MB0035 – Legal Aspects of Business

SET-1

Q.1 What do you mean by free consent? Under what circumstances

consent is considered as free? Explain.

ANSWER:

Free Consent

One of the essentials of a valid contract is free consent. Sec. 13 of the Act
defines consent as “Two or more persons are said to consent where they
agree upon the thing in the same sense.” There should be ‘consensus ad
idem’ or ‘identity of minds.’

Parties consenting to the same thing in the same sense is not sufficient.
Consent must be free. Section 14 of the Act proceeds to define “free
consent” as under:

The validity of a contract depends not only on consent of the parties but
their consent must also be free. According to Sec. 14, consent is said to be
free when it is not caused by (i) coercion as defined under Section 15, or
(ii) undue influence as defined under Section 16, or (iii) fraud as defined
under Section 17, or (iv) mis-representation or defined under Section 18, or
(v) mistake subject to the provisions of Section 21, 21 and 22.

1. Coercion:

(Sec. 15) “Coercion is the committing or threatening to commit any act

forbidden by the Indian Penal Code or the unlawful detaining or threatening
to detain any property, to the prejudice of any person whatever, with the
intention of causing any person to enter into an agreement.” It is immaterial
whether the Indian Penal Code is or is not in force in the place where the
coercion is employed.

Under English Law, coercion must be applied to one’s person only whereas
under Indian Law it can be one’s person or property. So also under English
Law, the subject of it must be the contracting party himself or his wife,
parent, child or other near relative. Under Indian Law, the act or threat may
be against any person. It is to be noted that the act need not be committed
in India itself. Unlawful detaining or threatening to detain any property is
also coercion. While threat to sue does not amount to coercion threat to file
a false suit amounts to coercion since such an act is forbidden by Indian
Penal Code.

2. Undue influence:

In the words of Holland, “Undue influence refers to “the unconscious use of

power over another person, such power being obtained by virtue of a
present or previously existing dominating control arising out of relationship
between the parties.”

According Sec. 16 (1) “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.”

A person is deemed to be in a position to dominate the will of other –

a) Where he holds a real or apparent authority over the other or where he

stands in a fiduciary relation to the other; or

b) Where he makes a contract with a person whose mental capacity is

temporarily or permanently affected by reason of age, illness or mental or
bodily distress;

c) Where a person who is in a position to dominate the will of another,

enters into a contract with him and the transaction appears to be
unconscionable. The burden of proving that such contract was not induced
by undue influence shall lie upon the person in a position to dominate the
will of the other.

Both coercion and undue influence are closely related. What contributes
coercion or undue influence depends upon the facts of each case.

Sec. 16 (i) provides that two important elements must be present. The first
one is that the relations subsisting between the parties to a contract are
such that one of them is in a position to dominate the will of the other.
Secondly, he uses that position to obtain unfair advantage over the other.
In other words, unlike coercion undue influence must come from a party to
the contract and not a stranger to it. Where the parties are not in equal
footing or there is trust and confidence between the parties, one party may
be able to dominate the will of the other and use that position to obtain an
unfair advantage. However, where there is no relationship shown to exist
from which undue influence is presumed, that influence must be proved.

Presumptions as to undue influence: Sec. 16 (2) mentions certain types

of relationships which give rise to presumptions of undue influence. They
are (i) parent and child (ii) guardian and ward (iii) trustee and beneficiary
(iv) religious advisor and disciple (v) doctor and patient (vi) solicitor and
client (vii) fiance and fiancee.

The presumption about undue influence is rebuttable one by proving that –

a) the person complaining of undue influence had independent advice.

b) Full disclosure of facts was made to him and he understood the same.

c) There was no undue influence and adequate consideration was there.

As regards the relationship between debtor and creditor, landlord and

tenants, mother and daughter, husband and wife, grandson and
grand/father there exists no presumption of undue influence. The party
avoiding the contract must prove the existence of undue influence.

Contracts with pardanashin women: A pardanashin woman is one who

according to the customs of her community lives in complete seclusion.
The law presumes undue influence in the case of a contract with a
pardanashin women. Ordinary presumption is that a person who signs a
document understands its contents. But as regards a pardanashin woman
this presumption does not hold good. The burden of proof lies on the other
party to show that there was no undue influence, that the party understood
the contents and the effects of the document upon her interests.

Unconscionable or catching bargains: When a dominant party enters

into contract with a weaker party, he may take undue advantage or that
others ignorance, infirmity or impaired bargaining power. Such contracts
are known as unconscionable contracts.

Sec. 16 (3) lays down that in the case of unconscionable bargain the onus
of proof that the transaction was not induced by undue influence is on the
person who is in a dominating position in relation to the other party to the
contract.

Coercion and undue influence distinguished:

1. In the case of coercion, contract is obtained by committing or

threatening to commit an act punishable under Indian Penal Code. In
the case of undue influence the consent is obtained by dominating
the will of the other.
2. Coercion involves physical force. Undue influence involves moral
force.
3. Coercion may proceed from a stranger and may be directed against a
stranger. Undue influence must proceed from a party to the contract.
4. There is no presumption as regards coercion. On the other hand law
presumes undue influence in certain circumstances.
5. The offence may be committed in or outside India in order to render it
coercion. Undue influence must be exercised in India.
6. Coercion affects provisions of Indian Penal Code. There is no
criminal liability for undue influence.
7. The party avoiding a contract under coercion has to restore any
benefit he received under the contract to the other party. Under
undue influence the party avoiding the contract may or may not be
directed by the court to do so.

Fraud:

A false statement made knowingly or without belief in its truth or recklessly

careless whether it be true or false is called fraud.

Sec. 17 of the Act instead of defining fraud gives various acts which
amount to fraud.

Sec. 17: Fraud means and includes any of the following acts committed by
a party to a contract or with his connivance or by his agent to induce him to
enter into contract:

1. The suggestion that a fact is true when it is not true by one who does
not believe it to be true. A false statement intentionally made is fraud.
An absence of honest belief in the truth of the statement made is
essential to constitute fraud. The false statement must be made
intentionally.
 2. The active concealment of a fact by a person who has knowledge or
belief of the fact. Mere non-disclosure is not fraud where there is no
duty to disclose.
3. A promise made without any intention of performing it.
4. Any other act fitted to deceive. The fertility of man’s invention in
devising new schemes of fraud is so great that it would be difficult to
confine fraud within the limits of any exhaustive definition.
5. Any such act or omission as the law specially declares to be
fraudulent.

Essentials of fraud:

1. Making a false suggestion: There should be a false suggestion by a

party who knows it to be false or the statement must have been made
recklessly without caring to know its truthfulness. The false
suggestion can be made by conduct of the party.
2. The representation must be of a fact. The false suggestion or
representation must be of a fact and not of opinion or intention.
Commendatory explanations as found in advertisements that a ’soap
washes whiter than white’ do not constitute representations of fact. It
is usual for a trader to praise his own goods.
3. Active concealment of facts amounts to fraud: Instead of making a
false representation a person may conceal a material fact which
according to him, if stated, would be disadvantageous to him, such
concealment of fact amounts to suppression of truth.
4. A promise made without any intention of performing it: A promise
includes a representation to the effect that the promisor has the
intention of performing it. So if a party makes a promise without
having any intention of performing it, he commits fraud e.g., buying
goods with no intention of paying for the same.
5. Any other act filled to deceive: Sec. 17 (4) brings within the purview of
Sec.17 all such acts which though apparently amount to
misrepresentation of fact, may amount to fraud considering the facts
of the case.
6. Any act of omission which the law specifically declares to be
fraudulent.
7. Misrepresentation should be addressed to the party misled: The idea
behind making misrepresentation should be that the other person
must act upon it. Once it is shown that the misrepresentation was
addressed to him, it becomes fraud if the person acts upon it though
 the person making representation may say that he did not intend that
the person to whom it was addressed, should act upon it.
8. The representation must induce the contract: The person to whom
the representation is made should rely upon the same and should
enter into a contract. A false representation is merely irrelevant if it
has not induced the party to whom it was made to act upon it by
entering into a contract.
9. The party acting on the representation should have been deceived
and suffered damage. The aggrieved party can not set aside the
contract if he has not sustained damage. If one knows that he is
going to be deceived later he cannot complain of being deceived by
entering into contract.

Silence – whether fraud? While active concealment of a material fact is

fraud, silence is not fraud except under two circumstances. There is no
general duty cast upon a party to a contract to disclose to the other party
material facts within his knowledge, but are unknown to the other party.
This principle is known as ‘Caveat Emptor’ (let the buyer beware) in
contracts of sale of goods. However, under the following two circumstances
silence would amount to fraud:

a) Circumstances of the case cast a duty upon the person keeping silence
to speak and (b) silence itself is equivalent to speech.

Duty to speak arises when the parties to a contract are in fiduciary

relationships. Such contracts are known as uberrimae fide contracts, the
most common examples being insurance contracts, contracts of surety
ship, releases or compromises.

When a person is under no duty to speak, he may become guilty of fraud

by non-disclosure, if he voluntarily discloses something and then stops half
the way.

4. Misrepresentation:

Before entering into a contract, the parties will make certain statements
inducing the contract. Such statements are called representation. A
representation is a statement of fact made by one party to the other at the
time of entering into contract with an intention of inducing the other party to
enter into the contract. If the representation is false or misleading, it is
known as misrepresentation. A misrepresentation may be innocent or
intentional. An intentional misrepresentation is called fraud and is covered
under Section 17. Sec. 18 deals with an innocent misrepresentation.

Sec. 18 misrepresentation means and includes (i) the positive assertion in

a manner not warranted by the information of the person making it, of that
which is not true, though he believed it to be true. (ii) any breach of duty
which, without an intent to deceive, gains an advantage to the person
committing it, by misleading another to his prejudice. (iii) by causing
however innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.

1. Positive assertion of a fact: A person might have received

information from an untrustworthy source or hear-say. But he may
assert positively that a particular fact concerning the subject matter of
the agreement is true. Then he is said to have misrepresented the
fact. A false statement need not be made direct to the plaintiff. It is
sufficient if it is made to a third party so that the plaintiff becomes
aware of it. However, if the misrepresentation has not been embodied
in the contract it creates no contractual obligation unless it turns out
to be fraudulent.
2. Breach of duty: A person may commit breach of duty without any
intention to deceive the other party thus gaining an unfair advantage
over the other. When a party to the contract has a duty to disclose all
the material facts concerning the subject matter of the contract, but
does not do so, he is said to be guilty of misrepresentation. A
representation may be true at the time of making it, but later becomes
false. This should also be disclosed before the contract is entered
into.
3. Causing mistake about the subject matter: If a party to an
agreement induces the other to commit mistake as to the nature or
quality of the subject matter of the agreement, he is guilty of
misrepresentation.

Distinction between fraud and misrepresentation:

1. In misrepresentation the person making the false statement honestly

believes it to be true. In fraud, the false statement is made by person
who knows that it is false or he does not care to know whether it is
true or false.
 2. There is no intention to deceive the other party when there is
misrepresentation of fact. The very purpose of fraud is to deceive the
other party to the contract.
3. Misrepresentation renders the contract voidable at the option of the
party whose consent was obtained by misrepresentation. In the case
of fraud the contract is voidable. It also gives rise to an independent
action in tort for damages.
4. Misrepresentation is not an offence under Indian Penal Code and
hence not punishable. Fraud, in certain cases is a punishable offence
under Indian Penal Code.
5. Generally, silence is not fraud except where there is a duty to speak
or the relation between parties is fiduciary. Under no circumstances
can silence be considered as misrepresentation.
6. The party complaining of misrepresentation cann’t avoid the contract
if he had the means to discover the truth with ordinary deligance. But
in the case of fraud, the party making a false statement cannot say
that the other party had the means to discover the truth with ordinary
deligance.

5. Mistake:

Usually, mistake refers to mis-understanding or wrong thinking or wrong

belief. But legally, its meaning is restricted and is to mean “operative
mistake”. Courts recognise only such mistakes which invalidate the
contract. Mistake may be mistake of fact (either unilateral or bilateral) or
mistake of law (either Indian law or foreign law).

Sec. 20 “Where both parties to an agreement are under a mistake as to a

matter of fact essential to the agreement, the agreement is void.”

Sec. 21 “A contract is not voidable because it was caused by a mistake as

to any law in force in India; but a mistake as to a law not inforce in India
has the same effect as a mistake of fact.”

Bilateral mistake: Sec. 20 deals with bilateral mistake. Bilateral mistake is

one where there is no real correspondence of offer and acceptance. The
parties are not really in consensus-ad-idem. Therefore there is no
agreement at all.

A bilateral mistake may be regarding the subject matter or the possibility of

performing the contract.
Mistake as to the subject matter: This mistake arises when the parties to
the contract assume at the time of making the contract, that a certain state
of things exists, but in reality it does not exist. Such a mistake may relate to
–

(i) Existence of the subject matter: Two parties may enter into the
contract on the assumption that the subject matter exists at the time
contract. But actually it may have ceased to exist or has never existed
at all. Then the contract becomes void.

(ii) Identity of the subject matter: A mutual mistakes as to the identity

of subject matter renders the contract void.

(iii) A mistake as to the quality of the subject matter will not render the
agreement void owing to the application of the principle of ‘caveat
emptor’ unless there is misrepresentation or guarantee by the seller.

(iv) Price of the subject matter: An explanation to Sec. 20 provides

that “an erraneous opinion as to the value of the thing which forms the
subject matter of the agreement is not to be deemed a mistake as to a
matter of fact.” A mistaken notion about the value of a thing bought or
sold may be unilateral or bilateral. If it is unilateral, the buyer or seller
has to presume that he has made a bad bargain.

Where the mistake is mutual and the parties enter into the contract with
false assumption and mistake as to the value of the subject matter is
the basis of their agreement, there can’t be an enforceable contract
between them.

(v) Title of the subject matter: If a person agrees to purchase

property which is unknown to himself and the seller is his own already,
the contract may be void. A mistake as to the title does not invalidate a
contract since Sec. 14 of the Sale of Goods Act imposes an implied
condition as to the title of the seller. Where there is no such warrantee
or the buyer purchases his own property the agreement will be void-ab-
initio.

