act, 1986? A1. Introduction: In the trade, there are two parties - one is buyer and the other is seller. But when the buyer becomes the ultimate user of goods and services then buyer will be called consumer. The buyer must get the full satisfaction from the goods or services under the consideration of the payment of price. But sometimes with the intension to earn maximum profit and perfect competition, the trader manufacturer or retailer have not provided the quality, quantity or the basic characteristic of the goods or services. Hence the consumer cannot able to get the full satisfaction from the product or service and he may feel that he has been cheated by the trader, manufacturer or retailer. Under this situation he may get justice under consumer protection act formed by Central Govt, of India in 1986. Objects of the Act: The act has been mainly made to create awareness among the consumers about their rights and to provide simple and speedy redressal (solution) of consumer's disputes. Rights of consumer: 1. Protection against the marketing of Goods and Services which are Hazardous to the life and property. 2. Right to be informed about the quality, quantity, purity, potency, standard and price of the goods or service. 3. Right of protection against unfair trade practices. 4. Right to have access to variety of goods and services at reasonable or competitive rates. 5. Right to seek redressal against unfair trade practice or restrictive trade practice or exploitation of consumers. 6. Right to be heard and to be assured that the consumer's interest will receive due consideration in the appropriate forum. 7. Right to have, consumer education. Q2. State the various definitions contained in Consumer Protection Act, 1986? A2. Consumer: A consumer for the purpose of goods means, Any person, who a. Buys any goods for consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment. b. Includes, any user of such goods other than the person who buys them, when such is made with the approval of the buyer. The person claiming himself as ' consumer' should satisfy that (i) There must be a sale transaction between the seller and the buyer, (ii) The sale must be of goods, (iii) The buying of goods must be for consideration. (iv) The consideration has been, paid or promised or partly paid and partly promised or under any system of deferred payment.

98 (v) The user of the goods may also be a consumer, when such use is made with the approval of the buyer. Consumer for the purpose of 'service' means any person who hires or avails the services of any expert in that particular field or facility from an expert for the consideration. Who is not a consumer? A person is not a consumer if he obtains goods for resale or for any commercial purpose. When the manufacturer sells the goods to the wholesaler, who in turn sells the goods to a retailer, the wholesaler will be excluded from the definition of the word consumer as he has brought the goods for resale or for commercial purpose. "A person buying the goods for resale or for commercial purposes, even if for consideration, is not a consumer. Commercial purpose is a mercantile activity, having profit as the main aim. It includes all business activities. E.g. A purchase of a car by a company for use by its business, by director and Employees is purchased for commercial purpose. "Person" includes: (1) A firm whether registered or not (2) A Hindu undivided family (3) A co-operative society. (4) Every other association or persons whether registered or not. Any person has to be consumer first as per definition of the word, consumer as given under the Consumers Protection Act to get remedy. "Goods" meaning of the word "Goods'' under the Consumer Protection Act are the same as defined in the sale of goods Act of 1930. "Service" means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing supply of electrical or other energy, board or lodging or both, (housing construction) entertainment, amusement or the purveying of news or other information but does not include the rendering of any service free of charge or under a contract of personal service. Contract of personal services is excluded from the definition, A service offered by an Advocate to the client or service rendered by a private tutor is therefore not included the definition. "Consumer dispute" Sec 2 (1) (e) "Consumer Dispute" means a dispute where the person against whom a complaint has been made, denies or disputes the allegations contained in the complaint. "Complainant" means 1) A consumer or, 2) Any voluntary consumer association registered under the Companies Act or under any other law or the time being in force or 3) The Central Government or the State Government, or 4) One or more consumers, having the same interest, A person seeking redressal of his complaint, must come within any of the above mentioned categories, otherwise he has no Locus Standi to proceed with the case before i.e. consumer Redressal Forum. "Complaint" means any allegation in writing made by a Complaint In regard to one or

99 more of the following: i) Any unfair trade practices or a restrictive trade practice has been adopted by any trader. ii) The goods bought by him or agreed to be bought by him, suffer from one or more defects, iii) The service hired or availed of or agreed to be hired or availed of him suffer from deficiency in any respect, iv) a tracer has charged for the goods mentioned in the complaint a price in excess of the price fixed by law or displayed on the goods or any packing containing such goods. v) Goods which will be hazardous to life and safety when used or being offered for sale to the public in contravention of the provision of any law. "Manufacturer means a person who 1) Makes or manufacturers any goods or part of it or 2) Assembles parts of any goods which are made or manufactured by others and claims the end product to be goods manufactured by himself or 3) Puts his own mark on any goods made or manufactured by any other manufacturer and claims such goods to be goods made or manufactured by himself. Where a manufacturer dispatches any goods or parts thereof to any branch office maintained by him, such branch office is not the manufacturer, even though the parts dispatched are assembled at such branch office and are sold or distributed from such branch office. "Defect" {Sec. 2 (1) (f)}means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which is required to be maintained by or under any law for the time being in force or under any contract, express or implied or as is claimed by the trader in relation to any goods.

Deficiency": {Sec. 2 (1) (g)} Deficiency means any fault, imperfection or shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service. Restrictive Trade Practice (RTP): It means a trade practice- which tends to bring about manipulation of price or its conditions of delivery or to affect the flow of supply in the market relating to goods or services in such a manner as to impose on the consumer unjustified cost due to delay beyond the period or any trade practice which requires a consumer to buy, hire or avail of any goods or services. For e.g.: The retailer charged more price from the consumer mentioned under maximum retail price printed on the goods. Unfair trade practice (UTP): It means a trade practice which for the purpose of promoting the sale, use or supply any goods or any services, adopts any unfair method or unfair practice by making a wrong statement or misleading publications or gifted prizes or hoarding of goods or spurious goods. Appropriate Laboratory: It means a laboratory or organisation recognized by the Central Govt, or the state Govt, to analyze the test of any goods with a view to determining whether such goods suffer from any defects or not.

100

Q3. Write a note on unfair trade practice? A3. Meaning: As per definition no. 9, the trader has committed unfair trade practice in the following circumstances. 1. Making statements: i) When trader makes false representation that the goods or services are of a particular standard or quality, ii) A trader falsely represents any second hand goods as new goods, iii) Trader makes a false or misleading representation concerning the need of any goods. iv) A trader gives false warranty of a product. v) A trader materially misleads the public concerning the price at which a product gives false or misleading facts. 2. Publication: When a trader permits the publication or any advertisement whether in any newspaper or otherwise for the sale of supply at a bargain price of goods or services that are not intended to be offered for sale or supply at the bargain price. 3. Gift and prizes: When a trader permits the offer of gift, prize other items with the intention of creating impression that something is being given or offered free of charge when it is fully or party covered by the amount. 4. Sale or Supply of goods: When a trader permits the sale or supply of goods knowing that the goods do not comply with the standards prescribed by competent authority relating to its performance. 5. Hoarding of goods: When a trader permits the hoarding or destruction of goods if such hoarding or destruction is intended to raise the cost of goods. 6. Spurious goods: Manufacture of spurious goods or offering such goods for sale or adapting deceptive practices in the provision of services. Q4. What is Central Consumer Protection Council? Explain its rights, powers and procedure under consumer protection Act. 1986? OR Write a note and C.C.P.C.? A4. Introduction: As per common introduction, Framed by Central Govt, of India by notification for the Protection of consumer, is called Central Consumer Protection Council. 1. The Central Govt, shall establish a Council by notification known as C.C.P.C 2. The Central Council shall consists of the following members a) The minister in charge of the consumer affairs in the Central Govt., who shall be called Chairman. b) Other members official or non-official as may be prescribed provided it should not be exceeded 150 members. The Minister In charge, Minister of state, 8 members of parliament, secretary of national commission, representative of Central Govt, not exceeding 20, the registrar the representative of the consumer organizations not less than 35 representative of women not

101 less than 10, representative of farmers not exceeding 20 and persons capable of representing consumers interest not exceeding 15. The term of the council shall be 3 years and any member may resign from the council by writing under his hand to the Chairman of Central Council. The vacancies so caused shall be filled by the Central Govt, and Central Govt. May constitute among the member of the council, a standing working group not exceeding 30 members. Procedure for meetings: The Central Council shall meet at least once every year. Meetings shall be held of such time and place as the chairman may think fit and he shall observe the procedure in regard to the transaction of its business as may be prescribed. Objects: The objects of the Central Council shall be to promote and protect the rights of consumers which are as follows: 1. The right to be protected against the marketing of goods and services which are hazardous to life and property. 2. The right to be informed about the quality, quantity, potency, parity, standard and price of goods or services so as to protect the consumer against unfair trade practices. 3. The right to be assured to a variety o goods and services at competitive prices. 4. The right to be heard and to be assured that consumer's interest will receive due consideration at appropriate forum. 5. The right to seek redresses or restrictive trade practices or exploitation of consumer. 6. The right to consumer education. Conclusion: The CCPC is an institution or council is working exclusively, for the protection of the basic rights of consumers. Such councils, Assure to the consumer' about their basic rights and Requirements. Consumer dispute redressal agencies To provide simple, speedy and inexpensive redressal of consumer grievances, the Act envisages a three tier quasi-judicial machinery at the district, state and national level. At the district level there will be "District Forum" to entertain consumer complaints where the value of goods or services and compensation does not exceed rupees twenty lakhs (Rs.20, 00,000): At the state level there will be 'State Commission' to deal with the complaints where the claim exceeds rupees twenty lakhs but does not exceed rupees one crore. At the national level there is a 'National Commission for complaints exceeding Rupees one crore. Q5. What is district forum? Explain its constitution, objects and power under consumer protection act 1986? OR Write a note on district forum? A5. Meaning: A judicial authority appointed under any law for the protection the consumer and to give justice to even, consumer under consumer protection act 986 is called district forum.

