Companies Act, 1956

Companies Act, 1956
Meaning and types of companies, Formation of a company, Memorandum and Articles of Association, Prospectus and Issue of Shares, Share Capital and Shareholders, Company Meetings and Proceedings, Powers and Liabilities of Directors ,meeting ,Managerial Remuneration and Winding up of Company

The Company Act 1956

This principal Act aims at:
• Protection of companies and investors.

• Facilitating the growth and development of the company.

• Safeguarding the interest of creditors.

• Attainment of the socio-economic goals fixed by the government policies.

• Regulating company affairs to preserve public interest.

Introduction
A company is a form of business organization. The definition of the term varies by country. In general, a company is same as a corporation.
Which is a union of natural persons that has its own legal status that is independent from the persons involved. It is a "creature" of statute; i.e., it is like a person created by law. Because it is recognized by governments as such (as a separate creature) it must file tax returns and pay taxes and conform to state and federal law. This separation of persons and corporation gives it special powers. Its status and capacity is determined by the law of the place of incorporation.

A CORPORATION IS DEFINED AS
A LEGAL ENTITY OR STRUCTURE CREATED UNDER THE AUTHORITY OF A STATE'S LAWS,
CONSISTING OF A PERSON OR GROUP OF PERSONS WHO BECOME SHAREHOLDERS.
THE ENTITY'S EXISTENCE IS CONSIDERED SEPARATE AND DISTINCT FROM THAT OF ITS MEMBERS.
LIKE A REAL PERSON, A CORPORATION CAN ENTER INTO CONTRACTS, SUE AND BE SUED, PAY TAXES SEPARATELY FROM ITS OWNERS, AND DO THE OTHER THINGS NECESSARY TO CONDUCT BUSINESS.

CHARACTERISTICS

1. Independent corporate existence
   
2. Perpetual succession
   
3. Limited liability
   
4. Transferable shares
   
5. Separate property
   
6. Power to sue / sued
   
7. Common seal
   
8. Separate management
   

Types of company

A. Private company B. Public company
Limited by shares
Limited by guarantee
Unlimited companies
Association not for profits
Government companies
Holding companies
Subsidiary companies

Types of company

PRIVATE COMPANY / PUBLIC COMPANY

Private company means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,
(a) restricts the rights to transfer its shares, if any;
(b) limits the number of its members to fifty not including-
(i) persons who are in the employment of the company, and
(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company ;
(d) prohibits any invitation or acceptance of deposits from persons other than its member, directors or their relatives;
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definitions, be treated as a single member;

Public company means a company which -
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not a private company.

A company limited by guarantee.

Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company. This type of company is common in England.

A company limited by shares.

The most common form of company used for business ventures. Specifically, a limited company is a "company in which the liability of each shareholder is limited to the amount individually invested" with corporations being "the most common example of a limited company .This type of company is common in England.

A limited-liability company.

"A company—statutorily authorized in certain states—that is characterized by limited liability, management by members or managers, and limitations on ownership transfer",
An unlimited liability company. A company where the liability of members for the debts of the company are unlimited. Today these are only seen in rare and unusual circumstances.

Incorporation of a Company
The incorporation of a Company is governed by the Companies Act 1956. The Companies Act is an Act to consolidate and amend the law relating to companies and certain other associations. It extends to the whole of India. Chapters I and II deal with the incorporation of a company and matters incidental thereto.

ADVANTAGES

1. Limited liability. One of the key reasons for forming a corporation is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities.
   
2. Corporate persona. Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners (at least in the typical C corporation). Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any profits.
   
3. Attractive investment. The built-in stock structure of a corporation makes it attractive to investors.
   
4. Capital incentive.
   
5. Flexibility & autonomy
   
6. Capacity to sue
   
   
7. Operational structure. Corporations have a set management structure. The owners of a corporation are shareholders, who elect a Board of Directors, which then elects the officers. Other than the election of directors, shareholders do not participate in the operations of the corporation. The Board of Directors is responsible for managing and exercising the rights and responsibilities of the corporation. The Board sets corporate policy and the strategy for the corporation.
   
8. Perpetual existence. A corporation continues to exist until the shareholders decide to dissolve it or merge with another business.
   
9. Freely transferable shares. Shares of corporations are freely transferable, because as a separate entity, the existence of a corporation is not dependent upon who the owners or investors are at any one time. A corporation continues to exist as a separate entity, and is not terminated or dissolved even when shareholders die or sell their shares.
   

Disadvantage of incorporation

1. Formalities ,expenses
   
2. Corporate disclosure
   
3. Divorce of control
   
4. Increased social responsibility
   
5. Greater tax burden
   

Salomon v. Salomon & Co. Ltd is a foundational decision of the House of Lords in the area of company law
Background
Aron Salomon was a successful leather merchant who specialized in manufacturing leather boots. For many years he ran his business as a sole proprietor. By 1892, his sons had become interested in taking part in the business. Salomon decided to incorporate his business as a Limited company, Salomon & Co. Ltd.
At the time the legal requirement for incorporation was that at least seven persons subscribe as members of a company i.e. as shareholders. The shareholders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon himself was managing director. Mr. Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000 was a debt to him. He was thus simultaneously the company's principal shareholder and its principal creditor.
When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud.
HELD: J.V. Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

Piercing corporate veil
Ultra vires is a Latin phrase that literally means "beyond the powers". Its inverse is called intra vires, meaning "within the powers". It is used as a legal term in a number of common law contexts. In corporate law, ultra vires describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation's Charter or in a clause in its ; in the laws authorizing its formation, or similar founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void or voidable.
The corporate law concept of piercing (lifting) the corporate veil describes a legal decision where a shareholder or director of a corporation is held liable for the debts or liabilities .
Piercing the corporate veil is not the only means by which a director or officer of a corporation can be held liable for the actions of the corporation. Liability can be established through conventional theories of contract, agency, or tort law. For example, in situations where a director or officer acting on behalf of a corporation personally commits a tort, he and the corporation are jointly liable and it is unnecessary to discuss the issue of piercing the corporate veil. The doctrine is often used in cases where liability is found, but the corporation is insolvent.

Factors for piercing the veil

1. Absence or inaccuracy of corporate records;
   
2. Concealment or misrepresentation of members;
   
3. Failure to maintain arm's length relationships with related entities;
   
4. Failure to observe corporate formalities in terms of behavior and documentation;
   
5. Failure to pay dividends;
   
6. Intermingling of assets of the corporation and of the shareholder;
   
7. Manipulation of assets or liabilities to concentrate the assets or liabilities;
   
8. Non-functioning corporate officers and/or directors;
   
9. Other factors the court finds relevant
   

Formation of company

• Promotion
  
• Preparation of memorandum of association
  
• Preparation of articles of association
  
• Preliminary Contract
  
• Registration of company
  
• Issue of prospectus
  

Promotion
Promotion of company is the process of conceiving an idea and developing it into concrete proposition or project.
Memorandum of association
The memorandum of association of a company, often simply called the memorandum (and then often capitalised as an abbreviation for the official name, which is a proper noun and usually includes other words), is the document that governs the relationship between the company and the outside world
A memorandum of association is required to state the name of the company, the type of company (such as public limited company or private company limited by shares), the objectives of the company, its authorised share capital, and the subscribers (the original shareholders of the company). A company may alter particular parts of its memorandum at any time by a special resolution of its shareholders, provided that the amendment complies with company law .
THERE ARE DIFFERENT CLAUSES TO BE MENTIONED IN THE MOA :
NAME CLAUSE
REGISTERED OFFICE CLAUSE
OBJECT CLAUSE
LIABILITY CLAUSE CAPITAL CLAUSE

Purpose
The MOA is designed to communicate to the public the state of affairs of the company and its purpose of being and operating. This aids various stakeholders of the company (creditors, suppliers, shareholders, etc.) to evaluate the extent of their risk and also possibilities of the company to overcome them at a future date.