(vi) A false and fundamental assumption: A false and fundamental

assumption going to the root of the contract would render the contract
invalid.
Mistake as to the possibility of performance: There may not be any
possibility of the performance of the contract. This impossibility of
performance may be physical or legal impossibility. However, impossibility
of performance cannot be included under the head bilateral mistake as
there is Sec. 56 which lays down a positive rule of law regarding
responsibility.

Unilateral mistakes: Mistake of one of the parties to a contract as to a

matter of fact is known as unilateral mistake. Sec. 22 provides that a
contract is not voidable merely because it was caused by unilateral
mistake. A person is bound by an agreement to which he has expressed a
clear assent unless the unilateral mistake is caused by misrepresentation
or fraud.

However, where consent to an agreement is given by a party to it under

mistake which prevents the formation of a contract, the unilateral mistake
multifies the consent and the contract becomes void. The following are
such exceptional cases:

(a)Mistake as to identity: It is a rule of law that if a person intends to

contract with A, B cannot give himself any right under it. An offer can be
accepted only by the person to whom it is offered. If it is accepted by
someone else, there arises a unilateral mistake rendering the contract void.

 Mistake as to identity is of two types: (i) where the parties are dating with
each other from a distance (ii) where they are face to face with each other.

(b)Mistake as to the character of a written document: If a person signs

a document under the mistaken impression that he is signing a document
of a different nature altogether he may escape liability in the document
signed by him, provided he can prove that the nature of the document is
different from what it is supposed to be. One party to a contract may not
disclose to the other the nature of the document and induce the other to
sign the same. The other party may sign it presuming it to be a document
of different nature. In such a case, the contract becomes wholly void for
want of consent.

(c)Mistake of law: A mistake of law may be of law of land or of foreign law.

Mistake as to the law of the land does not render the contract voidable as
‘ignorance of law is no excuse’.
Q.2 Define negotiable instrument. What are its features and
characteristics? Which are the different types of negotiable instruments? If
Mr. A is the holder of a negotiable instrument, under what situations
i. Will he be the Holder in due course?
ii. He has the right to discharge?
iii. He can make endorsements?

ANSWER:

Negotiable instruments are the most common credit devices used in

modern business. They are basically written promises or orders to pay
money, and may be transferred from person to person. The law relating to
negotiable instruments is contained in the Negotiable Instruments Act,
1881. The chief objective of this Act is to legalize the system under which
negotiable instruments pass from hand to hand in negotiation like ordinary
goods. The Act is based on the principles of English Law. In fact the law of
negotiable instruments is not the law of a single country but of the whole of
the commercial world and the general rule of the law will be of the same
pattern in all the countries.

Negotiable Instruments Act

The law relating to “Negotiable Instruments” is contained in the Negotiable

Instruments Act, 1881, as amended up-to-date. It deals with three kinds of
negotiable instruments, i.e., Promissory Notes, Bills of Exchange and
Cheques. The provisions of the Act also apply to ‘hundis’ (an instrument in
oriental language), unless there is a local usage to the contrary. Other
documents like treasury bills, dividend warrants, share warrants, bearer
debentures, port trust or improvement trust debentures, railway bonds
payable to bearer etc., are also recognized as negotiable instruments either
by mercantile custom or under other enactments like the Companies Act,
and therefore, Negotiable Instruments Act is applicable to them.

Definition & Features

The word ‘negotiable’ means ‘transferable by delivery’, and the word

‘instrument’ means ‘a written document by which a right is created in favor
of some person’. Thus, the term ‘negotiable instrument’ literally means ‘a
written document transferable by delivery’.
According to Section 13 of the Negotiable Instruments Act, “a negotiable
instrument means a promissory note, bill of exchange or cheque payable
either to order or to bearer.” The Act, thus, mentions three kinds of
negotiable instruments, namely notes, bills and cheques and declares that
to be negotiable they must be made payable in any of the following forms:

a)Payable to order: A note, bill or cheque is payable to order which is

expressed to be ‘payable to a particular person or his order’. But it
should not contain any words prohibiting transfer, e.g., ‘Pay to A only’ or
‘Pay to A and none else’ is not treated as ‘payable to order’ and
therefore such a document shall not be treated as negotiable instrument
because its negotiability has been restricted. There is, however, an
exception in favor of a cheque. A cheque crossed “Account Payee only”
can still be negotiated further; of course, the banker is to take extra care
in that case.

b) Payable to bearer: ‘Payable to bearer’ means ‘payable to any person

whom so ever bears it.’ A note, bill or cheque is payable to bearer which
is expressed to be so payable or on which the only or last endorsement
is an endorsement in blank. The definition given in Section 13 of the
Negotiable Instruments Act does not set out the essential characteristics
of a negotiable instrument. Possibly the most expressive and all-
encompassing definition of negotiable instrument had been suggested
by Thomas which is as follows:

 ”A negotiable instrument is one which is, by a legally recognized custom

of trade or by law, transferable by delivery or by endorsement and
delivery in such circumstances that (a) the holder of it for the time being
may sue on it in his own name and (b) the property in it passes, free
from equities, to a bonafide transferee for value, notwithstanding any
defect in the title of the transferor.”

Characteristics of Negotiable Instruments:

An examination of the above definition reveals the following essential

characteristics of negotiable instruments which make them different from
an ordinary chattel:

1. Easy negotiability: They are transferable from one person to

another without any formality. In other words, the property (right of
ownership) in these instruments passes by either endorsement or
 delivery (in case it is payable to order) or by delivery merely (in case
it is payable to bearer), and no further evidence of transfer is needed.
2. Transferee can sue in his own name without giving notice to the
debtor: A bill, note or a cheque represents a debt, i.e., an “actionable
claim” and implies the right of the creditor to recover something from
his debtor. The creditor can either recover this amount himself or can
transfer his right to another person. In case he transfers his right, the
transferee of a negotiable instrument is entitled to sue on the
instrument in his own name in case of dishonor, without giving notice
to the debtor of the fact that he has become holder.
3. Better title to a bonafide transferee for value: A bonafide
transferee of a negotiable instrument for value (technically called a
holder in due course) gets the instrument ‘free from all defects.’ He is
not affected by any defect of title of the transferor or any prior party.
Thus, the general rule of the law of transfer applicable in the case of
ordinary chattels that ‘nobody can transfer a better title than that of
his own’ does not apply to negotiable instruments.

Examples of Negotiable Instruments: The following instruments have

been recognized as negotiable instruments by statute or by usage or
custom: (i) Bills of exchange; (ii) Promissory notes; (iii) Cheques; (iv)
Government promissory notes; (v) Treasury bills; (vi) Dividend warrants;
(vii) Share warrants; (viii) Bearer debentures; (ix) Port Trust or
Improvement Trust debentures; (x) Hundis; (xi) Railway bonds payable to
bearer, etc.

Promissory Note-Definition & Essentials

Definition: According to Section 4 “a promissory note is an instrument in

writing (not being a bank note or a currency note) containing an
unconditional undertaking signed by the maker, to pay a certain sum of
money only to, or to the order of a certain person, or to the bearer of the
instrument.”

Essentials of a Promissory Note: From the definition given in the Act it

follows that to be a valid promissory note an instrument must fulfill the
following essential requirements:

1. It must be in writing: A promissory note has to be in writing. An oral

promise to pay does not become a promissory note. The writing may
 be on any paper, on any book. It may be in pencil or in ink and
includes printing or typing. No particular form of words is necessary,
even a promise contained in a letter will suffice, provided the other
requirements of Section 4 are complied with. The following is the
usual form of a promissory note:

1. It must contain a promise or undertaking to pay : There must be a

promise or an undertaking to pay. The undertaking to pay may be
gathered either from express words or by necessary implication. A
mere acknowledgement of indebtedness is not a promissory note,
although it is valid as an agreement and may be sued upon as such.
2. The promise to pay must be unconditional : A promissory note
must contain an unconditional promise to pay. The promise to pay
must not depend upon the happening of some uncertain event i.e., a
contingency or the fulfillment of a condition. If an instrument contains
a conditional promise to pay, it is not a valid promissory note.
3. It must be signed by the maker : It is imperative that the promissory
note should be duly authenticated by the ’signature’ of the maker.
4. The maker must be a certain person : The instrument itself must
indicate with certainty who is the person or are the persons engaging
himself or themselves to pay.
5. The payee must be certain : Like the maker the payee of a
promissory note must also be certain.
6. The sum payable must be certain: For a valid promissory note it is
also essential that the sum of money promised to be payable must be
certain and definite.
7. The amount payable must be in legal tender money of India : A
document containing a promise to pay a certain amount of foreign
money or to deliver a certain quantity of goods is not a promissory
note.
8. Other formalities: Though it is usual and proper to state in a note the
place where it is made and the date on which it is made but their
omission will not render the instrument invalid. But a promissory note
must be properly stamped as required by the Indian Stamp Act and
 each stamp must also be duly cancelled. The maker’s signature with
the date across the stamp cancels the stamp effectively. Although an
unstamped or inadequately stamped promissory note is invalid, but
the amount of loan can be recovered if proved otherwise.

Bill of Exchange-Definition & Essentials

Definition: Section 5 of the Negotiable Instruments Act defines a bill of

exchange as follows: “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.”

Parties to a bill of exchange: There are three parties to a bill of exchange

viz., drawer, drawee and payee. The person who makes the bill is called
the ‘drawer’. The person who is directed to pay is called the ‘drawee.’ The
person to whom the payment is to be made is called the ‘payee’. The
drawer, or if the bill is endorsed to the payee, the endorsee, who is in
possession of the bill is called the ‘holder’. The holder must present the bill
to the drawee for his acceptance. When the drawee accepts the bill, by
writing the words ‘accepted’ and then signing it, he is called the ‘acceptor’.

Drawee in case of need: Sometimes the name of another person may be

mentioned in a bill of exchange as the person who will accept the bill, if the
original drawee does not accept it. Since another person so named is to be
approached in case of need, he is known as “drawee in case of need.”

Acceptor for honour: When a bill of exchange has been noted or

protested for non-acceptance or for better security and any person accepts
it supra protest for honour of the drawer or of any one of the endorsers,
such person is called an “acceptor for honour”.

Essentials of a Bill of Exchange: To be a valid bill of exchange an

instrument must comply with the requirements of the definition given in
Section 5, which are as follows:

1. It must be in writing.
2. It must contain an order to pay. A mere request to pay on account will
not amount to an order.
3. The order to pay must be unconditional.
4. It must be signed by the drawer.
 5. The drawer, drawee and payee must be certain.
6. The sum payable must be certain.
7. The bill must contain an order to pay money only.
8. It must comply with the formalities as regards date, consideration,
stamps, etc.  

Specimen of a bill of exchange:

Cheque- Definitions & Distinction between a Cheque and a Bill of

Exchange

Definition: “A cheque is a bill of exchange drawn on a specified banker

and not expressed to be payable otherwise than on demand.” Thus, a
cheque is a bill of exchange with two distinctive features, namely: (i) it is
always drawn on a bank, and (ii) it is always payable on demand.

Distinction between a Cheque and a Bill of Exchange: Although a

cheque, being a species of a bill of exchange, must satisfy almost all the
essentials of a bill, e.g., signed by the drawer, containing an unconditional
order, to pay a certain sum of money, to the order of a person or the
bearer, etc., yet there are few points of difference between the two, namely:

1. A cheque is always drawn on a banker, while a bill may be drawn on

any person, including a banker.
2. A cheque can only be drawn payable on demand, whereas a bill may
be drawn payable on demand or on the expiry of a certain period
after date or sight.
3. A cheque drawn ‘payable to bearer on demand’ is valid but a bill
drawn ‘payable to bearer on demand’ is absolutely void and illegal.
4. A cheque does not require any acceptance by the drawee before
payment can be damanded. But a bill requires acceptance by the
drawee before he can be made liable upon it.
 5. A cheque does not require any stamp, whereas a bill of exchange
must be properly stamped.
6. Three days of grace are allowed while calculating the maturity date in
the case of time bills (i.e., bills drawn payable after the expiry of a
certain period). Since a cheque is always payable on demand, there
is no question of allowing any days of grace.
7. Unlike cheques, a bill of exchange cannot be crossed.
8. Unlike cheques, the payment of a bill cannot be countermanded by
the drawer.
9. Unlike bills, there is no system of Noting or Protest in the case of a
cheque.
10. The drawer of a bill is discharged from liability, if it is not duly
presented for payment, but the drawer of a cheque will not be
discharged by delay of the holder in presenting it for payment, unless
through the delay, the drawer has been injured, e.g., by the failure of
the bank the drawer has lost the money which would have otherwise
discharged the amount of the cheque. However, where the drawer is
so discharged, the payee may rank as creditor of the bank for the
amount of the cheque.

Bank Draft and Hundis

A bank draft is an order issued by one bank on another bank or on its own
branch (usually drawn on its own branch) instructing the latter to pay a
specified sum of money to a specified person or his order. It is a negotiable
instrument and is very much like a cheque, with the following distinctions:

a) It can be drawn only by a bank on another bank or on its another branch

and not by an individual as in the case of a cheque.

b) It cannot so easily be countermanded as a cheque.

c) It cannot be made payable to bearer.

Hundis: Hundis are negotiable instruments written in Hindustani language.

Sometimes they are in the form of promissory notes but usually they are
like bills of exchange in form and substance. The provisions of the
Negotiable Instruments Act apply to Hundis unless there is a local usage to
the contrary. They are quite popular among the Indian merchants from the
very old days.
If Mr. A is the holder of a negotiable instrument, under what situations
1. Will he be the Holder in due course?

ANSWER:

The ‘holder in due course’ means any person who for consideration
became the possessor of a negotiable instrument if payable to bearer, or
the payee or indorsee thereof if payable to order, before the amount
mentioned in it became, payable, and without sufficient cause to believe
that any defect existed in the title of the person from whom he derived his
title. Thus, in order to be called a ‘holder in due course’ a person must
possess the following qualifications:

1. He must be a ‘holder’ i.e., he must be entitled to the possession of

the instrument in his own name under a legal title and to recover the
amount thereof from the parties liable thereto.
2. He must be a holder for valuable consideration i.e., there must be
some consideration to which law attaches value. The consideration,
however, need not be adequate. A donee, who acquires title to the
instrument by way of gift, is not a holder in due course for want of
consideration, although he is a holder. The consideration must also
be lawful.
3. He must have become the holder of the negotiable instrument before
its maturity. The holder who acquires a negotiable instrument after
maturity cannot be a holder in due course. In case of instruments
payable on demand, e.g., a cheque, he must have taken the
instrument within a reasonable time of its issue.
4. He must take the negotiable instrument complete and regular on the
face of it. It is the duty of every person who takes a negotiable
instrument to examine its form and contents thoroughly, for if it
contains any material alteration which has not been confirmed by the
drawer through his signature, or if it is incomplete, say, drawer’s
name is not there or it is not properly stamped, he will not become a
holder in due course.
5. He must have become holder in good faith without having sufficient
cause to believe that any defect existed in the title of the transferor.
He must exercise great care and take all necessary precautions in
finding out if the transferor’s title was defective. He must take the
instrument without any negligence on his part.
ii. He has the right to discharge?