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Composition: Each district forum shall consist of a person who is qualified to be a district judge who shall be its president and two other members. One of them shall be a woman, shall have the following qualification. 1) Not less than 35 years of age. 2) Posses a bachelor degree from a recognized university. 3) Persons of ability, integrity and have knowledge and experience of at least 10 years in dealing with problems relating to economics law commerce, accountancy industry public affairs or administration. Appointment: Every appointment shall be made by State Govt. on the recommendation of selection committee consisting of the following: 1) President of State commission Chairman. 2) Secretary of law department of the state member. 3) Secretary in charge of the department dealing with consumer affairs in the state members. Every member of the district forum shall hold office for a term of five years or up to the age of 65 years whichever is earlier. A member shall be eligible for reappointment for another term of five years or up to the age of 65 years whichever is earlier. The salary payable of the members of the district forum may be prescribed by the state govt. Resignation: A member may resign his office in writing addressed to the state govt. If resignation is accepted, his office shall be vacated and the state Govt. may fill up the vacancy by appointing an appropriate persons. Disqualification: A person shall be disqualified for appointment as member if he, 1) Has been convicted and sanctioned to imprisonment for an offence involving moral turpitude. 2) Is insolvent. 3) Is of unsound mind and declared by a competent court. 4) Has been removed as dismissed from the service of the govt. 5) Has such other disqualification as may be prescribed by the state govt. Complaint Against service: The district forum shall refer a copy of complaint to the opposite party directing him to give his version within a period of 30 days and where the opposite party denies or disputes the allegations or fails to take any action to represent his case then the district forum shall proceed to settle the consumer dispute on the basis of evidence. Jurisdiction of the district forum: The District Forum shall have jurisdiction to entertain complaints where the goods or services and the compensation, ii any claimed does not exceed rupees twenty lakhs. Territorial Jurisdiction:Section 11 sub sec. 2) provides that a complaint shall be instituted in a District Forum

103 within the local limits of whose jurisdiction. (a) The opposite party or each of the opposite parties at the time of institution of the complaint - (i) actually and voluntarily resides or (ii) carries on business or (iii) has a branch office^ or (iv) personally works for gain. (b) Where there are more than one opposite parties, any of the opposite parties at the time of the institution of the complaint - (i) actually and voluntarily resides or. (ii) Carries on business or (iii) have a branch office or (iv) personally works for gain. (c) The cause of action, wholly or in part arises. Procedure on receipt of complaint: The provisions of sec. 13 lay down the procedure which is to be followed by the District Forum on the receipt of a complaints under the Act, where a complaint does not require analysis or testing of the goods, it should be decided as far as possible within a period of 90 days trap- the date of the notice received by the opposite party and within 150 days if it requires analysis or testing of goods. Power of district forum: The district forum shall have the same powers as the civil court is carrying which are as follows: 1) Give summons for attendance of any defendant or witness. 2) Discover any documents or other material objects as evidence. 3) Reception of evidence on affidavits. 4) If the district forum is satisfied that the goods complained suffer from any of the defects then it shall issue order to the apposite party to do following things: i) To remove the defect pointed out by the appropriate Laboratory. ii) To replace the goods with the new goods of the similar description. iii) To return to the complainant the prices and the charges paid by complainant. iv) To remove the defects in goods or deficiencies in the service. v) To discontinue the unfair trade practice or restrictive trade practice. vi) Not to affirm hazardous goods or services for sale. Appeal: Any person aggrieved by an order made by the district forum may prefer an appeal to the state commission within a period of 30 days. No appeal shall be entertained unless the appellant had deposited 50% of that amount or Rs. 25000 whichever is less. Conclusion: District forum established by state Govt, has judicial authority for providing justice to the genuine consumer or party those who are aggrieved under consumer protection act -1986. Q6. Explain meaning composition, procedure and appointment of members of state commission in detail? OR Write a note on state commission? A6. Meaning A forum or commission of members established by state Govt. to provide justice to the aggrieved person from the order of district forum is called state commission or state forum. Composition Each state commission shall consists of a person who is a judge of high court as president of

104 commission by the state govt. and not less than two members out of which one shall be a woman who shall have the following qualifications. 1) Not less than 35 yeas of age. 2) Possess a bachelor degree from a recognised university. 3) Person of ability, integrity. 4) Have adequate knowledge and experience of last 10 years in dealing with problems relating to economies, law commence; accounts, and industry. 5) Not more than 50% of the members shall be from judicial background. Appointment Every, appointment shall be made by state Govt, on the recommendation of a selection committee consisting of the following. President of the State Commission Chairman Secretary of the law department of the state - member, Secretary in charge of department dealing with consumer affairs in state member. Resignation A member may resign his office in writing under his hand addressed to the state govt. after acceptance his office shall become vacant and vacancy may be filled up by a qualified person. Disqualification as member A person shall be disqualified as member if he Has been convicted to imprisonment for an offence, Is a discharged insolvent? is of unsound mind, Has been removed or dismissed from the service of Government. Powers: The jurisdiction powers and authority of the state commission may be exercised by benches, constituted by. president with one or more members and if the opinion of member differs then president shall refer the case and give his best judgment, They can exercise the case of appellant who is aggrieved from the order of district forum. The State Commission shall have jurisdiction a) To entertain (i) complaints where the value of the goods or services and compensation, if any claimed exceeds rupees twenty lakhs but does not exceed rupees one crore and (ii) appeals against the orders of any District Forum within the State and (b) To call for the records and pass appropriate orders in any consumer dispute which is pending before or has been decided by any District Forum within the State where it appears to the state commission that such District Forum has exercised the jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested or has acted in exercise of it's jurisdiction illegally or with material irregularity. Thus, the State Commission has been vested with three types of jurisdiction namely (1) Original jurisdiction (2) Appellate jurisdiction, & (3) Revisional jurisdiction. Salary and term of the office The salary and other allowances of the members of the state commission shall be prescribed by the state commission. Every member of the state commission shall hold office for a. term

105 of five years or up to the age of 67 years whichever is earlier and member, shall be eligible to reappoint for another team of five years or the age of 67 years whichever is earlier. Appeal If the appellant aggrieved from state commission order then they can apply to the national commission within 30 days' from the order received from state commission. Conclusion State commission is a judicial authority ahead them district forum established by state Govt, for the time being gives the protection under consumer protection act -1986 by passing the order which may be conferred to national commission. Q7. Write a note on The National Commission? A7. Composition of the national commission (1) The National Commission shall consist of; a. A person who is or has been a judge of the Supreme Court, to be appointed by the Central Government who shall be its President, provided that no appointment under this clause shall be made after consulting the Chief Justice of India. b. Four members who shall be persons of ability, integrity and standing and has adequate knowledge or experience of, or have shown capacity in dealing with, problems relating to economics. Law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman. Provided that every appointment made under the clause shall be made by the Central Government on the recommendation of a selection committee consisting of the following, namely: A person who is a Judge of the Supreme Court, to be nominated by the Chief Justice of India Chairman The Secretary in the Department of Legal Affairs in the Government of India - Member, Secretary of the Department dealing with consumer affairs in the Government of India - member. (2) The salary or honorarium and other allowances payable to and the other terms and conditions of service of the members of the National Commission shall be such as may be prescribed by the Central Government. (3) Every member of the National Commission shall hold office for a term of five years or up to the age of seventy years, which ever is earlier and shall not be eligible for reappointment. Terms and conditions of service of the president and members of the national commission Before appointment, the president and the member of the National Commission shall have to take an undertaking that he does not and will not have any such financial or other interest as is likely to "affect pre judicially his functions as a member. The terms and conditions of service of the President and the members shall not be varied to their disadvantage during their tenure of office.

106 Vacancies in office A vacancy in the office of the President or member may occur by the expiry of the term, or by death, resignation, or by removal. A vacancy so caused shall be filled up by fresh appointment by the central government. Jurisdiction of the National Commission The jurisdiction of the National Commission may be classified into three categories namely. (1) Original jurisdiction: - to entertain complaints where the value of the goods or, services and compensation, if any, claimed exceeds rupees one crore. (2) Appellate Jurisdiction: - to entertain appeals against the order of any State Commission. (3) Revisional Jurisdiction - This is limited to consumer disputes where in, a state commission. (i) Has exercised a jurisdiction not vested in it by law or (ii) Has failed to exercise jurisdiction so vested or (iii) Has acted in the exercise of its jurisdiction illegally or with material irregularity The National Commission can exercise its power in revision only under the above stated situations.

7: INFORMATION TECHNOLOGY ACT, 2000

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Q1. Explain the Framework of cyber laws in India as governed under Information Technology Act, 2000? A1. The IT Act is a comprehensive piece of legislation, which aims at policing some of the activities over the Internet. The fundamental approach of the Act is towards validating and legalizing electronic and on-line transactions. Business transaction costs will be reduced and transaction volumes will grow manifold. While legislation will always be lagging behind as time and technology progress, the Parliament must ensure that it keeps amending old laws and enacting new laws to keep pace with the ever-changing standards. At the same time, Indian law must be compatible with international standards that are prescribed and that may be prescribed in the future. This is essential if we desire to effectively regulate this boundless world. With the evolution of information technology, paperless documents replaced paper documents. As a result, modern authentication tools viz. electronic signatures are slowly substituting the traditional authentication tools -handwritten signatures. The electronic signature covers digital signature techniques, biometrics and other signatures that use computer medium. To enable communication on electronic medium, where individuals may not actually communicate with each other, digital signatures are in vogue. A small change or amendment of an enactment or the legislation of a new law brings forth the relative changes in the provisions of the other enactments. Respect for a new law or amendments in an existing law will be there only when the relevant provisions in the procedural laws (like IPC, CrPC, Limitation Act etc.) are made in time to suit the requirements of the society as a whole. The objective of the Information Technology Act is to provide legal recognition for transactions carried out by means of electronic data interchange and other means of electronic communication, commonly referred to as "electronic commerce", which involve the use of alternatives to paper-based methods of communication and storage of information, to facilitate electronic filing of documents with the Government agencies and further to amend the Indian Penal Code I860, the Indian Evidence Act. 1872, the Bankers' Books Evidence Act, 1891 and the Reserve Bank of India Act, 1934 and for matters connected therewith or incidental thereto. The information technology has influenced many other substantial laws like Consumers Protection Act, 1986, Income Tax Act, 1961 Negotiable Instruments Act, 1881 etc.

Q2. Explain the provisions relating to Electronic Governance under Information Technology Act, 2000? A2. ELECTRONIC GOVERNANCE FIRST PART It covers the provisions related to the Legal recognition of Electronic records, Digital Signatures, Use of Electronic records and Digital Signatures in Government and its Agencies, Retention of Electronic Records, and Rules Related to the Publication of the

108 Electronic Records in the Electronic Gazette. SECOND PART It covers the provisions related to Attribution, Acknowledgement and Despatch of Electronic Records. THIRD PART It explains the provisions relating as to how to secure the Electronic Records, Digital Signature and the Procedure relating to the same. FIRST PART ELECTRONIC RECORDS AND DOCUMENTS A record is the documentation of a transaction that happens as a result of someone taking a particular action at a particular time - so it is the evidence, the proof, of what has happened, who was involved and when. There have been discussions during the past decade of what a record is in an electronic environment. Electronic records are extremely good at generating and storing data, but much less adequate at identifying when that data could be considered a record. Differences between Records and Documents Purpose: records are kept to provide evidence of business activity; documents may be kept for a wide range of purposes, including for use of the information they contain and for recycling into other documents. Context: records are created in the course of business and thereby document business transactions; documents may or may nor be created in the course of business and be connected with a business transaction. On this basis, most records are also documents and some documents are also records. But a document only functions as a record if it was created or received in the course of business and has been kept as evidence of that business activity. In other words, a document becomes a record when it takes part in a business transaction and is kept to provide evidence. One creates a document when one composes an electronic mail message; it becomes a record when one sends it. Meaning of Electronic Record The meaning of electronic record has to be understood in the light of the context it is used. Electronic record as a mere document might not be much relevant or significant whereas electronic record as a document of evidence needs a judicious explanation and legal recognition. In general an "electronic record" is simply a record, which is...communicated and maintained by means of electronic equipment." Authentication of Transactions and Records Section 3 of Chapter II of the Information Technology Act, 2000 deals with authentication of electronic records and transactions. Subject to the provisions, any subscriber may authenticate an electronic record by affixing his digital signature. The authentication shall be effected by the use of asymmetric crypto system and hash function that envelops and transforms the initial electronic record into another electronic record.