Articles of association
The articles of association of a company, often simply referred to as the articles, are the regulations governing the relationships between the shareholders and directors of the company
EFFECT OF MEMORANDUM AND ARTICLES.
(1) Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each members, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.
(2) All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company
Incorporation by registration
(1) Any seven or more persons, or where the company to be formed will be a private company, any two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability.
(2) Such a company may be either -
(a) a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them (in this Act termed "a company limited by shares");
(b) a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up (in this Act termed "a company limited by guarantee"); or
(c) a company not having any limit on the liability of its members (in this Act termed "an unlimited company

Prospectus
A prospectus is a legal document that institutions and businesses use to describe the share & securities they are offering for participants and buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors.

Share Capital
The issued share capital of a company is the total nominal value of the shares of a company which have been issued to shareholders and which remain outstanding .These shares, along with the share premium account, represent the capital invested by the shareholders in the company. The issued share capital may be less than the authorised share capital, the latter being the total value of the shares that are available for issue by the company.
Shareholder
One who owns shares of stock in a corporation or mutual fund. For corporations, along with the ownership comes a right to declared dividends and the right to vote on certain company matters, including the board of directors. also called stockholder
TYPES OF SHARES
A company may have as many different types of shares as it wishes, all with different conditions attached to them. Generally share types are divided into the following categories:

Ordinary Shares
As the name suggests these are the ordinary shares of the company with no special rights or restrictions. They may be divided into classes of different value.

Preference Shares
These shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes.

Cumulative preference
These shares carry a right that, if the dividend cannot be paid in one year, it will be carried forward to successive years.

Redeemable Shares
These shares are issued with an agreement that the company will buy them back at the option of the company or the shareholder after a certain period, or on a fixed date. A company cannot issue redeemable shares only.

Types of Meetings
Two types of meeting

1. Shareholders meeting

Statutory meeting
Annual General Meeting
Extra Ordinary General Meeting
2. Directors Meeting

Statutory meeting
This meeting is held by Public limited company compulsorily. The meeting should be held after one month but before six months of obtaining the certificate of commencement of business.

Annual General Meeting
The company gathering, usually held at the end of each fiscal year, at which the previous year and the outlook for the future are discussed and directors are elected by common shareholders. Shortly before each annual meeting, the corporation sends out a document called a proxy statement to each shareholder. The proxy statement contains a list of the business concerns to be addressed at the meeting and a ballot for voting on company initiatives and electing the new Board. This proxy ballot authorizes someone else at the meeting (usually the management team) to vote on investors' behalf.

Extra Ordinary General Meeting
All general meetings other than statutory meeting and annual general meeting is called Extra Ordinary General Meeting. This meeting is called by the directors or tribunal

2. Directors Meetings
Also known as Board Meetings. The directors have no individual rights (subject Articles of Association) to act on behalf of the company. They must act through the Board and their powers emanate from their collective decisions.
Regulations affecting the conduct of Board meeting and their powers (and limitations) are usually set out in their Articles of Association.

Powers of Directors
Powers of directors Subject to the provisions of the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company.... The powers given by this regulation shall not be limited by any special power given to the directors by the articles and a meeting of directors at which a quorum is present may exercise all powers exercisable by the directors.
In other words, the directors have the power to deal with any particular matter unless the Act, the articles or a (previously passed) special resolution says to the contrary.
Most companies do not have special articles and most have not passed special resolutions to restrict the directors' powers, so the reality is that in most companies the directors can make any decision unless the Act says it needs a resolution in general meeting is required.

Powers of Directors
1.General powers of the Board :

The board is entitled to exercise all such powers and to do all such acts and things as the company is authorised to do, provided the board shall exercise shall its powers subject to Companies Act, MOA, AOA.

2.Powers to be exercised in the board meetings

The board shall exercise the following powers on behalf of the company by means of resolution passed at the Board meeting:
Issue debentures.
Invest funds of the company.
Make loans.
Borrow money otherwise than on debentures.

3. Powers to be exercised with the approval of company in general meeting
To sell, lease or dispose of the whole of the undertaking of the company.
To remit or give time for repayment of any debt due to the company by a director.
To contribute to charitable or other finds not directly related to the business of the company.( Rs. 50,000 or beyond).
Borrowing of money beyond the paid-up capital of the company.
4. Power to make political contributions:

To any political parties or for any political purpose but should not exceed 5 % of the company’s net profit of three consecutive financial years.

Liabilities of Directors
Directors' legal duties fall into the following categories:

(1) general fiduciary duties imposed by the branch of the common law known as equity;

(2) the duty to observe care under the common law of negligence;

(3) duties under the Companies Acts, the Insolvency Act 1986 and related legislation, including for fraudulent and wrongful trading;

(4) duties imposed by the company itself;

(5) duties imposed by other legislation and common law provisions

Managerial Remuneration
Remuneration of directors The directors shall be entitled to such remuneration as the company may by ordinary resolution determine and, unless the resolution provides otherwise, the remuneration shall be deemed to accrue from day to day.
The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for that financial year computed in the manner laid down in sections 349 except that the remuneration of the directors shall not be deducted from the gross profits

Winding up of Company
Wind-up or windup can refer to a verb for terminating the existence of a company or other entity with a view to its liquidation and dissolution. In law, liquidation refers to the process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed.
MODES OF WINDING UP :
There are three ways, in which a company may be wound up. They are :

• Winding up by the court.
  
• Voluntary winding up,
  
• Members Voluntary winding up.
  
• Creditors Voluntary winding up.
  
• Winding up subject to supervision of the court
  

WINDING UP BY THE COURT:
A company may be wound up by the court in following situations. Here, the court means "High Court".
If the company itself, has passed a special resolution in the general meeting
If there is a default, in holding the statutory meeting
If the company fails to commence it's business within one year from the date of it's incorporation, or suspends it's business for a whole year.
A company limited by shares, has to obtain a "certificate of commencement" of business from the registrar. Unless it obtains such certificate, it cannot carry on it's business operation.
If the number of members, in a public company is reduced to less than seven, and in case of private company less than two.
If the company is unable to pay its debits; where the financial position of the company is, such, that it has more liabilities than assets, and after disposing off the assets
If the court, itself is of the opinion that the company should be wound up.

VOLUNTARY WINDING UP
A company may , voluntary wind up it's affairs, if it is unable to carry on it's business, or if it was formed only for a limited purpose, or if it is unable to meet it's financial obligation, and etc. A company may voluntary wind up itself, under any of the two modes:

Members voluntarily winding up

Creditors voluntarily winding up
A company may voluntarily wind up itself, either by passing :
An ordinary resolution, where the purpose for which the company was formed has completed, or the time limit for which the company was formed, has expired.
Or
By way of special resolution
Both types of resolution shall be passed in the general meeting of the company.