ANSWER:

A negotiable instrument is said to be discharged when it becomes

completely useless, i.e., no action on that will lie, and it cannot be
negotiated further. After a negotiable instrument is discharged the rights
against all the parties thereto comes to an end, and no party, even a holder
in due course, can claim the amount of the instrument from any party
thereto.
Discharge of the party primarily and ultimately liable on the instrument
results in the discharge of the instrument itself. For example, in the
following cases and instrument is deemed to be discharged:

1. When the party primarily liable on the instrument (i.e., the maker of
the note, acceptor of the bill or drawee bank) makes the payment in
due course to the holder at or after maturity. A payment by a party
who is secondarily liable does not discharge the instrument because
in that case the payer holds it to enforce it against prior indorser and
the principal debtor.
2. When a bill of exchange which has been negotiated is, at or after
maturity, held by the acceptor in his own right, the instrument is
discharged.
3. When the party primarily liable becomes insolvent, the instrument is
discharged and the holder cannot make any other prior party liable
thereon. Similarly, an instrument stands discharged when the primary
party liable is discharged by material alteration in the instrument or by
lapse of time making the debt time barred under the Limitations Act.
4. When the holder cancels the instrument with an intention to release
the party primarily liable thereon from the liability, the instrument is
discharged and ceases to be negotiable.

iii. He can make indorsements?

ANSWER:

“When the maker or holder of a negotiable instrument signs the same,

otherwise than as such maker, for the purpose of negotiation, on the back
or face thereof or on a slip of paper annexed thereto, or so signs for the
same purpose a stamped paper intended to be completed as negotiable
instrument, he is said to indorse the same, and is called the indorser.”

Thus, an indorsement consists of the signature of the holder usually made

on the back of the negotiable instrument with the object of transferring the
instrument. If no space is left on the back of the instrument for the purpose
of indorsement, further indorsements are signed on a slip of paper attached
to the instrument. Such a slip is called ‘allonge’ and becomes part of the
instrument. The person making the indorsement is called an ‘indorser’ and
the person to whom the instrument is indorsed is called an ‘indorsee.’

Q.3. a. Distinguish between guarantee and indemnity.

ANSWER:

Distinction between Indemnity and Guarantee

  Indemnity   Guarantee
1 Number of parties: There are two 1 There are three parties to it viz., the principal
. parties: Indemnifier and Indemnified. . debtor, the surety & the creditor.

  Number of Contracts: There is only   Three contracts: (i) between the principal
one contract between the indemnified debtor and the creditor, (ii) between the surety
  and Indemnifier.   and the creditor, and (iii) between the surety
and the principal debtor (implied).
2 Form: May be written or oral in both 2
. Indian and English Law. . According to section 4, of the Statute of Frauds
(in England) it should be in writing: in Indian
  Interest in the transaction: The   Law it may be written or oral.
indemnifier has interest in the
  transaction apart from the indemnity   The guarantee is totally unconnected with the
i.e., apart from his promise to pay the contract but the only interest in the contract
3 loss.  
. is his promise to the loss.
Nature of risk: It is possibility of risk  
  of any loss happening in future against There is an existing debt the discharge or
which the indemnifier undertakes to   performance of which is guaranteed by the
4 indemnify surety i.e., it is the absolute and subsisting risk.
. 3
In a guarantee the liability of the surety is co-
  i.e., continuing risk. . extensive with that of the principal debtor
(ancillary liability). The guarantor if
  Nature of liability: The indemnifier is   secondarily liable except where the principal
primarily and independently liable. debtor is incapable of contracting).
   
Subrogation: An indemnifier cannot If a surety pay the debt or perform the
5 have subrogation unless there is an   obligation he can file a suit in his own name
. assignment. Otherwise he must bring against the principal debtor to reimburse the
the suit in the name of the 4 amount so paid.
  indemnified. .
It is necessary for the surety to give his
  Request: It is not necessary for the   guarantee at the request of the debtor.
indemnifier to act the request of the
  indemnified.  

   

6 5
. .

   

   

7 6
. .

   

   

   

   

8  
.
 

7
.

 
  

8
.

b. Give a short note on Rights of Surety.

ANSWER:

Rights of Surety

Rights of Surety

A. Rights of Surety against the Creditor

1. Ask the creditor to sue the debtor: On the guaranteed debt having
fallen due for payment, the surety may ask the creditor to sue the
debtor to collect the due amount, but he cannot compel him to do so.
But he must then indemnify the creditor against any risk or delay
arising as a consequence.
2. Require the creditor to terminate the debtor’s services: In the
case of the fidelity guarantee, if the principal debtor’s dishonesty
comes to light, the surety can require the creditor to terminate the
principal debtor’s services so as to save him from further loss.
 3. Claim to any set off: The surety on being called upon to pay, can
claim any set-off to which the principal debtor is entitled from the
creditor.
4. Access to the securities of the debtor with the creditor: The
surety can, after paying the guaranteed debt, compel the creditor to
assign to him all the securities taken by the creditor either before or at
the time of the contract of guarantee, whether the surety was aware
of them or not.
5. Right to Share Reduction: On debtor’s insolvency the surety is
entitled to claim the proportionate reduction of his liability by the
amount of dividend claimed by the creditor (from the Official Receiver
of the Principal debtor). Similarly, debtor’s debt obligation is scaled
down by subsequent legislation; the creditor is entitled to claim
proportionate reduction in his liability.

B. Against the Principal Debtor

1. Right of subrogation: After paying the guaranteed debt, the surety

steps into the shoes of the creditor and acquires all the rights which
the latter had against the principal debtor (i.e., he gets subrogated to
all the rights and remedies available to the creditor) (Sec. 140). If the
creditor has the right to stop goods in transit or has a lien, the surety,
on payment of all he is liable for, will be entitled to exercise these
rights.
2. Right as to securities with the creditor: The surety has the right to
proceed against such securities of the principal debtor, as the creditor
could himself proceed.
3. Right of indemnity: The surety is entitled to be indemnified by the
principal debtor for all payments rightfully made by him (Sec. 145).
4. Compel the principal debtor to perform the promise: The surety
has also the right to insist the principal debtor to perform the promise.
The surety can, before making payment, compel the debtor to relieve
him from liability by paying of the debt, provided that liability is an
ascertained and subsisting one.
5.  Prove the debt in case of bankruptcy of the debtor: In case of the
bankruptcy of the principal debtor, the surety may prove the debt in
respect of contingent ability even if he has not been called upon to
pay a definite amount.

C. Against Co-sureties
When two or more persons guarantee the same debt jointly or severally,
whether under the same or different contracts, they are known as co-
sureties. As the co-sureties share the liabilities, they have in equity also the
right to share the means of recovery.

1.    Right to share the Securities Ratably (Proportionately): If they are

liable in equal amounts, they will be entitled to share equally the securities
belonging to the principal debtor in possession of the creditor. In case their
liabilities are unequal, they will share the securities ratably.

2.    Right to contributions: If any one of the sureties has to pay more than
his share, he has a right to call upon his co-sureties for such contribution as
will enable him to recoup himself to the extent of excess amount paid by
him over and above his proportionate liability.

3.    Right to counter-security: Co-surety has also the right to benefit of a

counter-security given to another surety by the principal debtor.

4.    Right to plead the co-sureties and debtor in one suit: It is open to a

surety to implead the co-sureties as well as the principal debtor in one suit.
Where one surety has paid more than his proportionate share the proper
procedure is to file a suit for contribution against his co-surety making the
principle debtor also a party thereto.

Rights of the Creditor against Surety

1. Demand payment when due: As the liability of the surety arises, the
creditor is entitled to demand payments from the surety although the debt is
time-barred against the principal debtor (Bombay Dyeing and
Manufacturing Co. Ltd. Vs. State of Bombay, 1985) or principal debtor has
been adjudged as bankrupt or the principal debtor’s contract is void or
voidable. He can file a suit against the surety without suing the principal
debtor even if the principal debtor is solvent. The liability of the surety is
immediate and not be deferred until the creditor has exhausted his
remedies against the principal debtor.

2. Proceed against surety before resorting to debtor’s securities: A

creditor can directly proceed against the surety before resorting to the
securities deposited by the principal debtor. This is feasible although the
liability of the surety becomes the primary one along with the principal
debtor. Of course, a contract may specifically provide that the creditor must
exhaust his remedies against the principal debtor or give notice of default
or proceed against the securities.

3. Claim for legal expenses: A creditor can claim the cost of baseless
legal suit against the principal debtor, sued at the request of the surety i.e,
the right of indemnity.

4. Prove against the official receiver in case of surety’s insolvency: If

the surety becomes insolvent, the creditor has the right to recover the dues
from the estate of the insolvent party.

5. Proceed against any one surety in the case of co-sureties: In case of

co-sureties, the creditor will be at liberty to proceed against any one of the
sureties for the whole debt because the liability of sureties is joint and
several.

6. Concurrent remedy: A creditor may also pursue his remedy

concurrently against both the principal debtor and the surety, and obtain a
degree against both in the same suit.

Rights of Co-sureties among themselves

1.Co-sureties have liabilities among themselves under Sec. 132:

Where two persons contract with a third person to undertake a certain
liability, and also contract with each other that one of them shall be liable
only on the default of the other, the third party not being a party to such a
contract, the liability of each of such two persons to the third person under
the first contract is not affected by the existence of the second contract,
although such third person may have been aware of its existence.

2. Release: Where there are co-sureties, a release by the creditor of one of

them does not discharge the other neither does it free surety so released
from responsibility to other sureties (Sec.138).

3. Contribution: Co-sureties are liable to contribute equally if there is more

than one surety in respect of one debt, though contracted on different dates
unless contracted otherwise (Sec. 146).

4. Equality: Where the sureties are bound in different sum, they are bound
to pay equally as far as the limits of their respective obligations permit (Sec.
147).
Liabilities of Co-sureties

Co-sureties are jointly and severally liable in India. The discharge of one
co-surety from his liability does not release the other co-sureties from their
liability. They are liable to bear the loss equally, subject to the limit of the
debt guaranteed by him. As mentioned earlier, if one of them has paid
more than his share, he can claim contribution from others. Where the co-
sureties have limited their liabilities to different sums, they should contribute
equally and not exceeding their respective limits.

Discharge of Surety

Discharge of surety means he is freed from his obligations. This can

happen in various ways, either by the action of the surety himself or by the
creditor or by the principal debtor or by both or by operation of law.

A. From the side of the Principal Debtor/Surety

1. Payment by debtor

2. Revocation

3. Death

4. General rules of contract

B. From the side of the Creditor

5. Variation in the term of the contract

6. Release or discharge of debtor by creditor

7. Compounding with the principal debtor by creditor or extending time for

payment.

8. Agreement not to sue debtor

9. Creditor’s omission impairing surety’s remedy.

C. From the side of the Contract itself

The surety is liable under the guarantee only if the contract of guarantee is
valid. If the contract of guarantee is invalid, then the surety will not be liable
i.e., he will be discharged from his liabilities. Thus, where a guarantee is
obtained by coercion, undue influence, fraud etc., then it will not be valid
and the surety is not be liable under such a guarantee. The following are
the ways in which a contract of guarantee becomes invalid.

10.    Guarantee obtained by misrepresentation.

11.    Guarantee obtained by concealment.

12.    Failure of the co-surety to join with the contract (other sureties and
creditor).

13.    Failure of consideration.

Q.4. a. Mention the remedies for breach of contract. How will the injured
party claim it?

ANSWER:

Remedies for Breach of Contract

Whenever there is breach of a contract, the injured party becomes entitled

to any one or more of the following remedies against the guilty party:

1. Rescission of the contract.

2. Suit for damages.
3. Suit upon quantum merit.
4. Suit for specific performance of the contract.
5. Suit for an injunction.

As regards the last two remedies stated above, the law is regulated by the
Specific Relief Act, 1963.

1. Rescission of the contract: When there is a breach of contract by one

party, the other party may rescind the contract and need not perform his
part of obligations under the contract. But in case the aggrieved party
intends to sue the guilty party for damages for breach of contract, he has to
file a suit for rescission of the contract. When the court grants rescission,
the aggrieved party is free from all his obligations under the contract and
becomes entitled to compensation for any damage which he has sustained
through the non-fulfillment of the contract (Sec. 75).

2. Suit for damages: Damages are a monetary compensation allowed to

the injured party for the loss or injury suffered by him as a result of the
breach of contract. The fundamental principle underlying damages is not
punishment but compensation. By awarding damages the court aims to put
the injured party into the position in which he would have been, had there
been performance and not to punish the defaulting party. As a general rule,
“compensation must be commensurate with the injury or loss sustained,
arising naturally from the breach.” “If actual loss is not proved, no damages
will be awarded.”