109 Recognition for Transactions and Records Section 4 of the Act confers recognition for electronic records rendered or made available/accessible so as to be usable for subsequent references. Section 5 recognizes the digital signature as equal to affixing signature. Section 6 enables electronic governance by permitting the filing of any form, application or other documents, creation, retention or preservation of records, issue or grant of any license or permit or receipt or payment in government offices and its agencies through the means of electronic form. Section 7 deals with retention of electronic records that represent accurately the information originally generated, sent or received. Section 8 confers recognition for electronic gazette. The date of publication is deemed to be the date of gazette. Section 10 states that the public does not have the right to insist that documents should be accepted in electronic form by Government by virtue of Sections 6, 7, 8 referred above. Powers are vested with central government to make rules in respect of digital signatures also. SECOND PART Attribution of Electronic Records Section 11: An electronic record shall be attributed to the originator if it fulfills the following conditions: Sent by the originator himself or a person who had authority to act on behalf of originator to operate. Sent by an information system programmed by or on behalf of the originator to operate automatically. Acknowledgment of Receipt of Electronic Record Section 12 states that if the originator stipulates that electronic record shall be binding on receipt of acknowledgement of record, it is binding only on receipt of acknowledgement. Time and Place of Despatch and Receipt of Electronic Record Section 13 states that the receipt of electronic record occurs at the time when electronic record enters designated computer resource (if no specific timing is mentioned). If the record is received through other than designated computer resource - time is deemed when electronic record is retrieved by the addressee. Principal place of business is considered for the originator or the addressee. If no place of business is mentioned, usual place of residence is taken. For body corporates - place where it is registered is accepted. THIRD PART Authentication Authentication may be described as "a process of certifying the identity of the sender/recipient of the message, willing to be bound by the act and not deny the later his authorship and the time of existence of the act". Authentication is generally, the process to corroborate the identity of a person or to attest the integrity of specific information. Particularly, in the case of a message, it entails determining its source and providing

110 assurance that the message has not been modified or replaced in transit. By authentication is meant: Data Origin Confirmation which assures the identity of the sender and the source of a message Data Integrity that ensures the veracity of the contents to assure that the data has not been altered by unauthorized means. Non-repudiation imposes obligation on the author by binding the parties to the act so that the parties cannot later deny the act. Security Provisions - Secure Digital Signature Section 15: Through a security procedure agreed by the parties concerned it can be verified that a digital signature at the time it was affixed was Unique to the subscriber affixing it. Capable of identifying such subscriber. Created in a manner or using a mean under exclusive control of the subscriber. The procedure should be such that if an electronic record was altered, the digital signature would be invalidated. Then such digital signature shall be deemed to be a secure, digital signature. Section 16 enables Central Government to lay down in the areas of security provisions having regard to commercial circumstances. Conditions for issuing Digital Signature Certificate Section 35 stipulates the following requirements to be verified by certifying authority for issuing the certificate. applicant holds the private key corresponding to public key to be listed in Digital Signature Certificate. applicant holds a private key which is capable of creating a digital signature. public key to be listed in certificate can be used to verify a digital signature affixed by a private key of the applicant. Section 36 stipulates the particulars to be incorporated in Digital Signature Certificate. Compliance with provisions of Act, rules and regulations. Acceptance of the certificate by the subscriber. Holding of private key by subscribers corresponding to public key. Public key and private key constitute a functioning key pair. Accuracy of information in the certificate. Certifying authority has no knowledge of any material fact which if included would adversely affect the reliability of representation. Section 37 also provides for suspension of Digital Signature Certificate in public interest or at the request of subscriber/authorized agent. Section 38 deals with revocation of Digital Signature Certificate by subscriber or authorized agent under the following events. Death of a subscriber Winding up of a firm/company. Certifying authority is also allowed under this Section to revoke the certificate issued after satisfying the following: Concealment of material facts

111 Non-compliance of requirements Certifying authority security system or private key was compromised affecting reliability of the Digital Signature Certificate.

Section 42 imposes certain obligations on the subscriber also. Every subscriber shall exercise a reasonable care to retain control of a private key corresponding to a public key listed in a certificate. If the private key is compromised, the subscriber shall communicate without any delay to the certifying authority. Subscriber shall be liable till he informs the certifying authority Q3 Explain the provisions relating to cyber regulation appellate tribunal under Information Technology Act, 2000? A3 CYBER REGULATION APEELATE TRIBUNAL ESTABLISHMENT The Central Government shall establish one or more Appellate Tribunals to be known as Cyber Regulations Appellate Tribunal. The matters and places in relation to which the Cyber Appellate Tribunal may exercise jurisdiction shall be specified by the Central Government (Sec 48). A cyber Appellate Tribunal shall consist of one person only to be known as the Presiding Office (Sec.49) the qualification of the Presiding Officer shall be a Judge of a High Court or a member of the Indian Legal Service holding a post in Grade-1 of that service for at lest three year (Sec.50). The Presiding Office shall hold office for, a term of five years or until he attains the age of 65 years (See 51) no order of Central Government appointing any person as the Presiding Office of a Cyber Appellate Tribunal shall be called in question in any manner. The Tribunal shall ordinarily hold its sittings at New Delhi, However, if at any time the presiding Office is satisfied that it is necessary to have sittings of the Tribunal at nay other place, the Presiding Officer may direct to hold the sittings at any such appropriate place (Rule 13). APPEAL TO APPELLATE TRIBUNAL Any person aggrieved by an order made by an adjudicating office may prefer an appeal to the Cyber Appellate Tribunal. Every appeal shall be filed within a period of 45 days from the' date of the receipt of the order by the aggrieved person. PROCEDURE FOR FILING APPLICATION An application to the Tribunal shall be presented to the Registrar in Form -I annexed to the CRAT Rules in person or through a legal practitioner. The application shall be presented in six complete sets in a paper book form along with one empty full size envelope bearing full address of the respondent (Rule 3). Every application shall be accompanied by a fee of Rs. 2000 (Rule 6).

112 The Registrar shall endorse on every application the date on which it is presented. If on scrutiny, the application is found to be in order, it shall be duly registered and given a serial number. If the application is found to be defective and the defect is formal in nature, the Registrar may allow the party to rectify the same. If the defect is not formal in nature, the Registrar may allow the applicant such time to rectify the defect as he may deem fit The Registrar shall decline to register the application if the applicant fails to rectify the defect. An appeal from this order shall He to the Tribunal within 15 days and the decision of the Tribunal shall be final (Rule 4). Every application shall set forth concisely under distinct heads the grounds of such application which shall be numbered consecutively and typed in double space on one side of the paper. Every application shall be accompanied by a paper book containing a certified copy of the order against which the application has been filed and copies c documents relied upon by the applicant. The documents annexed may be attested by an Advocate or a Gazetted Officer (Rule 8). An application shall be based upon a single cause of action. A copy of the application in the paper book shall be served on each of the respondents by the Registrar. The applicant shall pay a fee for service or execution of processes (Rule10). ORDERS On receipt of an appeal, the Cyber Appellate Tribunal may, after giving the parties to the appeal, and opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against. The appeal filed before the Cyber Appellate Tribunal shall be dealt with by it as expeditiously as possible and Endeavour shall be made by it dispose of the appeal finally within six months form the date of receipt of the appeal. Every order of the Tribunal shall be in writing and shall be signed and dated by the Presiding Officer. POWERS The cyber appellate tribunal shall not be bound by the procedure laid down by the code of civil procedure, 1908 but shall be guided by the principles of natural justice. The cyber appellate tribunal shall have same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely; summoning and enforcing the attendance of any person and examining him on oath; requiring the discovery and production of documents or other electronic records; receiving evidence on affidavits; issuing commissions for the examination of witnesses or documents; reviewing its decisions; dismissing an application for default or deciding it experts;

113 any other matter which may be prescribed

APPEAL TO HIGH COURT Any person aggrieved by any decision or order of the Cyber Appellate Tribunal may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Cyber Appellate Tribunal to him on any question of fact or law arising out of such order (Sec. 62). Q4.Explain various cyber offences and penalties described under Information Technology Act, 2000? A4. The Act provides for stringent punishment for Cyber crimes like theft of data, hacking and tampering with the confidentiality of the data. The Act also creates a legal framework for electronic transactions and usage of the digital signatures. The Information Technology Act, 2000 is a major enactment initiative to provide legal frameworks for security provisions of e-commerce in harmony with international cyber laws. Banker's vigilance has to cover new areas coming under e-commerce with the support of the Information Technology Act. In the context of low computer literacy level of customers, the present law could serve thee purpose adequately. It is equally important to note that majority of the legal claims fall under the purview of existing Acts like Indian Contracts Act, Negotiable Instruments Act and Sale of Goods Act and there is no conflict between these laws and the Information Technology Act. The Information Technology Act has only enabled the insertion of suitable clauses to envelope the electronic forms of banking transactions, which are otherwise already covered in the existing laws. Probably, in the years to come when electronic banking takes full shape, codification of various provisions of different enactments under a comprehensive legislation may become necessary. The following tables summarize the nature of various cyber crimes and penalties imposed under IT Act, 2000. Offences and Penalties under I.T. Act, 2000 Offence Penalty Section Damaging computer/System/Data/Network Compensation up to rupees one 43 Without the permission of the owner or person crore to the person affected. in charge of a computer system Securing access to the system. Downloading data or copying them. Injecting virus. Denial of access to other authorized persons. Changing the series availed by the person to the account of another person by tampering or manipulating the computer/ system or network.

114 Non-compliance with Reporting System Failure to furnish any document/return Not exceeding Rs.1.50 lakh for 44(a) or report to the controller of certifying each failure. authority. Failure to file any returns or furnish any Not, exceeding Rs. 5,000 per day 44(b) information, books or other during the period of noncompliance. documents within the time stipulated. Failure to maintain books of account or Up to Rs. 10,000 per day. record. Contravention of any rules or Compensation up to Rs. 25,000 regulations for which no specific to the affected person or a penalty is provided elsewhere in the penalty up to Rs.25, 000. Act. 44(c)

45

Imprisonment up to 3 years or Tampering Tampering with computer source document or fine upto Rs.2 lakh or with concealing, destroying, altering the document both.

65

Imprisonment up to 3 years or 66(02) Hacking Hacking with computer system causing fine upto Rs.2 lakh or both. wrongful loss or damage to public or any person. or deleting, altering, destroying any information residing in the computer. Imprisonment upto 5 years and fine upto Rs. 1 lakh for first Publishing or transmitting obscene material in conviction. electronic form. Imprisonment upto 10 years & fine upto Rs.2 lakh for second and subsequent convictions. Misrepresentation to Controller of Certifying Authority Misrepresentation or suppression of material Imprisonment upto 2 years or facts to the controller of certifying authority to fine upto Rs. l lakh or both. obtain Digital Signature Certificate. Transmission of Obscene Material False Information in Digital Signature Certificate Publishing Digital Signature Certificate with Imprisonment upto 2 years or false particulars. fine upto Rs. l lakh or both. Breach of Confidentiality Securing access to electronic record disclosing electronic record/ information documents. Misuse of Digital Signature Certificate Creating, publishing or making available a Digital Signature Certificate for any fraudulent or unlawful purpose 67

71

73

72 Imprisonment upto 2 years or fine upto Rs. l lakh or both. 74 Imprisonment upto 2 years or fine upto Rs. l lakh or both.