WINDING UP SUBJECT TO SUPERVISION OF COURT
Winding up subject to supervision of court, is different from "Winding up by court." Here the court only supervise the winding up procedure. Resolution for winding up, is passed by members in the general meeting. It is only for some specific reasons, that court may supervise the winding up proceedings. The court may put up some special terms and conditions also.

Disqualifications of directors
A person shall not be capable of being appointed director of a company, if-

(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a Court of any offence involving moral turpitude

(e) he has not paid any call in respect of shares of the company

The Negotiable Instruments Act, 1881.

The Negotiable Instruments Act, 1881.
The Act extends to the whole of India. It regulates commercial transactions, monetary dealings and deals with promissory notes, bills of exchange and cheques. The latest amendment to the Act was made in 2002.

DEFINITION OF NEGOTIABLE INSTRUMENTS
Negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery. The word “negotiable” means “ transferable from one person to another in return for consideration” and “instrument” means a “ written document by which a right is created in favour of some person”

Characteristics of a Negotiable Instrument:
1. Easy negotiability.
2. Transferee can sue in his own name without giving notice to the debtor.
3. Better title to a bona fide transferee for value.
4. Presumptions:
a). Consideration.
b). Date.
c). Time of acceptance.
d). Time of transfer.
e). Order of endorsements.
f). Stamp.
g).Holder presumed to be a holder in due course.
h).Proof of protest.

KINDS Of NEGOTIABLE INSTRUMENTS
The Act recognises only three kinds of instruments under section 13 of the Act but it does not exclude any other negotiable instrument provided the instrument entitles a person to a sum of money and is transferable by delivery.
The various kinds of instruments are:
Bills of Exchange.
Promissory Notes.
Cheques.

BILLS OF EXCHANGE
Definition: A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person or to the bearer of the instrument.
There are three parties to the bill of exchange- drawer, drawee and payee.

Essentials of a Bill of Exchange :
Must be in writing.
Must contain an unconditional order to pay money.
Must be signed by drawer.
Parties must be certain.
Sum payable must be certain.
Must comply with other formalities eg. Stamps, date etc.

PROMISSORY NOTES
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 to, or to the order of , a certain person, or only to the bearer of the instrument.
Parties to a promissory note are the Maker, the Payee, and the Holder.

Essentials of a promissory note:
Must be in writing.
Must contain an express promise or clear undertaking to pay.
Promise must be unconditional.
Must be signed by the maker in token of an undertaking to pay to the payee or his order.
The maker and the payee must be certain person.
Sum must be certain.
Amount payable must be in legal tender money of India.
Must be properly stamped .
Must contain a name of place, number and the date on which it is made.

Holder in Due Course.
A person is ‘holder in due course’ if he posses the following qualifications:
That for consideration became the possessor of the negitiable instrument if payable to the bearer, or the payee or the indorsee thereof if payable to order .
That he became the holder of the instrument before its maturity.
That he became the holder in good faith without sufficient cause to believe that any defect existed in the title of the transferor.
Privileges of a Holder in Due Course
Gets a better title than that of a transferor.
Liability of prior parties.

CHEQUE
A cheque is a bill of exchange drawn on specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in electronic form.
Cheque is a bill of exchange but has 2 additional qualifications:
a). Always drawn of specified banker.
b). Always payable on demand.

Crossing of Cheques.
There are two types of cheques :
a). Open cheque- a cheque which is payable in cash across the counter of a bank is called an open cheque. Such a cheque runs great risk in the course of circulation.
b). Crossed cheque- is one on which two parallel transverse lines with or without the words are drawn on the left hand top corner of the cheque. The payment of such a cheque is obtained through a banker.

There are two types of crossing:
General crossing: Where a cheque bears across its face two parallel transverse lines without any words or with words ‘and company’ or/ and ‘not negotiable’ written in between these lines is called general crossing.
1. Special crossing: Where a cheque bears across its face an addition of the name of a banker, either with or without words ‘not negotiable,’ the cheque is deemed to be crossed specially.The payment can be obtained only through the particular banker whose name appears across the face of the cheque.
2. Restrictive crossing: This type has been adopted by commercial or banking usage. In this type of crossing the words ‘ A/c Payee’ are added to the general or special crossing.
Who may cross a cheque :
The drawer.
The holder.
The banker.

Negotiation
When a negotiable instrument is transferred to any person, so as to constitute that person as holder thereof, the instrument is said to be negotiated.

There are two methods of negotiation:

1. Negotiation by delivery: If a instrument is payable to bearer , it is negotiation by delivery.
2. Negotiation by indorsement and delivery: If an instrument is payable to order, it is negotiable by the holder by indorsement and delivery thereof.

INDORSEMENT
It means writing of a person’s name on the instrument for the purpose of negotiation. The person who indorses the instrument is known as ‘indorser’ , and the person to whom it is indorsed is called the ‘indorsee’ .
Types of indorsement:

• Blank or general indorsement: A blank indorsement is effected by the simple signature of the indorser on the face or back of the instrument.It specifies no indorse and the instrument in consequence becomes payable to the bearer.
  
• Full or special indorsement: If the indorser signs his name and adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, indoresement is full.
  
• Restrictive indorsement: When by express words , indorsee is prohibited from further negotiation , indorsement is restrictive.
  
• Partial Indorsement: When an indorsement purports to transfer to the indorsee a part of the amount only . A partial indorsement does not operate as negotiation of the instrument.
  
• Conditional indorsement: If the indorser by express words, make his liability, dependent on the happening of the event, although such event may never happen, such indorsement is conditional indorsement.

Sale of Goods Act 1930

Sale of Goods Act 1930
Sale of Goods Act is one of very old mercantile law. Sale of Goods is one of the special types of Contract. Initially, this was part of Indian Contract Act. Later these sections in Contract Act were deleted, and separate Sale of Goods Act was passed in 1930.

Sec 4. Sale and agreement to sell.-

(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
(2) A contract of sale may be absolute or conditional
(3) Where under a contract of sale the property in the goods in transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

Hire Purchase – Pledge – Mortgage –Hypothecation Lease

Hire Purchase
In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner.

Pledge
It is an oath .The act of deposition of one's personal property to obtain personal loan of money. Such a property is called collateral property and if the loan amount is not paid within the due date the property will be lost to repay the loan

Mortgage
A mortgage is the pledging of a property to a lender as a security for a mortgage loan. While a mortgage in itself is not a debt, it is evidence of a debt. It is a transfer of an interest in land, from the owner to the mortgage lender, on the condition that this interest will be returned to the owner of the real estate when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.

Hypothecation Lease
This term is used principally in the civil law; it is defined to be a right which a creditor has over a thing belonging to another, and which consists in the power to cause it to be sold, in order to be paid his claim out of the proceeds.

Sec 5 How Contract of sale is made -
A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by installments, or that the delivery or payment or both shall be postponed. [section 5(1)].

Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties. [section 5(2)].

Thus, credit sale is also a ‘sale’. - - A verbal contract or contract by conduct of parties is valid. e.g. putting goods in basket in super market or taking food in a hotel.
Subject matter of contract of sale of goods

The subject matter of this act is basically goods. Classification of goods is as follows--

I Existing goods
Specific goods,
Ascertained goods,
Unascertained goods or generic goods

II Future goods

III Contingent goods

Explanation
Sec 6. Existing or future goods.- (1) The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or future goods.
(2) There may be a contract for the sale of goods the acquisition of which by the seller depends upon a contingency which may or may not happen.
(3) Where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods.