Different kinds of damages: Damages may be of four kinds:

1. Ordinary or General or Compensatory damages (i.e., damages

arising naturally from the breach).
2. Special damages (i.e., damages is contemplation of the parties at the
time of contract).
3. Exemplary, Punitive or Vindictive damages.
4. Nominal damages.
5. Ordinary damages: When a contract has been broken, the injured
party can, as a rule, always recover from the guilty party ordinary or
general damages. These are such damages as may fairly and
reasonably be considered as arising naturally and directly in the usual
course of things from the breach of contract itself. In other words,
ordinary damages are restricted to the “direct or proximate
consequences” of the breach of contract and remote or indirect
losses, which are not the natural and probable consequence of the
breach of contract, are generally not regarded.
6. Special damages: Special damages are those which arise on
account of the special or unusual circumstances affecting the plaintiff.
In other words, they are such remote losses which are not the natural
and probable consequence of the breach of contract. Unlike ordinary
damages, special damages cannot be claimed as a matter of right.
These can be claimed only if the special circumstances which would
result in a special loss in case of breach of contract are brought to the
notice of the other party. It is important that such damages must be in
contemplation of the parties at the time when the contract is entered
 into. Subsequent knowledge of the special circumstances will not
create any special liability on the guilty party.
7. Exemplary or vindictive damages: These are such damages which
are awarded with a view to punish the guilty party for the breach and
not by way of compensation for the loss suffered by the aggrieved
party. As observed earlier, the cardinal principle of the law of
damages for a breach of contract is to compensate the injured party
for the loss suffered and not to punish the guilty party. Hence,
obviously, exemplary damages have no place in the law of contract
and are not recoverable for a breach of contract. There are, however,
two exceptions to this rule: (a) Breach of a contract to marry. In this
case the amount of the damages will depend upon the extent of injury
to the party’s feelings. (b) Dishonour of a cheque by a banker when
there are sufficient funds to the credit of the customer. In this case
the rule of ascertaining damages is, “the smaller the cheque, the
greater the damage.” Of course, the actual amount of damages will
differ according to the status of the party.
8. Nominal damages: Nominal damages are those which are awarded
only for the name sake. These are neither awarded by way of
compensation to the aggrieved party nor by way of punishment to the
guilty party. These are awarded to establish the right to decree for
breach of contract when the injured party has not actually suffered
any real damage and consist of a very small sum of money.

Duty to mitigate damage suffered: It is the duty of the injured party to

mitigate damage suffered as a result of the breach of contract by the other
party. He must use all reasonable means of mitigating the damage, just as
a prudent man would, under similar circumstances in his own case. He
cannot recover any part of the damage, traceable to his own neglect to
mitigate.

Liquidated damages and penalty: ‘Liquidated damages’ means a sum fixed

up in advance, which is a fair and genuine pre-estimate of the probable
loss that is likely to result from the breach. ‘Penalty’ means a sum fixed up
in advance, which is extravagant and unconscionable in amount in
comparison with the greatest loss that could conceivably be proved to have
followed from the breach.

Courts in England usually allow ‘liquidated damages’ as stipulated in the

contract, without any regard to the actual loss sustained. ‘Penalty’ clauses,
however, are treated as invalid and the courts in that case calculate
damages according to the ordinary principles and allow only reasonable
compensation.

Under the Indian Law the courts are not bound to treat the sum mentioned
in the contract, either by way of liquidated damages or penalty, as the sum
payable as damages for the breach. Instead the courts are required to
allow reasonable compensation so as to cover the actual loss sustained,
not exceeding the amount so named in the contract. The court will award to
the party aggrieved only reasonable compensation not exceeding the
amount named or penalty stipulated.

The principles governing the measure of damages discussed above may

be summarized as under:

1. The damages are awarded by way of compensation for the loss

suffered by the aggrieved party and not for the purpose of punishing
the guilty party for the breach.
2. The injured party is to be placed in the same position, so far as
money can do, as if the contract had been performed.
3. The aggrieved party can recover by way of compensation only the
actual loss suffered by him, arising naturally in the usual course of
things from the breach itself.
4. Special or remote damages i.e., damages which are not the natural
and probable consequence of the breach are usually not allowed until
they are in the knowledge of both the parties at the time of entering
into the contract.
5. The fact that damages are difficult to assess does not prevent the
injured party from recovering them.
6. When no real loss arises from the breach of contract, only nominal
damages are awarded.
7. If the parties fix-up in advance the sum payable as damages in case
of breach of contract, the court will allow only reasonable
compensation so as to cover the actual loss sustained, not exceeding
the amount so named in the contract.
8. Exemplary damages cannot be awarded for breach of contract except
in case of breach of contract of marriage or wrongful refusal by the
bank to honour the customer’s cheque.
9. It is the duty of the injured party to minimise the damage suffered.
 10. The injured party is entitled to get the costs of getting the decree for
damages from the defaulter party.

3. Suit upon quantum merit (Sections 65 and 70 ): The third remedy for a
breach of contract available to an injured party against the guilty party is to
file a suit upon quantum merit. The phrase quantum merit literally means
“as much as is earned” or “in proportion to the work done.” This remedy
may be availed of either without claiming damages (i.e., claiming
reasonable compensation only for the work done) or in addition to claiming
damages for breach (i.e., claiming reasonable compensation for part
performance and damages for the remaining unperformed part).

The aggrieved party may file a suit upon quantum merit and may claim
payment in proportion to work done or goods supplied in the following
cases:

1. Where work has been done in pursuance of a contract, which has

been discharged by the default of the defendant.
2. Where work has been done in pursuance of a contract which is
‘discovered void’ or ‘becomes void’.
3. When a person enjoys benefit of non-gratuitous act although there
exists no express agreement between the parties. One of such cases
is provided in Section 70 (other cases are covered under quasi-
contracts). Section 70 lays down that when services are rendered or
goods are supplied by a person, (i) without any intention of doing so
gratuitously, and (ii) the benefit of the same is enjoyed by the other
party, the latter must compensate the former or restore the thing so
delivered.
4. A party who is guilty of breach of contract may also sue on quantum
merit provided both the following conditions are fulfilled: (a) the
contract must be divisible and (b) the other party must have enjoyed
the benefit of the part which has been performed, although he had an
option of declining it.

4. Suit for specific performance: Specific performance means the actual

carrying out of the contract as agreed. Under certain circumstances an
aggrieved party may file a suit for specific performance, i.e., for a decree by
the court directing the defendant to actually perform the promise that he
has made. Such a suit may be field either instead of or in addition to a suit
for damages.
A decree for specific performance is not granted for contracts of every
description. It is only where it is just and equitable so to do, i.e., where the
legal remedy is inadequate or defective, that the courts issue a decree for
specific performance. It is usually granted in contracts connected with land,
buildings, rare articles and unique goods having some special value to the
party suing because of family association. In all these contracts monetary
compensation is not an adequate relief because the injured party will not be
able to get an exact substitute in the market.

Specific performance is not granted, as a rule, in the following cases:

i) Where monetary compensation is an adequate relief.

ii) Where the court cannot supervise the actual execution of the
contract, e.g., a building construction contract. Moreover, in most cases
damages afford an adequate remedy.

iii) Where the contract is for personal services, e.g., a contract to marry
or to paint a picture. In such contracts ‘injunction’ (i.e., an order which
forbids the defendant to perform a like personal service for other
persons) is granted in place of specific performance.

iv) Where the contract is not enforceable by either party against the
other, that is, where one of the parties does not possess competency to
contract. Thus a minor cannot succeed in an action for specific
performance since he cannot himself be sued for breach of contract.

5. Suit for an injunction: ‘Injunction’ is an order of a court restraining a

person from doing a particular act. It is a mode of securing the specific
performance of the negative terms of the contract. To put it differently,
where a party is in breach of a negative term of the contract (i.e., where he
is doing something which he promised not to do), the court may, by issuing
an injunction, restrain him from doing, what he promised not to do. Thus
‘injunction’ is a preventive relief. It is particularly appropriate in cases of
‘anticipatory breach of contract’ where damages would not be an adequate
relief.

b. What is the difference between anticipatory and actual breach?

ANSWER:
Q. 5 a. Explain the term Privity of contract.

ANSWER:

Privity of Contract

The general rule of law is that a person who is not a party to a contract
cannot claim any rights under the contract even though the contract is for
his benefit. Such a person is known as a stranger to the contract.

Though Indian Contract Act is silent about the position of a stranger to a

contract, the Privy Council and later the Supreme Court extended the
principle of the English Law to India.

Exceptions:

The rule discussed above has the following exceptions:

1. In the case of a trust or a charge: Where a trust is created by a

contract, the beneficiary can enforce his rights which the trust has
conferred upon him even though he is not a party to the contract
creating the trust.
2. In the case of acknowledgement or estoppel: Wherein a contract
between two parties, the promisee may be required to make a
payment to a third party. The promisor may acknowledge the
payment by conduct or otherwise to the third party. Then the third
party can sue the promisor though there is no privity of contract
between himself and the promisor.
3. In the case of assignment: When rights under a contract are
assigned, the assignee can sue upon the contract for the
enforcement of his rights.
 4. In the case of family and marriage settlements: When a provision
is made for the maintenance of female members of a Hindu family in
a partition of Joint Hindu property, or for the marriage expenses of a
female member the person for whose benefit such a provision is
made is entitled to enforce the provision in her favour.
5. In the case of agency: A contract entered into by the agent acting
within the scope of his authority can be enforced by the principal.

b. Define a company? What are the features of Joint Stock Company?

ANSWER:

The term ‘company’ implies an association of a number of persons for

some common objective e.g. to carry on a business concern, to promote
art, science or culture in the society, to run a sport club etc. Every
association, however, may not be a company in the eyes of law as the legal
import of the word ‘company’ is different from its common parlance
meaning. In legal terminology its use is restricted to imply an association of
persons, ‘registered as a company’ under the law of the land. The following
are some of the definitions of company given by legal luminaries and
scholars of law:

“Company means a company formed and registered under this Act or an

existing company. Existing company means a company formed and
registered under the previous company laws.” – Companies Act, 1956 Sec.
3(i & ii)

“A joint stock company is an artificial person invisible, intangible and

existing only in the eyes of law. Being a mere creature of law, it possesses
only those properties which the charter of its creation confers upon it, either
expressly or as incidental to its very existence.” – Justice Marshall

“A company is an association of many persons who contribute money or

money’s worth to a common stock and employ it in some common trade or
business and who share the profit or loss arising therefrom. The common
stock so contributed is denoted in terms of money and is the capital of the
company. The persons who contribute it or to whom it belongs are
members. The proportion of capital to which each member is entitled is his
share. Shares are always transferable although the right to transfer them is
often more or less restricted.” – Lord Lindley

From the above definitions it is clear that a company has a corporate and
legal personality. It is an artificial person and exists only in the eyes of law.
It has an independent legal entity, a common seal and perpetual
succession.

Sometimes, the term ‘corporation’ (a word derived from the Latin word
‘corpus’ which means body) is also used for a company.

At present the companies in India are incorporated under the Companies

Act, 1956.

Characteristics of Company

The various definitions reveal the following essential characteristics of a

company:

1. Artificial Person: A company is an association of persons who have

agreed to form the company and become its members or
shareholders with the object of carrying on a lawful business for
profit. It comes into existence when it is registered under the
Companies Act. The law treats it as a legal person as it can conduct
lawful business and enter into contracts with other persons in its own
name. It can sell or purchase property. It can sue and be sued in its
name. It cannot be regarded as an imaginary person because it has a
legal existence. Thus company is an artificial person created by law.
2. Independent corporate existence: A company has a separate
independent corporate existence. It is in law a person. Its entity is
always separate from its members. The property of the company
belongs to it and not to the shareholders. The company cannot be
held liable for the acts of the members and the members cannot be
held liable for the acts or wrongs or misdeeds of the company. Once
a company is incorporated, it must be treated like any other
independent person. As a consequence of separate legal entity, the
company may enter into contracts with its members and vice-versa.
3. Perpetual existence: The attribute of separate entity also provides a
company a perpetual existence, until dissolved by law. Its life remains
unaffected by the lunacy, insolvency or death of its members. The
 members may come and go but the company can go on forever. It is
created by law and the law alone can dissolve it.
4. Separate property: A company, being a legal entity, can buy and
own property in its own name. And, being a separate entity, such
property belongs to it alone. Its members are not the joint owners of
the property even though it is purchased out of funds contributed by
them. Consequently, they do not have even insurable interest in the
property of the company. The property of the company is not the
property of the shareholders; it is the property of the company.
5. Limited liability: In the case of companies limited by shares the
liability of every member of the company is limited to the amount of
shares subscribed by him. If the member has paid full amount of the
face value of the shares subscribed by him, his liability shall be nil
and he cannot be asked to contribute anything more. Similarly, in the
case of a company limited by guarantee, the liability of the members
is limited up to the amount guaranteed by a member. The Companies
Act, however, permits the formation of companies with unlimited
liability. But such companies are very rare.
6. Common seal: As a company is devoid of physique, it can’t act in
person like a human being. Hence it cannot sign any documents
personally. It has to act through a human agency known as Directors.
Therefore, every company must have a seal with its name engraved
on it. The seal of the company is affixed on the documents which
require the approval of the company. Two Directors and the
Secretary or such other person as the Board may authorize for this
purpose, witness the affixation of the seal. Thus, the common seal is
the official signature of the company.
7. Transferability of shares: The shares of a company are freely
transferable and can be sold or purchased through the Stock
Exchange. A shareholder can transfer his shares to any person
without the consent of other members. Under the articles of
association, even a public limited company can put certain
restrictions on the transfer of shares but it cannot altogether stop it. A
shareholder of a public limited company possessing fully paid up
shares is at liberty to transfer his shares to anyone he likes in
accordance with the manner provided for in the articles of association
of the company. However, private limited company is required to put
certain restrictions on transferability of its shares. But any absolute
restriction on the right of transfer of shares is void .
 8. Capacity to sue and be sued: A company, being a body corporate,
can sue and be sued in its own name.

“A joint stock company is an artificial person invisible, intangible and

existing only in the eyes of law. Being a mere creature of law, it possesses
only those properties which the charter of its creation confers upon it, either
expressly or as incidental to its very existence.” – Justice Marshall. A Joint
Stock Company is a voluntary association where people become members
of the company and earn profit the capital is easily transferred.

FEATURES OF JOINT STOCK COMPANY

1)Voluntary Association
2)Incorporation stage
3)Artificial Legal Person
4)Separate Legal Status
5)Perpetual Sussesion
6)Large Membership
7)Large Capital
8)Strike Government Control
9)Limited Liability
10)Transfer of Shares

Q. 6. Om is enrolled in a managerial course. He has to write an assignment

on company management and various types of meetings that a company
holds. You are asked to help him in preparing the assignment.

ANSWER:

Company Management

A company is an artificial person having no physical existence and as such

can act only through human agency i.e., directors.

The persons who are in charge of the management of the affairs of a

company are called Directors. They are collectively known as Board of
Directors or the Board. The supreme executive authority in the control of a
company and its affairs resides in persons known as ‘Board of Directors’.

Director: Definition

Sec. 2(13) of the Companies Act, 1956 defines the term ‘Director’ as
including “any person occupying the position of a Director by whatever
name called.”