8: THE PATENTS ACT, 1970

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Q1. What is patent? Explain the procedure for obtaining patent? A1. Who can apply for Patent? An application for a patent for an invention may be made by a person claiming to be the true and first inventor of the invention or his assignee, or by the legal representative of any deceased person who immediately before his death is entitled to make such an application. The term true and first inventor means that the claimant has to be the actual inventor and not merely be the first importer of the invention or the first person to whom the invention is communicated from outside India. In case the inventor is employee of an organization, the inventions made during the employment would be patentable in the name of the employee. However, the ownership of the patent (i.e. rights of using, manufacturing, selling etc.) will be dependent on the terms of contract between the employee and employer. It is a common practice in the R&D organizations to keep the ownership rights with the employer though the patent is in the employees (inventors) name. Filing a Patent Application There is only one application filed for one invention. This must be done in a prescribed form along with the prescribed fees in the appropriate patent office. It should be accompanied by a provisional or a complete specification. If the application is filed by the assignee, it must be accompanied with the proof of the right to make the application. Every application must state that the applicant is in possession of the invention and shall name the owner claiming to be the true and first inventor. Where the true and first inventor is not the applicant, a declaration is required that the applicant believes the person so named to be the true and first inventor. Every international application under the Patent Co-operation Treaty (PCT) for a patent designating India shall be deemed to be an application under the Indian Patents Act if a corresponding application has also been filed before the Controller in India. Recently the World Intellectual Property Organization (WIPO) has launched the facility of electronic patent filing under PCT. Typically, the form of application for grant of an Indian patent asks for (i) full name, address, nationality of the applicant(s) and inventor(s), (ii) patent specifications, and (iii) whether an application has been made or patent granted in a PCT or a convention country, which affords to citizens of India, or applicants for patents in India. Similar privileges as granted to its own citizens in matters of patent and which has been so notified by the Central Government with relevant dates. Filing of Provisional and Complete Specification A specification is an accurate description of the patent stating how the invention can be carried out by the method best known to the applicant. The specification ends with a claim or claims defining the scope of the invention for which protection is claimed. Every application must be accompanied by a provisional or a complete specification. It is possible to file the application with provisional specifications. But it is necessary to file the complete specifications within one year of filing the original patent application. The application is deemed to be abandoned if this condition is not met. The twelve months limit can be extended to 15 months if an application is made to the Controller with such request and the prescribed fee is paid. A complete specification filed may include claims in respects of developments of or additions to the invention described in provisional specification. The inventor is entitled to apply for a separate patent in respect of such

116 developments/additions. In case of a convention application the patent application must be accompanied with complete specifications only. The claim/claims of a complete specification relate to a single invention, or to a group of inventions, which form a single inventive concept e.g. in an instrument there may be 8 or 10 different inventions used. All these could be separately patented; or they can be patented together as a group; if they form an integrated instrument. The specification must contain the following: Title, sufficiently indicating the subject-matter; Relevant drawings; Full and particular description of the invention; Indian Patent Law Details of its operation or use and the method by which it is to be performed; Disclosure of the best method of performing the invention; Claims defining the scope of the invention substantiated by the disclosure; Abstract providing technical information on the invention; Declaration as to the inventorship of the invention. If an invention is an improvement in or modification of another invention, for which the patent has been obtained or has been applied for, the Controller may grant the patent for modification/improvement, as a patent of addition; however the patentee for both the original patent and the patent of addition has to be the same. Each claim of a complete specification has a priority date. In a simple case, where a complete specification is filed in pursuance of a single application with a provisional specification, the priority date of a claim is the date of the filing of the application. This is true if the claim is fairly based on the matter disclosed in the specification. However, in some cases, the priority date may be different than the date of filing. A detailed discussion of the issue is not within the scope of the present course. Publication of the Application Normally every patent application is published after 18 months of filing the application and objections are invited. The patent application shall not be open to the public for eighteen months after the date of filing, or date of priority, whichever is earlier. However, if the invention is considered relevant for defence purposes, the Controller may issue direction to prohibit or restrict such publication. In the case of secrecy direction, the application will be published when the secrecy directions cease to operate. The publication will include the particulars of the date of application, number of application, name and address of the applicant and an abstract. Upon publication of an application, the patent office, on payment of the prescribed fees, will make the specification and drawings, available to the public. If the specification mentions a biological material, which is not available to the public, the applicant is required to deposit the material in an authorized depository institution. From this institute, the biological material mentioned in the specification is made available to the public, as necessary. Examination of the Application For granting a patent, examination of the application is a mandatory step. However, such examination is taken up only if the applicant or any other interested person makes a request in the prescribed manner for such examination within 48 months from the date of filing of the patent application. If such request is not made within the prescribed time, the patent application is treated as withdrawn. When the patent application is in respect of an invention for a chemical substance used as an intermediate in the preparation of a

117 medicine or drug including insecticides etc used for protection or preservation of plants, the request for examination has to be made within a period of 12 months from 31st December, 2009 or within 48 months from the date of the application, whichever is later. If such a request is not so made, the application shall be treated as withdrawn. After a request for examination is made, the Controller refers the application, specification and the related documents to an examiner for making a report within 18 months on: a) whether these are in accordance with the requirements of the IPA; b) whether there is any lawful ground of objection to the grant of the patent; c) whether the invention has been anticipated by publication before the date of filing of applicants complete specification; and d) on any other matter which may be prescribed. Of these matters, Search for anticipation by previous publication and by prior claim is important. This search requires investigation in the publications and specifications of prior applications and specifications of patents already granted to see whether the same invention has already been published or claimed or is the subject matter of existing or expired patents. If the examiner raises any objections, the Controller will communicate the gist of the objections to the applicant. If the objections raised by the examiner are removed satisfactorily within 12 months, the Controller will accept the complete specification. If the objections are not removed satisfactorily, the application is refused after giving an opportunity of hearing to the applicant. Acceptance and Advertisement of Complete Specifications Once the complete specification is accepted, Controller notifies it to the applicant and also advertises it in the Official Gazette. On advertisement, the application and the specification with the drawings, if any, are open for public inspection. From the date of advertisement of the acceptance of the complete specification and until the date of sealing of the patent, the applicant will have the like privileges and rights as if a patent for the invention had been sealed on the date of advertisement. However, the applicant is not entitled to initiate any proceedings for infringement until the patent has been sealed. Opposition to the Grant of Patent Any person interested in opposing the grant of patent may give notice to the Controller of such opposition within 4 months from the date of advertisement of the acceptance on the grounds like: the invention was wrongfully obtained by the inventor/applicant; the invention, as claimed in any claim of the complete specification has been anticipated in a specification filed for another patent earlier; or the invention as claimed in any claim was publicly known/used in India before the priority date of the claim; or the subject of the patent is not an invention, within the meaning of the Act; or the information furnished is false; or geographical origin of biological material is not disclosed or falsely disclosed; or in the case of a convention application (an application filed in India following a patent application for the same invention made in a convention country), the application was not made in the prescribed time. Convention country means a country notified as such by the Central Government On receipt of the notice of opposition, the Controller shall notify the applicant of it and may give opportunity of hearing to both parties, and arrive at a decision.

118 Grant and Sealing of Patent Indian Patent Law Where the application for a patent along with complete specification has been accepted either without opposition or after the opposition, a patent shall be granted if the applicant makes a request in the prescribed manner for a grant of patent. The request has to be made within six months from the date of advertisement of the acceptance of the complete specification. The patent so granted shall be sealed with the seal of the patent office and the date of sealing of patent shall be entered in the register. Q2.What amounts to infringement of Patents? Describe the remedies available in respect of infringement of patents? A2. A patentee has an exclusive monopoly rights over the patented invention to make, use, sell or distribute the invention in India. If any person, other than the patentee or assignor or mortgagor, violates this exclusive right, there will be infringement of patent rights. Whether the alleged act of a person amounts to an infringement or not depends upon the extent of the monopoly right conferred by the patent. These can be inferred from the specification and claims made by the patentee contained in the patent application. An important provision pertains to the burden of proof in case of infringement. If the patent pertains to a process for making a product, and a person makes an identical product, then in a case of infringement he is obliged to prove that the process used to make the product, is different from the patented process. However, the patentee has to prove that the product being made by the infringer is identical to the product from his process. He also has to prove that he is not able to determine the process used by the infringer through reasonable efforts. The following acts of the defendant can amount to infringement: colourable imitation of patented invention; or copying essential features of patented invention; or variation of non-essential features of patented invention; or chemical or mechanical equivalents. Suit for Infringement When any person infringes the rights of the patentee, a suit for infringement of patent should be instituted in the District Court having jurisdiction to try the suit. A suit for infringement can be instituted only if the patent has been sealed. The patentee cannot institute a suit for infringement during the period between date of advertisement of acceptance of the complete specification and the date of sealing of patent. However, he can claim damages sustained due to infringement during the said period in a separate suit after sealing of patent. A suit for infringement of a patent, whose term has expired, can be instituted for claiming damages if the infringement occurred during the term of patent. In case the patent was wrongfully obtained by the patentee and was later granted to the true and first inventor, a suit for infringement occurring before the grant of patent cannot be instituted. Where a patent had lapsed but was subsequently restored, the proceedings for infringement cannot be instituted against any infringement committed between the date on which the patent ceased to have effect and the date of advertisement of application for restoration.

119 Acts not Constituting Infringement Where the patented invention is merely used for the purpose of experiment or research or for imparting instruction to pupils, it does not amount to infringement of patents. Similarly, any act of making, using or selling a patented invention solely for development of information required under any relevant law does not amount to infringement. Also the importation of patented products by any person from a person who is duly authorized by the patentee will not constitute infringement. Limitation Period for Institution of Infringement Suit The period of limitation for instituting a suit for infringement is 3 years from the date of infringement. However, it is not necessary to send a notice of infringement to the defendant before filing the suit for infringement. Relief in Suit for Infringement The patentee, on being successful in a suit for infringement is entitled to an injunction (or restraining), damages or accounts, and otherwise. Injunction is a normal remedy, though discretionary on the part of the Court. It stops the infringement during the pendency of the proceedings. Damages account for the loss in money terms suffered by the owner of the patent due to infringement. Accounts relates to the account of net profits earned by the defendant (infringer). If there are no profits, accounts is not a remedy. Damages and Accounts are alternative remedies; the owner can chose only one of them, not both. Otherwise as a remedy is a general provision which authorizes the court to grant such other reliefs as it may deem necessary for complete redressal of the complaint. For example, the court may order that the infringing goods or materials and implements shall be seized, forfeited or destroyed.