Effect of Destruction of Goods

7. Goods perishing before making of contract.- Where there is a contract for the sale of specific goods, the contract is void if the goods without the knowledge of the seller have, at the time when the contract was made, perished or become so damaged as no longer to answer to their description in the contract.
Barrow, Lane & Ballard Ltd v . Philips & co

8. Goods perishing before sale but after agreement to sell.- Where there is an agreement to sell specific goods, and subsequently the goods without any fault on the part of the seller or buyer perish or become so damaged as no longer to answer to their description in the agreement before the risk passes to the buyer, the agreement is thereby avoided.
Howell v . Coupland

Price
Price - “Price” means the money consideration for a sale of goods. [section 2(10)]. Consideration is required for any contract. However, in case of contract of sale of goods, the consideration should be ‘price’ i.e. money consideration.

Sec9. Ascertainment of price.- (1) The price in a contract of sale may be fixed by the contract or may be left to be fixed in manner thereby agreed or may be determined by the course of dealing between the parties.

(2) Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

Sec10. Agreement to sell at valuation.- (1) Where there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of a third party and such third party cannot or does not make such valuation, the agreement is thereby avoided. Provided that, if the goods or any part thereof have been delivered to, and appropriated by, the buyer, he shall pay a reasonable price therefor.

(2) Where such third party is prevented from making the valuation by the fault of the seller or buyer, the party not in fault may maintain a suit for damages against the party in fault.

Sec11. Stipulations as to time.- Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of a contract of sale. Whether any other stipulations as to time is of the essence of the contract or not depends on the terms of the contract.


Conditions and Warranties
There are certain stipulations which are essential for main purpose of the contract of sale of goods. These go the root of contract and non-fulfillment will mean loss of foundation of contract. These are termed as ‘conditions’.
Other stipulations, which are not essential are termed as ‘warranty’. These are collateral to contract of sale of goods. Contract cannot be avoided for breach of warranty, but aggrieved party can claim damages. - - A breach of condition can be treated as breach of warranty, but vice versa is not permissible.

A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. [section 12(1)].
A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. [section 12(2)]( Where a particular stipulation in contract is a condition or warranty depends on the interpretation of terms of contract. Mere stating ‘Conditions of Contract’ in agreement does not mean all stipulations mentioned are ‘conditions’ within meaning of section 12(2))
A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. [section 12(3)].
Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the con­tract. A stipulation may be a condition, though called a warranty in the contract. [section 12(4)].

When condition to be treated as warranty -

VOLUNTARY WAIVER OF CONDITION
Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warran­ty and not as a ground for treating the contract as repudiated. [section 13(1)].

ACCEPTANCE OF GOODS BY BUYER
Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the con­tract, express or implied, to that effect. [section 13(2)].
Nothing in this section shall affect the case of any condition or warranty fulfillment of which is excused by law by reason of impossibility or otherwise. [section 13(3)].

Implied warranties

Implied warranties of quiet possession

warranties against encumbrances

Disclosure of Dangerous Nature of Goods clarke v. Army and Navy Co-operative Society

Implied conditions

Implied condition as to title

Implied condition under a sale by description-
goods must correspond with description,
goods must be of merchantable quality,
condition of wholesomeness,
condition for a fitness for a particular purpose- Priest v. Last Grant v.Australian Knitting Mills

Implied conditions under Sale by Sample-
Correspondence with sample
Seller's opportunity
merchantability

Implied conditions under Sale by Sample as well as description

Doctrine of caveat emptor

The principle termed as ‘caveat emptor’ means ‘buyer be aware’. Generally, buyer is expected to be careful while purchasing the goods and seller is not liable for any defects in goods sold by him. This principle in basic form is embodied in section 16 that subject to provisions of Sale of Goods Act and any other law, there is no implied condition or warranty as to quality or fitness of goods for any particular purpose. As per section 2(12), “Quality of goods” includes their state or condition.

Exceptions

1. False representation by seller
   
2. Seller actively conceals a defect
   
3. Buyer relying upon the skill of the seller Priest v. Last , Bombay Burma Trading Corp.Ltd Aga Muhammed
   
4. Goods bought by description
   

Legal ownership
Transfer of general property is required in a sale. ‘Property’ means legal ownership. It is necessary to decide whether property in goods has transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes.

Risk follows ownership
-Action against third party
-Insolvency of seller / buyer
-Suit for price

Transfer of property or ownership sec18-26

Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. [section 18].

Property passes when intended to pass - Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. (section 19)

Specific goods in a deliverable state - Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immate­rial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed. (section 20)
contd
21. Specific goods to be put into a deliverable state.- Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof.

22. Specific goods in a deliverable state, when the seller has to do anything thereto in order to ascertain price.- Where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof.

23. Sale of unascertained goods and appropriation.- (1) Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation is made.

(2) Delivery to carrier.- Where, in pursuance of the contract, the seller delivers the goods.

24. Goods sect on approval or ‘on sale or return’- when goods are delivered to the buyer on approval or on sale or return or other similar terms, the property therein passes to the buyer-
(a) when he signifies his approval or acceptance to the seller to does not other act adopting the transaction.
(b) if he does not signify his approval or acceptance to the seller but retains the gods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of such time, and, if not time has been fixed, on the expiration of a reasonable time.

NOTE : The property in goods will never pass to anybody if the seller reserves the right of disposal

Reservation of right of disposal.-sec 25

(1) Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled. In such case, notwithstanding the delivery of the goods to a buyer, or to a carrier or other bailee for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.
(2) Where goods are shipped or delivered to a railway administration for carriage by railway and by the bill of landing or railway receipt, as the case may be, the goods are deliverable to the order of the seller or his agent, the seller is prima facie deemed to reserve the right of disposal.

Sale by non-owners (sec 27-30)
Subject to the provisions of this Act and of any other law for the time being in force, where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by conduct precluded from denying the seller’s authority to sell.

Exceptions

1.Mercantile agent
2.Sale by co-owners
3.Sale by person under voidable contract
4.Buyer in possession after sale
5.Estoppels
6.Sale by unpaid seller
7.Sale by person under other laws

Auction sale -
Auction sale is special mode of sale. The sale is made in open after making public announcement. Buyers assemble and make offers on the spot. Person offering to pay highest price gets the goods. Usually, auctioneer is appointed to conduct auction. Higher and higher bids are offered and sale is complete when auctioneer accepts a bid

Unpaid seller

sec45. "Unpaid seller" defined.-
(1) The seller of goods is deemed to be an "unpaid seller" within the meaning of this Act-
(a) When the whole of the price has not been paid or tendered.
(b) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the conditions on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise.
(2)The term "seller" includes any person who is in the position of a seller, as, for instance, an agent of the seller to whom the bill of lading has been endorsed, or a consignor or agent who has himself paid, or is directly responsible for, the price.

Unpaid seller’s rights.-

I . Right against goods - (these rights can be practiced by the seller till he has the possession of the goods or till buyer has`nt received the goods )
Subject to the provisions of this Act and of any law for the for the time being in force,

- (a) a lien on the goods for the period while he is in possession of them,

• The unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases, namely :-
  where the goods have been sold without any stipulations as to credit.
  
• where the goods have been sold on credit, but the term of credit has expired.
  
• where the buyer becomes insolvent.
  

Part delivery.- Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an agreement to waive the lien.

Termination of lien.-
The unpaid seller of goods losses his lien thereon -

• when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods.
  
• when the buyer or his agent lawfully obtains possession of the goods,
  
• by waiver thereof.
  