A Director is a person who, along with his fellow Directors, manages the
affairs of a company. He is a member of the governing body of a company
and takes part in planning, conducting and controlling its affairs.

The appointment of Directors is regulated by the Act. Directors may be

appointed in the following ways:

By the articles as regard first directors.

By the company in general meeting.

By the directors.

By third parties.

By the principle of proportional representation.

By the central government.

Appointment by the Articles as regard first directors: The first Directors

are usually named in the articles. The articles may also provide that both
the number and the names of the first Directors shall be determined in
writing by the subscribers to the memorandum or a majority of them.

Managing Director: According to Sec. 2(26), a ‘Managing Director’ means

a Director who by virtue of an agreement with the company or of a
resolution passed by the company in a general meeting or by its Board of
Directors or, by virtue of its Memorandum or Articles of Association, is
entrusted with substantial powers of management, which would not
otherwise be exercisable by him, and includes a Director occupying the
position of a Managing Director, by whatever name called.
Appointment of the Managing Director: The following provisions relate to
the appointment of the Managing Director in Section 269:

1. Every public company or a private company which is a

subsidiary of a public company, having a paid up capital of
rupees five cr. or more shall have a Managing Director or a
Whole-time Director or Manager.
2. No appointment of a person as a Managing or Whole-time
Director or a Manager in a public company or a private
company which is a subsidiary of a public company shall be
made except with the approval of the Central Government
unless such appointment is made in accordance with the
conditions specified in parts I and II of Schedule XIII.

Ordinarily a person cannot be the Managing Director of more than one

company. Section 316 restricts the managing directorship to only one
company except in the following cases:

1. A public company or a private company subsidiary of public

company may appoint a person as its Managing Director if he is
already the Managing Director or Manager of one and not more
than one other company including a private company which is
not a subsidiary of a public company. However, such
appointment must have been approved by a board resolution
which has been consented to by all the directors present at the
meeting. Under this clause, a person can be appointed the
Managing Director of only two companies and not more.
2. A person can be the Managing Director of any number of
private companies but he cannot be the Managing Director of
any public and one private company.
3. The Central Government may permit any person to be
appointed as the Managing Director of more than two
companies if it thinks that the companies should, for their
proper working, function as a single unit and have a common
Managing Director.

Manager: According to Sec. 2(24), Manager means an individual who has

the management of the whole or virtually the whole of the affairs of a
company under his control. He is subject to superintendence, control and
direction of the Board of Directors. ‘Manager’ includes a Director or any
other person occupying the position of a Manager, by whatever name
called, and whether under a contract of service or not. A company cannot
appoint or employ a firm, body corporate or association as its Manager .

According to Section 385, the following person cannot be appointed as

managers:

i) A person who is an undischarged insolvent, or has to any time within the

preceding five years been adjudged an insolvent.

ii) A person who suspends, or has at any time within the preceding five
years suspended, payment to his creditors, or makes, or has at any time
within the preceding five years made, a composition with them.

iii) A person who is, or has at any time within the preceding five years been,
convicted by a court in India of an offence involving moral turpitude.

The company may appoint a Managing Director or Manager for the

management of the company in addition to the Board of Directors.
However, according to Section 197A, a company cannot appoint both a
Managing Director and a Manager at the same time. The following officers
are included in the category of other managerial personnel:

Secretary:

Section 2(45) of the Companies Act, 1956 defines a Secretary as follows:

“Secretary means a Company Secretary within the meaning of Clause C of
sub-section 1 of Section 2 of the Company Secretaries Act, 1980, and
includes any other individual possessing the prescribed qualifications and
appointed to perform the duties which may be performed by a Secretary
under this Act and any other ministerial or administrative duties.” The
definition reveals the following characteristics of a Company Secretary.

1. Only an individual may be appointed a Company Secretary.

Thus, a firm or a body corporate cannot be a Company
Secretary.
2. A Company Secretary should possess the requisite
qualifications to be prescribed by the Central Government.
3. The Company Secretary performs the functions performed by a
Secretary under the Companies Act including any other
ministerial or administrative duties.
Section 383-A of the Companies Act, 1956 provides for the statutory
requirement for certain companies to have a Company Secretary.

No firm or body corporate can hold the office of a secretary and no

individual can be a secretary in more than one company at the same time. 

Meetings

Meaning of a meeting

A meeting may be generally defined as a gathering or assembly or getting

together of a number of persons for transacting any lawful business. For
proper working of the company, it is necessary that the shareholders meet
as often as possible and discuss matters of mutual interest and take
important decisions, there must be at least two persons to constitute a
meeting.

Company meetings must be convened and held in perfect compliance with

the various provisions of the Companies Act, 1956, and the rules framed
thereunder.

Kinds of company meetings

Company meetings can broadly be classified as follows:

(A) Shareholders’ meetings: Such meetings are known as general

meeting of the members which are held to exercise their collective rights.
The meetings of the shareholders may be of the following types:

1. Statutory meetings

2. Annual general meeting

3. Extra-ordinary general meetings;

4. Class meeting of shareholders.

(B) Meeting of Directors:

These meetings may be of two types: (i) Board meeting; (ii) Meeting of the
board committees.
(C) Other Meetings: These meetings may be either of the following;

(i) Meetings of the debenture holders; (ii) Meeting of creditors.

Statutory Meeting: Every public company limited by shares or limited by

guarantee and having a share capital must hold a general meeting of the
members of the company which may be called the statutory meeting. It is to
be convened after not less than one month but within six months from the
date at which the company is entitled to commence business.

A meeting held prior to the statutory period of one month from the date of
entitlement of a company to commence business cannot be called the
statutory meeting. The notice for such a meeting should state that it is
intended to be statutory. The statutory meeting is held only once in the life
time of a company.

The following companies need not hold statutory meeting:

i) Private company,

ii) Company limited by guarantee having no share capital.

iii) Unlimited liability company.

iv) Government companies.

Objectives of statutory meeting: The statutory meeting is held to inform

the shareholders about matters relating to incorporation, allotment of
shares, the details of the contracts concluded by the company, etc.
Statutory meeting is convened in order to afford the shareholders an
opportunity for seeing what degree of success has attained the floatation of
the company and in order that any special matters requiring their approval
may be laid before them.

Annual general meeting: A meeting known as an annual general meeting

is required to be held by every company, public or private, annually for the
purpose of transacting the company’s ordinary business.

First annual general meeting: The first annual general meeting of a

company may be held within 18 months of incorporation, and so long as
the company holds its first annual general meeting within that period, the
company need not hold any general meeting in the year of incorporation or
in the following year.

However, the provision of Section 210 must be complied with which provide
that the first annual general meeting of the company must be held not later
than 9 months from the date of the closing of its financial year.

Subsequent annual general meeting: Section 166(1) of the Companies

Act, 1956 provides that every company shall in each calendar year hold in
addition to any other meetings, its annual general meeting and shall specify
the meeting as such in the notice calling the meeting, provided that not
more than 15 months shall elapse between two annual general meetings.

Meeting must be held not later than 6 months from the close of financial
year and extension granted by the Registrar.

Extra-ordinary general meeting: All the general meetings of a company,

with the exception of the statutory meeting and the annual general meeting,
are called extraordinary general meetings.

There are various matters in relation to the administration of a Company’s

affairs which can be transacted only by resolutions of members in a general
meeting. It is not always possible or expedient for consideration of such
matters to wait until the next annual general meeting. The Articles of
Association of the company therefore make provisions for the convention of
general meeting than the annual general meeting. Such meetings are
termed extraordinary general meetings.

All business transacted at such meeting is deemed to be special.

In nut shell, extraordinary general meeting is a meeting which is held
between two annual general meetings.

This meeting is called to discuss some urgent special business which

cannot be postponed till the next annual general meeting.

An extraordinary general meeting may be convened by:

1. Board of Directors on its own motion.

2. Board of Directors on the requisition of members.
3. Requisitionists themselves on the failure of the Board to call the
meeting.
4. Company Law Board.

Board Meeting: The affairs of a Company are managed by the Board of

Directors. In other words, powers delegated by a company to its directors
must be exercised at properly convened and duly constituted meeting
generally referred as Board meeting. Only acts done at duly constituted
meetings are therefore valid, unless the articles provide otherwise. The
rules regarding the holding and conduct of Board meetings are laid down
by the Act and the Articles. Section 285 require the Board to meet at least
once every three months irrespective of whether it is the Board of a public
company or a private company and at least four such meetings must be
held in every year.

Resolutions: Decisions of the members at a general meeting are

expressed by way of resolutions. At the meetings a definite proposal in the
form of a ‘motion’ is placed, it is discussed thoroughly and finally is put to
vote. When the motion is passed by a majority, it is called a resolution. In
simple words, resolution means the decision taken at the meeting. A
company expresses its will by means of resolution.

Three kinds of resolutions are recognized by the Companies Act:

i) Ordinary resolutions,

ii) Special resolutions,

iii) Resolutions requiring a special notice.

(i) Ordinarily Resolution: Section 189(1) defines an ordinary resolution as
follows:

“A resolution shall be an ordinary resolution when at a general meeting of

which the notice required under this Act has been duly given, the votes cast
(whether on a show of hands, or on a poll, as the case may be) in favour of
the resolution (including the casting vote, if any, of the chairman) by
members who, being entitled so to do, vote in person, or where proxies are
allowed, by proxy, exceed the votes, if any, cast against the resolution by
members so entitled and voting.”

An ordinary resolution means a resolution passed by a simple majority of

shareholders present and voting. As distinguished from a simple majority,
an absolute majority is a majority of all those entitled to vote whether they
attend or not.

So all resolutions which are not special or which do not require special
notices are ordinary resolutions.

Ordinary resolutions normally do not require filing with the Registrar of

companies. The usual notice of 21 days is however, required for passing
an ordinary resolution. The important items of business of a company
which can be transacted with ordinary resolutions are:

a) To authorize an issue of shares at a discount.

b) To increase the share capital if authorized by the articles or otherwise

alters the share capital apart from its reduction.

c) To appoint auditors; but in the case of a company in which not less than
25 per cent of the subscribed share capital is held. Whether single or in any
combination, by a public financial institution or a Government company or
Central or any State Government, or a nationalized bank or an insurance
company carrying a general insurance business, the appointment of
auditors requires a special resolution (Section 224A);

d) To appoint directors;

e) To adopt annual accounts;

f) To declare dividends;
g) To wind up voluntarily when the period, if any, fixed for the duration of
the company by the articles has expired, or the event, if any, has occurred,
on the occurrence of which the articles provide that the company is to be
dissolved.

h) To appoint liquidators in a members’ voluntary winding up and to fix their

remuneration.

i) To register an unlimited company as a limited company.

j) To do all things for which a special resolution is not specifically required

either by the Act or the company’s articles.

ii) Special resolution: A resolution shall be a special resolution when:

a) The intention to propose the resolution as a special resolution has been

duly specified in the notice;

b) The notice required under the Act (21 days) has been duly given; and

c) The votes cast in favor of the resolution by members entitled to vote

either in person or by proxy are not less than three times the number of
votes if any, cast against the resolution. The votes may be cast either on a
show of hands or by poll. There is no question of a casting vote in case of a
special resolution.

A resolution is said to be a special resolution if notice of the intention to

move it as a special resolution is given specifically and it is passed by
three-fourth of the votes. The notice convening the meeting at which a
special resolution is to be considered must set out the actual wording of the
resolution.

The articles of association may provide that certain types of business shall
be approved by a special resolution. The Act also provides that in certain
specified cases, a company must pass a special resolution. It is not
necessary that a special resolution should be passed only at an
extraordinary meeting of the shareholders. It may be passed at any general
meeting of the shareholders. A special resolution is required for the
following purposes:
 1. To alter any provisions contained in the memorandum which
could lawfully have been contained in the articles instead of the
memorandum;
2. To alter the objects or the place of registered office of a
company;
3. To change the name of a company;
4. To alter the articles of association;
5. To create a reserve capital;
6. To reduce the share capital;
7. To move the company’s registered office within the same State
but outside the local limits of the city, town or village where
such office is situated;
8. To commence any new business which is not related to the
business the company is carrying on currently; though covered
by the objects clause of the memorandum;
9. To pay interest on shares out of capital;
10. To appoint auditors, if not less than 25 per cent of the
company’s subscribed capital is held, whether singly or in any
combination, by the Central or any State Government,
Government companies, financial institutions, nationalised
banks, etc.;
11. To support an application to the Central Government to appoint
inspectors to investigate the affairs of the company;
12. To appoint sole selling agents, if the company’s paid-up capital
is Rs. 50 lakhs or more;
13. To authorize payment of remuneration to directors who are not
in the whole-time employment of the company;
14. To make the liability of directors unlimited;
15. To have the company wound up by the court;
16. To wind up the company voluntarily;

In addition, a company’s own articles may prescribe for special resolution

where under the Act only an ordinary resolution is required, but vice versa
is not allowed i.e. where the Act specifies for a special resolution, the
articles cannot provide in the different kind of resolution.

Resolution requiring a special notice: Where the Act requires a special

notice, i.e., 14 clear days’ notice, to be received by the company from a
shareholder of his intention to move the resolution, either as an ordinary or
as a special resolution. After the receipt of the notice, the company must
immediately issue a notice to the shareholders in this regard, not less than
7 days before the meeting either by serving it on them or through an
advertisement in the newspaper having an appropriate circulation or in any
other mode allowed by the articles.

The object of drawing special attention of the company, and through the
company of the members to it, is to give the members sufficient time to
consider the proposed resolution and to give an opportunity to the directors
to indicate their views if the resolution is proposed by the shareholders.

Resolutions where special notice is required:

1. A resolution appointing an auditor other than the retiring one.

2. A resolution providing expressly that the retiring auditor shall not be
reappointed.
3. A resolution purposing to remove a director before the expiry of his
period of office.
4. A resolution to appoint another director in place of the removed
director.

 
 MB0035 – Legal Aspects of Business
SET 2

Q.1 a. What is an arbitration agreement? Discuss its essentials.

ANSWER:

Arbitration- (The Arbitrator decides):

Arbitration is a dispute resolution process where the opposing parties

select or appoint an individual called an Arbitrator. Upon appointment, the
Arbitrator will arrange the process to hear and consider the evidence,
review arguments and afterwards will publish an award in which the items
of dispute are decided.