9: THE TRADE MARKS ACT

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Q1. What is a trademark? When can we say that a trademark is a good trademark? State the functions of trademark? A1 A Trademark A trade mark, as currently recognised in India, is a visual symbol (in the form of a word, a name, a device, a symbol, or a label) which identifies any merchant's or manufacturer's goods or services and distinguishes them from similar goods or services of competitors in the trade. It may include shape of goods, their packaging and combination of colours. The Act makes a distinction between a trade mark and a well-known trade mark. If a substantial segment of public associates a trade mark with a particular class of goods and services, and if this trade mark is used for other goods or services, and the public is inclined to associate the new goods/services with the earlier goods/services, then the mark is a well known trade mark. If the proprietor of a trade mark is an association of persons, who do not make a partnership within the meaning of the Indian Partnership Act, 1932, the trade mark is called a collective mark. A special class of trade marks is termed as certification trade marks. These trade marks do not indicate the origin of the goods, but are certified by the proprietor of the mark as conforming to certain characteristics, like quality, ingredients, geographical origin etc. Agmark used for food items in India is a certification mark. A trade mark is a sign used on, or in connection with the marketing of goods. Saying that the sign is used on the goods means that it may appear not only on the goods themselves but also on the container or wrapper of the goods. Saying that the sign is used in connection with the marketing of the goods refers mainly to the appearance of the sign in advertisements (in newspaper, on television, etc.) or in the windows of the shops in which the goods are sold. Where a trade mark is used in connection with services, it may be called service mark, e.g. service marks used by hotels, restaurants, airlines, tourist agencies. The worth of a trade mark may amount to huge sums. According to Business Week/Interbrands Annual Ranking of the 100 Best Global Brands, 2003, the value of the brand name "Coca-Cola" is estimated to be $70 billion and that of "Nescafe" $12 billion! A person who sells his product under a particular trade mark acquires an exclusive right to the use of the mark in relation to those goods. Such a right can be registered under the new Trade Mark Act 1999, which repealed the Trade Mark and Merchandise Marks Act 1958. A registered trade mark can be protected against unauthorized use by others by an action for infringement. An unregistered trade mark can also be protected against unauthorized use by others by an action of passing off. A trader is guilty of passing off, if he attempts to pass off his goods by misrepresentation that leads the consumer to believe that the goods are the same as those of another better-known trader in those goods. For example, using Coco Cola to cause confusion with Coca Cola is an action of passing off. A Good Trademark A trade mark should be distinctive. Distinctiveness may be inherent or acquired. An invented word may be inherently distinctive as a trade mark e.g. RIN. Other trade marks

121 may have acquired distinctiveness through usage e.g. TATA, Reliance, Revlon. Most brands acquire distinctiveness through use. A brand may depend on the class of goods e.g. Hawkins and Prestige are two distinctive brands in pressure cookers. If the trade name is a word, it should be short and easy to spell, pronounce and remember; if it is a device it should be expressible in a word. The word should be an invented word. Zen, Avon, RIN, Flex are all fine examples. The mark can be denied if it is not considered distinctive. A trade mark consisting of parts of a chain wheel and chain to cover a business in chains and chain wheels is not considered distinctive. However, distinctiveness alone is not sufficient for registration of a trade mark. It may also depend on whether other traders, without any improper motives want to use the same mark. Functions of Trade Mark A trade mark performs five main functions: a. To identify the origin or source of goods and services and distinguish them from similar products or services of other enterprises. Trade Marks facilitate the choice to be made by the consumer when buying certain products or making use of certain services. b. To signify that all goods bearing the same trade mark have a single source. c. To signify that all goods bearing the same trade mark are of the same quality. However, it is to be understood that there is no legal obligation on the trade mark owner to maintain a specific quality. In fact the House of Lords, UK has approved application of some trade mark to products of different quality in different countries. The brand owner is free to enhance or reduce the quality of the product. The check against deterioration of quality lies with the consumer. If a brand does not give at least the quality that the consumer associates with it, she will switch on to another brand. However, the brand owner is bound to offer the quality features as declared under trade description. d. To serve as the principal instrument in advertising and selling of goods and services. e. A fifth function, particularly in the case of registered trade marks, has acquired importance over the years, viz. to protect the trade and business interests of the owner of the brand, as also the goodwill associated with the brand, in case of infringement of trade mark. Q2. How are Trademarks registered under the Trademarks Act? A2. In India an office of the Registrar of trade mark s has been established for the maintenance of the Trade Mark Registry. Controller General of Patents and Designs is also the Registrar of Trade Marks. The Register of Trade Marks contains the record of all registered trade marks, with names, addresses and description of proprietors and users, assignments and transmissions, and conditions and limitations and the name of registered users. Any person who claims to be a proprietor of a trade mark can apply to the Registrar of Trade Marks for its registration. The application may be made in the

122 name of an individual, partners of a firm, a Corporation, any Government Department, a trust or joint applicants claiming to be the proprietor of the trade mark. Application 1. Application in the prescribed form has to be filed in the office of the Trade Mark Registry within whose territorial limits the principal place of business in India of the applicant, or the first applicant in the case of joint applicants, is situated. The Registrar is required to classify goods and services in accordance with the international classification for registration of trade marks. A single application is sufficient for registration of a trade mark for different classes of goods and services; however, the fee is payable for each class separately. 2. Every application for registration of a trade mark shall contain a representation of the mark in the place provided in the form for the purpose. Five additional representations of the mark have to be supplied with the application. The application can either be accepted completely or accepted subject to amendments or rejected. It is possible that an application is accepted and later, before registration, the acceptance is found to be in error. In such a case the Registrar, after hearing the applicant may withdraw the acceptance. Advertisement Soon after acceptance, the application is advertised in the Trade Marks Journal to provide the public an opportunity to oppose the registration. Any person may, within three months from the date of the advertisement or within such further period not exceeding one month, give notice in writing to the Registrar of opposition to the registration. When the procedure for registration, including the opposition, if any, is satisfactorily complete, the Registrar is mandated to register the mark. Time Period The registration of a trade mark is for a period of ten years, but it may be renewed from time to time indefinitely. Q3. Which kinds of Trademarks are registerable and not registerable under the Trademarks Act? A3. A trade mark which consists of at least one of the following essential characteristics can be registered. a. The name of a company, individual or firm represented in a particular or special manner; b. The signature of the applicant for registration; c. One or more invented words; d. One or more words having no direct reference to the character or quality of the goods except the exceptions listed in the next section;

123 e. Any other distinctive trade mark; and f. A trade mark which has acquired distinctiveness by use over a prolonged period of time. A part of trade mark can be registered separately in addition to a whole trade mark if it satisfies the requirements of registration of a trade mark. The Act also provides for registration of the same or similar trade mark by more than one proprietor in the case of honest concurrent use or other special circumstances. TRADEMARKS NOT REGISTERABLE The Act debars a trade mark from registration if it is not distinctive, or consists exclusively of marks or indications which have become customary in the current language and practice. Also, mark falling in any of the following categories is not registerable: a mark which is identical with or deceptively similar to a trade mark already registered in respect of the same goods or goods of the same description; a mark the use of which would be contrary to any law or which would be disentitled for protection in a court of law; a mark comprising or containing scandalous or obscene matter; a mark comprising or containing any matter likely to hurt the religious susceptibilities of any class or section; a word which is the commonly used and accepted name of any single chemical element or compound, in respect of chemical substances; and a geographical name or a surname or a personal name or any common abbreviation thereof or the name of a sect, caste or tribe in India. Shape trade marks attract prohibition from registration in certain conditions which may arise in a very limited number of cases, and it would be difficult in those cases to satisfy the distinctiveness criterion. A mark cannot be registered as a trade mark, if it consists exclusively of the shape of goods which results from the nature of goods themselves. For example, shape of an apple used for apples or their packaging; which is necessary to obtain a technical result. An exclusively technical shape will be the one if no other shape will perform its function; which gives substantial value to the goods. There may be difficulty in interpreting this provision. The word exclusively is to be noted here. If a mark has a shape of any of the descriptions given above but has other additional features, it could be considered for registration subject to other essential qualifications for a trade mark. Also, an unregistered trade

124 mark can continue to have a shape of a description that makes it ineligible for registration. There are also relative grounds for refusal of registration. If a trade mark is identical with an earlier trade mark, or if it is similar to an earlier trade mark and covers identical goods and services so as to cause confusion in the mind of the public, it will not be registered. If a trade mark has similarity or identity with an earlier well-known trade mark but is sought to be applied to a different category of goods, it will not be registered, as it seeks to exploit a well known brand for an unfair advantage or may harm the reputation of the earlier, well known trade mark. If a trade mark violates any law, in particular the law of passing off protecting an unregistered trade mark, or the law of copyright, it shall not be registered. The Act provides for registration of same or similar trade mark by more than one proprietor in case of honest, concurrent use. The trade mark is considered to be an incorporeal property of the owner of the trade mark. So it is assignable and transmissible as in the case of other forms of property. But considering the peculiarities of the property in trade mark, it is subject to a number of restrictions on assignability. A registered trade mark has to be used on the goods it was applied for. If it is not used for long, it can be taken off the register on application made by any aggrieved person to the Registrar or to the Appellate Board on the ground that the owner of the trade mark had no intention to use it while registering it. Similar and Deceptively Similar Trade Marks The word similar is not defined in the Act. However, a trade mark is said to be deceptively similar to another mark if it so nearly resembles that other mark as to be likely to deceive or cause confusion. The deceptively similar mark includes not only confusion but deception also. Near resemblance is mentioned in the Act in connection with registered trade marks in the name of the same proprietor which may closely resemble each other, so as to deceive or cause confusion in the mind of a user. The Registrar may require them to be registered as associated trade marks. The following factors are to be taken into consideration when deciding the question of similarity: The nature of the marks; The degree of resemblance; The nature of goods in which they are likely to be used as trade marks; The similarity in nature, character and nature of goods in which it is used; The nature of the potential class of consumers; and

125 The visual and phonetic similarity.

Q4. Explain the provisions relating to infringement of Trademarks? Also state the provisions relating to the offences and penalties in respect of infringement of Trademark? A4. Infringement If a person, who is not the owner of a registered trade mark, without permission from the owner uses the same trade mark, or a deceptively similar trade mark in the course of trade, he infringes the trade mark and is liable to be sued for legal remedies by the rightful owner, or persons so authorized. No action for infringement is available in respect of unregistered trade marks; however, common law rights for action against passing off are not affected. Specifically, infringement is caused in the following cases: the mark is identical and is used for similar goods/services; the mark is similar to the registered mark and is used for the same or similar goods/services as covered by the registered trade mark; the mark is identical with the registered trade mark and is used for identical goods; and the mark is therefore likely to cause confusion on the part of the public. If a trade mark has a reputation in India, the use of a mark identical with or similar to it, on goods or services which are different, constitutes infringement as such use, without due cause, would take unfair advantage of a reputed trade mark or harm its distinctive character. The Act prohibits adoption of a registered trade mark by another person as trade name, i.e. the name of an enterprise. A suit for infringement of registered trade mark must be filed in the district court within whose territorial jurisdiction, the plaintiff (or if there are more than one such person, any one of them) instituting the suit or proceeding actually and voluntarily resides or carries on business or personally works for gain. Offences and Penalty Falsifying and falsely applying Trade Marks A person making a registered trade mark or a deceptively similar mark is deemed to falsify a trade mark if he is doing it without the consent of the proprietor of the trade mark. Any alteration, addition, effacement of a genuine trade mark also amounts to its falsification. A person who, without authorisation, applies registered trade mark or a deceptively similar mark to goods or services or any package containing goods is deemed to falsely apply the genuine trade mark. If any person uses any package bearing a mark which is identical with or deceptively similar to the registered trade mark for the Purpose of packing, filling or wrapping any goods other than the genuine goods of the proprietor of the trade mark he is guilty of falsely applying the trade mark.

126 Offence under the Act is committed if a person makes, disposes of, or has in his possession, any die, block, machine, plate or other instrument for the purpose of falsifying or of being used for falsifying a trade mark: applies any false trade description to goods or services, or applies a false indication of the country or place where the goods were produced or name and address of the manufacturer, or of the person for whom they are produced. tampers with, alters or effaces an indication of origin which has been applied to any goods to which it is required to be applied,

The above mentioned offences shall be punishable with imprisonment for a term of minimum of six months but which may extend to three years and with a minimum fine of fifty thousand rupees but which may extend to two lakh rupees. For adequate and special reasons mentioned in the judgement, the court may impose a sentence of imprisonment for a term of less than six months or a fine of less than fifty thousand rupees. Penalty for selling goods or providing services to which false trade mark or false trade description is applied is punishable with imprisonment for a minimum term of six months but which may extend to three years and with a minimum fine of fifty thousand rupees but which may extend to two lakh rupees. Enhanced penalty can be imposed on second or subsequent conviction. Such offences shall be punishable with imprisonment for a term between one to three years and with fine between one lakh rupees to two lakh rupees. A person, who represents an unregistered trade mark as a registered trade mark, shall be punishable with imprisonment for a term which may extend to three years, or with fine, or with both. The penalty for falsification of entries in the register is imprisonment for a term, which may extend to two years, or a fine, or both. The use of words, which may falsely suggest that a persons place of business is officially connected with the trade mark office, attracts imprisonment for a term up to two years or a fine or both. If the person committing an offence under this Act is a company, the company as well as every person in charge of, and responsible to, the company for the conduct of its business at the time of the commission of the offence shall be deemed to be guilty of the offence. A company means any corporate body and includes a firm or other association of individuals. Abetment of any offence is punishable as if the abetter himself committed that offence.