- (b) Right of stopping the goods in transit after he has parted with the possession of them.

The unpaid seller who has parted with the possession of the goods has the right of stopping them in transit, that is to say, he may resume possession of the goods as long as they are in the course of transit, and may retain them until payment or tender of the price.
conditions

• seller has parted with the possession of the goods
• the buyer of goods becomes insolvent
  

- (c) a right of re-sale as limited by this Act.

The seller can practice this right under following conitions

• where goods are of perishable nature
• where the seller has reserved the right of re-sale in the contract
• where the seller gives notice to the buyer via court order

-(d) right to withhold delivery

This right is co-extensive of right of lien and is practiced between right of lien and right of stopping the goods in transit

II . Right against the buyer(these rights can be practiced by the seller if he has parted with the possession of the goods or buyer has received the goods )

(a)-suit for price
(1) Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of the goods.
(2) Where under a contract of sale the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract.

(b)-suit for damages

The right of the seller is to recover interest or special damages if any, or to recover the money paid where the consideration for the payment of it has failed with the help of law.

LAW OF TORTS

Law of Torts

Tort law is the name given to a body of law that creates, and provides remedies for, civil wrongs that do not arise out of contractual duties.
A person who is legally injured may be able to use tort law to recover damages from someone who is legally responsible, or "liable," for those injuries. Generally speaking, tort law defines what constitutes a legal injury, and establishes the circumstances under which one person may be held liable for another's injury. Torts cover intentional acts and accidents.


Categories of torts (There are seven categories of torts)

1. Negligence
   It is a legal concept in the common law legal systems usually used to achieve compensation for injuries (not accidents). Negligence is a type of tort or delict (also known as a civil wrong).
   
2. Statutory torts
   A statutory tort is like any other, in that it imposes duties on private or public parties, however they are created by the legislature, not the courts.
   One example is in consumer protection, with the Product Liability Directive, where businesses making defective products that harm people must pay for any damage resulting. Liability for defective products is strict in most jurisdictions
   
3. Nuisance
   It is a common law tort. It means that which causes offence, annoyance, trouble or injury. A nuisance can be either public (also "common") or private.
   Public nuisance is a class of common law offence in which the injury, loss or damage is suffered by the local community as a whole rather than by individual victims.
   Private nuisance" is the interference with the right of specific people
   
4. Defamation
   It is tarnishing the reputation of someone; it is in two parts, slander and libel. Slander is spoken defamation and libel is printed and broadcast defamation, both share the same features.
   
5. Intentional torts
   Intentional torts are any intentional acts that are reasonably foreseeable to cause harm to an individual, and that do so. Intentional torts have several subcategories, including tort(s) against the person, including assault, battery, false imprisonment, intentional infliction of emotional distress, and fraud. Property torts involve any intentional interference with the property rights of the claimant.
   
6. Competition law
   Modern competition law is an important method for regulating the conduct of businesses in a market economy
   
7. Economic torts
   Economic torts are torts that provide the common law rules on liability for the infliction of pure economic loss, such as interference with economic or business relationships.
   Economic torts protect people from interference with their trade or business. The area includes the doctrine of restraint of trade and has largely been submerged in the twentieth century by statutory interventions on collective labour law, modern antitrust or competition law, and certain laws governing intellectual property, particularly unfair competition law. The "absence of any unifying principle drawing together the different heads of economic tort liability has often been remarked upon."
   

The principal torts can be listed as passing off, injurious falsehood and trade libel ,conspiracy, inducement of breach of contract, tortious interference (such as interference with economic relations or unlawful interference with trade), and watching and besetting. These torts represent the common law's historical attempt to balance the need to protect claimants against those who inflict economic harm and the wider need to allow effective, even aggressive, competition (including competition between employees and their workers).

Consumer Protection Act, 1986

Consumer Protection Act, 1986
Need for Consumer Protection Meaning of Consumer Different redressal Forums for Consumers, Rights of Consumers, Unfair Trade Practices, and Procedure for Filing Complaints




EXTENT AND COVERAGE OF CONSUMER PROTECTION ACT

-The Act applies to all goods and services unless specifically exempted by the Central Government.
-It covers all the sectors whether private, public or cooperative.
-The provisions of the Act are compensatory in nature.
-The provisions of this Act are in addition to and not in derogation of the provisions of any other law for the time being in force.
-The Act envisages establishment of Consumer Protection Councils at the Central and State levels, whose main objects will be to promote and protect the rights of the consumers.

Need for Consumer Protection
The consumer protection Act, 1986, provides for the better protection of consumers. Unlike existing laws which are punitive or preventive in nature, the provisions of this Act are compensatory in nature. The act is intended to provide simple, speedy and inexpensive redressal to the consumers' grievances, award relief and compensation wherever appropriate to the consumer. The act has been amended in 1993 both to extend its coverage and scope and to enhance the powers of the redressal machinery.

Meaning of Consumer

WHO IS CONSUMER?
All of us are consumers of goods and services. For the purpose of the Consumer Protection Act, the word "Consumer" has been defined separately for "goods" and "services".
(A) For the purpose of "goods", a consumer means a person belonging to the following categories:
One who buys or agrees to buy any goods for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment;
It includes any user of such goods other than the person who actualy buys goods and such use is made with the approval of the purchaser.
Note : A person is not a consumer if he purchases goods for commercial or resale purposes. However, the word "commercial" does not include use by consumer of goods bought and used by him exclusively for the purpose of earning his livelihood, by means of self employment.

(B) For the purpose of "services", a "consumer" means a person belonging to the following categories:
One who hires or avails of any service or services for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment.
It includes any beneficiary of such service other than the one who actually hires or avails of the service for consideration and such services are availed with the approval of such person.

RIGHTS ENJOYED BY CONSUMER
1-Right to be protected against the marketing of goods and service that is hazardous to life and property.
2-Right to be informed about the quality, quantity, potency, purity, standard and price of goods or services so as to protect the consumer against unfair trade practices.
3-Right to choice wherever possible , access to a variety of goods and services at competitive prices.
4-Right to be heard and to be assured that consumers' interests will receive due consideration at appropriate forums;
5-Right to seek redressal against unfair trade practices unscrupulous exploitation of consumers.
6-Right to consumer education.
7-Right to clean and healthy environment.

Different redressal Forums for Consumers
The Act envisages a three- tier quasi-judicial machinery at the National, State and District levels.

National Consumer Disputes Redressal Commission - known as "National Commission" deals with complaints involving costs and compensation higher than Rs. One Crore.

State Consumer Disputes Redressal Commissions - known as "State Commission, deals with complaints involving costs and compensation higher than Rs. Twenty Lakhs and less than Rs. One Crore.

District Consumer Disputes Redressal Forums - known as "District Forum, deals with complaints involving costs and compensation less than Rs. Twenty Lakhs.