In some cases the Arbitrator can conduct the arbitration on documents

evidence only. When published the Arbitrator’s decisions are final and
binding on the parties. It is rare for an arbitration to be appealed to the
courts. Arbitration may comprise a sole Arbitrator, or may be a panel of
Arbitrators.

Costs of the arbitration are disposed of in the Arbitrator’s award, unless the
parties have some agreement to the contrary.

Arbitration is a settlement of dispute by the decision of one or more

persons called arbitrators. It is an arrangement for investigation and
settlement of a dispute between opposing parties by one or more unofficial
persons chosen by the parties. In arbitration some dispute is referred by
the parties for settlement to a tribunal of their own choosing. The dispute is
not submitted for decision to the ordinary courts but a domestic tribunal. It
is thus a method of settling the disputes in a quasi-judicial manner. The
essence of arbitration is that the arbitrator decides the case and his award
is in the nature of a judgment. Arbitration is a speedy and inexpensive
method of settling the disputes between the parties.

In lines with the international trend, the Government of India has also
enacted the Arbitration and Conciliation Act, 1996 and repealed the three
earlier enactments namely, the Arbitration (Protocol and Convention) Act,
1937; the Arbitration Act, 1940; and the Foreign Award (Recognition and
Enforcement) Act, 1961.

Objectives of the Act

The main objectives of the Act are as under:

i) To comprehensively cover international commercial arbitration and

conciliation as also domestic arbitration and conciliation.

ii) To make provision for an arbitral procedure which is fair, efficient and
capable of meeting the needs of the specific arbitration.

iii) To provide that the arbitral tribunal gives reasons for its arbitral award.

iv) To ensure that the arbitral tribunal remains within the limit of jurisdiction.

v) To minimize the supervisory role of courts in the arbitral process.

vi)To permit an arbitral tribunal to use mediation, conciliation or other

procedures during the arbitral proceedings to encourage settlement of
disputes.

vii) To provide that every final arbitral award is enforced in the same
manner as if it were a decree of the court.

viii) To provide that a settlement agreement reached by the parties as a

result of conciliation proceedings will have the same status and effect as an
arbitral award on agreed terms on the substance of the dispute rendered by
an arbitral tribunal.
ix) To provide that, for purposes of enforcement of foreign awards, every
arbitral award made in the country to which one of the two international
Conventions relating to foreign arbitral awards to which India is a party
applies, will be treated as a foreign award.

Arbitration Agreement: The foundation of arbitration is the arbitration

agreement between the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them. Thus, the
provision of arbitration can be made at the time of entering the contract
itself, so that if any dispute arises in future, the dispute can be referred to
arbitrator as per the agreement. It is also possible to refer a dispute to
arbitration after the dispute has arisen. Arbitration agreement may be in the
form of an arbitration clause in a contract or in the form of a separate
agreement. The agreement must be in writing and must be signed by both
parties. The arbitration agreement can be by exchange of letters,
document, telex, telegram etc.

Court must refer the matter to arbitration in some cases: If a party

approaches court despite the arbitration agreement, the other party can
raise objection. However, such objection must be raised before submitting
his first statement on the substance of dispute. Such objection must be
accompanied by the original arbitration agreement or its certified copy. On
such application the judicial authority shall refer the parties to arbitration.
Since the word used is “shall”, it is mandatory for judicial authority to refer
the matter to arbitration [Section 8]. However, once first statement to court
is already made by the opposite party, the matter has to continue in the
court. Once an application is made by other party for referring the matter to
arbitration, the arbitrator can continue with arbitration and even make an
arbitral award.  

Essentials of Arbitration Agreement

1. It must be in writing [Section 7(3)]: Like the old law, the new law also
requires the arbitration agreement to be in writing. It also provides in
section 7(4) that an exchange of letters, telex, telegrams, or other
means of telecommunications can also provide a record of such an
agreement. Further, it is also provided that an exchange of claim and
defense in which the existence of an arbitration agreement is alleged by
one party and not denied by the other, will also amount to be an
arbitration agreement.
 It is not necessary that such written agreement should be signed by the
parties. All that is necessary is that the parties should accept the terms
of an agreement reduced in writing. The naming of the arbitrator in the
arbitration agreement is not necessary. No particular form or formal
document is necessary.

2. It must have all the essential elements of a valid contract: An

arbitration agreement stands on the same footing as any other
agreement. Every person capable of entering into a contract may be a
party to an arbitration agreement. The terms of the agreement must be
definite and certain; if the terms are vague it is bad for indefiniteness.

3. The agreement must be to refer a dispute, present or future,

between the parties to arbitration: If there is no dispute, there can be no
right to demand arbitration. A dispute means an assertion of a right by one
party and repudiation thereof by another. A point as to which there is no
dispute cannot be referred to arbitration. The dispute may relate to an act
of commission or omission, for example, with holding a certificate to which
a person is entitled or refusal to register a transfer of shares.

Under the present law, certain disputes such as matrimonial disputes,

criminal prosecution, questions relating to guardianship, questions about
validity of a will etc. or treated as not suitable for arbitration. Section 2(3) of
the new Act maintains this position. Subject to this qualification Section 7(1)
of the new Act makes it permissible to enter into an arbitration agreement
“in respect of a defined legal relationship whether contractual or not”.

4. An arbitration agreement may be in the form of an arbitration

clause in a contract or in the form of a separate agreement [Section
7(2)].

Appointment of Arbitrator: The parties can agree on a procedure for

appointing the arbitrator or arbitrators. If they are unable to agree, each
party will appoint one arbitrator and the two appointed arbitrators will
appoint the third arbitrator who will act as a presiding arbitrator [Section
11(3)]. If one of the parties does not appoint an arbitrator within 30 days, or
if two appointed arbitrators do not appoint third arbitrator within 30 days,
the party can request Chief Justice to appoint an arbitrator [Section 11(4)].
The Chief Justice can authorize any person or institution to appoint an
arbitrator. [Some High Courts have authorized District Judge to appoint an
arbitrator]. In case of international commercial dispute, the application for
appointment of arbitrator has to be made to Chief Justice of India. In case
of other domestic disputes, application has to be made to Chief Justice of
High Court within whose jurisdiction the parties are situated [Section
11(12)]

Challenge to Appointment of arbitrator: An arbitrator is expected to be

independent and impartial. If there are some circumstances due to which
his independence or impartiality can be challenged, he must disclose the
circumstances before his appointment [Section 12(1)]. Appointment of
Arbitrator can be challenged only if (a) Circumstances exist that give rise to
justifiable doubts as to his independence or impartiality (b) He does not
possess the qualifications agreed to by the parties [Section 12(3)].
Appointment of arbitrator cannot be challenged on any other ground. The
challenge to appointment has to be decided by the arbitrator himself. If he
does not accept the challenge, the proceedings can continue and the
arbitrator can make the arbitral award. However, in such case, application
for setting aside arbitral award can be made to Court. If the court agrees to
the challenge, the arbitral award can be set aside [Section 13(6)]. Thus,
even if the arbitrator does not accept the challenge to his appointment, the
other party cannot stall further arbitration proceedings by rushing to court.
The arbitration can continue and challenge can be made in Court only after
arbitral award is made.

Conduct of Arbitral Proceedings: The Arbitral Tribunal should treat the

parties equally and each party should be given full opportunity to present
his case [Section 18]. The Arbitral Tribunal is not bound by Code of Civil
Procedure, 1908 or Indian Evidence Act, 1872 [Section 19(1)].  The parties
to arbitration are free to agree on the procedure to be followed by the
Arbitral Tribunal. If the parties do not agree to the procedure, the procedure
will be as determined by the arbitral tribunal.

Law of Limitation Applicable: Limitation Act, 1963 is applicable. For this

purpose, date on which the aggrieved party requests other party to refer
the matter to arbitration shall be considered. If on that date, the claim is
barred under Limitation Act, the arbitration cannot continue [Section 43(2)].
If Arbitration award is set aside by Court, time spent in arbitration will be
excluded for purpose of Limitation Act. So that case in court or fresh
arbitration can start.
Flexibility in respect of procedure, place and language: Arbitral
Tribunal has full powers to decide the procedure to be followed, unless
parties agree on the procedure to be followed [Section 19(3)]. The Tribunal
also has powers to determine the admissibility, relevance, materiality and
weight of any evidence [Section 19(4)]. Place of arbitration will be decided
by mutual agreement. However, if the parties do not agree to the place, the
same will be decided by tribunal [Section 20]. Similarly, language to be
used in arbitral proceedings can be mutually agreed. Otherwise, Arbitral
Tribunal can decide [Section 22].

Submission of statement of claim and defence: The claimant should

submit statement of claims, points of issue and relief or remedy sought.
The respondent shall state his defense in respect of these particulars. All
relevant documents must be submitted. Such claim or defense can be
amended or supplemented any time [section 23].

Hearings and Written Proceedings: After submission of documents and

defense, unless the parties agree otherwise, the Arbitral Tribunal can
decide whether there will be oral hearing or proceedings can be conducted
on the basis of documents and other materials. However, if one of the
parties requests the hearing shall be oral. Sufficient advance notice of
hearing should be given to both the parties [Section 24]. [Thus, unless one
party requests, oral hearing is not compulsory].

Settlement during Arbitration: It is permissible for parties to arrive at

mutual settlement even when arbitration is proceeding. In fact, even the
Tribunal can make efforts to encourage mutual settlement. If parties settle
the dispute by mutual agreement, the arbitration shall be terminated.
However, if both parties and the Arbitral Tribunal agree, the settlement can
be recorded in the form of an arbitral award on agreed terms. Such Arbitral
Award shall have the same force as any other Arbitral Award [Section 30].

Arbitral Award: Decision of Arbitral Tribunal is termed as ‘Arbitral Award’. 

Arbitrator can decide the dispute ex aequo et bono (In justice and in good
faith) if both the parties expressly authorize him to do so [Section 28(2)].
The decision of Arbitral Tribunal will be by majority. The arbitral award shall
be in writing and signed by the members of the tribunal [Section 29]. The
award must be in writing and signed by the members of Arbitral Tribunal
[Section 31(1)]. It must state the reasons for the award unless the parties
have agreed that no reason for the award is to be given [Section 31(3)].
The award should be dated and place where it is made should be
mentioned. Copy of award should be given to each party. Tribunal can
make interim award also [Section 31(6)].

Cost of Arbitration: Cost of arbitration means reasonable cost relating to

fees and expenses of arbitrators and witnesses, legal fees and expenses,
administration fees of the institution supervising the arbitration and other
expenses in connection with arbitral proceedings. The tribunal can decide
the cost and share of each party [Section 31(8)]. If the parties refuse to pay
the costs, the Arbitral Tribunal may refuse to deliver its award. In such
case, any party can approach Court. The Court will ask for deposit from the
parties and on such deposit, the award will be delivered by the Tribunal.
Then Court will decide the costs of arbitration and shall pay the same to
Arbitrators. Balance, if any, will be refunded to the party [Section 39].

Intervention of Court

One of the major defects of earlier arbitration law was that the party could
access court almost at every stage of arbitration – right from appointment
of arbitrator to implementation of final award. Thus, the defending party
could approach court at various stages and stall the proceedings. Now,
approach to court has been drastically curtailed. In some cases, if an
objection is raised by the party, the decision on that objection can be given
by Arbitral Tribunal itself. After the decision, the arbitration proceedings are
continued and the aggrieved party can approach Court only after Arbitral
Award is made. Appeal to court is now only on restricted grounds. Of
course, Tribunal cannot be given unlimited and uncontrolled powers and
supervision of Courts cannot be totally eliminated.

Arbitration Act has Over-Riding Effect: Section 5 of Act clarifies that

notwithstanding anything contained in any other law for the time being in
force, in matters governed by the Act, the judicial authority can intervene
only as provided in this Act and not under any other Act.

b. What do you mean by mediation?

ANSWER:

Mediation
A dispute resolution process in which the parties freely choose to
participate and any agreements reached to settle disputes is done solely by
the parties, without interference. The Mediator is selected by the parties
and once selected; the Mediator will arrange the mediation process. The
Mediator makes no decisions; instead he/she acts as a facilitator only to
assist the parties to understand the dispute, provide structured discussion
and to help the parties reach a dispute settlement agreement.
If the parties can’t reach a settlement agreement, they are free to pursue
other options. The parties generally decide in advance how they will
contribute to the cost of the mediation. Mediation is a very important form of
ADR, particularly if the parties wish to preserve their relationship.
Q.2 a. What kinds of rights are considerable under consumer rights?

ANSWER:
Rights of Consumer or Objectives of the Act
The Consumer Protection Act, 1986 seeks to provide for better protection
of the interests of consumers. This Act seeks, inter alia, to promote and
protect the basic rights of consumers such as:

Right of Protection to Life and Property: The Right to be protected against

marketing of goods which are hazardous to life and property.

Right to be informed: The Right to be informed about quality, quantity,

potency, purity, standard and price of goods to protect the consumers
against unfair trade practices.

Right to choose: The Right to be assured, wherever possible, access to a

variety of goods at competitive prices.

Right to be heard: The Right to be heard and to be assured that consumer’s

interests will receive due consideration at appropriate forums.

Right to Redress: The Right to seek Redressal against unfair trade practices
or unscrupulous exploitation of consumers, and

Right to Education: The Right to consumer education.

This is based on the basic rights of consumers as defined by the
International Organization of Consumers (IOCU) viz. Right to safety, to
information, of choice, to be heard, to redressal, to consumer education, to
healthy environment and basic needs.

These objects are being promoted and protected by the Consumer

Protection Councils established at the Central and State level. The Act
seeks to provide speedy and simple redressal to consumer disputes. For
this purpose a quasi-judicial machinery is being set up at the District, State,
and Central level. These quasi-judicial bodies will observe the principles of
natural justice. These have been empowered to give reliefs of a specific
nature and to award compensation to consumers. Penalties for non-
compliance of the orders given by the quasi-judicial bodies have also been
provided. The remedies under this Act are additional supplemental
remedies.

Sec. 3 of the Consumer Protection Act states that provision of this Act shall
be in addition and not in derogation of the provisions of any other law or Act
for the time being in force.

b. Distinguish between Memorandum of Association and Articles of

Association.

ANSWER:

1) MoA:

It is along with the application of starting of a company.

It confines & defines the objective of a company.

MoA is also called Charter of a Company.

The main aim of MoA is to let the investors know where their money is
invested.

It has 2 objectives; Main Objective & Subsidiary Objectives.