10: THE COPYRIGHTS ACT, 1957

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Q1.What is copyright? State the criteria for the entitlement of copyright? A1. Introduction The word copy has a range of meanings: transcript, imitation, reproduction of an original writing or painting etc. Creators of literary artistic or musical works in ancient times did not worry about their work being copied. However, the question of copyright came to the fore when the printing technology made its appearance. The first to be affected adversely by printing were the authors whose books/works could be copied in large numbers by unauthorized persons, who would reap the benefits depriving the authors of just rewards of their intellectual work. Later as technology advanced, several other categories of originators of intellectual works were included under copyright: literary, dramatic, musical, artistic, cinematograph film, sound recording. Broadly speaking, copyright is an exclusive right granted by law for a specified period to the creator of a work of thought against any form of copying by an unauthorized person. Under copyright, several acts are defined which are prohibited to prevent what would amount to copying. The things for which copyright subsists emerge from ideas, concepts, thoughts etc. that are common to all, but these things have been put in a fixed form using ones mental faculty. The Indian Law Only original works are entitled for protection under the Act. Copyright is not concerned with literary quality, or artistic merit or originality of thought in the work. Ideas are not protected by copyright; only the material form of their expression is protected provided sufficient labour, skill and judgment has been exercised. Two authors writing independently on the same theme would produce two independent works and copyright in each work would belong to the respective author. Subject Matter of Copyright The copyright shall subsist in the following classes of work: Original literary, dramatic, musical and artistic works; Cinematograph films Sound recording Literary work includes computer programmes and compilations including databases. Dramatic work includes any piece for recitation, choreographic work or entertainment in a dumb show, scenic arrangement or acting, the form of which is fixed in writing or otherwise. Musical work includes graphical notation of music; it does not include any work or action intended to be sung, spoken or performed with the music. Artistic work means a painting, a sculpture, a drawing (including a diagram, map, chart, plan); an engraving; a photograph; a work of architecture having an artistic character or design, including its model; any other work of craftsmanship. Cinematograph film means any work of visual recording on any medium produced India through a process from which a moving image may be produced by any means and includes a sound recording accompanying such visual recording.

128 Sound recording means recording of sounds on any medium, from which the original sound may be reproduced regardless of the medium of record or of the method used to reproduce the sounds. Meaning of Copyright The copyright means exclusive right to do or authorize to do the following acts: In the case of literary, dramatic or musical work: to reproduce the work in any material form, this includes storing it by electronic means; to perform the work in public or communicate it to the public; to make any cinematograph film or sound recording in respect of that work; to make any translation or adaptation of the work or to do any of the above acts in respect to any translation or adaptation of the work.

In the case of computer programmes: any of the acts specified above; to sell or commercially rent any copy of the computer programme.

In the case of artistic work: to reproduce the work in any material form, including depiction in 3-D of a 2-D work or in 2-D of a 3-D work; to communicate the work to the public; to include the work in any cinematograph film; to make an adaptation of the work and/or to do any of the work mentioned above in respect of the adaptation.

In the case of cinematograph film: to make a copy of the film, including a photograph of any images forming part of the film; to sell or hire any copy of the film; to communicate the film to the public. In the case of sound recording: to make any sound recording embodying it; to sell or give on hire or offer for sale any copy of the sound recording; to communicate the sound recording to the public. Thus, Copyright in a work is not a single right, but it bundles several rights together, including a negative right. Broadly, these rights can be grouped as follows: the right of publication; the neighbouring (related) rights; the right to prevent anybody from altering the content of the work that may damage the authors reputation; and

129 the right of authorship or the right of paternity.

Even after a copyright is assigned wholly to another person, the author of the work retains the right to the claim for authorship of the work and the right to restrain or claim damages in respect of any distortion, mutilation, modification that are prejudicial to the honour or reputation of the author. The author has the right to prosecute anybody who publishes the work without the authors consent. The artist who performs the drama or music has no right and there is no copyright in the performance as such, even though the dramatic work and music and lyrics can be copyrighted. Criteria for Entitlement for a Copyright In order to be entitled for a copyright in a work in India, its author must fulfil certain other qualifications besides the originality of the work in respect of form of expression. These require that the work be published in India, or if it is first published outside India, the author, at the time of publication, be a citizen of India, or if the work is published posthumously, the author at the time of death be a citizen of India. In the case of unpublished work the author must be a citizen of India, or domiciled in India, at the time of making the work. However, this does not apply to works of architecture. The above mentioned requirements do not apply to works of foreign authors or of foreign organisations. However, the Central Government may extend the copyright protection under the Act to such works subject to certain conditions on the basis of reciprocal arrangement with foreign countries in respect of grant of copyright to Indian authors in those countries similar to those granted to their own nationals. Q2. State the provision relating to the Registration of the Copyrights? A2. The author or publisher of any work or the owner of the copyright in any work may apply to the Registrar of Copyright in prescribed form, accompanied by due fees, to enter the particulars of the work under the Register of Copyrights. The Registrar, after holding such enquiry as he deems fit, may enter the particulars of the work in the register. There is provision for correction of entries in the register, or rectification of the Register. Every entry mode in the Register, or any correction or rectification is required to be published by the Registrar in the official Gazette. Registration confers a bundle of rights in relation to the copyright, as discussed. However, it is not necessary to register the work for copyright. There is nothing in the Act, which makes registration of copyright as a precondition for availing of the remedies for infringement. Registration only provides prima facie evidence of particulars entered, without the necessity of further proof by way of production of the original. Q3. Explain the provisions relating to infringement of copyrights? A3. Anyone who violates the exclusive rights of the owner of copyrighted work for its commercial exploitation or its communication to the public, without the authors consent or authority is infringing the copyright. Under the Act Infringing copy means: The reproduction of literary, dramatic, musical or artistic work;

130 A copy of the cinematograph film made on any medium by any means; In relation to sound recording any other recording embodying the same sound recording, made by any means; In relation to a programme or performance, which entails a broadcast reproduction right or a performers right, the sound recording or cinematographic film of such programme or performance.

Copyright in a work is infringed if any person, without due authorization of the owner of the copyright: Does any act which is against the exclusive right of the copyright owner; or Permits for profit a place to be used for communicating the work to the public, unless he was unaware that such communication to the public would be an infringement of copyright; or Sells or hires or by way of trade displays or distributes or exhibits in public, any infringing copy, so as to prejudicially affect the owners interest. However, import of one copy for private use is not infringement. To summarize, the infringement occurs if any of the following acts is committed without authorisation from the author: Reproduction of the work in a material form; Publication of the work; Communication of the work to the public; Performance of the work in public; Making of its translations and adaptation; and Commercially exploiting the work, or trying to do so. What is not Infringement? A blanket ban on reproduction of a work of science, literature and arts, either in full or part may, in certain circumstances, become inimical to the public purpose that a copyright is intended to serve. For example, such a total ban may, instead of promoting and stimulating study and research in science, humanities and arts, lead to thwart it and become counter productive. The Act, recognizing such possibility, permits copying and reproduction of and from a copyrighted work in certain circumstances without attracting provisions of infringement. The principle behind such statutory exceptions to infringement is one of fair dealing or fair use of the copyrighted work, which provides balance between the copyright owners exclusive rights, and the wider public interest. The fair use is to be determined by considering whether the part reproduced or copied is substantial and amounts to plagiarism. To determine whether the portion taken up from a work is substantial one does not necessarily depend on the volume of the material reproduced; it is very much a question of the importance and the import of the part picked up. Statutory Exceptions The Act has a long list of actions that are not to be regarded as infringement of copyright: a fair dealing with a literary, dramatic, musical or artistic work for private use including research, and for criticism or review; in the case of a computer programme, making copies or adaptation by the lawful possessions of a copy of the programme for the original or back up purposes; or

131 for understanding its underlying principles and ideas, or for non- commercial personal use; a fair dealing of the work for reporting current events in newspaper or a periodical, or in a broadcast or a film or by means of a photograph. (The publication of a compilation of addresses or speeches delivered in public is not a fair dealing); reproduction for the purpose of a judicial proceeding or a report of judicial proceedings; or reproduction in a work prepared by the secretariat of a legislature exclusively for the use of members of the legislature; reading or reciting in public extracts from a published literary or dramatic work; publication of short passages in a collection for use in educational institutions. Not more than two such passages from works by the same author can be taken. reproduction by a teacher or a pupil in the course of instruction, or as a part of questions for examination or in answers to such questions; performance in the course of activities of an educational institution, if the audience is limited to the staff and students and parents and guardians of the students and persons directly connected with the institution; making of sound recordings in respect of any literary, dramatic or musical work, if the person making the recordings (i) has given a notice of his intention to make the recordings, (ii) has provided copies of all covers or labels with which the recordings are to be sold, and (iii) has paid due royalties to the author, at the rate fixed by the copyright Board. (No recording can be made until the expiry of two calendar years from the end of the year in which the first recording of the work was made). Playing the recording to an audience, if it is utilised in a room in a private residence meant for the common use of residents, or in a club/organisation as part of the amenities provided by it, and which is not conducted for profit; performance in an amateur club before a non-paying audience, or for the benefit of a religious institution; the reproduction in a newspaper, magazine, periodical of an article on current economic, political, social or religious topics, unless the author has reserved to herself the right of such reproduction; the publication in a newspaper etc. of a report of a public lecture; the making of a maximum of three copies for use in a public library, if such work is not available for sale in India; the reproduction for the purpose of research and/or private study, or with a view to publishing an unpublished work kept in a library, museum or other public institution. However, if the identity of the author of such work is known, such reproduction is to be made only after more than sixty years have passed since the death of the author; if

132 there are more than one authors, the sixty year are to be counted from the death of the author who died last; the reproduction of any matter, published in any official Gazette, except an Act of a Legislature; any Act of a Legislature, if it is reproduced with any commentary thereon or any other original matter; the report of any Committee, Commission, Board or a like body appointed by the Government, if such report has been laid on the Table of the Legislature, unless prohibited by the Government; any judgment of a judicial authority unless prohibited; the reproduction/publication of a translation of an Act of Legislature, in any Indian language if no such translation produced by the Government exists, or if such government translation exists, it is not available for sale to public. However, in such cases, it is to be stated at a prominent place that such translation has not been authorized or accepted by the Government; the making or publishing of a painting, drawing or photographs of a work of architecture; the making or publishing of a painting, drawing, engraving or photograph of a sculpture or other artistic work, if such work is permanently located in a public place; and the inclusion in a cinematograph film of any artistic work permanently situated in a public place, or any other artistic work by way of background, or if such inclusion is incidental to the principal matters represented in the film.