JURISDICTION
If the cost of goods or services and compensation asked for is up to rupees twenty lakh ,then the complaint can be filed in the District Forum which has been notified by the State Governmentfor the district where the cause of action has arisen or where the opposite party resides. A complaint can also be filed at a place where the branch office of the opposite party is located.
If the cost of goods or services and compensation asked for is more than rupees twenty lakh , but less than rupees one crore then the complaint can be filed before the State Commission notified by the State Government or Union Territory Concerned.
If the cost of goods or services and compensation asked for exceed rupees one crore then the complaint can be filed before the National Commission at New Delhi

COMPOSITION

Each District Forum shall consist of -
(a) A person who is, or who has been or is qualified to be, a District Judge, who shall be its President;

(b) two other members, one of whom shall be a woman, who shall have the following qualifications, namely:-
(i)be not less than thirty-five years of age,

(ii) posses a bachelor's degree from a recognized university,

(iii) be persons of ability, integrity and standing, and have adequate knowledge and experience of at least ten years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration:

Each State Commission shall consist of -

(a) a person who is or has been a Judge of a High Court, appointed by the State Government, who shall be its President : Provided that no appointment under this clause shall be made except after consultation with the Chief Justice of the High Court;

(b) two other members, who shall be persons of ability, integrity and standing and have 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 :

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:1[Provided that no appointment under this clause shall be made except after consultation with the Chief Justice of India;

(b) not less than four, and not more than such number of members, as may be prescribed, and one of whom shall be a woman, who shall have the following qualifications, namely:-

(i) be not less than thirty-five years of age;

(ii) possess a bachelor's degree from a recognized university; and

(iii) be persons of ability, integrity and standing and have adequate knowledge and experience of at least ten years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration:

RELIEF AVAILABLE TO CONSUMER
Depending on the facts and circumstances, the Redressal Forums may give order for one or more of the following relief.
1-Removal of defects from the goods,
2-Replacement of the goods;
3-Refund of the price paid;
4-Award of compensation for the loss or injury suffered;
5-Removal of defects or deficiencies in the services;
6-Discontinuance of unfair trade practices or restrictive trade practices or direction not
to repeat them;
7-Withdrawal of the hazardous goods from being offered to sale; or
8-Award for adequate costs to parties

LIMITATION
The District Forum, the State Commission or the National Commission shall not admit a complaint unless it is filed within two years from the date on which cause of action has arisen

Unfair Trade Practices
unfair trade practice" the detailed definition is given in the Consumer Protection Act, 1986 as amended by the Consumer Protection (Amendment) Act. 1993. It means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice including any of the following practices, namely :-
(a) false or misleading representation,
(b) bargain price
(c) offering of gifts, prize, contest etc.
(d) non compliance of product safety standard.
(e) hoarding or destruction of goods.

Procedure for Filing Complaints
Procedures for filing complaints and seeking redressal are simple. There is no fee for filing a complaint before the District Forum, the State Commission or the National Commission. ( A stamp paper is also not required). Three to five copies of the complaint on plain paper are required to be submitted by the complainant or his authorized agent in person or could be sent by post to the appropriate Forum / Commission.

A complaint should contain the following information:-
(a) The name, description and the address of the complainant.
(b) The name , description and address of the opposite party or parties, as the case may be, as far as they can be ascertained;
(c) The facts relating to complaint and when and where it arose;
(d) Documents, if any, in support of the allegations contained in the complaint.
(e) The relief which the complainant is seeking.
The complaint should be signed by the complainant or his authorized agent.
The complaint is to be filed within two years from the date on which cause of action has arisen.

Special Contracts

Basic Elements of Law Relating to Agency, Guarantee and Pledge



Contract of indemnity Sec124

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’.
Illustration - A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.



Contract of guarantee sec126

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”; [Person giving guarantee is also called as ‘guarantor’. However, Contract Act uses the word ‘surety’ which is same as ‘guarantor’].
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”.

RULES
1-A guarantee may be either oral or written.
2-Three parties are involved in contract of guarantee. Contract between any two of them is not a ‘contract of guarantee’.
3-Primary liability is of the principal debtor. Liability of surety is secondary and arises when Principal Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the request of principal debtor. If the surety gives guarantee on his own, then it will be contract of indemnity. In such case, surety has all primary liabilities.

CONSIDERATION FOR GUARANTEE
Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee.
Illustrations
(a) 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 sufficient consideration for C’s promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient considera­tion for C’s promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agree­ment is void.

Bailment sec148

Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. - - Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods is transferred, but property i.e. ownership is not transferred.

A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. Bailment can be only of ‘goods’.

As per Sale of Goods Act, ‘goods’ means every kind of movable property other than money and actionable claim. - - Thus, keeping money in bank account is not ‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as house or farm is not a movable property

Bailment of pledges
Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security.
Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The 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 “pawnor”. The bailee is called the “pawnee” sec172

Contract of Agency -
Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have opportunity or facility to transact business through others like an agent.

The principles of contract of agency are –
(a) Excepting matters of a personal nature, what a person can do himself, he can also do it through agent (e.g. a person cannot marry through an agent, as it is a matter of personal nature)
(b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal. - - Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also, except to the extent excluded in the Act. One important distinction is that, no consideration is necessary to create an agency.
contd

AGENT AND PRINCIPAL DEFINED - An “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal” [section 182].

WHO MAY EMPLOY AGENT - Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. [section 183]. - - Thus, any person competent to contract can appoint an agent.

WHO MAY BE AN AGENT - As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [section 184]. - -
The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.

CONSIDERATION NOT NECESSARY - No consideration is necessary to create an agency. [section 185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

DUTIES OF AGENT
AGENT’S DUTY TO PRINCIPAL - An agent has following duties towards principal. *
1. Conducting principal’s business as per his directions
2. Carry out work with normal skill and diligence
3. Render proper accounts
4. Agent’s duty to communicate with principal
5. Not to deal on his own account, in business of agency
6. Agent’s duty to pay sums received for principal
7. Agent’s duty on termination of agency by principal’s death or insanity

REMUNERATION TO AGENT - Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.

RIGHTS & DUTIES OF PRINCIPAL
RIGHTS OF PRINCIPAL –
1. Recover damages from agent if he disregards directions of Principal
2. Obtain accounts from Agent
3. Recover moneys collected by Agent on behalf of Principal
4. Obtain details of secret profit made by agent and recover it from him
5.Forfeit remuneration of Agent if he misconducts the business.

DUTIES OF PRINCIPAL –
1. Pay remuneration to agent as agreed
2. Indemnify agent for lawful acts done by him as agent
3. Indemnify Agent for all acts done by him in good faith
4. Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.

TERMINATION OF AGENCY
1. An agency is terminated by the principal revoking his au­thority;
2. or by the agent renouncing the business of the agency;
3. or by the business of the agency being completed;
4. or by either the principal or agent dying or becoming of unsound mind;
5. or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insol­vent debtors.

In following cases, an agency cannot be revoked –
1. Agency coupled with interest
2. Agent has already exercised his authority
3. Agent has incurred personal liability.

MODULE- 2 Indian Contract Act, 1872

The Indian Contract Act extends to the whole of India (except the State of Jammu and Kashmir) and it came into force on the first day of September 1872





WHAT IS A CONTRACT?
Section 2(h)-An agreement enforceable by law is a contract.
Thus for the formation of a contract there must be
•an agreement
•the agreement should be enforceable by law


The definition of Contract u/s2(h) emphasis
an agreement enforceable by law
Consensus-ad-idem Exceptions
Rights & duties social & domestic agreements


ESSENTIALS OF A VALID CONRACT
1.Offer and its acceptance
2.Free consent of both parties
3.Mutual and lawful consideration for agreement
4.It should be enforceable by law- intention should be to create legal relationship.
5.Parties should be competent to contract
6.Object should be lawful
7.Certainty and possibility of performance
8. Contract should not have been declared as void under Contract Act or any other law



EXPLANATIONS


1.Offer or Proposal and Acceptance


•Offer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. An offer is an indication by one person ("offeror") to another ("offeree") of the offeror's willingness to contract on certain terms without further negotiations. A contract is then formed if there is express or implied agreement. A contract is said to come into existence when acceptance of an offer has been communicated to the offeror by the offeree.