MoA has 6 clauses:

1. The Name Clause
2. The Registered Office Clause
3. The Object Clause
4. The capital Clause
5. The Liability Clause
6. The Association Clause.

2) AoA:

It is internal management of the company.

It shows what type of power / responsibilities / authority the investors have..

It’s by laws that governs management of internal affairs defines duties /

rights / powers / number of directors of the company.

It also show that what is mode & form in which business is to be carried out
subordinating to MoA & cannot supersede object set by MoA.

Q.3 a. Identify the types of evidence which are relied upon by complainants
to establish defect in product.

ANSWER:

Following types of evidence is generally relied upon by complainants to

establish defect in product:

(a)    Expert opinion

(b)    Manufacturer’s record

(c)    Government and Industry Standards

(d)    Post accident changes

(e)    Report of Governmental and other agencies

(f)    Past record
 (a) Expert Opinion: Complainant hires a technical expert to testify
about the defective characteristics of a product. A manufacturer has to
retain highly qualified experts to rebut the findings of complainant’s
expert and also educate defence lawyer so well that he can the bluff of
complainants expert.

(b) Manufacturer’s records: If manufacturer’s own employees

expressed concern about product safety it can be extremely persuasive
that product defect existed.

(c) Government and Industry Standard: Evidence that manufacturer

has failed to meet government or industry standards can be compelling
proof of existence of defect and when such standards are mandatory it
also amounts to automatic findings of negligence.

(d) Post accident changes: Post accident changes may be considered

as evidence that original designs were deficient. Though this is a
contentious factor as to whether such an evidence is admissible a jury
may be influenced by the same.

(e) Report of Government and the other agencies: Generally factual

findings of an official investigation forms admissible evidence.

(f) Past record: Complainant may show that past record of the product
proves his claim. Manufacturer has the obligation of proving that other
accidents were not similar.

b. Write a short note on unfair trade practices and Restrictive trade

practice.

ANSWER:

Unfair Trade Practices

The Consumer Protection Act has adopted the definition of ‘Unfair Trade
Practices’ as given in the MRTP Act.

Section 36-A of the Monopolies and Restrictive Trade Practices Act, 1969,
amended in 1993 explains what ‘unfair trade practice’ means. Unfair trade
practice methods are listed in section 36-A. Where the methods listed in
section 36-A are adopted for the purpose of promoting the sale, use or
supply of any goods, or for the provision of any services and thereby some
loss or injury is caused to the consumers of such goods or services, it is an
unfair trade practice. The practices mentioned in section 36-A are grouped
into the following five categories.

1.    Misleading Advertisement and False Representation: These

include:

(a)    Falsely representing that the goods are of a particular standard,

quality, quantity, grade, composition, style or model.

(b)    Falsely representing that the services are of a particular standard,

quality or grade

(c)    Falsely representing that the re-built, second-hand, renovated,

reconditioned or old goods as new goods.

(d)    Representing that the goods or services have sponsorship, approval,

performance, characteristic, accessories, uses or benefits which such
goods or services do not have.

(e)    Representing that the seller or the supplier has a sponsorship or

approval or affiliation which he does not have.

(f)    Making a false or misleading representation concerning the need, for,

or the usefulness of any goods or services.

(g)    Giving to the public any warranty or guarantee of the performance or

length of life of a product which is not based on adequate test.

(h)    Making a materially misleading representation to the public

concerning the price at which a product or like products of goods have
been or are ordinarily sold.

(i)    Giving false or misleading facts disparaging the goods, services or

trade of another person.

The mode of representation or statement to the public may be by any

method. It will be enough if the statement comes to the knowledge of the
buyer of those goods etc. The representation may appear on the article or
on its wrapper or container or on anything on which the article is mounted.
Restrictive Trade Practice

Sec. 2(nn) of the Consumer Protection Act defines “Restrictive Trade

Practice” as any trade practice which requires a consumer to buy, hire or
avail of any goods or, as the case may be, services as a condition
precedent for buying, hiring, or availing of other goods or services.” While
the “restrictive trade practice” covered under C.P. Act relates to tie up sales
of slow moving goods with fast moving goods, Sec.2 (0) of MRTP Act as a
wider ambit which covers all practices which prevents distort or restrict
competition and obstructs free flow of goods and services or obstruct free
flow of capital and resources into production.

Restrictive Trade Practices (RTP – under MRTP Act 1969)

Restrictive Trade practices are those trade practices which have the effect
of preventing, distorting or restricting competition in any manner and in
particular acts intended to result in:

1. Obstruction of Capital and Resources into stream of production.

2. Manipulation of price or to abstract production, distribution/supply of
goods or provision of services.
3. Agreement falling within the scope of Sec.33(of the MRTP Act) which
are deemed as Registrable Agreements relating to Restrictive Trade
Practices.

Q.4. Present a detail note on Shops and Establishment Act.

ANSWER:

Shop: “Shop” means any premises where any trade or business is carried
on or where services are rendered to customers and includes offices, store-
rooms, godowns and warehouses, whether in the same premises or
otherwise, used in connection with such business but does not include a
restaurant, eating-house or commercial establishment.

Establishment: “Establishment” means a shop, commercial establishment,

restaurant, eating-house, residential hotel, theatre or any place of public
amusement or entertainment and includes such establishment as the
(State) Government may, by Notification, declare to be an establishment for
the purposes of this Act.
Provisions Applicable to Shops (Sections 7-11)

Opening and Closing Hours of Shops: No shop shall on any day be

opened earlier or closed later than such hours as fixed by the State
Government. Any customer who was being served or was waiting to be
served in any shop at the hour fixed for its closing may be served during
the quarter of an hour immediately following such an hour. No person shall
carry on, in or adjacent to a street or public place, the sale of any goods
after the hour fixed for closing of shops dealing in the same class of goods
except newspapers in that locality, i.e., selling outside the shop is
prohibited after closing hour.

Daily and Weekly Hours of Work in Shops: No person employed in any

shop shall be required or allowed to work therein for more than eight hours
in any day and 48 hours in any week. If any such persons work for any
period in excess of the time limit fixed, he is entitled to overtime wages.
However, the period of work including overtime work, shall not exceed 10
hours in any day and in the aggregate 50 hours in any week. Further, he
should be given an interval for rest of at least one hour after four hours of
work in any day. The spread-over of work periods of such a person is not to
exceed more than 12 hours in any including the intervals for rest.

Closing of Shops and Grant of (Weekly and Additional) Holidays:

Every shop is to remain entirely closed on one day of the week. The shop-
keeper has to specify that day in a notice exhibited in a conspicuous place
in the shop and the day so specified is not to be altered by the shop-keeper
more than once in three months. Every person employed in a shop is to be
allowed in each week a holiday of one whole day. This provision is not
applicable to any person whose period of employment, in the week
including any days spent on authorized leave, is less than six days or a
person who has been allowed a whole holiday on the day on which the
shop has remained closed.

Besides one whole day, the State Government may by Notification require
shops to be closed at such hour in the afternoon of one weekday in every
week. Every person employed in any such notified shop(s) is to be allowed
in each week an additional holiday of one-half day. The State Government
may, for this purpose fix different hours for different shops or different
classes of shops or for different areas or for different times of the year.
There should be no deduction of wages of any person employed in a shop
on account of weekly holiday (one whole day) and additional holiday (one-
half day).

Provisions Applicable to Establishments other than Shops (Sections

12-16)

Besides the above provision in Sections 7 to 11 the following provisions are

also applicable.

Employment of Children and Young Persons: They are allowed to work

only between 6 a.m. and 7 p.m. Young persons are not allowed to work for
more than 7 hours in any day and 40 hours in any week. They are also not
allowed to work overtime (Sections 17-19).

Cleanliness, Ventilation, Light and Precautions against Fire: The

premises of every establishment should be kept clean by lime washing,
colour washing, painting, varnishing, disinfecting and deodoring. Proper
ventilation and sufficient lighting should also be provided in accordance
with such standards and by such methods prescribed by the Inspector.
Precautions against fire should be provided as prescribed (Sections 20-24).

Annual Holidays with Wages (Sections 25-28)

Every person employed in any establishment after 12 months of continuous

service, is entitled to annual holidays with wages for a period of 12 days, in
the subsequent period of 12 months, such holidays with wages may be
accumulated up to a maximum period of 24 days. Further, he is entitled to
(i) 12 days leave with wages on the ground of sickness incurred or accident
sustained by him and (ii) 12 days casual leave with wages on any
reasonable ground.

If a person entitled to any holidays as above is discharged by his employer

before he has been allowed the holidays or he quits his employment (after
having applied for he has been refused the holidays), the employer shall
pay him the amount payable in respect of such holidays. Similarly, if a
person entitled to sick leave is discharged by his employer when he is sick
or suffering from the result of an accident, the employer should pay him the
amount payable in respect of such period of leave.
While calculating a period of 12 months’ continuous service the following
interruptions in service need not be considered.

i) On account of sickness, accident or authorized leave (including

authorized holidays) not exceeding 90 days in the aggregate for all three,
or

ii) by a lock-out, or

iii) by a strike which is not an illegal strike, or

iv) by intermittent period of involuntary unemployment not exceeding thirty

days in aggregate.

The term ‘authorized leave’ shall not include any weekly holidays or half-
holiday allowed under this Act. The wages for such holidays with wages is
payable at a rate equivalent to the daily average of his wages earned
during the preceding three months exclusive of any earning in respect of
overtime.

Provisions Relating to Wages (Sections 29-41)

Every employer is responsible:

i) for the payment of wages to persons employed by him;

ii) to fix wage period; no wage period shall exceed one month;

iii) to pay overtime payments in respect of overtime work at a rate twice the
ordinary rate of wages.

iv) to pay wages before the expiry of the seventh day after the last day of
the wage-period.

v) Where the employment of a person is terminated by or on behalf of the

employer, wages earned by such persons should be paid before the expiry
of the second working day from the day on which his employment is
terminated.

vi) to pay wages on a working day;

vii) to pay all wages in current coins or current notes or both;

viii) to pay the wages without deduction of any kind except those authorized
by or under this Act.

Q. 5 a. What is a cyber crime? What are the categories of cyber crime?

ANSWER:

Definition of Cyber Crime:

Cyber crime refers to all the activities done with criminal intent in
cyberspace or using the medium of Internet. These could be either the
criminal activities in the conventional sense or activities, newly evolved with
the growth of the new medium. Any activity, which basically offends human
sensibilities, can be included in the ambit of Cyber crimes.

Because of the anonymous nature of Internet, it is possible to engage in a

variety of criminal activities with impunity, and people with intelligence,
have been grossly misusing this aspect of the Internet to commit criminal
activities in cyberspace. The field of cyber crime is just emerging and new
forms of criminal activities in cyberspace are coming to the forefront each
day. For example, child pornography on Internet constitutes one serious
cyber crime. Similarly, online pedophiles, using Internet to induce minor
children into sex, are as much cyber crimes as any others.

Categories of cyber crimes:

Cyber crimes can be basically divided in to three major categories:

1. Cyber crimes against persons;

2. Cyber crimes against property; and
3. Cyber crimes against government.
1. Cyber crimes against persons: Cyber crimes committed against
persons include various crimes like transmission of child-pornography,
harassment of any one with the use of a computer and cyber stalking.

The trafficking, distribution, posting, and dissemination of obscene material

including pornography, indecent exposure, and child pornography
constitute the most important cyber crimes known today. These threaten to
undermine the growth of the younger generation and also leave irreparable
scars on the minds of the younger generation, if not controlled.

Similarly, cyber harassment is a distinct cyber crime. Various kinds of

harassments can and do occur in cyberspace, or through the use of
cyberspace. Harassment can be sexual, racial, religious, or of any other
nature. Cyber harassment as a crime also brings us to another related area
of violation of privacy of citizens. Violation of privacy of online citizens is a
cyber crime of a grave nature.

Cyber stalking: The Internet is a wonderful place to work, play and study.
The net is merely a mirror of the real world, and that means it also contains
electronic versions of real life problems. Stalking and harassment are
problems that many persons especially women, are familiar within real life.
These problems also occur on the Internet, in the form of “cyber stalking” or
“online harassment”.

2. Cyber crimes against property: The second category of Cyber crimes

is Cyber crimes against all forms of property. These crimes include
unauthorized computer trespassing through cyberspace, computer
vandalism, and transmission of harmful programs and unauthorized
possession of computerized information.

3. Cyber crimes against Government: The third category of Cyber crimes

is Cyber crimes against Government. Cyber Terrorism is one distinct kind
of crime in this category. The growth of Internet has shown that the medium
of cyberspace is being used by individuals and groups to threaten
international governments as also to terrorize the citizens of a country. This
crime manifests itself into Cyber Terrorism when an individual “cracks” into
a government or military maintained website, for the purpose of
perpetuating terror.

Since Cyber crime is a newly emerging field, a great deal of development

has to take place in terms of putting into place the relevant legal
mechanism for controlling and preventing cyber crime. The courts in United
States of America have already begun taking cognizance of various kinds
of fraud and cyber crimes being perpetrated in cyberspace. However, much
work has to be done in this field. Just as the human mind is ingenious
enough to devise new ways for perpetrating crime, similarly, human
ingenuity needs to be canalized into developing effective legal and
regulatory mechanisms to control and prevent cyber crimes. A criminal
mind can assume very powerful manifestations if it is used on a network,
given the reachability and size of the network.

Legal recognition granted to Electronic Records and Digital Signatures

would certainly boost E – Commerce in the country. It will help in
conclusion of contracts and creation of rights and obligations through
electronic medium. In order to guard against the misuse and fraudulent
activities over the electronic medium, punitive measures are provided in the
Act. The Act has recognized certain offences, which are punishable. They
are: -

Tampering with computer source documents (Sec 65)

Any person, who knowingly or intentionally conceals, destroys or alters or

intentionally or knowingly causes another person to conceal, destroy or
alter any -

a. Computer source code when the computer source code is required to be

kept by law for the time being in force,

b. Computer programme,

c. Computer system and

d. Computer network.

- is punishable with imprisonment up to three years, or with fine which may

extend up to two lakh rupees or with both.

Hacking with computer system (Sec 66):

Hacking with computer system is a punishable offence under the Act. It

means any person intentionally or knowingly causes wrongful loss or
damage to the public or destroys or deletes or alters any information
residing in the computer resources or diminishes its value or utility or
affects it injuriously by any means, commits hacking.