It may be noted that the exceptions to infringement in relation to a literary, dramatic, musical or artistic work, are equally applicable in relation to any translation or adaptation of such a work since they qualify as original works in their own right and copyright subsists in them too. However, for publishing a translation, permission of the author of the original work is necessary. Q4. State the remedies available in respect of infringement of copyrights? Also state the penalties in case of infringement of copyrights? A4. Remedies In case of infringement of a copyright the owner of the copyright can file a suit in a district court having jurisdiction seeking remedies by way of (i) injunction, (ii) damages, (iii) accounts or (iv) otherwise. The owner of copyright includes an exclusive licensee, and in the case of an anonymous or pseudonymous literary, dramatic, musical or artistic work, the publisher of the work, until the identity of the author is satisfactorily established. In the case of such a work under joint authorship, it is sufficient that the identity of any one author is satisfactorily established.

133 Injunction is a normal remedy, though discretionary on the part of the court. It stops the infringement during the pendency of the proceedings and ensures that no further loss/damage is caused to the owner of the copyright during the period when the injunction is in force. Damages account for the loss in money terms suffered by the owner of the copyright due to infringement. Accounts relates to the accounts of net profits earned by the defendant (infringer). If there are no profits, accounts is not ordered as a remedy. Damages and accounts are alternative remedies; the owner can choose only one of them, not both. Otherwise, as a remedy, is a general provision authorizing the court to grant such other reliefs as the court may deem necessary for complete redressal of the complaint, e.g., destruction of the infringing material. Penalties A person who knowingly infringes or abets the infringement of a copyright is punishable with imprisonment ranging from six months to three years, and with a fine ranging from fifty thousand rupees to two lakh rupees. If the infringement has not been done for gain or in trade or business, the court may reduce the term of imprisonment and the amount of fine and mention the reasons for doing so in the judgement. In the case of second, and every subsequent, conviction the term of imprisonment is minimum one year that may go up to three years, and the amount of fine is minimum one lakh rupees that may go up to two lakh rupees. A person who knowingly uses on computer an infringing copy of a computer programme is punishable with a prison term ranging from seven days to three years and a minimum fine of fifty thousand rupees which may go up to two lakh rupees. However if the use has not been for gain or in trade or business, the court may not impose a prison term and may impose a fine, which may go up to fifty thousand rupees; the reasons for reduced sentence are to be mentioned in the judgment. A sound recording is required to display on the recording itself, and on the container, the names and addresses of the person making the recording, and the owner of the copyright, as also the year of its first publication. Similarly, a video (cinematograph) film has to show the following particulars in the film, as well as on the video cassette or other container: a copy of certificate granted by the Board of Film Certification; the name and address of the person making the film with permission from the owner of the copyright to make such film; the name and address of the copyright owner.

A person making a sound recording or a video film, which contravenes these provisions, is punishable with imprisonment up to three years and shall also be liable to a fine.

11: THE ENVIRONMENT PROTECTION ACT, 1986

134

Q1. State the Definitions covered under the Environment Protection Act, 1986? A1. This Act may be called the Environment (Protection) Act, 1986. It extends to the whole of India. It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act and for different areas. 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, microorganism and property; b. Environmental pollutant means any solid 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 pollution; 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, plant, micro-organism, 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.

Q2. Describe the Powers of Central Government and court to take measures to protect and improve environment ? A2. (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

135 being in force which is relatable to the objects of this Act; (ii) planning and execution of a nation-wide programme 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; (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 purpose 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 sub-section (2) as may be mentioned in the order and subject to the supervision and control of the Central

136 Government and the provisions of such order, such authority or authorities may exercise and 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. 4. Appointment of officers and their powers and functions (1) Without prejudice to the provisions of sub-section (3) of section 3, the Central Government may appoint officers with such designation as it thinks fit for the purposes of this Act and may entrust to them such of the powers and functions under this Act as it may deem fit. (2) The officers appointed under sub-section (1) shall be subject to the general control and direction of the Central Government or, if so directed by that Government, also of the authority or authorities, if any, constituted under subsection (3) of section 3 or of any other authority or officer. 5. Power to give directions - Notwithstanding anything contained in any other law but subject to the provisions of this Act, the Central Government may, in the exercise of its powers and performance of its functions under this Act, issue directions in writing to any person, officer or any authority and such person, officer or authority shall be bound to comply with such directions. 6. 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 restriction on the location of industries and the carrying on process 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. Q3.State the provisions relating to prevention, control, and abatement of environmental pollution? A3. The provisions relating to prevention, control, and abatement of environmental pollution are described as under: (1) Persons carrying on industry operation, etc., not to allow emission or discharge of environmental pollutants in excess of the standards - No person carrying on any industry, operation or process shall discharge or emit or permit to be discharged or emitted any environmental pollutants in excess of such standards as may be prescribed. (2) Persons handling hazardous substances to comply with procedural safeguards 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.

137 (3) Furnishing of information to authorities and agencies in certain cases - (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 on 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 sub-section (1) shall, as early as practicable, cause such remedial measures to be taken as 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 sub-section (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. (4) Powers 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 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 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 reason 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 of handling any hazardous substance shall be bound to render all assistance to the person empowered by the Central Government under sub-section (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 wilfully delays or obstructs any persons empowered by the Central Government under sub-section (1) in the performance of his functions, he shall be guilty of an offence under this Act. (4) The provisions of the Code of Criminal Procedure, 1973, or, in relation to the State of Jammu and Kashmir, or an 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 seizures 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 provision of the said law.

138 (5) Power to take sample and procedure to be followed in connection therewith 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 sub-section (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 sub-section (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 of 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 sub-section (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 wilfully 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 sub-section (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 under section 12 in writing, about the wilfull absence of the occupier or his agent or person, or, as the case may be, his refusal to sign the container or containers. Q4. State the provisions relating to the offences, cognizance of offences and penalties for contravention of the provisions of the act and the rules, orders and directions under Environment Protection Act, 1986? A4. 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 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 sub-section (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 deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

139 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 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 exercise all due diligence to prevent the commission of such offence. (2) Notwithstanding anything contained in sub-section (1), where an 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. 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 authorized 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 authorized as aforesaid. Penalty for contravention of the provisions of the act and the rules, orders and directions - (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 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.

140

12: PRACTICAL PROBLEMS AND SOLUTIONS

1. A customer after reaching home from shopping in a self-service super store realized that he had picked up Clinik brand of shampoo, mistaken that it was Clinic brand. The get up and appearance of the packets was similar. He wants to return back the bottle and get his money back. The store refuses to take it back. Decide Solution The shop was offering for sale just the things put on the shelves. The buyer accepted the offer of buying clinik by picking it up and paying for it. It is thus a valid contract and the buyer cannot return back the bottle. 2. A battery operated travel lamp was being sold by a shop. It was claimed that a Duracell battery would last for 10 hours. While the claim was valid, the light of the bulb appeared harsh and piercing to the eyes. The buyer wants to return back the bulb and claim his money back. Decide. Solution The claim that a Duracell battery would last for 10 hours has been fulfilled and thus, is not contested. Light of a bulb is often bright and tends to get in the eye. Ordinarily, it can be defused by using lamp shades and other mechanisms. This may be difficult to do for a travel lamp. Further, travel lamps are not to be used all the time. These are only for occasions when one travels. Thus, light being harsh would not make the lamp unmerchantable. The buyer does not have a remedy. 3. A was offering to its buyers washing machines made in technical collaboration with the Whirlpool corporation of the US. After buying the washing machine, the buyer realized that A and Whirlpool had settled on a technical collaboration but it was yet to be effected. The buyer wants to return back the washing machine and claim his money back. Solution The seller had made a misrepresentation of fact. This would make the contract voidable. It can be set aside on the insistence of the buyer. 4. A bought an electric iron from a shop. A's wife W was using the iron. In the first use itself, the coil melted and gave W a shock. W had to be hospitalised. Can A return back the iron and claim his money back? Can W demand compensation for injury? Can A demand compensation for W? Solution The iron is clearly not of mechantable quality as it has melted in first use. Thus, A can return back the iron and claim his money back. W cannot demand compensation as there is no contract between her and the shopkeeper. She is a stranger to the contract. As W is a stranger to the contract, she will not have any remedy 5. Aditya Advertisement Co., in response to a tender notice dated April 17, 2002, put in its bid for advertising on the buses of the company Tramco Ltd. A bid was to be accompanied with a deposit of Rs. 30 lakhs. The bids were to be put in a box which was to be opened at 3 PM, May 2, 2003 in front of representatives of the parties who had put in tender. The tender advertisement had provided that tenderers will not be permitted to withdrawn their tender after the tenders were opened. It further provided

141 that if the highest tenderer backed out from taking up the agency, for whatsoever reason, the deposit amount of Rs. 30 lakhs would be forfeited. Subsequently, a court through an order dated May 1, 2003 stalled the tender. The box was opened on May 2, 2003 in the presence of the representative of the tendering parties. A total of six responses were found. All the six responses were put in a large envelope and sealed with the signature of the representatives. Aditya Advertising Co. had raised the loan of 30 lakhs to put in the bid. It wrote a letter on May 3, 2003 to say that it could not keep money for so long and requested the return of the deposit without any delay. The bus company received the letter on May 4, 2003. The court withdrew its order on May 17, 2003 and permitted opening of the tenders in the presence of a courts nominee. Aditya Advertising Co. was the highest bidder. The Tramco Ltd. insists that Aditya Co. has to take up the work or the 30 lakhs would be forfeited. Decide. Solution Aditya Co and Tramco have obligations to each other only if they have got into a contractual relationship. For an agreement to arise, there must be an acceptance of an offer. The fact of tenders putting in their tender is not an acceptance of any thing. Thus, a tender is only an invitation to an offer. Thus, Aditya Co. has made an offer through a tender. However, he withdraws the offer before it could be accepted. Thus, when Tramco actually opened the tender application on May 17, Aditya Co.s tender was already revoked through its withdrawal. Thus, no contract arose between the parties. Tramco must return the security deposit. 6. I-jet Ltd. invited tender for building a cellular phone network. Only the applicants who fulfilled a minimum criterion were eligible to apply. Towards this, the potential parties were to first furnish their balance sheet for the past five years, and details of projects successfully completed. The successful parties were issued application form for a price of Rs. 20, 000. IBD Constructions Ltd. was one of the seven firms which was successful in getting an application form. It made an application. I-jet informed the seven parties of the value of each bid. IBD had bid the least. Thereafter, IBD did not hear anything from I-jet. It wrote to I-jet and was informed that I-jet has had difficulties in raising funds for the project. But the real reason was that the I-jet was negotiating with a firm which had not even bid for the project. The negotiations did not work out. A year later, IBD saw that the same tender was being called again. IBD is aggrieved and contests that it has a right to be given the contract. Decide. Solution A tender is only an invitation to make offer. Thus, the applicants offer and the tender accepts. Till the time a tender accepts an application, there is no agreement. The tender is, thus, free to accept any tender or even reject all. Unless, of course, a tender notice says that just the act of opening the tender and finding the best bid itself will be implied acceptance of the offer. No tender ever makes this commitment. Thus, the best bid does not on its own create an agreement. I-jet is free to reject all applications and ask for fresh tender. 7. A fluorescent electric lamp had a Bureau of India Standards certification mark (ISI) attached on the label. A buyer bought the lamp. The lamp fused after five months of use. The ISI mark was to be given to a fluorescent electric lamp only if it had a minimum life of 5000 hours. The buyer is claiming a replacement from the seller. The seller says that that lamp is perfectly fine, of merchantable quality. It has given service for five months. He further argues that ISI mark is a voluntary certification scheme and casts no obligations on the seller or manufacturer. The seller says that if the buyer is still not convinced, he should claim from the manufacturer and the