• For the formation of a contract the process of proposal or offer by one party and the acceptance thereof by the other is necessary. This generally involves the process of negotiation where the parties apply their minds make offer and acceptance and create a contract.


•When one person signifies to another his willingness to do or abstain from doing anything with a view to obtaining the assent of the other to such act or abstinence, he is said to make a proposal or offer.


Rules of Offer

•Offer must create legal relationship.
•Offer must be definite & certain.
•Offer must be communicated.
•Offer must be made with a view to obtaining the assent.
•Offer should not contain a term the non-compliance of which may be assumed to amount to acceptance.
•A statement of price is not an offer.


Acceptance

•When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.


Rules of acceptance

Communication of acceptance

•The acceptance must be communicated. Carlill v. Carbolic Smoke Ball Co
•An offer can only be accepted by the offeree, that is, the person to whom the offer is made.
•An offeree is not bound if another person accepts the offer on his behalf without his authorization.
•It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance.
•If the offer specifies a method of acceptance (such as by post or fax), you must accept it using a method that is no less effective than the method specified.
•Silence cannot be construed as acceptance. Felthouse v. Bindley



Revocation or Lapse of offer

•By communication of notice
•By lapse of time
•By non-fulfillment of a condition
•By death or insanity of the offeror
•If offer is not accepted in usual manner
•Counter offer is made
•If law is changed

Unilateral contract
•The contract in Carlill v. Carbolic Smoke Ball Co was of a kind known as a unilateral contract, one in which the offeree accepts the offer by performing his or her side of the bargain. It can be contrasted with a bilateral contract, where there is an exchange of promises between two parties
Invitations to treat
•An invitation to treat is not an offer, but an indication of a person's willingness to negotiate a contract. In Harvey v. Facey, an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat
Revocation of offer
•An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror. If the offer was made to the entire world, such as in Carlill's case, the revocation must take a form that is similar to the offer.If the offer is one that leads to a unilateral contract, then unless there was an ancillary contract entered into that guaranteed that the main contract would not be withdrawn, the contract may be revoked at any time:



WHO CAN ENTER INTO A CONTRACT?

A person who
is of the age of majority according to the law to which he is subject
is of sound mind ? A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests.
is not disqualified from contracting by any law to which he is subject
is competent to contract.
Therefore a minor is not competent to contract and an agreement by a minor is void ab initio. He can not ratify an agreement on attaining the age of majority and validate the same. (Void ab initio means it has at no time had any legal validity).


The following persons are therefore incompetent to contract
•Minors
•Persons of unsound mind
•Persons disqualified by law to which they are subject



Minors and Contractual Capacity


•An agreement with or by a minor is void
•Can be a promissee or a beneficiary
•NO ratification of agreement on the age of majority
•There can be no claim for compensation from a minor
•Minor can always plead minority
•Liability - for necessities, the item contracted for must be necessary for minor’s existence, the value must be up to that of the current standard of living or financial/social status (not excessive in value),
-for tort or a civil wrong.
•Can act as a agent
•Cannot be a partner in a firm or adjudged insolvent



Others and Contractual Capacity

•Insanity, mental illness, or mental/medical condition
•Drunkenness/drug abuse
•Bankruptcy
•Enemy aliens and/or terrorists
•Convict
•Foreign sovereigns & accredited representatives of a foreign state
•Business entities


Corporations
–The extent of an artificial person's capacity depends on the law of the place of incorporation and the enabling provisions included in the constitutive documents of incorporation. The general rule is that anything not included in the corporation's capacity is unenforceable by the corporation, but the rights and interests of innocent third parties dealing with the corporations are usually protected.


Insolvency
–When a business entity becomes insolvent, an administrator, receiver, or other similar legal functionary may be appointed to determine whether the entity shall continue to trade or be sold so that the creditors may receive all or a proportion of the money owing to them. During this time, the capacity of the entity is limited so that its liabilities are not increased unreasonably and to the detriment of the existing creditors.



Consideration

•Consideration is a central concept in the Indian contract act:
It is value paid for a promise or the inducement, price or motive that causes a party to enter into an agreement or contract. Consideration is needed for a valid contract.
An example; If you sign a contract with a man, agreeing to buy his car for an amount of money, his consideration is the car, which he promises to give to you. Your consideration is the CAR that you BUY and his consideration is the AMOUNT PAID to him. However, a contract saying that he would give you his car for nothing would not be valid per se, because you aren't giving him any consideration.



Legal Rules for Consideration

1.Moved at the desire of the promisor
2.It may be moved from promisee or any other person
3.It may be an act ,abstinence or forbearance or a return promise
4.It may be past , present or future
5.It need not be adequate
6.It must be real and not illusory
7.It must be something which the promisor is not already bound to do
8.It must not be illegal ,immoral or opposed to public policy



STRANGER TO CONTRACT CANNOT SUE -DOCTRINE OF PRIVITY OF CONTRACT

Only parties to contracts should be able to sue to enforce their rights or claim damages as such. However the doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.
Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty.


Common law exceptions
There are exceptions to DOCTRINE OF PRIVITY OF CONTRACT
These are:

1.Collateral Contracts (between the third party and one of the contracting parties)
2.Trusts (the beneficiary of a trust may sue the trustee to carry out the contract)
3.Land Law (restrictive covenants on land are imposed upon subsequent purchasers if the covenant benefits neighboring land)
4.Agency and the assignment of contractual rights are permitted.
5.Marriage settlement ,partition ,family arrangements.

There are exceptions to -A CONTRACT IS VOID WITHOUT CONSIDERATION
1.Love and affection
2.Compensation for voluntary services
3.Payment for time barred debt
4.Completed gift
5.Charitable subscription


FREE CONSENT IN INDIAN CONTRACT ACT

•“Consent” defined.
U/S13. Two or more persons are said to consent when they agree upon the same thing in the same sense.
•“Free consent” defined.
U/S14. Consent is said to be free when it is not caused by—
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of sections 20, 21 and 22.

Consent is said to be free if it is not caused by-

•Coercion ? Consent is said to be caused by coercion when it is obtained by pressure exerted by either committing or threatening to commit an act forbidden by the Indian Penal Code or unlawfully detaining or threatening to detain any property.

•Undue influence ? A contract is said to be induced by "undue influence" where the relation subsisting between the 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.

•Fraud ? Means and includes the following acts done with the intention to deceive or to induce a person to enter into a contract.
(a) 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
(b) active concealment of a fact by a person who has knowledge or belief of the fact,
(c) promise made without the intention of performing it.

•Misrepresentation ? When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes it to be true, it is misrepresentation. A breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice is also a misrepresentation.

•Mistake ? Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. An erroneous opinion as the value of the thing, which forms the subject matter of the agreement, is not deemed as mistake as to a matter of fact. Unilateral mistake, i.e. the mistake in the mind of only one party does not affect the validity of the contract


LAWFUL OBJECT
Object or consideration is unlawful if
(1) It is forbidden by law,
(2) Is of such a nature if permitted it would defeat the provisions of any law,
(3) It is fraudulent,
(4) The court regards it immoral,
(5) The court regards it opposed to public policy.
Every agreement of which the consideration or object is unlawful is void


Void agreements
Void agreements - An agreement not enforceable by law is said to be void. [section 2(g)]. - - Note that it is not ‘void contract’, as an agreement which is not enforceable by law does not become ‘contract’ at all.