Such offenses will be punished with three years’ imprisonment or with fine
of two lakh rupees or with both.

Publishing of information which is obscene in electronic form (Sec

67):

Whoever publishes or transmits or causes to be published in the electronic

form, any material which is lascivious or appeals to prurient interest or if its
effect is such as to tend to deprave and corrupt persons who are likely,
having regard to all relevant circumstances, to read, see or hear the matter
contained or embodied in it shall be punished on first conviction with
imprisonment for a term extending up to 5 years and with fine which may
extend to one lakh rupees. In case of second and subsequent conviction
imprisonment may extend to ten years and also with fine which may extend
up to two lakh rupees.

Failure to comply with orders of the controller by a Certifying

Authority or any employee of such authority (Sec 68):

Failure to comply with orders of the Controller by any Certifying Authority or

by any employees of Certifying Authority is a punishable offence. Such
persons are liable to imprisonment for a term not exceeding three years or
to a fine not exceeding two lakh rupees or to both.

Fails to assist any agency of the Government to decrypt the

information (Sec 69):

If any subscriber or any person-in-charge of the computer fails to assist or

to extend any facilities and technical assistance to any Government agency
to decrypt the information on the orders of the Controller in the interest of
the sovereignty and integrity of India etc. is a punishable offence under the
Act. Such persons are liable for imprisonment for a term, which may extend
to seven years.

Unauthorized access to a protected system (Sec 70):

Any person who secures access or attempts to secure access to a

protected system in contravention of the provisions is punishable with
imprisonment for a term which may extend to ten years and also liable to
fine.

Misrepresentation before authorities (Sec 71):

Any person who obtains Digital Signature Certificate by misrepresentation

or suppressing any material fact from the Controller or Certifying Authority
as the case may be punished with imprisonment for a term which may
extend two years or with fine up to one lakh rupees or with both.

Breach of confidentiality and privacy (Sec 72):

Any person in pursuant of the powers conferred under the act,

unauthorized secures access, to any electronic record, books, register,
correspondence, information, document or other material without the
consent of the person concerned discloses such materials to any other
person shall be punished with imprisonment for a term which may extend to
two years, or with fine up to one lakh rupees or with both.

Publishing false particulars in Digital Signature Certificate (Sec 73):

No person can publish a Digital Signature Certificate or otherwise make it

available to any other person with the knowledge that: -

a. the Certifying Authority listed in the certificate has not issued it; or

b. the subscriber listed in the certificate has not accepted it; or

c. the certificate has been revoked or suspended

Unless such publication is for the purpose of verifying a digital signature

created prior to such suspension or revocation. Any person who
contravenes the provisions shall be punishable with imprisonment for a
term, which may extend to two years or with fine up to rupees one lakh or
with both.

Publication of Digital Signature Certificate for fraudulent purpose (Sec

74):
Any person knowingly creates, publishes or otherwise makes available a
Digital Signature Certificate for any fraudulent or unlawful purpose shall be
punished with imprisonment for a term which may extend to two years or
with fine up to one lakh rupees or with both.

Search and Arrest

Any Police Officer not below the rank of a Deputy Superintendent of Police
or any other officer of the Central Government or a State Government
authorized in this behalf may enter any public place, search and arrest
without warrant any person found therein who is reasonably suspected or
having committed or of committing or of being about to commit any offence
under this Act.

b. Mention the provisions covered under IT Act?

ANSWER:

The Information Technology Act:

 Enables Legal recognition to Electronic Transaction / Record

 Facilitates Electronic Communication by means of reliable electronic
record
 Provides for acceptance of contract expressed by electronic means
 Facilitates Electronic Commerce and Electronic Data interchange.
 Facilitates Electronic Governance.
 Facilitates electronic filing of documents.
 Enables retention of documents in electronic form.
 Where the law requires the signature, digital signature satisfies the
requirement.
 Ensures uniformity of rules, regulations and standards regarding the
authentication and integrity of electronic records or documents.
 Facilitates Publication of Official Gazette in the electronic form.
 Enables interception of any message transmitted in the electronic or
encrypted form.
 Prevents Computer Crime, forged electronic records, international
alteration of electronic records fraud, forgery or falsification in
Electronic Commerce and electronic transaction.
Digital Signature: Any subscriber may authenticate an electronic record by
affixing his digital signature. [section 3(1)]. “Subscriber” means a person in
whose name the Digital Signature Certificate is issued. [section 2(1)(zg)].
“Digital Signature Certificate” means a Digital Signature Certificate issued
under section 35(4) [section 2(1)(q)].

“Digital signature” means authentication of any electronic record by a

subscriber by means of an electronic method or procedure in accordance
with the provisions of section 3. [section 2(1)(p)].

“Affixing digital signature” with its grammatical variations and cognate

expressions means adoption of any methodology or procedure by a person
for the purpose of authenticating an electronic record by means of digital
signature. [section 2(1)(d)].

Authentication of records: The authentication of the electronic record

shall be effected by the use of asymmetric crypto system and hash function
which envelop and transform the initial electronic record into another
electronic record. [section 3(2)].

Verification of digital signature: Any person by the use of a public key of

the subscriber can verify the electronic record. [section 3(3)]. The private
key and the public key are unique to the subscriber and constitute a
functioning key pair. [section 3(4)].

The idea is similar to locker key in a bank. You have your ‘private key’ while
bank manager has ‘public key’. The locker does not open unless both the
keys come together match.

Electronic records are acceptable unless specific provision to the

contrary: Where any law provides that information or any other matter
shall be in writing or in the typewritten or printed form, then,
notwithstanding anything contained in such law, such requirement shall be
deemed to have been satisfied if such information or matter is – (a)
rendered or made available in an electronic form; and (b) accessible so as
to be usable for a subsequent reference. [section 4]. – - Unless there is
specific provision in law to contrary, electric record or electronic return is
acceptable. – - Soon, it will be possible to submit applications, income tax
returns and other returns through internet.
Department or Ministry cannot be Compelled to Accept Electronic
Record - Section 8 makes it clear that no department or ministry can be
compelled to accept application, return or any communication in electronic
form.

Legal recognition of digital signatures: Where any law provides that

information or any other matter shall be authenticated by affixing the
signature or any document shall be signed or bear the signature of any
person then, notwithstanding anything contained in such law, such
requirement shall be deemed to have been satisfied, if such information or
matter is authenticated by means of digital signature affixed in such
manner as may be prescribed by the Central Government. – - “Signed”,
with its grammatical variations and cognate expressions, shall, with
reference to a person, mean affixing of his hand written signature or any
mark on any document and the expression “signature” shall be construed
accordingly. [section 5].

Secure digital signature: If, by application of a security procedure agreed

to by the parties concerned, it can be verified that a digital signature, at the
time it was affixed, was – (a) unique to the subscriber affixing it (b) capable
of identifying such subscriber (c) created in a manner or using a means
under the exclusive control of the subscriber and is linked to the electronic
record to which it relates in such a manner that if the electronic record was
altered the digital signature would be invalidated, – - then such digital
signature shall be deemed to be a secure digital signature. [section 15].

Certifying digital signature: The digital signature will be certified by

‘Certifying Authority’. The ‘certified authority’ will be licensed, supervised
and controlled by ‘Controller of Certifying Authorities’.

Q. 6 Ishaan is a fresher and recently is appointed as a part-time employee

in Consumer Redressal Dispute Agency. As his superior, how will you
guide him regarding the redressal forums, the nature of making complaints
and the working of the agency?

Consumer Disputes Redressal Agencies

For the purpose of speedy and simple settlement of ‘Consumer’s disputes’

section 9 of the Act, 1986 provides for the establishment of the following
three Consumer Disputes Redressal Agencies.
A “Consumer Disputes Redressal Forum” to be known as the District
Forum established by the State Government in each district of the State of
notification.

A “Consumer Disputes Redressal Commission” to be known as State

Commission established by the State Government, with the prior approval
of the Central Government, in the State by notification and

A “National Consumer Disputes Redressal Commission” to be known as

National Commission established by the Central Government by
Notification.

Thus, the Act envisages a hierarchy of three Redressal Forums: (1) District
Forums, (2) State Commission and (3) National Commission. These are
quasi-judicial bodies.

District Forum:

District Forum means a Consumer Disputes Redressal Forum, established

under Section 9 (2) of the Consumer Protection Act, 1986. This is
established by the State Government in each district of the State by means
of a notification. If reasonable and necessary, the State Government can
establish more than one district forum in a district. As per the amended Act,
1993, permission of the Central Government is not necessary for
establishing a district forum.

Composition of the District Forum: According to section 10 of the Act, each

district forum shall consist of : (i) a person who is, or has been or is
qualified to be a District Judge shall be nominated by the State
Government and shall be the President of the Forum, (ii) a person of
eminence in the field of education, trade, or commerce, law etc., and (iii) a
lady social worker.

Appointments to the State Commission shall be made by the State

Government on the recommendation of a Selection Committee consisting
of the President of the State Committee, the Secretary-Law Department of
the State and Secretary in charge of Consumer Affairs in the state.
Every member of the District Forum shall hold office of a term office 5 years
or up to the age of 65 years, whichever is earlier. Of course, a member
may resign by giving a notice in writing to the State Government where
upon the vacancy will be filled up by the State Government. The salary of
honorarium and other allowances payable to the members and their
conditions of service may be prescribed by the State Government. A
member shall not be eligible for re-appointment.

Pecuniary and Territorial Jurisdiction of the District Forum: Section 11

provides for the jurisdiction of the District Forum under two criteria:
Pecuniary and Territorial. The district forum enjoys jurisdiction to entertain
complaints where the value of goods or the services and the compensation,
if any, claimed, does not exceed Rs.20 lakhs. A complaint can be filed
either at the place where the opposite party resides or carry on business or
at the place where the cause of action arises. In case of action arises also
at the place where the product is sold.

In the case, Consumer Education and Research Society Vs. Canara Bank,
it was held that a banking company to be proceeded against the district
forum where its branch was located.

Manner of making a Complaint:

A complaint, in relation to any goods sold or delivered, or any service

period, may be filed with a District Forum by any of the following: The
consumer to whom such goods are sold or delivered, or such services
provided, any recognized consumer association, whether the consumer is a
member of such association or not, the Central or the State Governments,
any consumer of consumers on behalf of a number of consumers.

Procedure on Receipt of Complaint: The District Form has to observe the

following procedure as detailed in section 13 of the Act.

i)    The first step on receiving a complaint is to refer a copy of the

complaint to the opposite party directing him to give his version of the case
within a period of 30 days. When the opposite party denies or disputes the
allegations contained in the complaint, or omits or fails to take any action to
represent his case within the 30 days or extended period of 15 days, a
dispute arises, the District Form shall proceed to settle the consumer
dispute. After these preliminary steps, the Forum has to follow the
procedure prescribed in section 13 of the Act.

ii)    The complaint may relate to the defects of goods. The term ‘defect’
means any fault, imperfection or short coming in the quality, quantity,
purity, or standard which is required to be maintained by any law in force or
which the trader claimed that his goods possessed. If the alleged defect in
the goods is such that his goods possessed. If the alleged defect in the
goods is such that it cannot be determined without proper analysis or test
of the goods, the Forum should obtain a sample of goods from the
complainant. The sample of goods should be protected by a seal. The
sample of goods received must be sent to ‘appropriate laboratory’ along
with a direction that the goods should be tested or analysed for the alleged
defect. The time allowed for the laboratory is 45 days.

The Direct Form/State Commission may require the complainant to deposit

with it such amount as may be specified towards payment of fees to the
‘appropriate laboratory’ for the purpose of carrying out the necessary
analysis or tests [Section 13(1)(d)]. The amount so deposited shall be
remitted by them to the appropriate laboratory to enable it to carry out the
analysis and send the report.

iii)    On receipt of the report from the laboratory, the Forum should send a
copy of it to the opposite party along with such remarks, as the District
Forum may feel necessary.

iv)    If any party disputes the correctness of the report or the correctness of
the methods of analysis, the Form shall require him to submit his objections
in writing.

v)    Before issuing any final order in the matter, the Forum will provide an
opportunity to both parties to present their views about the report. The
Forum shall proceed to settle the dispute on the basis of allegations,
counter allegations and the evidence produced by the parties in support of
their case. Where the opposition party does nothing in response to the
complaint, the matter may be decided on the basis of the evidence
produced by the complainant. The proceedings of the Forum in compliance
with the procedure laid down by the Act are to be regarded as valid. The
validity cannot be questioned on the ground that the principles of natural
justice have not been complied with.

Limitation Period for filing of Complaint: Section 24A provides that the
District Forum, the State Commission or the National Commission shall not
admit a complaint unless it is filed within one year from the date on which
the cause of action has arisen. However, where the complainant satisfies
the Forum/Commission as the case may be, that he had sufficient cause
for not filling the complaint within one year, such complaint may be
entertained by it after recording the reasons for condoning the delay.

Administrative Control:

Section 24-B provides that the National Commission shall have

administrative control over all the State Commission in the matter of calling
for periodical returns regarding the institution, pendency and disposal of
cases, issuance of instructions regarding adopting of uniform procedure in
hearing of matters, serving copies of documents, translation of judgements
etc. and generally over-seeing the functioning of the State Commission/
District fora to ensure that the objects and purposes of the Act are served
in the best possible manner.

The State Commission shall have administrative control over all the District
fora within its jurisdiction in all the above-referred matters.

Findings of the Forum: If the Forum is convinced that the goods are really
defective, or that the complaint about the service is proved, the Forum shall
have to order the opposite party to do one or more of the following things.

-    To remove the defect pointed out by the laboratory from the goods in
question.

-    To replace the goods with new goods of a similar description, which
should be free from any defect.

-    To return to the complainant the price of the goods, or the charges of
services paid by the complainant.

-    To pay such amount as may be awarded compensation to the

consumer for any loss or injury suffered by the consumer due to the
negligence of the opposite party.
-    To remove the defects or deficiencies in the services in question.

-    To discontinue the unfair trade practice or the restrictive trade

practice or not to repeat them

-    Not to offer the hazardous goods for sale.

-    To withdraw the hazardous goods from being offered for sale.

-    To provide for adequate costs to parties.

The order for the District Forum shall be signed by it’s president and the
member or members who conducted the proceedings. In case of
difference of opinion, the order of the majority of the members shall be
the order of the Forum.