142 Bureau of Indian Standard. Is the bulb of merchantable quality? Decide the claim of the buyer against the seller, manufacturer and Bureau of Indian Standards. Solution Since the lamp has lasted for five months, it is fit to pass as a fluorescent electric lamp. Thus, t is of merchantable quality. The buyer has a right only against the seller since his contract is only with the seller. Manufacturer and the Bureau of Indian Standards are third parties. The lamp by putting the ISI mark describes itself as one which will last for a minimum of 5000 hours. Thus, this is a sale by description where the description has not been fulfilled. Thus, the seller must replace the lamp. The buyer has no right against the manufacturer. The buyer could perhaps complain to the appropriate officers that the Bureau of Indian Standards was not doing its job properly. The officers may take action against the subordinates. However, no contractual rights would arise for the buyer as he has no contract with the Bureau of Indian Standards. 8. Private airlines carried an advertisement campaign in print and television media stating: Fly Mumbai-Delhi just for Rs. 3,000. A potential customer, D, called on the booking office of the airlines to book a ticket. D learnt that the advertised fare was only for the late night flight. On deciding to travel by the late night flight, D further learnt that only 4 seats were to be sold at the advertised price. Other seats were to be sold at the full fare of Rs. 4,000. D insists that the airlines sell a ticket to him for Rs. 3,000 only. Solution For D to have a claim there should be contract. For a contract to get formed there must have been acceptance of an offer. The key issue in this case, thus, is whether the statement Fly Mumbai-Delhi just for Rs. 3,000 capable of being accepted by D to form a contract. Usually, such representation of fare and schedules by the airlines and railways are not intended to be offers. These are only invitation to offer. Thus, it is D who makes an offer and the airlines may or may not accept it. 9. Rakesh was browsing through books, tapes and DVDs in a store. He came across three-dimension DVD version of a new film. Rakesh knew about this new technology. The DVD came with goggles. The DVD could be played on any DVD player. The viewer had to wear the goggles to get the three-dimension effect. A sticker on the package mentioned the price to be Rs. 700. Rakesh was surprised and pleased to know that it was selling for Rs 700. He had seen it advertised for Rs. 1500. He immediately picked up one and put it in his shopping basket. He took his purchase to the counter for paying. When the person at the counter put the bar code reader, the computer screen flashed Rs. 1600 as the price. Rakesh exclaimed. He showed the sticker to the person at the counter. The person at the counter called his supervisor. The supervisor examined the sticker and made investigations. It turned out that the shop assistants had made a mistake by putting wrong sticker on the package. On some of the threedimension version of the DVD, they had put the sticker meant for the ordinary version (non three-dimension) DVD. As the shop has made a mistake, Rakesh maintains that he has a right to take the DVD for Rs. 700. The shop profusely apologizes but refuses to sell it for any price other than Rs. 1600. Decide. Solution Rakesh would have a right to take the DVD for Rs. 1600 only if there is an offer to these effects, followed by an acceptance, leading to an agreement. In the arrangement of a self-service store, the putting up of things in the shop is not an offer. It is the

143 customer who makes the offer when he reaches the counter. Thus, the shop, even if it has made a mistake, can refuse to sell the DVD to Rakesh for Rs. 700. 10. Ajit was tired on his electric kettle. He had to wait for the kettle to boil the water to switch it off. He learnt that automatic kettles had come in the Indian market. These kettle are fitted with thermostat which switches off the kettle after water has boiled. He went to a shop, Shuvit Appliances, to buy one of these automatic electric kettles. There were several competing brands. The shopkeeper was recommending Symon brand. Ajit, however, asked for Monex brand. Ajit is extremely unhappy with the purchase. The kettle switches off when the water is just about beginning to get hot. As a result, the kettle never gives him hot, steaming water to make his coffee. Does Ajit have a remedy? Solution Ajit has been sold a kettle which does not fulfil the basic function of a kettle, boiling water and giving hot steaming water. Thus, the kettle is not of a merchantable quality. In every sale, it is implicit that the goods would be of merchantable quality. Thus, Ajit has a right to get a kettle of merchantable quality. 11. Reynold Ltd. was importing electric iron made by Pinox Ltd. from UK, sold under Pinox brand name. The electric iron was being sold to customers through a network of retailers. Baman bought an electric iron from one of the retailers, Ashok Electricals. Baman gifted the iron to a new colleague at work, Sumit. While Sumit was using it the very first time, there was a spark and fire from the iron. Sumit sustained injuries. His medical treatment cost him Rs. 12, 000. He was ironing his new jacket, which caught fire and was completely damaged. The jacket had cost him Rs. 6,000. Sumit feels agitated with the defective and poor quality of the product. Sumit wants to claim Rs. 12, 000 for medical bills, Rs. 6, 000 for damage to his jacket and Rs. 1,100 Baman had spent in buying the iron. Answer the following questions based on the above transactions. a. What claims could Sumit make on Reynold Ltd? b. What claims could Sumit make on Ashok Electricals? c. What claims could Sumit make on Baman? d. What claims can Baman make on Reynold Ltd. and Ashok Electricals? Solution It is only the parties to a contract who have rights and obligations to each other. As Sumit has no contract with Reynolds, he can make no claims from them. (Same as above) It is only the parties to a contract who have rights and obligations to each other. As Sumit has no contract with Ashok Electricals, he can make no claims from them. Baman and Sumit have an agreement. However, it is one of gift. There is no consideration for Baman. Thus, there is no contract between the parties. Thus, Sumit can make no claims on Baman Baman does not have a contract with Reynolds, thus, he can make no claims on them. 12. Abhay in a self-service store came across power saver electric bulbs. He picked up a bulb and put it in his trolley. After reaching home, he realized that the bulbs were not of Philips brand. The bulbs were of Oxam brand. Philips was the only brand Abhay had seen in the market. He, thus, had no reasons to believe that he could be picking up any other brand. Also, the background of the packet was green, like Philips packets.

144 Abhay wants to return back the bulbs but the self-service store refuses to take it back. Decide. Solution What was offered and accepted, leading to agreement and contract, by the parties was the bulb just the way it was. Thus, Abhay has no right to return it. 13. A non-governmental organisation bought watches to give it as prize in a sports competition. After receiving the prize, a recipient realized that the watch was defective. Can the person get remedy from a consumer court against the sellers and manufacturers of the watch? Solution The non-government organisation is consumer in relation to the seller and manufacturer. With in the consumer protection act, consumer includes any user of such goods, when such use is made with the approval of such person. Since the recipient are using it with the approval of the Non governmental Organisation, they are also consumers and can get remedy. 14. The HMM, the manufacturers of Horlicks, In September 1985, advertised a scheme called the Hidden Wealth Prize offer for the buyers in Delhi. The judgement of the Supreme Court on this scheme became a landmark judgement for the subsequent cases. What was the key point of the judgement in relation to such schemes? Solution Holding of any contest, lottery or game of chance for direct or indirect promotion of sales is an unfair trade practice. The question was whether holding of such schemes, where a lucky person could have a coupon, which entitled to a prize, was a lottery, and therefore an unfair trade practice or not. The Supreme Court ruled that this was not a lottery in the ordinary as a person did not have to pay extra for the scheme and in any case got his moneys worth in the product. 15. In an advertisement of cloth whitener, it was put up by the manufacturers of Sanco that only three to four drops of Sanco were sufficient to achieve the desired whitening effect on the clothes as against 15-20 drops of an ordinary whitener. The manufacturers of Reno, a competing brand, are claiming that this is disparaging Reno. Reno could also produce the same whitening effect in 3-4 drops. Decide. How would the answer be different if actually 15-20 drops of Reno were needed to produce the same whitening effect? Solution For disparaging others goods, there must be a comparison between specific goods. Since the reference here is to an ordinary whitener and not specifically to Reno, this would not be a case of disparaging Renos whitener. Since it is not a case of disparagement, the question of actual qualities of Reno does not arise. Thus, it would make no difference whether 3-4 drops of Reno are needed or 15-20 drops are needed. 16. A daily newspaper, priced at Rs. 1, started a game of Tambola. The newspaper of October 19, Sunday, carried a card which had drawn the housie squares. The result of each days draw were published in the newspaper the next day. The awards included Honda city car, washing machines and television sets. The competing newspapers are apprehensive that this would increase the circulation of the newspaper. A case of unfair trade practice is being made. Decide.

145 Solution Holding of any contest, lottery, game of chance, for direct or indirect promotion of sale is an unfair trade practice. The newspaper has organised housie which is clearly a game of chance. What we need to see is whether this is for promotion of sales of sales or not. Once a person starts playing the game, he would need to buy the newspaper everyday to see the result. Thus, sales will get promoted. Second, the quantum of prizes compared to the price of the newspaper is very high. This is likely to entice people to buy the newspaper to play the game. Thus, this is an unfair trade practice. 17. A company altered Its Memorandum of Association according to the procedure laid down by law and the alteration was also confirmed by the Company Law Board. A certified copy of the order of the Company Law Board was filed 4-months after the order was passed by the Company Law Board. Can the Registrar register the alteration? Solution Yes. He can do so as per provisions mentioned under Sec.18. As per Section 18 company shall file with the Registrar, a certified copy of the order of the company law board confirming the alteration within 3 months of the order. The registrar shall register the same and certify the registration within 1 month from the date of filing such documents. However the company can be allowed the extension of time if the company law board thinks fit. 18. A company was started with the object of building 'a hall with shops'. The building was destroyed by fire and the company wanted to alter the objects clause in the Memorandum by substituting the words 'a hall with shops' with the words 'shops, dwelling houses and warehouses for letting purposes.' Should this alteration be allowed? Solution No, As the alteration exceeds object mentioned by the company on its incorporation. (Strathspey Public Assembly etc. Hall Co. Ltd. v. Anderson's Trustees, (1934) S.C. 385). 19. X Mining Co. Ltd. applied to the Company Law Board for permission to add the following objects in its Memorandum of Association, which earlier stated mining as its main purpose : (a ) To sell goods on hire-purchase basis ; (b) To do all kinds of fabrication works of steel, aluminum, copper, zinc, and alloys ; (c) To buy and sell land, buildings, hotels, restaurants and business premises ; and (d) to enter in to contracts for construction of building with private people or government. Will the Company Law Board approve this alteration? Solution No, The Company Law Board will only approve the alteration if the incidental objects are in alignment of the main purpose for which the company is established. 20. A Ltd. applies to the Company Law Board for approving an alteration in situation clause of its Memorandum and thus permitting it to change its registered office from Calcutta to Delhi. The Government of West Bengal requests the Company Law Board not to allow this change, for it would lead to a loss of revenue of the Government. Decide.

146 Solution No, The request of Government of West Bengal wont be considered. The change will be allowed if it is warranted by the interests of the company [Rank Film Distributors of India Ltd. v. Registrar of Companies].The court observed that the state has no statutory right to oppose the shifting of the registered office from one state to another. Members of the company will decide whether the registered office of the company is to be transferred from one state to another. Moreover the shifting should be in the interest of the company.