Following are void agreements –
• Both parties under mistake of fact (section 20)
• Unlawful object or consideration (section 24)
• Agreement without consideration (section 25)
• Agreement in restraint of marriage (section 26)
• Agreement in restraint of trade (section 27)
• Agreement in restraint of legal proceedings (section 28)
• Uncertain agreement (section 29)
• Wagering agreement (section 29)
• Agreement to do an impossible Act (section 56).



Performance of contract

Obligation of parties to contracts. U/S 37
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 provisions of this Act, or of any other law.
•Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.

Tender of performance.
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.

Effect of refusal of party 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, unless he has signified, by words or conduct, his acquiescence in its continuance.

Person by whom promises is to be performed
If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contain in it should be performed by the promisor himself, such promise must be performed by the promisor.In other cases, the promisor or his representative may employ a competent person to perform it.

Effect of accepting performance from this person
When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor.

Devolution of joint liabilities
When two or more person have made a joint promise, then, unless a contrary intention appears by the contract, all such persons, during their joint lives, and, after the death of any of them, his representative jointly with the survivor or survivors, and, after the death of the last survivor the representatives of all jointly, must fulfill the promise.



Discharge of contract
•BY PERFORMANCE
•BY MUTUAL CONSENT
•LAPSE OF TIME
•OPERATION OF LAW
•IMPOSSIBILITY OF PERFORMANCE
•BREACH OF CONTRACT


BREACH OF CONTRACT

•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 provisions of the Act, or any other law.Promises bind the representatives of the promisor in the case of death of such promisor before performance, unless a contrary intention appears from a contract.

•In a contract the agreement being enforceable by law, each party to the contract is legally bound to perform his part of the obligation. Non-performance of the duty undertaken by a party in a contract amounts to breach of contract, for which he can be made liable.


REMEDIES


When a party to the contract makes a breach of contract, there are five possible alternatives available to the other party.
•Rescind the contract
•Sue for damages
•Specific performance
•Injunction
•Quantum meruit

COMPENSATION IN CASE OF BREACH.
•Compensation for loss or damage caused by breach of contract.
• Compensation for breach of contact where penalty stipulated for.
• Party rightfully rescinding contract entitled to compensation.

SPECIFIC PERFORMANCE
Specific performance means actual execution of the contract as agreed between the parties.
•When there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done; or
•When the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief.

Quantum meruit’ means ‘as much as earned’.
A contract may come to end by
* breach of contract
* contract becoming void or
* Voidable contract avoided by party.
In such case, if a party has executed part of contract, he is entitled to get a proportionate amount i.e. ‘as much as earned by him’. This is not by way of ‘damages’ or ‘compensation for loss’. - - The principle is that even when contract comes to a premature end, the party should get amount proportional to the work done/services provided/goods supplied by one party. One party should not get enriched at the cost of others

MODULE 1: BUSINESS AND ITS LEGAL ENVIRONMENT

What is “Law”?

•Law consists of rules that regulate the conduct of individuals, businesses, and other organizations within society. It is intended to protect persons and their property from unwanted interference from others.
•Enforceable rules governing relationships among individuals and between individuals and their society



Functions of the law

•Keeping the peace
•Shaping moral standards
•Promoting social justice
•Maintaining the status quo
•Facilitating orderly change
•Facilitating planning
•Providing a basis of compromise
•Maximizing individual freedom



Basic Sources of Law

• Customs & usages
• Constitution
• Statutes and Ordinances
• Decided cases and Precedents
• Foreign Laws
• Miscellaneous

Administrative Law
Treaties
Executive Orders

•Constitution establishes the structure of the government (legislative, Executive, Judicial )
•A treaty- compact made between two or more nations.
•Statutes- written law enacted by the legislative branches of union and state governments
•Ordinances- law enacted by local government bodies
•An executive order- an order issued by a member of the executive branch of government.
•Administrative Law- legislative and executive branches of union and state governments establish administrative agencies to enforce and interpret statutes enacted by union and state legislatures.
•A judicial decision- decision about an individual case issued by a court

Classification of Law

•Substantive or Procedural Law

•Public and Private Law

•Civil or Criminal Law

EXPLANATIONS

•Substantive law deals with whether the defendant is guilty or liable
•Procedural law deals with the rules of the court under which litigation takes place
•Public Law- involves the govt.- Labor law, securities, criminal law
•Private law involves disputes among citizens- Contract law, torts, corporation law
•Civil law involves mainly private law disputes-contract law, torts, property law
•In criminal law, the state prosecutes a defendant for violating a criminal statute

Doctrine of Stare Decisis

•Stare decisis—Latin for “to stand by the decision”—means adherence to precedent.
•Based on the common law tradition, past court decisions become precedent for deciding future cases.
•Precedent is a rule of law established in a court decision. Lower courts must follow the precedent established by higher courts.
•Judges use precedent (decisions in previous cases) to determine the outcome of a current case
•Functions of stare decisis: efficiency, uniformity, stability, and predictability
•However, some cases are “cases of first impression”

BUSINESS AND ITS LEGAL ENVIRONMENT

•With the growing strength of consumer movements and rising levels of awareness among stakeholders, corporations are realizing that stakeholders and consumers are no longer indifferent to unethical practices like financial irregularities, tax-evasion, poor quality products and services, kick-backs, non-compliance with environmental issues, and hazardous working conditions.Many Indian companies too have recognized the importance of integrity, transparency, and open communications. They believe that the goodwill resulting from adopting and successfully implementing a code of business ethics will, in the long run, translate into economic gains.Today, investors want to ensure that the companies they invest in are not only managed properly, but also have proper corporate governance. They regard corporate governance as a control mechanism that ensures the optimum use of the human, physical and financial resources of an enterprise.
•Companies have now begun to integrate ethics into their corporate cultures and concentrate on putting appropriate corporate governance mechanisms in place.

What is Business ethics?

•Business ethics is a form of applied ethics that examines ethical principles and moral problems that arise in a business environment.
•In the increasingly conscience-focused marketplaces of the 21st century, the demand for more ethical business processes and actions (known as ethicism which is a major branch of philosophy, encompassing right conduct and good life ) is increasing. Simultaneously, pressure is applied on industry to improve business ethics through new public initiatives and laws.
•The improvising of legal ethics in business scenario is called Commercial law (sometimes known as business law)

What is Commercial law ?

Commercial law (sometimes known as business law) is the body of law which governs business and commercial transactions. It is often considered to be a branch of civil law and deals both with issues of private law and public law.
Commercial law includes within its compass such titles as principal and agent; carriage by land and sea; merchant shipping; guarantee; marine, fire, life and accident insurance; bills of exchange and partnership. It can also be understood to regulate corporate contracts, hiring practices, and the manufacture and sales of consumer goods. Many countries have adopted civil codes which contain comprehensive statements of their commercial law.

List of business law topics
•Contracts
•Corporate law
•Intellectual property
•Negotiable instrument
•Property law
•Financial regulation
•Tax law
•Arbitration

What is the importance of studying business law?
the main reasons are given below:
•It is helpful in maintaining business in legal ways as it promotes ethics on the whole.
•To make a student aware of those laws which regulate business and corporate world in a country.
•To resolve business disputes in a legal format.
•To have a better society